Creating Miracles in Life
2014 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 plasma-based biopharmaceutical company in China, ~14%
market share of plasma products among Chinese domestic manufacturers
Two majority-owned subsidiaries, Shandong Taibang and Guizhou Taibang, and
equity investment in Xi’an Huitian
12 captive plasma collection centers: 10 operated by Shandong, 2 by Guizhou
(excluding 2 new centers under construction in Hebei Province)
Strong pipeline: five pipeline products, commercial production of Human
Prothrombin Complex Concentrate (PCC) commenced in late 2014
Founded in 2002, headquartered in Beijing; Listed on NASDAQ in 2009
Our Mission
Grow as a world-class biopharmaceutical
company focused on saving lives
Core Values
Quality / Growth / Innovation / Focus / Passion / Responsibility
Table of Contents
5 Chinese Plasma Protein Market
7 Financial Highlights
9 Business Highlights
10 Chairman’s Letter
13 Operational Review
Plasma Collection
Manufacturing
Products
Research & Development
21 Corporate Social Responsibility
22 Board of Directors
26 Financial Report
96 Corporate Information
4 | Annual Report 2014
Annual Report 2014 | 5
Chinese Plasma
Protein Market
• China’s plasma protein market exceeds $2 billion, and is now the second-largest market in the
world, but per capita penetration is a fraction of U.S.
• Albumin is the largest product, IVIG sales growing; these two products represented 85% of
market in 2012
•
Significant unmet clinical demand provides sustainable and profitable growth, driven by aging
population and various disease
• By 2015, the Chinese plasma protein products market is forecasted to reach approximately RMB
16 billion ($2.5 billion), representing an over 50% increase from 2012. Albumin will remain the
largest product with an increase of at least 15% per year between 2012 and 2015.
45.0
30.0
15.0
0.0
2012 Market Size
in China (US$MM)
2012 Per Capita Usage U.S. / China
38.0x(3)
15.3x(2)
3.1x(1)
Albumin
945
IVIG
470
Factor VIII
19
Source: The Marketing Research Bureau, Inc. and company estimates
Notes
1&2. Based on 2012 per capita usage (kilogram per MM inhabitant) in U.S. divided by 2012 per capita usage in China
3. Based on 2012 per capita usage (international units per capita) in U.S. divided by 2012 per capita usage in China
• Albumin: the China market is the largest market in the world; significant rise in disease drives
growth of albumin usage
•
IVIG: still in early-stage of development in China; market growth will be driven by expanded
indications and physician education
•
Factor VIII: a life saving and a lifelong treatment, significant growth opportunity in China
6 | Annual Report 2014
Annual Report 2014 | 7
Financial Highlights
Total Sales
($ In Millions)
Non-GAAP Net Income
($ In Millions)
Non-GAAP EPS
($)
CAGR (11-14)=16.7%
CAGR (11-14)=27.5%
243.3
203.4
184.8
153.1
300.0
250.0
200.0
150.0
100.0
50.0
0.0
75.6
59.0
48.0
36.5
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
3.5
3
2.5
2
1.5
1
0.5
0
2.89
2.12
1.79
1.37
2011 2012 2013 2014
2011
2012
2013
2014
2011
2012
2013
2014
8.1%
Hyper-immune
9.9%
Placenta Polypeptide
40.4%
IVIG
2.3%
Others
Sales
Breakdown
By Products
2014
39.3%
Human albumin
Human albumin
IVIG
Placenta Polypeptide
Hyper-immune
Others
Operating Cash Flow and Net Income
($ In Millions)
93.5
96.1
74.3
76.9
71.1
66
120.0
100.0
80.0
60.0
40.0
20.0
0.0
38.5
31.4
2011
2012
2013
2014
Operating Cash Flow
Net Income
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
Operating Costs as of Sales
9.5%
7.8%
5.2%
20.6%
18.4% 17.7%
4.4%
13.2%
2.6%
2011
Selling
1.6%
2012
2.1%
2013
1.7%
2014
G&A
R&D
9.9%
8.1%
2.3%
40.4%
39.3%
Human albumin
IVIG
Placenta Polypeptide
Hyper-immune
Others
8 | Annual Report 2014
Annual Report 2014 | 9
Business Highlights
In November 2014, Shandong Taibang received the approval from the Hebei Provincial Health and
Family Planning Commission to build two new plasma collection stations in Hebei Province.
In October 2014, Shandong Taibang received manufacturing approval certificate for Human
Prothrombin Complex Concentrate (“PCC”) from the China Food and Drug Administration (“CFDA”).
In September 2014, China Biologic increased its equity interest in Guizhou Taibang to 76.23%
through purchasing additional interest from a minority shareholder.
In June-July 2014, China Biologic sold 920,000 shares of common stock from its treasury stock in a
follow-on offering, and raised net proceeds of approximately $33.2 million.
In March 2014, Guizhou Taibang received the renewed Good Manufacturing Practice (“GMP”)
certification from CFDA for its updated plasma production facility.
In January 2014, Guizhou Taibang received the renewed GMPcertification from CFDA for its
updated placenta polypeptide production facility.
In January 2014, China Biologic repurchased 2.5 million shares of common stock from one of its
individual shareholders for a consideration of $70 million.
10 | Annual Report 2014
Mr. David (Xiaoying) Gao
Chairman, CEO & President
Dear Valued
Shareholders
2014 was a year of opportunity and strong growth for China Biologic
Products as we achieved a number of significant operational and
capital market developments. We also finished 2014 with record sales
and non-GAAP adjusted net income results. Total sales for 2014
increased 19.6% to $243.3 million while our non-GAAP adjusted net
income attributable to the Company increased 28.1% to $75.6 million.
We attribute this healthy financial growth to strong overall market
demand, stable product pricing, increased production capacity after
the renewal of the GMP certification at our Guizhou facility, stringent
cost control measures, the optimization of our product portfolio mix
and the successful implementation of our sales strategy in tier-one
cities.
China’s healthcare industry continues to grow at double-digit rates,
driven by an aging population, the rise in chronic disease rates,
better insurance coverage and higher government investment. We
believe that China’s plasma market has exceeded $2 billion, and is
now the second-largest market in the world. China’s plasma market
is expected to show steady growth in the years ahead driven by rising
plasma collection volume, increased awarness of plasma protein
products and usage, more advanced technologies, and approval
of new products. Yet, China’s plasma industry remains a lucrative
niche market with high entry barriers, strict regulatory policies, an
acute supply shortage and limited competition from new entrants
and multinational corporations. Established industry leaders like
China Biologic Products are well positioned to sustain growth and
profitability in the years to come.
Sufficient plasma supply is a key advantage among plasma players
in China. China Biologic Products is a leader in China measured
by annual plasma collection volume and is among the highest in
terms of per center collection volume. Our company is expanding
its collection territories of existing plasma stations and building new
ones. In 2014, we experienced a double digit increase in our plasma
collection volume for the third consecutive year, outpacing domestic
collection growth. During the fourth quarter of 2014, we received
government approval to build two new plasma collection centers
in Hebei Province, which are expected to increase our raw material
supply and total collection capacity by approximately 10-15% after
the initial ramp-up period.
Annual Report 2014 | 11
At the non-operational level, we continued our efforts
to improve our shareholder structure and enhance
shareholder value in 2014. In the beginning of the year, we
repurchased an aggregate 2.5 million shares of common
stock, for a total consideration of $70 million. We
also completed a follow-on offering in June and raised
approximately $33.2 million in proceeds. In September,
we acquired an additional 19.8% equity stake in Guizhou
Taibang, which resulted in earnings accretion as well as
super majority ownership with significantly enhanced
control of Guizhou Taibang’s long-term strategy and
development. In January 2015, our board retained a two-
year stockholder rights plan, to guard against partial tender
offers and other coercive tactics to gain control or undue
influence of China Biologic Products without offering a fair
and adequate price and terms to our shareholders.
As we head into 2015, with the strength of our product
portfolio and planned growth initiatives, we are confident
that 2015 will be another productive year for China Biologic
Products. We intend to further capitalize on the growing
demand for our plasma-based and polypeptide products.
We expect the enhanced production capacity at Guizhou
Taibang to help drive our 2015 financial results. We also
intend to strengthen our market leadership by further
expanding our sales opportunities for existing products,
continue our research and development efforts to improve
production yields and plasma utilization efficiency and to
launch new products to better serve the growing market
in China.
Finally, I would like to thank all our employees for their
efforts and contributions to our company’s development
over the last year. I also want to express gratitude to our
long-term shareholders for your commitment to our company.
Sincerely,
David (Xiaoying) Gao
Chairman and CEO,
China Biologic Products, Inc.
We currently carry over 20 plasma products in three
categories (human albumin, IVIG and coagulation factor)
in our product portfolio, which provides us with an optimized
mixture to increase yield, drive growth and offset rising
raw material cost. We remain committed to new product
development (currently five pipeline products), which can
ensure sustainable growth in the years to come. We are
also very proud of our IVIG product development efforts
aiming to keep us stay ahead of the competition and
generate new revenue opportunities.
On the production front, in the first quarter of 2014, we
successfully achieved our goal since 2013 of ensuring
that our two operating facilities were in full compliance
with GMP standards. Our Guizhou Taibang facility received
GMP Certification, allowing us to resume full-scale com-
mercial production in late March for all of our approved
plasma products, one quarter earlier than our original
estimation. In addition, we received approval for the
commercial manufacturing of human PCC at our Shandong
Taibang facility in the third quarter and obtained GMP
certification for our new coagulation factor facility in the
fourth quarter. We expect to commercially launch PCC
in second quarter 2015. Also in 2014, we made steady
progress with the construction of a new manufacturing
base in Shandong Province. Once complete, we believe
that this expanded manufacturing base, equipped with
state-of-the-art plasma fractionation equipment, will be
one of the largest standalone franctionation facilities in
China.
During 2014, human albumin and IVIG products remained
the Company’s largest two sales contributors, accounting
for 39.3% and 40.4% of total sales, respectively. The
average price for both products remained relatively stable
as a result of the combined effects of the higher govern-
ment-imposed retail price ceiling, reduced value-added
tax rate and the discounts given to distributors operating in
tier-one cities and new markets in 2014. We are particularly
proud of the successful implementation of our IVIG sales
strategy in select tier-one cities. We believe the market
potential for IVIG remains substantial and we anticipate
the growth momentum for IVIG to continue in 2015.
Our placenta polypeptide product contributed $24.0
million for the full year, accounting for 9.9% of total sales
in 2014 as compared to 6.0% in 2013, due to higher volume
from the expanded production capacity at Guizhou
Taibang. The implementation of an in-house sales strategy
for placenta polypeptide helped improve our operational
efficiency by reducing our per-unit selling expenses.
12 | Annual Report 2014
Annual Report 2014 | 13
Operational Review
Plasma Collection
Plasma is a key item among China’s national strategic reserves for emergency response and
disease treatment.
China’s plasma fractionation throughput in 2013 was 4.5 million liters*, barely meeting half of the
demand for plasma protein products.
China’s plasma-based products industry is strictly supervised by the Chinese government. From
1986, imports of all plasma-based products were banned except for human albumin.
Source: National Health and Family Planning Commission
Plasma Collection Regulation Environment – Differences vs. U.S.
United States
China
Population (million)
320.6
1,384.7
Donation Frequency
twice per 7 days,
not within 48 hours
twice per month,
not within 14 days
Collection Volume
volumes by weight
50 – 68kg / 69-79kg / >79kg,
donate 690 / 825 / 880 ml
Plasma Collection Centers
Over 400
Preapproval Requirement
No
Plasma Donation Compensation
($ for one time donation)
25-35
580 ml
165
Yes
42-50
Regulation Agencies
Plasma Collected in
2012 (million liters)
Source: MRB
Food and Drug Administration
(FDA) and Plasma Protein
Therapeutics Association (PPTA)
County-, Municipal- and
Provincial - Level Governments
21.7
3.8
14 | Annual Report 2014
Plasma Donation Process
1. Check-in at reception
Each plasma collection facility is only allowed to collect plasma from healthy donors within its
respective districts (“Residence Requirement”). All donors must present their national identification
card as a proof of identity and compliance with the Residence Requirement. Additionally, each
donor’s confirmed through fingerprint identification.
Facial identification
Five-point fingerprint identification
Five-point fingerprint identification
2. Health screening and physical exam
All potential donors receive a physical exam, blood test and full medical history to verify their
eligibility to donate.
3. Plasmapheresis Procedure
Once a donor is approved, he or she is escorted to a comfortable,
plasma donation bed. Trained medical staff person will complete the
venipuncture, or insert a needle in the donor’s arm to draw blood,
and connect the donor with the plasmapheresis device, a specialized
device used to collect plasma. The automated plasmapheresis
device removes whole blood, separates plasma from the other blood
components and then returns those components to the donor. During the procedure, a sterile,
one-time collection kit is used and the donor’s blood never leaves the device.
4. Donor rest and receiving compensation
Each plasma collection facility is only allowed to collect plasma
from healthy donors within its respective districts (“Residence
Requirement”). All donors must present their national identification
card as a proof of identity and compliance with the Residence
Requirement. Additionally, each donor’s confirmed through fingerprint
identification.
Annual Report 2014 | 15
5. Plasma Storage and Virus Testing
Collected plasma is packaged in 25 separate 600g bags and stored at 20°C
shortly after collection to ensure that it will congeal within 6 hours. Each bag
is labeled with a computer-generated tracking code and has a separate “pig
tail” with a small plasma sample for additional virus testing purposes at the
manufacturing plant.
Five-point fingerprint identification
Manufacturing
Shandong Taibang
Guizhou Taibang
State-of-the-art Fractionation Facilities
Three manufacturing bases, 1,300 metric tons (MT) of annual capacity, including 200 MT at Xi’an Huitian.
Pipelined Equipment
Closed Reaction Tanks
Automatic Sub-Packing System
Capacity Expansion
planned new facility in Shandong and Xi’an, under construction
Shandong Taibang
Xi’an Huitian
16 | Annual Report 2014
Products
Human Albumin
Shock caused by blood loss trauma or burn; raised intracranial
pressure caused by hydrocephalus or trauma; oedema or ascites
caused by hepatocirrhosis and nephropathy; prevention and treatment
of low-density-lipoproteinemia; and Neonatal hyperbilirubinemia.
Human Immunoglobulin for Intravenous Injection
Primary 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 Idiopathic thrombocytopenia purpura or kawasaki disease.
Human Hepatitis B Immunoglobulin
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 Tetanus Immunoglobulin
Mainly used for the prevention and therapy of tetanus. Particularly
applied to patients who have allergic reactions to tetanus antitoxin.
Annual Report 2014 | 17
Human Rabies Immunoglobulin
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 Immunoglobulin
Primary 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 Idiopathic thrombocytopenia purpura or kawasaki disease.
Human Coagulation Factor VIII
Correcting the disorder of coagulation due to deficiency of
Factor VIII ,mainly for prevention and control of bleeding in patients
with hemophilia A or acquired Factor VIII deficiency ,and for
treatment of bleeding caused by operation of these patients.
Human Prothrombin Complex Concentrate
This product is mainly used for the treatment of congenital and acquired
clotting factor II, VII, IX, X deficiency (single deficiency or combined
deficiency), including: the clotting factor II, VII, IX, X deficiency, including
Hemophilia B; Excessive anticoagulant, and vitamin K deficiency; the
mechanism of coagulation disorders and bleeding caused by liver disease
when the patients need to correct blood coagulation dysfunction; a variety
of reasons caused by the prothrombin time prolong and the patients intend
to go for surgery, but the lack of clotting factor may be rejected; treatment
for the bleeding symptoms of Hemophilia A who has produced inhibitor of
clotting factor VIII; reversing hemorrhage induced by coumarin
anticoagulants.
Placenta Polypeptide
Treatment for cell immunity deficiency diseases, viral infection and
leucopenia caused by various reasons, and assist in postoperative healing.
18 | Annual Report 2014
Annual Report 2014 | 19
Research & Development
Human Albumin
Treatment / Use
Status of Product
Stage*
Human hepatitis B
immunoglobulin (pH4)
for intravenous injection
Human fibrinogen
Human Cytomegalovirus
Immunoglobulin
Immune Globulin
Intravenous (Human),
aprylate/Chromatography
Purified & 20 nm
virus filtration
Human Antithrombin
III (concentration)
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.
Treatment for lack of fibrinogen
and increase human
fibrinogen concentration.
Clinical trial program under
CFDA review. Commercial
production expected in 2016.
Prophylaxis and treatment of CMV
infection, especially for the
prevention of active virus
replication for patients in
immunosuppression, such as
organ transplantation patients.
Develop the manufacturing
process for the new medicine
on an expanded basis in the
workshop. Application for
clinical trial expected in 2015.
Treatment for original
immunoglobulin deficiency;
secondary immunoglobulin
deficiency and auto-immune
deficiency diseases
Treatment for (i) hereditary
antithrombin III deficiency in
connection with surgical or
obstetrical procedures and
(ii) thromboembolism
Application in progress for
clinical trial. Approval of clinical
trials expected in 2015.
Application for clinical trial
submitted to CFDA. Approval of
clinical trials expected in 2015.
4
3
1
2
2
Note : Stage 1: Pre-clinical research; Stage2: Clinical trial application; Stage 3: Clinical trials; Stage 4: Registration
Innovation focuses on:
• Expanding portfolio of plasma-based biopharmaceutical products
• Maximizing manufacturing efficiency
• Enhancing product quality through new technologies
• Continual improvement in production methods
20 | Annual Report 2014
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
patient access to life-saving drugs. Our efforts align with and support our mission of saving and
enhancing the quality of patient lives.
Annual Report 2014 | 21
Corporate Social
Responsibility
•
•
•
•
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.
I n Ju ly 2 0 1 3 , 1 1 0 e m p l oye e s at G u i z h o u Ta i b a n g
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.
2013
2012
•
•
•
•
In May 2012, our Shandong Taibang subsidiary
donated RMB 500,000 to the Beijing Medical Award
Foundation, which is dedicated to recognizing
excellence in heathcare practice and research.
In September 2012, our Guizhou Taibang subsidiary
donated 1,000 bottles of life-saving Tetanus
immunoglobulin products to those injured in an
earthquake in China’s Yunnan province that same
month.
In September 2012, our Guizhou Taibang subsidiary
initiated a scholarship program to assist with college
education expenses for low-income families.
In October 2012, our Shandong Taibang subsidiary
donated 600 bottles of Human Coagulation Factor
VIII to the Hemophilia Home of China (HHC) to
support low-income hemophilia patients.
• Our active involvement in social welfare projects.
Our employees participate in various forms of public
service activities to contribute to community well-
being. For example, in May 2012, approximately
250 employees at our Shandong Taibang facility
volunteered to clean up trash at Mount Tai.
2014
• Since launching Human Coagulation Factor VIII
(“Factor VIII”) in 2012, China Biologic Products,
Inc. has expanded its par tnership with the
Hemophilia Home of China (“HHC”). In April and
December 2015, Shandong Taibang donated
a total of 200 dosages of Factor VIII to HHC, to
help low-income patients with hemophilia.
•
•
•
In May 2014, Shandong Taibang held a “Read
for Children” activity and donated RMB9,900
worth of books to the Education Foundation of
Shandong Province.
In September 2014, China Biologic joined hands
with Tai’an Radio and TV Station to hold an event
promoting public plasma donation. On that day,
dozens of China Biologic staff and volunteers
from Tai’an Radio and TV Station donated plasma
at Ningyang plasma collection center.
In December 2014, Mr. Zhiwei Zhang, Marketing
Director of China Biologic, visited some hemophilia
patients and gave away Factor VIII and other
household necessities.
Looking ahead, we remain committed to pursuing activites that will benefit individuals with coagulation deficiency
and 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.
22 | Annual Report 2014
Board of Directors
Mr. David (Xiaoying) Gao has been a member of our Board since October 6,
2011, our Chairman since March 30, 2012, our Chief Executive Officer since
May 10, 2012 and our President since January 1, 2013. From February 2004
until the company’s acquisition by Sanofi in February 2011, Mr. Gao served as
the Chief Executive Officer and director of BMP Sunstone Corporation (Nasdaq:
BJGP). Following the acquisition, he served as a senior integration advisor for
Sanofi from February to August 2011. From February 2002 through February
2004, Mr. Gao served as Chairman of BMP China’s board of directors. Mr.
Gao served as President and director of Abacus Investments Ltd, a private
wealth management company, from August 2003 until June 2004, and as
Chief Executive Officer of Abacus from July 2003 to June 2004. From 1989
to 2002, Mr. Gao held various executive positions at Motorola, Inc., including:
Vice President and Director, Integrated Electronic System Sector, Asia-Pacific
operation, from 1998 to 2002; Member, Motorola Asia Pacific Management
Board, Management Board of Motorola Japan Ltd., 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, Germany, and an M.B.A. from
The Massachusetts Institute of Technology.
Mr. David Li has been a member of our Board since November 4, 2013. Mr.
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 (Xiaoying) Gao
Chairman, CEO & President
Mr. David Hui Li
Director
Annual Report 2014 | 23
Mr. Min Fang
Director
Mr. Sean Shao
Independent Director,
Chairman of Audit Committee
and Compensation Committee
Mr. Min Fang has been a member of our Board since March 2, 2015. Mr.
Fang has been a principal at Beijing Warburg Pincus Investment Consulting
Company Limited Shanghai Branch (“Warburg Pincus”) since July 2011, and
a core member of the China healthcare team. In addition to his role with the
Company, Mr. Fang currently serves on the board of several private companies
including, among others, EA Inc. and Beijing Amcare Women’s and Children’s
Hospital Co., Ltd. From Mar 2010 to July 2011, he was a vice president at Carlyle
Asia Private Equity. From July 2007 to Feb 2010, Mr. Fang was an associate at
Warburg Pincus. Prior to Warburg Pincus, he worked at the Boston Consulting
Group focusing on management consultancy for pharmaceutical and medical
device companies. Mr. Fang received a B.A. in International Finance from
Fudan University and an M.B.A. from the Stanford Graduate School of Business.
Mr. Sean Shao has been a member of our Board since August 7, 2008.
Mr. Shao currently serves as (i) independent director and member of the
audit committee of Trina Solar Limited, an integrated solar-power products
manufacturer and solar system developer listed on the NYSE, since January
2015, (ii) independent director and chairman of the audit committee of: Jumei
International Holding Ltd., an e-commerce company listed on NYSE since May
2014; LightInTheBox Holdings Co. Ltd., an e-commerce company listed on
NYSE since June 2013; UTStarcom Holdings Corp., a provider of broadband
equipment and solutions listed on NASDAQ since October 2012;and (iii)
independent director and chairman of the nominating committee of Agria
Corporation, an agricultural company listed on NYSE since November 2008.
He served as the chief financial officer of Trina Solar Limited from 2006 to
2008. In addition, Mr. Shao served from 2004 to 2006 as the chief financial
officer of ChinaEdu Corporation, an educational service provider, and of
Watchdata Technologies Ltd., a Chinese security software company. Prior to
that, Mr. Shao worked at Deloitte Touche Tohmatsu CPA Ltd. for approximately
a decade. Mr. Shao received his master’s degree in health care administration
from the University of California at Los Angeles in 1988 and his bachelor’s
degree in art from East China Normal University in 1982. Mr. Shao is a member
of the American Institute of Certified Public Accountants.
24 | Annual Report 2014
Prof. Wenfang Liu
Independent Director
Dr. Yungang Lu
Independent Director
Chairman of Governance
& Nominating Committee
Prof. Wenfang Liu has been a member of our Board since February 27,
2011. From 2007 to 2011, Prof. Liu served as the Chief Consultant for Sichuan
Yuanda Shuyang Pharmaceuticals. Prior to that, he served from 2000 to 2007,
in various managerial positions including as Chief Engineer and Director of
Hualan Biological Engineering, and as Director of Blood Separating, from
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.
Dr. Yungang Lu has been a member of our Board since March 19, 2012 and
currently serves as chairman of our Governance and Nominating Commit-
tee. Dr. Lu has served as a Managing Director of Seres Asset Management
Limited, an investment manager based in Hong Kong, since August 2009. Dr.
Lu also serves as a board director of the following listed companies: AsiaIn-
fo-Linkage, Inc., a provider of software solutions and IT services in China’s
telecommunications industry, China Techfaith Wireless Communication Tech-
nology Ltd., a handheld device company in China, and China Cord Blood
Corporation, a provider of cord blood storage services in China. From 2004 to
July 2009, Dr. Lu was a Managing Director of APAC Capital Advisors Limited, a
Hong Kongbased investment manager specializing in Greater China equities.
Dr. Lu was 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.
Annual Report 2014 | 25
Mr. Zhijun Tong
Independent Director
Mr. Albert (Wai Keung) Yeung
Independent Director
Mr. Joseph Chow
Independent Director
Mr. Zhijun Tong has been a member of our Board since April 20, 2012. Mr. Tong
has served as the chairman of the board of directors of several corporations,
including Spain Qifa Corporation Ltd. since 1996, Hong Kong Tong’s Group
since 2007, Sunstone (Qingdao) Plant Oil Co., Ltd. since 2008, Sunstone
(Qingdao) Food Co., Ltd. since 2009, Shengda (Zhangjiakou) Pharmaceutical
Co., Ltd. since 2011 and Shengda (Qianxi) Chinese Medicine Cultivation Co.,
Ltd. since 2012. Mr. Tong has also served as a director and a vice president
of Spain International Haisitan Group since 1993. From 2007 to 2011, He
also served as the president and a director of BMP Sunstone Corporation, a
NASDAQ-listed pharmaceutical corporation.
Mr. Albert (Wai Keung) 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 spent more than 30 years
in China’s pharmaceutical industry, holding various senior sales, marketing
and general management positions with major pharmaceutical corporations in
Hong Kong and mainland China, including Johnson & Johnson, Xian-Janssen,
Burroughs Wellcome, Bristol Myers-Squibb and GlaxoSmithKline.
Mr. Joseph Chow has been a member of our Board since November 3,
2014. Mr. Chow has over 20 years of experience in corporate finance,
financial advisory and management and has held senior executive and
managerial positions in various public and private companies. Mr. Chow was
recently a managing director of Moelis and Company and was previously a
managing director at Goldman Sachs (Asia) LLP. Prior to that, he served as an
independent financial consultant, as chief financial officer of Harbor Networks
Limited, and as chief financial officer of China Netcom (Holdings) Company
Limited. Prior to that , Mr. Chow served as the director of strategic planning
of Bombardier Capital, Inc., as vice president of international operations of
Citigroup and as the corporate auditor of GE Capital. Mr. Chow currently sits
on the board as a director for China Lodging Group, Limited, a company listed
on NASDAQ; Synutra International, Inc., a company listed on NASDAQ; and
an independent non-executive director for Intime Department Store (Group)
Co., Ltd., a company listed on the Stock Exchange of Hong Kong. Mr. Chow
obtained a Bachelor of Arts degree in political science from Nanjing Institute
of International Relations and a Master of Business Administration degree
from the University of Maryland at College Park.
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, 2014
[_] 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]
Form 10-K
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [_] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X]
No [_]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website,
if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§
232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files) Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this
chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or
a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [_]
Accelerated Filer [X]
Non-Accelerated Filer [_]
Smaller reporting company [_]
(Do not check if a smaller reporting company)
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [_] No [X]
The aggregate market value of common stock held by non-affiliates of the registrant, based upon the closing sale
price on June 30, 2014 as reported on the NASDAQ Global Select Market, was approximately $358 million.
There were a total of 24,811,792 shares of the registrant’s common stock outstanding as of March 4, 2015.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for its 2015 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.
Form 10-K
Annual Report on Form 10-K
Year Ended December 31, 2014
Table of Contents
6
27
51
52
52
55
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
56
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
58
58
77
79
80
80
83
84
84
84
84
84
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
PART IV
85
Item 15. Exhibits, Financial Statement Schedules
Form 10-K
Special Note Regarding Forward Looking Statements
In addition to historical information, this report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. We use words such as “believe,” “expect,” “anticipate,” “project,” “target,” “plan,” “optimistic,” “intend,”
“aim,” “will” or similar expressions which are intended to identify forward-looking statements. Such statements
include, among others, those concerning market and industry 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 international 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.
Form 10-K Use of Terms
Except as otherwise indicated by the context and for the purposes of this report only, references in this report to:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
“China Biologic,” “we,” “us,” the “Company,” or “our” are to the combined business of China Biologic Products, Inc.,
a Delaware corporation, and its direct and indirect subsidiaries;
“China” or “PRC” are to the People’s Republic of China, excluding, for the purposes of this report only, Taiwan and
the special administrative regions of Hong Kong and Macau;
“CFDA” are to China Food and Drug Administration;
“Exchange Act” are to the Securities Exchange Act of 1934, as amended;
“GMP” are to good manufacturing practice;
“Guizhou Taibang” are to our majority owned subsidiary Guizhou Taibang Biological Products Co., Ltd., a PRC
company, formerly known as Guiyang Qianfeng Biological Products Co., Ltd.;
“Huitian” are to Xi’an Huitian Blood Products Co., Ltd., a PRC company in which we hold a minority equity interest;
“NDRC” are to the PRC National Development and Reform Commission;
“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 CFDA
on February 24, 2011;
“RMB” are to the legal currency of China;
“SEC” are to the Securities and Exchange Commission;
“Securities Act” are to the Securities Act of 1933, as amended;
“Shandong Taibang” are to our majority owned subsidiary Shandong Taibang Biological Products Co. Ltd., a PRC
company;
“Taibang Biological” are to Taibang Biological Ltd., a British Virgin Islands company, formerly known as Logic
Express, Ltd.;
“Taibang Holdings” are to Taibang Holdings (Hong Kong) Limited, a Hong Kong company, formerly known as Logic
Holdings (Hong Kong) Limited; and
•
“U.S. dollars” or “$” are to the legal currency of the United States.
Form 10-K ITEM 1. BUSINESS.
OVERVIEW
We are a biopharmaceutical company principally engaged in the research, development, manufacturing and sales
of human plasma-based biopharmaceutical products in China. We are the largest non-state-owned producer of
plasma products and the second largest producer in China in terms of 2014 sales, based on our industry knowledge.
We operate our business through 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 plasma products company based in Xi’an, Shaanxi Province.
We have a strong product portfolio with over 20 different dosage forms of plasma products. Our principal products are
human albumin and immunoglobulin for intravenous injection, or IVIG. Albumin has been used for almost 50 years to
treat critically ill patients by assisting the maintenance of adequate blood volume and pressure. IVIG is used for certain
disease prevention and treatment by enhancing specific immunity. These products use human plasma as their principal
raw material. Sales of human albumin products represented approximately 39.3%, 44.1% and 44.6% of our total sales
for 2014, 2013 and 2012, respectively. Sales of IVIG products represented approximately 40.4%, 38.0% and 39.0% of
our total sales for 2014, 2013 and 2012, respectively. All of our products are prescription medicines administered in the
form of injections.
Our sales model focuses on direct sales to hospitals and inoculation centers and is complemented by distributor sales.
In 2014, we generated sales of $243.3 million, an increase of 19.6% from 2013, and recorded net income attributable
to the Company of $70.9 million, an increase of 29.9% from 2013. In 2013, we generated sales of $203.4 million, an
increase of 10.0% from 2012, and recorded net income attributable to the Company of $54.6 million, an increase of
20.7% from 2012.
We operate and manage our business as one single segment. We do not account for the results of our operations on a
geographic or other basis.
Corporate History and Structure
China Biologic Products, Inc. was originally incorporated on December 20, 1989 under the laws of the State of Texas as
Shepherd Food Equipment, Inc. On November 20, 2000, Shepherd Food Equipment, Inc. changed its corporate name
to Shepherd Food Equipment, Inc. Acquisition Corp., or Shepherd. Shepherd is the survivor of a May 28, 2003 merger
between Shepherd and GRC Holdings, Inc., or GRC, a Texas corporation. In the merger, the surviving corporation
adopted the articles of incorporation and bylaws of GRC and changed its corporate name to GRC Holdings, Inc.
On January 10, 2007, a plan of conversion became effective pursuant to which GRC was converted into a Delaware
corporation and changed its name to China Biologic Products, Inc. On July 19, 2006, we completed a reverse
acquisition with Logic Express Ltd., or Logic Express, a British Virgin Islands company, as a result of which Logic
Express became our wholly owned subsidiary, the former shareholders of Logic Express became our then controlling
6
Form 10-KPART I stockholders, and Logic Express’s majority owned PRC subsidiary, Shandong Taibang, became our majority owned
indirect subsidiary. Logic Express changed its corporate name to Taibang Biological Limited in 2006.
Our common stock was initially quoted on the over-the-counter market maintained by Pink Sheets LLC. On February 29,
2008, our common stock was approved for quotation on the Over-The-Counter Bulletin Board under the trading symbol
“CBPO.OB.” On November 25, 2009, our common stock was approved for listing on the NASDAQ Global Market under
the symbol “CBPO” and subsequently approved for listing on the NASDAQ Global Select Market on December 7, 2010.
The following chart reflects our current corporate structure as of the date of this prospectus supplement:
China Biologic Products, Inc.
(Delaware)
100%
Taibang Biological Ltd.
(BVI)
100%
Taibang Holdings (Hong Kong) Limited
(Hong Kong)
100%
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%
76.23%
Shandong Taibang Biological
Products Co., Ltd(2)
Guizhou Taibang Biological
Products Co., Ltd.
35%
Xi’an Huitian Blood
Products Co., Ltd.(1)
100%
100%
100%
100%
Guiyang Qianfeng Biological
Science Company
Guiyang Qianfeng Renyuan
Bio Material Co., Ltd
100%
80%
20%
Ten operating plasma
collection companies
Two operating plasma
collection companies
Five non-operating plasma
collection companies
Three operating plasma
collection companies
(1) Pursuant to an investment entrustment agreement dated September 12, 2008, Shandong Taibang holds the 35% equity interest
in Huitian as a nominee for the benefit of Taibang Biological. For further details on the investment entrustment agreement, see our
Current Report on Form 8-K filed with the SEC on October 16, 2008.
(2)
In February 2015, Taibang Holdings transferred its 82.76% equity interest in Shandong Taibang to Taibang Biotech (Shandong)
Co., Ltd.
7
Form 10-KPART I Overview
INDUSTRY
We operate in the plasma industry in China. We derive certain industry related data from a China-specific report
prepared by The Marketing Research Bureau, Inc., or MRB, for 2012, which was published in December 2013, and
a commissioned report prepared by MRB in June 2014. MRB is an independent research firm focused on blood and
plasma industry data on a global level.
China is the second largest plasma products market in the world, after the United States. According to MRB, China’s
plasma products market (excluding recombinant products) grew from $0.43 billion in 2006 to $1.66 billion in 2012
in terms of sales revenue, representing a compound annual growth rate, or CAGR, of 25.5%. Based on our industry
knowledge, human albumin products dominated China’s plasma products market with a market share of 69.1% in terms
of sales revenue in 2014 while IVIG and hyper immunoglobulin products accounted for 22.4% and 5.9%, respectively,
of the market. Other plasma products, including coagulation factors, accounted for the remaining 2.6% of the market in
2014. Compared to the more developed countries, China has a lower per capita usage level of plasma products, and
China’s plasma products market is significantly different in terms of product composition and range. In more developed
countries such as the United States, IVIG products account for a majority of plasma product sales. This difference is
mainly due to the maturity levels of the plasma industries in these countries. For instance, plasma fractionation came
into existence in the 1940s in the United States, whereas in China, plasma processing appeared in the 1960s or 1970s,
according to MRB. Until the early 1970s, the U.S. plasma products market was dominated by albumin products, as is
the case in the Chinese market presently. The current low per-capita consumption of IVIG products in China is primarily
attributable to a lack of awareness of the benefits of IVIG therapy, especially in medical conditions such as primary
immune deficiency or chronic inflammatory demyelinating polyneuropathy, and lower per capita healthcare spending
conditions in China. China’s plasma products market is expected to be increasingly driven by IVIG products in the
future as IVIG therapy becomes more widespread as a result of the combined efforts of physician education and
product promotion, among other factors.
Based on our industry knowledge, China National Biotec Group, or CNBG, a state-owned enterprise, was China’s
largest plasma products manufacturer with a market share of 10.7% in terms of sales revenue of plasma products
in 2014. China Biologic was the second largest plasma products manufacturer and the largest non-state-owned
manufacturer, with a market share of 8.2% in terms of sales revenue of plasma products in 2014.
Overall Plasma Products Market Trends
According to MRB, China’s plasma products market has grown from $0.80 billion in 2009 to $1.66 billion in 2012 in
terms of sales revenue, representing a CAGR of 27.5%. Key market characteristics and trends of China’s plasma
products market include the following:
Stringent regulation and high entry barriers. China’s plasma products market is stringently regulated. Because of the
public health crises of contaminated plasma products experienced by China over the past decade, China has and
is expected to continue to maintain stringent regulations for the plasma products industry in the foreseeable future.
8
Form 10-KPART I The PRC State Council ceased issuing new plasma fractionation licenses since 2001, and there are approximately 30
licensed producers of plasma products in China, of which only no more than 25 are currently in operation. Nearly all
of these producers make albumin and IVIG products, and only four of them, including China Biologic, make factor VIII
products. Furthermore, foreign investment in domestic producers of plasma products is restricted and subject to a
stringent approval process. As a result, existing China-based producers with large production capacities face limited
competition and are uniquely positioned.
Demand outstripping supply. Due to stringent regulations on the collection of raw plasma from human beings and a
lack of plasma donation, there has been a shortage of plasma products in China since the 1980s. Plasma product
manufacturers sell their products at or near the maximum retail reimbursement price and generally do not engage in
export sales. In the case of factor VIII products, the supply shortage is demonstrated by the growth of recombinant
products which are sold at three times the price as plasma-derived factor VIII products. In 2010, the PRC Ministry of
Health estimated that China’s market demand for plasma products was 8,000 tonnes per annum while domestic supply
only met approximately half of such demand. The gap between demand and supply enhances pricing power for market
leading producers, and it is expected that such gap will likely to continue in the foreseeable future.
Ban on imports. As a measure to prevent a range of viral risks, China strictly prohibits the importation of plasma
products, except for human albumin and recombinant factor VIII products. In those market segments, such as IVIG,
where importation is prohibited, domestic producers are shielded from competition from their multinational peers, and
the demand for such products in China has been supplied entirely by domestically-sourced plasma.
Low consumption level and huge growth potential. While China’s plasma products market has experienced rapid
growth in recent years, China’s per capita consumption of plasma products lags substantially behind more developed
countries. The following chart sets forth the comparison of per capita consumptions of selected plasma products in
China and the United States in 2012:
(x)
45.0
30.0
15.0
0.0
38.0x(3)
15.3x(2)
3.1x(1)
Albumin
MG
Factor VIII
Source: MRB
(1) Based on 2012 per capita consumption (kilogram per million inhabitants) in the Unites States divided by 2012 per capita
consumption in China.
(2) Based on 2012 per capita consumption (kilogram per million inhabitants) in the Unites States divided by 2012 per capita
consumption in China.
(3) Based on 2012 per capita consumption (International Units per inhabitant) in the Unites States divided by 2012 per capita
consumption in China.
9
Form 10-KPART I
As a result of growing number of patients desiring treatment of plasma products, increasing awareness of health
benefits of plasma products and rising affordability of plasma products since the commencement of China’s healthcare
reform, it is projected that China’s plasma products market will continue to have substantial growth potential.
Increasing market concentration of top players. China’s current landscape of plasma products producers is relatively
fragmented. However, factors such as stringent regulations, tightened quality control and heavy capital expenditure
requirements have contributed to increasing industry consolidation in recent years. For instance, CFDA recently issued
new GMP requirements to re-certify all the fractionation plants by the end of 2013, which has resulted in the shutdown
of smaller fractionation plants that were unable to upgrade their production lines by the deadline. Market leaders with
stable plasma supplies complemented by further collection expansion potentials, strong product portfolios and robust
research and development capabilities are expected to be able to continue to solidify their positions and further gain
development advantages.
Albumin Market Trends
According to MRB, human albumin products accounted for a majority of China’s plasma products market in 2012,
which was approximately 40% larger than the albumin products market in the United States. According to MRB,
China’s albumin products market grew from $406.5 million in terms of sales revenue in 2009 to $945.2 million in 2012,
representing a CAGR of 32.5%.
The demand for albumin products in China was high and continued to grow as a result of the high incidence of
hypoalbumiemia from liver cirrhosis and hepatitis B. Unlike many other plasma products, albumin products may be
imported from other countries, and as a result many multinational plasma product manufacturers are expected to
increasingly divert a large portion of their albumin products to China’s market in the future so long as the price in China
remains competitive. Based on our industry knowledge, the largest four multinational plasma product manufacturers
accounted for approximately 56% of China’s albumin products market in 2014, with CSL Behring as the market leader
with a market share of 24.5% in terms of sales volume. CNBG, Shanghai RAAS Blood Products Co., Ltd., and China
Biologic were the largest three domestic albumin product manufacturers with a market share of 8.0%, 5.4% and 5.3%,
respectively, in terms of sales volume in 2014. Based on our industry knowledge, the combined local and imported
albumin supplies did not fully meet the demand in China in 2014.
IVIG Market Trends
According to MRB, China’s IVIG products market grew from $296.8 million in terms of sales revenue in 2009 to $469.5
million in 2012, representing a CAGR of 16.5%. Based on our industry knowledge, CNBG was the market leader with
a market share of 19.8% in terms of sales volume in 2014, and China Biologic ranked second with a market share of
15.4%.
In more developed countries, the major applications of IVIG therapy are for chronic diseases such as primary immune
deficiency and chronic inflammatory demyelinating polyneuropathy, which require treatment for a number of years or
even lifetime. In contrast, in China, IVIG therapy is only used to treat acute diseases and infections. The substantial
10
Form 10-KPART I growth in China’s IVIG products market in recent years was mainly due to the IVIG therapy for Hand, Foot and Mouth
Disease, which is rare and less known in more developed countries. Compared with the markets in these countries,
China’s IVIG products market is far from mature. In 2012, for instance, the per-capita consumption of IVIG products
in China was 11 grams per 1,000 inhabitants, as compared to 168 grams per 1,000 inhabitants in the United States,
according to MRB, and therefore there is tremendous growth potential as China’s IVIG consumption draws closer to that
of the United States. Developing this market requires significant efforts from IVIG manufacturers to educate physicians,
the public and the health authorities on the benefits of IVIG therapy for a number of medical conditions. In countries
with higher per-capita consumption of IVIG products, the efficacy of IVIG therapy in a number of medical conditions
was promoted by the following means over the years: clinical trials, anecdotal reports, scientific articles, educational
activities for physicians and medical students, medical conferences and seminars, and promotional campaigns such as
advertisements in medical journals. The role of a specialized sales force was also instrumental in the rapid acceptance
of IVIG therapy in North America and Europe. In addition, patient organizations, which are largely supported by
IVIG manufacturers, have also become increasingly important in recent years, as they are able to draw physicians’
attention to antibody deficiency tests. All of these factors may be replicated in China as a result of IVIG manufacturers’
educational and promotional efforts as well as economic development and healthcare spending growth in China.
Factor VIII Market Trends
According to MRB, China’s market size for plasma-derived factor VIII was $19.2 million in terms of sales revenue in
2012, as compared to $10.6 million in 2009, representing a CAGR of 21.9%.
Based on our industry knowledge, only four domestic plasma product manufacturers offered plasma-derived factor
VIII in 2014. Hualan Biological Engineering Inc. was the market leader with a market share of 42.0% in terms of sales
volume (excluding recombinant factor VIII products) in 2014.
There were over 10,000 registered patients of hemophilia in China as of December 31, 2014, according to China
Hemophilia Association, which underpins a significant market demand for factor VIII products. Due to an acute
shortage of plasma-derived coagulation factor concentrates available in China as a result of limited coagulation factor
manufacturers, recombinant factor VIII products have taken a growing role in hemophilia care in China. However,
since recombinant products are approximately three times more expensive than plasma-derived factor VIII products
and not covered by national health insurance for full reimbursement in China, they are used only in the absence of
suitable plasma-derived products. As an increasing number of China-based manufacturers, including China Biologic,
commercially launched factor VIII products, the supply is expected to increase and lead to overall market growth. It
is unlikely, however, that plasma-derived factor VIII will be able to fully meet the market demand if hemophilia care
continues to improve in China. China’s market for factor VIII products is expected to experience a continued shortage of
plasma-derived factor VIII products in the foreseeable future.
11
Form 10-KPART I Our Competitive Strengths
BUSINESS
We believe that the following competitive strengths enable us to compete effectively in and capitalize on the growth of
the plasma products market:
Leading producer of plasma products in China with strong market position
We are the largest non-state-owned producer of plasma products and the second largest producer in China in terms
of 2014 sales based on our industry knowledge. In the albumin segment, which accounts for a majority of the market
in China, we are the third largest domestic producer with a market share of 5.3% in terms of 2014 sales based on our
industry knowledge. In the IVIG segment, which is the second largest segment of the plasma products market in China,
we are the second largest producer overall in China with a market share of 15.4% in terms of 2014 sales based on our
industry knowledge.
We have a strong product portfolio with over 20 different dosage forms of plasma products crossing nine categories.
Since different types of plasma products utilize different protein components of plasma, different types of plasma
products can be produced from the same raw plasma supply with minimal incremental increase in raw material cost.
Our broad product portfolio therefore provides us with the benefit of higher comprehensive plasma utilization, which in
turn contributes to higher profit margins.
We believe product safety and supply stability are the most critical considerations for hospitals and inoculation centers
in making purchase decisions on plasma products. We have not historically experienced any issue of failing to receive
pre-sale approval or had a recall with respect to any of our plasma products. As a leading producer of plasma
products, we have been able to maintain a steady plasma supply volume and sales volume over the years. Our safety
record and the stability of our supply, we believe, have strengthened our business relationship with existing customers
and enhanced our ability to acquire new customers.
Stable supply of plasma with strategically located collection stations
Our ability to secure and expand our supply of plasma, a critical raw material for our operations, is one of our key
strengths. Our plasma collection network consists of 12 captive plasma stations. In 2014, we were the second largest
plasma collector in China in terms of collection volume with approximately 14% of the total national supply, based on
our industry knowledge.
We operate eight plasma collection stations in Shandong Province, two in Guangxi Province and two in Guizhou
Province, covering 31 cities and counties with an aggregate population of approximately 38.4 million. Shandong
Province has one of the largest population and Guangxi Province and Guizhou Province are among the least
economically developed regions in China — both favorable characteristics underpinning a strong and stable plasma
supply.
12
Form 10-KPART I We continue to seek innovative ways to identify and attract potential donors. Our messages focus on the life-saving
and other social contribution aspects of plasma donation. To this end, we regularly organize a variety of community
events, while also regularly reviewing our donor compensation to ensure that it remains competitive. In addition, we
actively seek to expand the geographic territories of our existing collection stations to gain access to additional donor
populations. As a result of our activities, our plasma collection volume increased 12% from 2013 to 2014.
Unique and effective sales model targeting hospitals
Our sales model focuses on direct sales to hospitals and inoculation centers and is complemented by distributor
sales, which we believe is unique in the industry. Under this sales model, our products reach all of the 31 provinces,
municipalities and autonomous regions in China.
In 2014, 65.4% of sales of our plasma products were generated from direct sales, and in 2014, our direct sales
network covered approximately 641 hospitals and inoculation centers. Our sales and marketing team, consisting of
131 employees in 2014, is responsible for the sales and marketing efforts to our end customers and provide product
educational programs and other sales support directly to doctors and nurses. These efforts are designed to ensure
effective and seamless communications with our end-customers and provide us with first hand intelligence on
latest industry trends and market demands. For example, our sales and marketing team actively promotes new IVIG
indications that are widely accepted in more developed countries but less known among Chinese physicians. These
efforts contributed significantly to the growth of our IVIG sales, which increased by $21.1 million from $77.3 million in
2013 to $98.4 million in 2014.
Our direct sales network is complemented by sales through distributors, which accounted for 34.6% of our plasma
sales in 2014. We select our distributors through a rigorous process, which focuses on market leadership in the covered
region, the degree of control we have over to which hospitals our products are sold (i.e. larger and higher tiered
hospitals are preferred), and the level of access we have to our customers (i.e. greater access enables us to better
track the sales of our products).
We believe that our unique sales model of focusing on direct sales is cost-effective and has helped us to achieve strong
financial performance. Our selling expenses as a percentage of sales in 2014, 2013 and 2012 were 4.4%, 5.2% and
7.8%, respectively; and our operating margin was 45.7%, 42.7% and 40.3%, respectively.
Robust near-term product pipeline to capture full plasma value chain backed by strong research and
development capabilities
We currently have five new products under development, with one of them in registration stage and expected to be
commercially launched by the end of 2015 and one in clinical trial stage and expected to be commercially launched by
2016. We expect our expanding product portfolio to further increase our comprehensive plasma utilization, which will in
turn lead to higher profit margins. With our current and pipeline products, we believe that by 2016, our product offerings
will be able to capture substantially all of the value along the plasma products value chain.
13
Form 10-KPART I
Our ability to bring new products to market reflects a research and development process that is designed to be
demand-driven and highly responsive to physician feedback and the latest trends in medicine. To complement
our research and development efforts, we also work closely with a number of leading research institutes in China
specializing in plasma products. As of December 31, 2014, we held 43 patents for plasma products.
Experienced and committed management team
We have an experienced, dedicated and visionary management team with an in-depth understanding of the
pharmaceutical industry in China. Our Chairman and Chief Executive Officer, Mr. David (Xiaoying) Gao, with more than
12 years of experience in the pharmaceutical industry, was instrumental in the development and implementation of our
business strategy. Before joining the Company, Mr. Gao was the chief executive officer of BMP Sunstone Corporation
before being acquired by Sanofi. Our Chief Financial Officer, Ming Yang, has more than 17 years of financial
management and accounting experience. Mr. Guangli Pang and Mr. Gang Yang, the general manager of Shandong
Taibang and Guizhou Taibang, respectively, have more than 30 and 20 years of experience, respectively, in the plasma
products industry in China. Since our current senior management team was put in place in 2012, we have been
committed to improving corporate governance and enhancing shareholder value. We believe our management team,
with their extensive industry background and strong management talent, provides a strong foundation for the execution
of our growth strategy and achievement of our goals.
Our Business Strategy
Our mission is to become a first-class biopharmaceutical enterprise in China. To achieve this objective, we have
implemented a business strategy with the following key components:
Market development and network expansion
Leveraging on the high quality and steady supply of our products, we intend to expand our geographic coverage in
China to include markets where we envision significant growth potential. In particular, we plan to further strengthen our
direct sales by growing our sales and marketing team and expanding our coverage among hospitals and inoculation
centers. We also plan to strengthen our relationships with major distributors in tier-one cities to deepen our penetration
in those markets.
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. We currently have a total of 12
plasma stations in operation, of which eight are in Shandong Province, two in Guangxi Province and two in Guizhou
Province. In October 2014, Shandong Taibang, one of our majority owned subsidiaries, received the approval from the
Hebei Provincial Health and Family Planning Commission to build two new plasma collection stations in Hebei Province.
Meanwhile, we are carrying out various promotional activities to stabilize and expand our donor base for our existing
plasma stations. A majority of our plasma stations recorded increases in plasma collection volume in 2014 as compared
to 2013.
14
Form 10-KPART I 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
approximately 30 approved plasma-based biopharmaceutical manufacturers in the market, we believe that there are
no more than 25 manufacturers currently in operation in China, only about half of which are competitive. We estimate
that the top five manufacturers in China accounted for more than 50% market share (excluding imports) in 2014.
Furthermore, we believe that the regulatory authorities are considering further industry reform and those smaller, less
competitive manufacturers will face possible revocation of their manufacturing permits by the regulators due to the cost
of compliance, 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 United States, China’s plasma products are at an
early stage of development. There are many other plasma products that are being used in the United States, which
are not currently being manufactured or used widely in China. We intend to strengthen our research and development
capabilities through in-house development and partnership with leading international players so as to expand our
product line to include plasma 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.
Our Products
Our principal products are our approved human albumin and IVIG products. Human albumin is principally used to
treat critically ill patients by replacing lost fluid and maintaining adequate blood volume and pressure. IVIG products
are primarily used to enhance specific immunity, a defense mechanism by which the human body generates certain
immunoglobulin, or antibodies, against invasion by potentially dangerous substances. In a situation where the human
body cannot effectively react with these foreign substances, injection of our products will provide sufficient antibodies to
neutralize such substances. We are currently approved to produce over 20 different dosage forms of plasma products.
15
Form 10-KPART I Approved Products (1) (2)
Treatment / Use
Human albumin – 20%/10ml,
20%/25ml, 20%/50ml, 10%/100ml,
10%/20ml, 10%/50ml, 25%/50ml
and 20%/50ml (10g, from factor IV)
Shock caused by blood loss trauma or burn; raised intracranial
pressure caused by hydrocephalus or trauma; oedema or ascites
caused by hepatocirrhosis and nephropathy; prevention and treatment
of low-density-lipoproteinemia; and neonatal hyperbilirubinemia.
Human immunoglobulin –
10%/3ml and 10%/1.5ml
Original immunoglobulin deficiency, such as X chain low immunoglobulin,
familiar variable immune deficiency, immunoglobulin G secondary
deficiency; secondary immunoglobulin deficiency, such as severe
infection, newborn sepsis; and auto-immune deficiency diseases,
such as original thrombocytopenia purpura or kawasaki disease.
IVIG – 5%/25ml, 5%/50ml,
5%/100ml and 5%/200ml
Same as above.
Thymopolypeptides injection
– 20mg/2ml and 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 hepatitis B immunoglobulin
– 100 IU(3),200IU and 400IU
Prevention of measles and contagious hepatitis. When
applied together with antibiotics, its curative effect on certain
severe bacteria or virus infection may be improved.
Human rabies immunoglobulin
– 100IU, 200IU and 500IU
Mainly for passive immunity from bites or claws by rabies or other infected
animals. All patients suspected of being exposed to rabies are treated with
a combined dose of rabies vaccine and human rabies immunoglobulin.
Human tetanus
immunoglobulin – 250IU
Mainly used for the prevention and therapy of tetanus. Particularly
applied to patients who have allergic reactions to tetanus antitoxin.
Placenta polypeptide – 4ml/vial
Treatment for cell immunity deficiency diseases, viral infection and leucopenia
caused by various reasons, and assist in postoperative healing.
Factor VIII – 200IU and 300IU
Treatment for coagulopathies such as hemophilia A and
increased concentration of coagulation factor VIII.
Human prothrombin complex
concentrate (or PCC) – 300IU
Treatment for congenital and acquired clotting factor II, VII, IX, X deficiency,
such as Hemophilia B, excessive anticoagulant, and vitamin K deficiency, etc.
(1)
“%” represents the degree of dosage concentration for the product and each product has its own dosage requirement.
For example, human albumin 20%/10ml means 2g of human albumin is contained in each 10ml packaging and human
immunoglobulin 10%/3ml means 300mg of human immunoglobulin is contained in each 3ml packaging. Under PRC law, each
variation in the packaging, dosage and concentration of medical products requires separate registration and approval by
CFDA before it may be commercially available for sale. For example, among our human albumin products, only human albumin
20%/10ml, 20%/25ml, 20%/50ml, 10%/100ml, 10%/20ml, 10%/50ml, 25%/50ml and 20%/50ml (10g, from factor IV) products are
currently approved and are commercially available.
(2)
“IU” means International Units. IU is a unit used to measure the activity of many vitamins, hormones, enzymes, and drugs. An IU
is the amount of a substance that has a certain biological effect. For each substance there is an international agreement on the
biological effect that is expected for 1 IU. In the case of immunoglobulin, it means the number of effective units of antibodies in
each package.
(3)
Tetanus antitoxin is a cheaper injection treatment for tetanus. However it is not widely used because most people are allergic to it.
16
Form 10-KPART I Our approved human albumin, immunoglobulin (including IVIG), factor VIII and PCC products all use human plasma as
the primary raw material. All of our approved products are prescription medicines administered in the form of injections.
We have two product liability insurance policies covering Shandong Taibang’s and Guizhou Taibang’s products in the
amount of RMB20 million (approximately $3.2 million) each. Since our establishment in 2002, we have been subject to
three lawsuits filed by patients who were treated with our products and received blood and/or plasma transfusions. See
“Risk Factors — Risks Related to Our Business — Product liability claims or product recalls involving our products could
have a material and adverse effect on our business” for further details. We do not believe these three claims to have a
material and adverse impact on the Company.
Raw Materials
Plasma
Plasma is the principal raw material for our biopharmaceutical products. We currently operate 10 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.
Other Raw Materials and Packaging Materials
Other raw materials used in the production of our biopharmaceutical products include reagents and consumables such
as filters and alcohol. The principal packaging materials we use include glass bottles for our injection products as well
as external packaging and printed instructions for our biopharmaceutical products. We acquire our raw materials and
packaging materials from our approved suppliers in China and overseas. We select our suppliers based on quality,
consistency, price and delivery of the raw materials which they supply.
Our five largest suppliers in the aggregate accounted for approximately 30.2%, 39.3% and 38.0% of our total
procurement for the years ended December 31, 2014, 2013 and 2012, respectively. We have not experienced any
shortage of supply or significant quality issue with respect to any raw materials and packaging materials.
Plasma Collection
All of our plasma is collected through plasma stations of Shandong Taibang and Guizhou Taibang. These stations
purchase, collect, examine and deepfreeze plasma on behalf of Shandong Taibang and Guizhou Taibang and are
subject to provincial health bureau’s rules, regulations and specifications for quality, packaging and storage. Each
station is only allowed to collect plasma from healthy donors within its respective districts and in accordance with a time
table set by its respective parent company, Shandong Taibang or Guizhou Taibang. The plasma must be tested negative
for HBsAb, HCV and HIV antibodies and the RPR test, contain ALT 25 units (ALT) and plasma protein 55g/l, and contain
no virus pollution or visible erythrolysis, lipemia, macroscopic red blood cell or any other irregular finding. The plasma
17
Form 10-KPART I is packaged in 25 to 30 separate 600g bags in each box and then stored at a temperature of -20°C or lower within
limited time after collection to ensure that it will congeal within six hours. Each bag is labeled with a computer-generated
tracking code. Shandong Taibang and Guizhou Taibang are responsible for the overall technical and quality supervision
of the plasma collection, packaging and storage at each plasma station.
Sales, Marketing and Distribution
Because all of our products are prescription drugs, we can only sell to hospitals and inoculation centers directly or
through approved distributors. For 2014, 2013 and 2012, direct sales to hospitals and inoculation centers represented
approximately 65.4%, 66.8% and 66.4%, respectively, of our total plasma sales. Our five largest customers in
the aggregate accounted for approximately 14.6%, 11.0% and 10.8% of our total sales for 2014, 2013 and 2012,
respectively. Our largest customer accounted for approximately 4.2%, 2.7% and 3.6% of our total sales for 2014, 2013
and 2012, respectively.
We select our distributors through a rigorous process, which focuses on market leadership in the covered region, the
degree of control we have over to which hospitals our products are sold (i.e. larger and higher tiered hospitals are
preferred), and the level of access we have to our customers (i.e. greater access enables us to better track the sales
of our products). As part of our effort to ensure the quality of our distributors, we also conduct due diligence to verify
whether potential distributors have obtained necessary permits and licenses and facilities (such as cold storage) for the
distribution of our biopharmaceutical products and assess their financial condition. Certain of our regional distributors
are appointed on an exclusive basis within a specified geographic territory. Our supply contracts set out the quantity
and price of products to be supplied by us. For distributors, our contracts also contain guidelines for the sale and
distribution of our products, including restrictions on the geographical territory in which the products may be sold.
We provide our distributors with training in relation to our products and on sales techniques. We generally require our
distributors to pay in advance before we deliver products, with a few exceptions for a credit period of no longer than 60
days to major distributors in tier-one cities. For hospitals and clinics, we generally grant a credit period of no longer than
90 days, with exceptions to certain high credit-worthy customers of up to six months. For 2014, 2013 and 2012, we had
not incurred any significant bad debts from our customers.
Our largest geographic market is Shandong Province, representing approximately 23.9%, 27.3% and 24.1% of our total
sales for 2014, 2013 and 2012, respectively. Hebei Province is our second largest geographic market, representing
10.4%, 6.3% and 5.5% of our total sales for 2014, 2013 and 2012, respectively. In addition to Shandong Province and
Guizhou Province, we also have sales presence in 29 other provinces, municipalities and autonomous regions.
As of December 31, 2014, our marketing and after-sales services department consisted of 131 employees.
We believe that due to the nature of our products, the key factors of our competitiveness centers on product safety,
steady supply, brand recognition, timely availability and pricing. As all of our products are prescription medicines,
we are not allowed to advertise our products in the mass media. For 2014, 2013 and 2012, total sales and marketing
expenses amounted to approximately $10.7 million, $10.6 million and $14.4 million, respectively, representing
approximately 4.4%, 5.2% and 7.8%, respectively, of our total sales.
18
Form 10-KPART I Our Research and Development Efforts
Each of Shandong Taibang and Guizhou Taibang has its own research and development department, or collectively,
our R&D Departments. All of our research and development 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 a number of leading institutions in China specializing in plasma products to
strengthen our research and development capacity.
We employ a market driven approach to initiate research and development projects, including both product and
production technique development. We believe that the key to our industry’s developments is the safety of products and
maximizing the yield per unit volume of plasma. Our research and development efforts are focused on the following
areas:
•
•
broaden the breadth and depth of our portfolio of plasma products;
enhance the yield per unit volume of plasma through new collection techniques;
• maximize manufacturing efficiency and safety;
•
•
promote product safety through implementation of new technologies; and
refine production technology for existing products.
All the products we currently manufacture have been developed in-house. The following table outlines our research and
development work in progress:
Products Currently
in Development
Treatment / Use
Status of Product
Development
Stage*
Human 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 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.
Immune Globulin Intravenous
(Human), Caprylate/
Chromatography Purified
and 20 nm virus filtration
Treatment for original immunoglobulin
deficiency; secondary immunoglobulin
deficiency and auto-immune
deficiency diseases.
Clinical trial is undergoing.
Commercial production
expected in 2016.
Application in progress for
clinical trial. 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.
Application for clinical trial
submitted to CFDA. Approval of
clinical trials expected in 2015.
Human Cytomegalovirus
Immunoglobulin
Prophylaxis and treatment of CMV infection,
especially for the prevention of active virus
replication for patients in immunosuppression,
such as organ transplantation patients.
Develop the manufacturing
process for the new medicine
on an expanded basis in the
workshop. Application for
clinical trial expected in 2015.
4
3
2
2
1
* These stages refer to the stages in the regulatory approval process for our products described in “— Regulation.”
19
Form 10-KPART I For 2014, 2013 and 2012, total research and development expenses amounted to approximately $4.2 million, $4.2
million and $3.0 million, respectively, representing approximately 1.7%, 2.1% and 1.6%, 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 China.
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 profitability may be adversely affected if (i) competition intensifies; (ii) competitors reduce prices; (iii) PRC
government requires us to reduce the prices of our products; or (iv) competitors develop new products or product
substitutes with comparable medicinal applications or therapeutic effects which are more effective or less costly than
ours.
There are approximately 30 approved manufacturers of plasma products in China of which no more than 25 are
currently in operation. 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 regulations of the PRC Ministry
of Health, we believe that it is difficult for new manufacturers to enter into the industry. We believe that our major
competitors in China include China National Biotec Group, Hua Lan Biological Engineering, 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 where importation is allowed. China became a member
of the World Trade Organization in December 2001 and as a result imported biopharmaceutical products enjoy lower
tariffs. Since 2009, China has experienced a substantial increase in volume of imported human albumin. If importation
of human albumin continues to increase, we may face more fierce competition in domestic human albumin market.
Based on our industry knowledge, we are the second largest plasma products manufacturer and the largest non-
state-owned manufacturer in China, with a market share of 8.2% in terms of 2014 sales. To solidify our market position,
we have also expanded our product portfolio to include factor VIII in 2012. We received the manufacturing approval
certificate and the GMP certification for production facility from CFDA for factor VIII in 2012. We also have obtained the
manufacturing approval certificate for human prothrombin complex concentrate, or PCC, in July 2013, and obtained the
GMP certification for the production facility of PCC in March 2014.
We will continue to meet challenges and secure our market position by enhancing our existing products, introducing
new products to meet customer demand, delivering quality products to our customers in a timely manner and
maintaining our established industry reputation.
20
Form 10-KPART I Our Intellectual Property
We held 48 issued patents and 11 pending patent applications in China for certain manufacturing processes and
packing designs as of December 31, 2014. We also had nine registered trademarks in China as of December 31, 2014.
In addition, we had registered three domain names as of December 31, 2014, namely, www.chinabiologic.com, www.
ctbb.com.cn and www.taibanggz.com.
Regulation
Set forth below is a summary of the major PRC regulations relating to our business.
Due to the nature of our products, we are supervised by various levels of the PRC Ministry of Health and/or CFDA.
Such supervision includes the safety standards regulating our raw material supplies (mainly plasma), our manufacturing
process and our finished products.
We are also subject to other PRC regulations, including those relating to taxation, foreign currency exchange and
dividend distributions.
Plasma collection
Substantially all plasma donations for commercialized plasma products are done through plasma stations. Plasma
donation means donors give only selected blood components — platelets, plasma, red cells, infection-fighting white
cells, 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 following are the general 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;
• have the required professional health care technicians to operate a station;
• have the facility and a hygienic environment to operate a station;
• have an identification system to identify donors;
• have the equipment to operate a station; and
• have the equipment and quality control technicians to ensure the quality of the plasma collected.
Plasma stations were historically owned and managed by the PRC health authorities. In March 2006, the PRC Ministry of
Health and other eight central governmental departments of the PRC State Council promulgated the Measures for the
Reform of Blood Collection Stations whereby the ownership and management of the plasma stations are required to be
transferred to plasma-based biopharmaceutical companies while the regulatory supervision and administrative control
remain with the government. As a result, all plasma stations are now having direct supply relationship with their parent
fractionation facilities.
21
Form 10-KPART I Set out below are some of the safety features at China’s plasma stations:
• Plasma stations can only source plasma from donors within the assigned district approved by the provincial health
authorities;
• Plasma stations must perform a health check on the donor. Once the donor passes the health check, a “donor
permit” is issued to the donor. The standards of the health check are established by the health authorities at the
PRC State Council level;
• The designing and printing of the “donor permit” is administrated by the provincial health authorities, autonomous
region or municipality government, as the case maybe. The “donor permit” cannot be altered, copied or assigned;
• Before donors can donate plasma, the station must verify their identities and the validity of their “donor permits.”
The donors must pass the verification procedures before they are given a health check and blood test. For those
donors who have passed the verification, health check and blood test and whose plasma were donated according
to prescribed procedures, the station will set up a record;
• Collected plasma which passes quality testing cannot be used to produce plasma products until its donor donates
again after a 90-day quarantine period and the subsequently donated plasma passes quality testing as well;
• All plasma stations are subject to the regulations on the prevention of communicable diseases. They must strictly
adhere to the sanitary requirements and reporting procedures in the event of an epidemic situation.
The operation of plasma collection stations is subject to stringent regulations by the PRC government. We estimate that
there were approximately 190 plasma stations in operation in China as of December 31, 2014.
Importation of blood products
According to current PRC regulations, except for human albumin and recombinant factor VIII products, all the plasma
products are banned from importation into China.
Production of plasma products
The manufacture and sale of plasma products are subject to stringent regulations by the PRC government. Under PRC
law, each variation in the packaging, dosage and concentration of medical products requires separate registration and
approval by CFDA before it may be commercially available for sale. For example, among our human albumin products,
only human albumin 20%/10ml, 20%/25ml, 20%/50ml, 10%/100ml, 10%/20ml, 10%/50ml, 25%/50ml and 20%/50ml (10g,
from factor IV) products have been approved and are commercially available.
22
Form 10-KPART I The table below illustrates 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; and
• 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 PRC Provincial Food and Drug
Administration, or PFDA. PFDA will perform an on-site examination on the documents and
equipment, and then transfer all the required materials to 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; and
3 Clinical trials
• 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.
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; and
• Grant of GMP certificate following the public notification period.
5
Production
and approval
for sale
The production and approval for sale stage mainly involves the following steps:
• Produce the approved products in qualified facilities with requisite GMP certificates;
• Submit documentation and samples of mass production products to CFDA for inspection; and
• Grant of qualification certificate to mass production products for sale on a batch-by-batch basis.
23
Form 10-KPART I 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 requires us to, among others, maintain and operate a comprehensive
and effective product quality control system throughout the production process. In addition, it imposes higher standards
for our production facilities. The New GMP Standard became applicable to all of our production facilities at the end
of 2013. After respective upgrades on their production facilities, Shandong Taibang and Guizhou Taibang obtained
the renewed GMP certificate in June 2013 and March 2014, respectively. Huitian has suspended the production at its
production facilities for technical upgrade and will apply for a new GMP certificate upon the completion of the upgrade.
Huitian may not be able to obtain the certificate, which would prevent it from carrying on its business at these facilities
and harm our profitability. See “Risk Factors — Risk Related to Our Business — We may not be able to carry on our
business if we lose any of the required permits and licenses. Moreover, Huitian has suspended the production at its
production facilities for technical upgrade and will apply for a new GMP certificate upon the completion of the upgrade;
however, it may not be able to obtain the certificate, which would prevent it from carrying on its business at these
facilities and harm our profitability” for details.
Pricing
Retail prices of certain pharmaceutical products are subject to various regulations. According to the “Regulations on
Controlling Blood Products” promulgated by the PRC State Council in 1996, regional offices of the Pricing Bureau and
the PRC 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, or the NIC, which may be adjusted by 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 factor VIII, 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.
In an announcement published in September 2012, or the 2012 Adjustment, NDRC adjusted retail price ceilings for
95 oncology, immunology and hematology drugs, which became effective on October 8, 2012. Two of our approved
products, IVIG and factor VIII were affected by the 2012 Adjustment. The new retail price ceilings for IVIG products
were lower than the current prevailing market retail prices in some of our regional markets while those for factor VIII
were close to the then prevailing market retail prices. As a result, some local governments revised tender price ceilings
24
Form 10-KPART I for IVIG products. In January 2013, NDRC further adjusted retail price ceilings for certain drug products, which became
effective on February 1, 2013, or the 2013 Adjustment. Three of our approved products, human albumin, human rabies
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
human rabies immunoglobulin products to a retail price ceiling for the first time. The retail price ceiling imposed on
human rabies immunoglobulin products by the 2013 Adjustment is close to the prevailing market retail price.
Taxation
On March 16, 2007, the National People’s Congress of China passed the Enterprise Income Tax Law, or the EIT Law,
and on November 28, 2007, the PRC State Council passed its implementation rules, which became effective on January 1,
2008. Before the implementation of the EIT Law, foreign invested enterprises, or FIEs, established in China, unless granted
preferential tax treatments by the PRC government, were generally subject to an enterprise income tax, or EIT, rate of
33.0%, which included a 30.0% state income tax and a 3.0% local income tax. The EIT Law and its implementation rules
impose a unified EIT of 25.0% on all domestic-invested enterprises and FIEs, unless they qualify under certain limited
exceptions. In addition, the EIT Law terminated the “two-year exemption and three-year half reduction” and “five-year
exemption and five-year half-reduction” tax preferential policy enjoyable by FIEs under the old EIT laws. The PRC State
Administration of Taxation, or SAT, then promulgated a series of regulations to implement the EIT Law, under which
FIEs established before March 16, 2007, or Old FIEs, were given a five-year 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 old EIT Law could gradually increase their EIT rate by 2% per year until their tax rate
reached 25%.
In addition to the changes to the tax structure, under the EIT Law, an enterprise established outside of China with
“de facto management bodies” within China is considered a resident enterprise and will normally be subject to an
EIT of 25% on its global income. The implementation rules define the term “de facto management bodies” as “an
establishment that exercises, in substance, overall management and control over, among others, the production,
business, recruitment and accounting aspects of a Chinese enterprise.” If the PRC tax authorities subsequently
determine that we should be classified as a resident enterprise, then our global income will be subject to PRC income
tax of 25%. For detailed discussion of PRC tax issues related to resident enterprise status, see “Risk Factors — Risks
Related to Doing Business in China — Under the Enterprise Income Tax Law, we may be classified as a “resident
enterprise” of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC
stockholders.”
The EIT Law confirmed that qualified high and new technology enterprises may enjoy a preferential income tax rate
of 15%, instead of the uniform enterprise income tax rate of 25%. The PRC Ministry of Science and Technology, the
PRC Ministry of Finance and SAT jointly promulgated the Measures for Determination of High and New Technology
Enterprise on August 14, 2008 to provide the detailed rules for the examination of qualifications and approval of
certificates for high and new technology enterprises. Each certificate of high and new technology enterprise is valid
for three years. Shandong Taibang was recognized by Shandong provincial government as a high and new technology
enterprise in 2008 and renewed the certificate in 2011, as a result of which Shandong Taibang is entitled to enjoy a
preferential income tax rate of 15% until the end of 2013. In October 2014, Shandong Taibang obtained a notice from
25
Form 10-KPART I the Shandong provincial government that granted it the high and new technology enterprise certificate. This certificate
entitled Shandong Taibang to enjoy a preferential income tax rate of 15% for a period of three years from 2014 to 2016.
Shandong Taibang may apply for a renewal for an additional three years from 2017 to 2019 upon its expiration.
According to Notice on Issues Concerning Relevant Tax Policies in Deepening the Implantation of the Western
Development Strategy jointly promulgated by the PRC Ministry of Finance, the PRC General Administration of Customs
and SAT on July 27, 2011, enterprises located in the western region of China which have at least 70% of their income
from the businesses falling with in the Category of Encouraged Industries in Western Region of China may enjoy a
preferential income tax of 15% within the period from January 1, 2011 to December 31, 2020. Guizhou Taibang, being
a qualified enterprise located in the western region of China, enjoys a preferential income tax rate of 15% effective from
January 1, 2011 to December 31, 2020.
Foreign currency exchange
The principal regulation governing foreign currency exchange in China is the Foreign Currency Administration Rules
(1996), as amended (2008). Under these rules, RMB is freely convertible for current account items, such as trade
and service-related foreign exchange transactions, but not for capital account items, such as direct investment,
loan or investment in securities outside China unless the prior approval of, and/or registration with, SAFE or its local
counterparts (as the case may be) is obtained.
Pursuant to the Foreign Currency Administration Rules, FIEs in China may purchase foreign currency without the
approval of SAFE for trade and service-related foreign exchange transactions by providing commercial documents
evidencing these transactions. They may also retain foreign exchange (subject to a cap approved by SAFE) to satisfy
foreign exchange liabilities or to pay dividends. In addition, if a foreign company acquires a company in China, the
acquired company will also become an FIE. However, the relevant PRC government authorities may limit or eliminate
the ability of FIEs to purchase and retain foreign currencies in the future. In addition, foreign exchange transactions for
direct investment, loan and investment in securities outside China are still subject to limitations and require approvals
from, and/or registration with, SAFE.
Dividend distributions
Under applicable PRC regulations, FIEs in China may pay dividends only out of their accumulated profits, if any,
determined in accordance with PRC accounting standards and regulations. In addition, an FIE in China is required to
set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its general reserves until
the accumulative amount of such reserves reach 50% of its registered capital. These reserves are not distributable as
cash dividends. The board of directors of a FIE also has the discretion to allocate a portion of its after-tax profits to staff
welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation.
In addition, under the EIT law, the Notice of the State Administration of Taxation on Negotiated Reduction of Dividends
and Interest Rates, promulgated on January 29, 2008, the Arrangement between the PRC and the Hong Kong Special
Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion, or the Double Taxation
Treaty, which became effective on December 8, 2006, and the Notice of the State Administration of Taxation Regarding
26
Form 10-KPART I Interpretation and Recognition of Beneficial Owners under Tax Treaties, which became effective on October 27, 2009,
dividends from our PRC subsidiary, Taibang Biotech (Shandong) Co., Ltd., paid to us through our Hong Kong subsidiary,
Taibang Holdings, may be subject to a withholding tax at a rate of 10%, or at a rate of 5% if Taibang Holdings is
considered a “beneficial owner” that is generally engaged in substantial business activities in Hong Kong and entitled to
treaty benefits under the Double Taxation Treaty.
Our Employees
As of December 31, 2014, we employed 1,684 full-time employees, of which 63 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 China. We
participate in various employee benefit plans that are organized by municipal and provincial governments, including
retirement, medical, unemployment, work injury and maternity benefit plans for our managerial and key employees. In
addition, we provide short term insurance plans for all our employees while on duty to cover work related accidents.
We believe that we maintain a satisfactory working relationship with our employees and we have not experienced any
significant labor disputes or any difficulties in recruiting staff for our operations.
Corporate Information
Our principal executive offices are located at 18th Floor, Jialong International Building, 19 Chaoyang Park Road,
Chaoyang District, Beijing 100125, People’s Republic of China. Our corporate telephone number is (8610) 6598-3111 and
our fax number is (8610) 6598-3222. We maintain a website at http://www.chinabiologic.com that contains information
about the Company, but that information is not part of this report or incorporated by reference herein.
ITEM 1A. RISK FACTORS.
An investment in our common stock involves a high degree of risk. You should carefully consider the risks described
below, together with all of the other information included in this report, before making an investment decision. If any of
the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case,
the trading price of our common stock could decline, and you may lose all or part of your investment. You should read
the section entitled “Special Note Regarding Forward Looking Statements” above for a discussion of what types of
statements are forward-looking statements, as well as the significance of such statements in the context of this report.
RISKS RELATING TO OUR BUSINESS
The biopharmaceutical industry in China is strictly regulated and changes in such regulations,
including banning or limiting plasma products, may have a material and adverse effect on our
operations, revenues and profitability.
27
Form 10-KPART I The principal raw material 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 are not currently known or for which screens are currently commercially
available, which could result in a widespread epidemic due to blood infusion. As a result, the biopharmaceutical
industry in China is strictly regulated by the government. The regulatory regime regulates the process of administrative
approval of medicine and its production, and includes laws and regulations such as the PRC Pharmaceutical Law, the
Implementation Rules on the PRC Pharmaceutical Law and the Regulations on the Administration of Blood Products.
These laws and regulations require entities producing 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, or otherwise limit the use of such blood product. Changes in these laws and regulations, including
banning or limiting plasma products, could have a material and adverse effect on our operations, revenues and
profitability.
If the biopharmaceutical products we sell are found to be contaminated, our operation, revenues and
profitability would be severely and adversely affected and we may be subject to civil and criminal
liabilities.
We currently obtain 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, screening tests may fail to identify and exclude from our supply the plasma from infected
donors due to technical limitation and human errors. If such contaminated plasma is not appropriately screened out,
our entire plasma supply for the relevant plasma station may become contaminated. If the plasma from our collection is
found to be contaminated and we sell biopharmaceutical products made from that plasma, we could be subject to civil
liability from suits brought by consumers. Further, we may lose our registration and have criminal liability if we are found
by the government to have been criminally negligent. If this occurs, our business, prospects, results of operations and
financial condition will be materially and adversely affected.
If our supply of quality plasma is interrupted, our results of operations and profitability will be
adversely affected.
The production of plasma products relies on the supply of plasma of suitable quality. For 2014, 2013, and 2012,
the cost of plasma we used for production accounted for approximately 80%, 74%, and 74%, respectively, of total
production cost. The supply and market prices of plasma may be adversely affected by factors such as heightened
or new regulatory restrictions, higher living standards or outbreaks of diseases, any of which would 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.
28
Form 10-KPART I We may not be able to carry on our business if we lose any of the required permits and licenses.
Moreover, Huitian has suspended the production at its production facilities for technical upgrade
and will apply for a new GMP certificate upon the completion of the upgrade; however, it may not be
able to obtain the certificate, which would prevent it from carrying on its business at these facilities
and harm our profitability.
We and Huitian are required to obtain from various PRC governmental authorities certain permits and licenses, including
permits for pharmaceutical manufacturing and GMP certificates for each of our plants, as well as pharmaceutical
distribution permits.
Each of the production facilities operated by us and Huitian is required to obtain a GMP certificate for its pharmaceutical
production activities. In February 2011, CFDA enacted the New GMP Standard, which has significantly increased
standards for quality control, documentation, and overall manufacturing processes that applied to us and each of our
production facilities as of December 31, 2013. In order for us to meet the New GMP Standard, we have upgraded the
related production facilities of Shandong Taibang and Guizhou Taibang, which obtained the renewed GMP certificates
and resumed commercial production of plasma products in June 2013 and March 2014, respectively. However, Huitian
suspended its production in late 2013 and is constructing a new production facility to meet the New GMP Standard. The
suspension of Huitian’s production may have a negative effect on its business and profitability, which may in turn affect
the income we derive from our minority investment in Huitian and adversely affect our financial condition and results of
operations.
We have also obtained permits and licenses and GMP certificates required for the manufacturing and sales of
our products. Our permits and licenses are subject to periodic renewal and/or reassessment by the relevant PRC
governmental authorities, and the compliance standards may be subject to change from time to time. We intend to
apply for the renewal of such permits and licenses when required by applicable laws and regulations. However, there
is no guarantee that we may renew such permits and licenses in a timely manner, or at all. If we are unable to renew
our permits and licenses or failed an inspection which would impair our permits and licenses, our business, prospects,
financial condition and results of operations may be materially and adversely affected.
In addition, any changes in compliance standards, or any new laws or regulations that may prohibit or render it more
restrictive for us to conduct our business or increase our compliance costs may adversely affect our operations and
profitability. For example, we expect our on-going compliance cost to increase under the New GMP Standard as
compared to the previous standard. As a result, our business and financial condition may be materially and adversely
affected.
We do not have discretion to increase the prices of certain of our products, which are subject to
price controls by the PRC government.
Retail prices of certain pharmaceutical products are subject to various regulations. According to the “Regulations on
Controlling Blood Products” promulgated by the PRC State Council in 1996, regional offices of the Pricing Bureau and
the PRC 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
29
Form 10-KPART I retail price ceilings set out in the National (Medical) Insurance Catalog, or the NIC, which may be adjusted by NDRC,
from time to time. The hospitals which are participants of the national insurance program cannot sell the products to
patients at prices exceeding such retail price ceilings. In addition, provincial governments often establish a tender
price ceiling for products sold to hospitals based on, among other things, regional living standards, cost of production
of the manufacturers and the corresponding retail price ceiling. The prices at which we sell directly to hospitals and
distributors and the distributor’s wholesale prices cannot exceed the applicable tender price ceiling. Five of our
principal products, including human albumin, IVIG, human rabies immunoglobulin, human tetanus immunoglobulin and
factor VIII, are included in the NIC and are also 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 PRC provinces. In addition, NDRC may adjust the retail price ceilings applicable to our products from
time to time, and any downward adjustment of our product prices implemented by the government may have a negative
impact on our results of operations. See “Business — Regulation” for further details.
We do not have discretion to increase the prices we charge our customers and distributors for price-controlled products
above the relevant controlled tender price ceiling. Although we may appeal to the local governments for price increases,
such increases are only granted on a case-by-case basis and there is no guarantee that we would obtain any such
relief. We may not be able to obtain government approval to increase our prices even if the cost of manufacturing
our products increases as a result of increases in the cost of raw materials or other costs, and, if we were unable to
obtain relief, our revenue and profitability would be adversely affected. If the margin of any of these products becomes
prohibitively low, we may stop manufacturing such product, which may further adversely affect our revenue and
profitability.
We may fail to obtain, maintain or renew required licenses and permits for our plasma stations. In
addition, if we fail to adequately monitor our plasma stations, follow proper procedures or comply
with safety requirements, we may be subject to sanctions by the government, civil and criminal
liability. Any of these events could have a material and adverse effect on our business, reputation
and prospects.
We currently operate 10 plasma stations through Shandong Taibang and two plasma stations through Guizhou Taibang.
Huitian, a company in which we hold a minority interest, has three plasma stations in Shaanxi Province. To enable
growth in our sales, we are seeking opportunities to build more plasma stations. The operation of plasma stations is
highly regulated and there is no assurance that we will be able to obtain, maintain and renew the required licenses and
permits for existing and new plasma stations in desirable locations or in a timely manner, if at all. While we monitor our
plasma intake procedures through frequent unscheduled inspections of our stations, there remain risks that our plasma
stations may fail to comply with hygiene and procedural requirements for plasma screening, collection, storage and
tracking. If we fail to comply with any of these requirements, we may lose our plasma collection permits or incur criminal
liability if we are found by the government to have been criminally negligent. In the case of plasma contamination, we
may also be subject to civil liability from suits brought by consumers of our biopharmaceutical products. In addition,
failure to comply with hygiene and procedural requirements may cause harm to donors, who may contract diseases
from other donors, among other things. Any such incident may subject us to government sanctions, civil or criminal
liabilities. If any of these events were to occur, our business, reputation and prospects would be materially and
adversely affected.
30
Form 10-KPART I Our operations, sales, profit and cash flow will be adversely affected if our plasma products fail to
pass inspection in a timely manner.
The PRC government inspects each batch of our plasma products before we can ship it to our customers. CFDA has
quality standards which require the regulators to assess, 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 throughout the lifecycle of each product including plasma collection, delivery, production
and packaging. Government regulators typically take more than a month to inspect one batch of plasma products. The
process begins when the regulator randomly selects samples of our products and delivers them to the PRC National
Institute for the Control of Pharmaceutical and Biological Products, or NICBPB, for testing, and the process ends when
the products are given final approval by NICBPB. In the event that the regulators delay the approval of or reject our
products or change the requirements such that we are unable to comply, our operations, sales, profit and cash flow will
be adversely affected.
We face risks relating 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, coupled with access to the credit markets, provide us with
significant working capital. 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 or failures of significant financial institutions could adversely affect our access to capital needed
to conduct or expand our business or conduct acquisitions or make other investments. Such disruptions may also
adversely impact our customers and suppliers, which, in turn, could adversely affect our results of operations, cash
flows and financial condition.
In addition, despite the positive impact of insurance schemes, our products are still not affordable to many patients
and fewer patients can afford these products when economic conditions worsen in China. As our economy grows, we
expect more Chinese people will become consumers of medical treatments and procedures, including procedures
requiring human plasma. However, any potential global economic slowdown may result in slower economic growth in
China and an unfavorable economic environment, which in turn may make our products less affordable to more patients
and result in an overall decreased demand for our products. Such reductions and disruptions could have a material and
adverse effect on our business operations.
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 anticipate that we may seek 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
31
Form 10-KPART I 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 times of market contraction. To raise funds,
we may need to issue new securities which could result in additional dilution to our stockholders. 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 that contain covenants that would limit our operations and strategy. 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 expansion plans.
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, 2014, 2013,
and 2012 were approximately $19.4 million, $17.3 million, and $11.2 million, respectively. A majority of our accounts
receivable 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 cash flow and working capital, which could in turn adversely affect our business.
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 approximately 171 distributors located in about 28
provinces, municipalities and autonomous regions 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 2014, 2013,
and 2012, sales to distributors represented approximately 34.6%, 33.2%, and 33.6%, respectively, of our sales of
plasma products. 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.
32
Form 10-KPART I Our inability to successfully research and develop new biopharmaceutical products could have an
adverse effect on our future growth.
We believe that the successful development of biopharmaceutical products can be affected by many factors. Products
that appear to be promising in the early phases of research and development may fail to be commercialized for various
reasons, including the failure to obtain the necessary regulatory approvals. In addition, the research and development
cycle for any new medicine is a relatively lengthy process. In our experience, the process of conducting research and
various tests on new products before obtaining a Certificate of New Medicine from CFDA 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.
Some of our owned or leased properties have title defects or non-compliance, which could adversely
affect our business operations.
Some of our owned or leased properties have title defects or non-compliance. We cannot assure you that we will be
able to rectify such defects and non-compliance in a timely manner or at reasonable costs, if at all. In addition, we use
properties built on collectively owned rural land for two of our plasma collection stations. Under PRC laws, collectively
owned rural land may not be used for commercial purposes and we may be required to vacate and seek other space
to house our collection facilities. We plan to construct facilities on a new site and relocate one of the two collection
stations. For the other collection station, under the lease agreement for the collectively owned rural land among us,
the local government and the economic collective which owns the land, the economic collective is required to assist
us in securing legal rights to use such land. If the economic collective fails to perform its obligations under the lease
agreement, or the lease agreement is deemed to be void, voidable or otherwise unenforceable, or if ownership disputes
or claims regarding the land otherwise arise, we may be required to relocate our collection station. Any disputes or
claims relating to our owned or leased properties or land or any efforts in securing alternative sites and properties could
divert our resources and management’s attention from our regular business operations. In addition, we may not be able
to secure alternative sites and properties, if required, in a timely manner or at reasonable costs, which could adversely
affect our business operations.
Our financial position and operations may be materially and adversely affected if our product liability
insurance does not sufficiently cover our liabilities
Under current PRC laws, manufacturers and vendors of defective products in China may incur liability for loss and injury
caused by such products. Pursuant to the General Principles of the Civil Law of the PRC, or the PRC Civil Law, which
became effective in 1987, a defective product 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
33
Form 10-KPART I 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 insurance policies for sales in China for Shandong Taibang and Guizhou Taibang’s
products in the amount of $3.2 million (RMB20 million) each. If our products are found to be defective and our
insurance coverage is insufficient to cover a successful claim against us, our financial position and operations may be
materially and adversely affected.
Product liability claims or product recalls involving our products could have a material and adverse
effect on our business.
Our business exposes us to the risk of product liability claims that are inherent in the manufacturing, distribution and
sale of plasma products. Plasma is a biological substance that is capable of transmitting viruses and pathogens,
whether known or unknown. Therefore, our plasma and plasma products, if not properly collected, tested, pathogen-
inactivated, processed, stored or transported, could cause serious disease and possibly death to patients. Further,
there are viral and other infections of plasma which may escape detection using current testing methods and which are
not susceptible to inactivation methods. Any infection of disease by persons using our products could result in claims
against us. Since our establishment in 2002, we have been subject to three lawsuits filed by patients who were treated
with our products and received blood and/or plasma transfusions. In two of these cases, we were ordered to contribute
a portion of the compensation for the patients even though the courts did not find that our products were defective or
caused the patients’ illness. The required contribution by us was immaterial in these two cases. For the third case, we
settled with the patient and contributed to a small portion of the compensation made by all the defedents who might
be responsible for the case. We cannot assure you that there will be no future claims against us or that we will always
succeed in defending against such claims. Furthermore, the presence of a defect in a product could require us to carry
out a recall of such product.
A product liability claim, regardless of merit or eventual outcome, or a product recall could result in substantial financial
losses, civil and criminal liabilities, administrative sanctions, revocation of business and product permits and licenses,
negative reputational repercussions and an inability to retain customers. If our products are found to be defective and
our insurance coverage is insufficient to cover a successful claim against us, our financial position and operations may
be materially and adversely affected.
34
Form 10-KPART I We are subject to intense competition and may encounter increased competition from both local
and overseas pharmaceutical enterprises if PRC regulators relax the approval process for plasma
products or international trade restrictions. A change in our competitive environment could adversely
affect our profitability and prospects.
We face intense competition from local and foreign entities that manufacture and sell products that compete with ours in
China. These competitors may have more capital, better research and development resources, expanded manufacturing
and marketing capabilities and more experience than we do. The plasma-based biopharmaceutical manufacturing
industry in China is highly regulated, and although we believe that compliance with the regulatory requirements pose a
competitive barrier to enter into the Chinese market, over time, however, there may be new entrants. If the government
relaxes these restrictions and allows more competitors to enter into the market, these competitors may have more
capital, better research and development resources, more manufacturing and marketing capability and experience than
us. Our operating results and financial condition may be adversely affected if (i) competition intensifies, (ii) competitors
reduce prices to gain market share, or (iii) competitors develop new products having comparable medicinal applications
or therapeutic effects which are more effective or less costly than ours.
In addition, we also face competition from imported products. Since 2009, there has been a substantial increase in
volume of imported human albumin in China, which competes in domestic human albumin market. In addition, we
compete with foreign biopharmaceutical manufacturers that set up production facilities in China and compete directly
with us. The increased supply of both domestic and foreign biopharmaceutical products in China may result in lower
sales or lower prices for our products. There is no assurance that we will remain competitive or that our profitability and
prospects will not be adversely affected.
We depend heavily on key personnel, and turnover of key employees and senior management could
harm our business.
Our success, to a certain extent, is attributable to the expertise and experience of our senior management and key
research and technical personnel who carry out key functions in our operation. If we lose the service of any of our
senior management or key research or technical personnel or fail to attract additional personnel with suitable experience
and qualification, our business operations and research capability may be adversely affected.
We have a Secondment Agreement with the Shandong Institute, which is expected to terminate upon
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 provided us with 63 of our employees, including certain key management personnel, out
of our total of approximately 1,684 employees as of December 31, 2014, 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 earlier of October 2032
or the privatization of the Shandong Institute, which was originally scheduled to occur before the end of 2008. However,
35
Form 10-KPART I the privatization of the Shandong Institute has been delayed indefinitely due to delay by the Shandong Department
of Health in implementing the privatization plan. Upon expiration or termination of the Secondment Agreement, we
plan to hire the seconded employees directly. However, we cannot assure you that all of the employees will accept our
employment offers at that time. Guangli Pang, Shandong Taibang’s chief executive officer is employed through the
Secondment Agreement. Although none of our seconded employees have indicated that they do not plan to continue
working for us after the privatization, if the Secondment Agreement is terminated or expires and we are unable to hire
those employees or their replacements on time, our operations, as well as our financial results, may be materially and
adversely affected.
Future acquisitions may have an adverse effect on our ability to manage our business.
Selective acquisitions form part of our strategy to further expand our business. If we are presented with appropriate
opportunities, we may acquire additional companies, products or technologies. Future acquisitions and the subsequent
integration of new companies into ours would require significant attention from our management. The diversion of our
management’s attention and any difficulties encountered in any integration process could have an adverse effect on
our ability to manage our business. Future acquisitions would expose us to potential risks, including risks associated
with the integration of new operations, technologies and personnel, unforeseen or hidden liabilities, the diversion of
resources from our existing businesses and technologies, the inability to generate sufficient revenue to offset the costs
and expenses of acquisitions, and potential loss of, or harm to, relationships with employees, customers and suppliers
as a result.
We may lose our competitive advantage and our operations may suffer if we fail to prevent the loss
or misappropriation of, or disputes over, our intellectual property or proprietary information.
We regard our intellectual property, particularly our patents and trade secrets, to be of considerable value and
importance to our business and our success. We rely on a combination of patent, trademark and trade secret laws, as
well as confidentiality agreements to protect our intellectual property rights. Failure to protect our intellectual property
rights could harm our brands and our reputation, and adversely affect our ability to compete effectively. Further,
enforcing or defending our intellectual property rights, including our patents and trade secrets, could result in the
expenditure of significant financial and managerial resources.
As of December 31, 2014, we held 48 issued patents and had 11 pending patent applications in China for certain
manufacturing processes and packaging designs. We may not be able to successfully obtain the approval of the PRC
authorities for our patent applications. As of December 31, 2014, we also had 9 trademarks registered in China.
While we are not aware of any infringement on our intellectual property and we have not been notified by any third
party that we are infringing on their intellectual property, our ability to compete successfully and to achieve future
revenue growth will depend, in significant part, on our ability to protect our proprietary technologies and operate without
infringing upon the intellectual property rights of others. Policing unauthorized use of proprietary technologies is difficult
and expensive. The steps we have taken may not be adequate to prevent unauthorized use of our intellectual property
rights.
36
Form 10-KPART I The legal regime in China for the protection of intellectual property rights is still at its early stage of development.
Despite many laws and regulations promulgated and other efforts made by China over the years to tighten up its
regulation and protection of intellectual property rights, private parties may not enjoy intellectual property rights in
China to the same extent as they would in many Western countries, including the United States, and the enforcement of
such laws and regulations in China has not achieved the levels reached in those countries. The administrative agencies
and the court system in China are not well-equipped to deal with violations or handle the nuances and complexities
between compliant technological innovation and noncompliant infringement.
We also rely on confidentiality agreements with our management and employees to protect our confidential proprietary
information. However, the protection of our intellectual property may be compromised as a result of:
• 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 and 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 any 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.
Finally, any event that would jeopardize our proprietary rights or any claims of infringement by third parties could have a
material and adverse effect on our ability to market or sell our brands, and profitably exploit our products.
A disruption in the supply of utilities, fire or other calamity at our manufacturing plant would disrupt
production of our products and adversely affect our sales.
Our products are manufactured at our production facilities located in Tai’an, Shandong Province and Guiyang, Guizhou
Province in China. While we have not in the past experienced any calamities which disrupted production, any disruption
in the supply of utilities, in particular, electricity or power supply, or any outbreak of fire, flood or other calamity resulting
37
Form 10-KPART I in significant damage at our facilities would severely affect our production and have a material and 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.
If we do not maintain strong financial controls, investor confidence in us may decline and our stock
price may decline as a result.
As required by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring every public company
to include a management report on such company’s internal control over financial reporting in its annual report, which
must also contain management’s assessment of the effectiveness of 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 in our
Annual Report on Form 10-K for the year ended December 31, 2014. Our management has concluded that our internal
controls over financial reporting as of December 31, 2014 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 on Form 10-K for year ended December 31, 2010, which were subsequently remediated in 2011 as
described under Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2011. However, 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 and 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.
Pending disputes regarding Guizhou Taibang’s equity ownership against us, if not resolved in our
favor, could result in significant dilution to our shareholding percentage in Guizhou Taibang.
Guizhou Jie’an Company, or Jie’an, a minority shareholder of Guizhou Taibang, filed several lawsuits against Guizhou
Taibang over the years, seeking to, among other requests, register 1.8 million shares in Guizhou Taibang, approximately
2% of Guizhou Taibang’s registered capital, under Jie’an’s name with the local Administration of Industry and
Commerce, or AIC. Some of these cases were ruled in our favor and others were still pending as of the date of this
report. See “Item 3—Legal Proceedings—Dispute with Jie’an over Certain Capital Injection into Guizhou Taibang” below
for details. If these ongoing cases are ruled in Jie’an’s favor, our ownership interest in Guizhou Taibang may be diluted
to 71% and Jie’an may be entitled to receive its claimed damages of RMB18.3 million (approximately $3.0 million) (being
its claimed share of Guizhou Taibang’s accumulated dividend distributions associated with the 1.8 million shares),
38
Form 10-KPART I and the acrrued interest from the date when Jie’an’s capital contribution was deemed effective till December 31, 2014
from Guizhou Taibang. In addition, as a result of the appellate court’s unfavorable ruling in one of the lawsuit with
Jie’an in December 2014, Guizhou Taibang paid RMB18.0 million (approximately $2.9 million) in February 2015 into an
escrow held by the trial court pending further appeal for such case. Although we, based on our PRC litigation counsel’s
assessment, do not expect Jie’an to prevail in these pending litigations, we cannot assure you that the final judgment
will be in our favor. If Guizhou Taibang is ordered to register the 1.8 million shares for Jie'an, our ownership interest in
Guizhou Taibang will be diluted to 71%, and we may be required to pay Jie’an accumulated dividends of RMB18.3
million (approximately $3.0 million) and related interest expenses (being its claimed share of Guizhou Taibang’s
accumulated dividend distributions associated with the 1.8 million shares and the acrrued interest from the date when
Jie’an’s capital contribution was deemed effective till December 31, 2014) from Guizhou Taibang. As of December 31,
2014, the Company had maintained, on its balance sheet, payables to Jie’an of RMB5.0 million (approximately $0.8
million) as received funds in respect of the 1.8 million shares in dispute, RMB1.4 million (approximately $0.2 million) for
the over-paid subscription price paid by Jie’an and RMB3.3 million (approximately $0.5 million) for the accrued interest.
In addition, Guizhou Taibang has a pending lawsuit with an individual investor who is among cerain alleged strategic
investors in the Equity Purchased Agreement signed in May 2007. See “Item 3—Legal Proceedings—Dispute with
Certain Individual Investor Over Certain Capital Injection into Guizhou Taibang.” Such individual investor claimed for
14.35% ownership interests in Guizhou Taibang and the corresponding entitlement to share dividend distributions since
2007. Such individual investor’s claims have been repeatedly denied by both the trial court and the appellate court (which
is the PRC Supreme Court). He has, however, applied to the PRC Supreme Procuratorate to seek an appeal by the PRC
Supreme Procuratorate to the PRC Supreme Court for an ultimate re-trial on his behalf. The PRC Supreme Procuratorate
has recently accepted his application and is currently reviewing such application. We are in the process of preparing
written response to such application. While we, based on our PRC litigation counsel’s assessment, do not expect such
investor to prevail in this pending re-trial application process, we cannot assure you that the PRC Supreme Procuratorate
will decide not to appeal for re-trial or the final outcome of such ultimate re-trial by the PRC Supreme Court (if the PRC
Supreme Procuratorate decides to appeal for re-trial) will continue be in our favor. In case such investor’s shareholder
status is established through the re-trial process, our ownership interests in Guizhou Taibang will be significantly diluted
to 66.29% and our control of Guizhou Taibang may be weakened. In addition, such investor may be entitled to receive
his claimed pro rata share of Guizhou taibang’s dividend distributions and the accrued interests although he has not
specified the amount of the claimd damages for that in either the appeal to the PRC Supreme Court or the application
to the PRC Supreme Procuratorate. As of December 31, 2014, Guizhou Taibang had maintained, on its balance sheet,
payables to such investor of RMB34.2 million (approximately $5.6 million) as originally received funds from such investor
in respect of the shares in dispute, RMB15.9 million (approximately $2.6 million) for the accrued interest, and RMB0.3
million (approximately $55,647) for the 1% penalty imposed by the agreement for any breach in the event that Guizhou
Taibang is required to return the original investment amount to such investor.
39
Form 10-KPART I RISKS RELATING TO DOING BUSINESS IN CHINA
Changes in China’s political or economic situation could harm us and our operating results.
Economic reforms adopted by the 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 in the following areas, could either benefit or damage our operations
and profitability:
•
•
Level of government involvement in the economy;
Control of foreign exchange;
• Methods of allocating resources;
•
•
International trade restrictions; and
International conflict.
The Chinese economy differs from the economies of most member countries of the Organization for Economic
Cooperation and Development, or the OECD, in many ways. For example, state-owned enterprises still constitute a large
portion of 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.
Uncertainties with respect to the PRC legal system could limit the legal protections available to you
and us.
We conduct substantially all of our business through our operating subsidiaries in China. Our operating subsidiaries are
generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable
to foreign-invested enterprises. The PRC legal system is based on written statutes, and prior court decisions may be
cited for reference but have limited precedential value. Since 1979, a series of new PRC laws and regulations have
significantly enhanced the protections afforded to various forms of foreign investments in China. However, since the PRC
legal system continues to evolve rapidly, the interpretations of many laws, regulations, and rules are not always uniform,
and enforcement of these laws, regulations, and rules involve uncertainties, which may limit legal protections available
to you and us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of
resources and management attention. 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 could be difficult for investors to affect service of process in the United States or to enforce a judgment
obtained in the United States against our Chinese operations and subsidiary.
You may have difficulty enforcing judgments against us.
Most of our assets are located outside of the United States and most of our current operations are conducted in China.
In addition, most of our directors and officers are nationals and residents of countries other than the United States and
substantially all the assets of these persons are located outside the United States. As a result, it may be difficult for you
40
Form 10-KPART I 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
directors.
There is also uncertainty as to whether the courts of the PRC would recognize or enforce judgments of U.S. courts. Our
counsel as to PRC law has advised us that although recognition and enforcement of foreign judgments are provided
for under the PRC Civil Procedures Law, recognition and enforcement of a foreign judgment by PRC courts depend on
treaties or reciprocity between China and the country where the judgment is made. China does not have any treaties
or other arrangements with U.S. that provide for the reciprocal recognition and enforcement of U.S. judgments. In
addition, according to the PRC Civil Procedures Law, courts in China will not enforce a foreign judgment against us or
our directors and officers if they decide that the judgment violates basic principles of PRC law or national sovereignty,
security, or the public interest. So it is uncertain whether a PRC court would enforce a judgment rendered by a court in
the United States.
The PRC government exerts substantial influence over the manner in which we must conduct our
business activities.
The PRC government has exercised and continues to exercise substantial control over virtually every sector of the
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
applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions in which
we operate may impose new, stricter regulations or interpretations of existing regulations that would require additional
expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.
Accordingly, government actions in the future, including any decision not to continue to support recent economic
reforms and to return to a more centrally planned economy and any regional or local variations in the implementation
of economic policies, could have a significant effect on economic conditions in China or particular regions thereof and
could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.
Restrictions on currency exchange may limit our ability to receive and use our sales effectively.
Substantially all of our sales are settled in RMB, and any future restrictions on currency exchanges may limit our
ability to use revenue generated in RMB to fund any future business activities outside China or other payments in U.S.
dollars. Although the Chinese government introduced regulations in 1996 to allow greater convertibility of the RMB for
current account transactions, significant restrictions still remain, including primarily the restriction that foreign-invested
enterprises may only buy, sell or remit foreign currencies after providing valid commercial documents at those banks
in China authorized to conduct foreign exchange business. In addition, conversion of RMB for capital account items,
including direct investments and loans, is subject to governmental approval and companies are required to open
and maintain separate foreign exchange accounts for capital account items. We cannot be certain that the Chinese
regulatory authorities will not impose more stringent restrictions on the convertibility of the RMB.
41
Form 10-KPART I Fluctuations in exchange rates could adversely affect our business and the value of our securities.
The value of our common stock will be indirectly affected by the foreign exchange rate between the U.S. dollar and
RMB and between those currencies and other currencies in which our sales may be denominated. Appreciation or
depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar
terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the
exchange rate will also affect the relative value of any dividends we issue that will be exchanged into U.S. dollars, as
well as earnings from, and the value of, any U.S. dollar-denominated investments we make in the future.
Since July 2005, 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 incur interest expense 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
distributions could materially and adversely affect our ability to grow, make investments or
acquisitions, pay dividends to you and otherwise fund and conduct our business.
Substantially all of our profits are earned by our PRC subsidiaries. However, PRC regulations restrict the ability of our
PRC subsidiaries to make dividends and other payments to their offshore parent companies.
PRC legal restrictions permit payments of dividends by our PRC subsidiaries only out of their accumulated after-tax
profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC subsidiaries are
also required under PRC laws and regulations to allocate at least 10% of their annual after-tax profits determined in
accordance with PRC GAAP to a statutory general reserve fund until the amounts in said fund reaches 50% of their
registered capital. Allocations to these statutory reserve funds can only be used for specific purposes and are not
transferable to us in the form of loans, advances or cash dividends. Any limitations on the ability of our PRC subsidiaries
to transfer funds to us could materially limit our ability to grow, make investments or acquisitions that could be beneficial
to our business, pay dividends and otherwise fund and conduct our business.
42
Form 10-KPART I Failure to comply with PRC regulations relating to the establishment of offshore special purpose
companies by PRC residents may subject our PRC resident stockholders to personal liability, limit
our ability to acquire PRC companies or to inject capital into our PRC subsidiaries, limit the ability of
our PRC subsidiaries to distribute profits to us or otherwise materially adversely affect us.
Pursuant to the Circular on Relevant Issues concerning Foreign Exchange Administration of Overseas Investment and
Financing and Return Investments Conducted by Domestic Residents through Overseas Special Purpose Vehicle, or
Circular 37, which was promulgated by the State Administration of Foreign Exchange, or SAFE, and became effective
on July 4, 2014, (i) a PRC resident must register with the local SAFE branch before he or she contributes assets or
equity interests in an overseas special purpose vehicle, or an Overseas SPV, that is directly established or controlled by
the PRC resident for the purpose of conducting investment or financing; and (ii) following the initial registration, the PRC
resident is also required to register with the local SAFE branch for any major change, in respect of the Overseas SPV,
including, among other things, a change in the Overseas SPV’s PRC resident shareholder, name of the Overseas SPV,
term of operation, or any increase or reduction of the Overseas SPV’s registered capital, share transfer or swap, and
merger or division.
We have requested the beneficial holders of our stock who are PRC residents to register with the relevant branch of
SAFE in connection with their equity interests in us and our acquisitions of equity interests in our PRC subsidiaries
pursuant to Circular 37 or the predecessor regulation of Circular 37, namely the Notice on Relevant Issues Concerning
Foreign Exchange Administration for PRC Residents Engaging in Financing and Roundtrip Investments via Overseas
Special Purpose Vehicles, as the case may be. As Circular 37 was recently promulgated, it remains unclear how it
will be interpreted and implemented, and how or whether SAFE will apply it to us. Therefore, we cannot predict how
it will affect our business operations or future strategies. For example, the ability of our present and prospective
PRC subsidiaries to conduct foreign exchange activities, such as the remittance of dividends and foreign currency-
denominated borrowings, may be subject to compliance with Circular 37 by our PRC resident beneficial holders.
In addition, such PRC residents may not always be able to complete the necessary registration procedures required
by Circular 37. We also have little control over either our present or prospective direct or indirect stockholders or the
outcome of such registration procedures. Failure of our present or future PRC resident beneficial holders to comply
with Circular 37 could subject these PRC resident beneficial holders to fines or legal sanctions, restrict our overseas
or cross-border investment activities, limit the ability of our PRC subsidiaries to make distributions or pay dividends or
affect our ownership structure, which could adversely affect our business and prospects.
We may be unable to complete a business combination transaction efficiently or on favorable terms
due to complicated merger and acquisition regulations.
In August 2006, six PRC regulatory agencies, including the China Securities Regulatory Commission, or CSRC,
promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or Circular
10, which became effective in September 2006 and was amended in June 2009. This regulation, among other things,
governs the approval process by which a PRC company may participate in an acquisition of assets or equity interests.
Depending on the structure of the transaction, Circular 10 requires the PRC parties to make a series of applications
and supplemental applications to the government agencies. In some instances, the application process may require the
presentation of economic data concerning a transaction, including appraisals of the target business and evaluations
43
Form 10-KPART I of the acquirer, which are designed to allow the government to assess the transaction. Government approvals will have
expiration dates by which a transaction must be completed and reported to the government agencies. Compliance
with Circular 10 is likely to be more time-consuming and expensive than in the past and the government can now exert
more control over the combination of two businesses. Accordingly, due to Circular 10, our ability to engage in business
combination transactions has become significantly more complicated, time consuming and expensive, and we may
not be able to negotiate a transaction that is acceptable to our stockholders or sufficiently protect their interests in a
transaction.
Circular 10 allows PRC government agencies to assess the economic terms of a business combination transaction.
Parties to a business combination transaction may have to submit to the PRC Ministry of Commerce, or MOFCOM,
and other relevant government agencies an appraisal report, an evaluation report and the acquisition agreement, all
of which form part of the application for approval, depending on the structure of the transaction. The regulations also
prohibit a transaction at an acquisition price obviously lower than the appraised value of the PRC business or assets
and in certain transaction structures, require that consideration must be paid within defined periods, generally not in
excess of a year. The regulation also limits our ability to negotiate various terms of the acquisition, including aspects
of the initial consideration, contingent consideration, holdback provisions, indemnification provisions and provisions
relating to the assumption and allocation of assets and liabilities. Transaction structures involving trusts, nominees and
similar entities are prohibited. Therefore, such regulation may impede our ability to negotiate and complete a business
combination transaction on financial terms that satisfy our investors and protect our stockholders’ economic interests.
Under the Enterprise Income Tax Law, we may be classified as a “resident enterprise” of China.
Such classification will likely result in unfavorable tax consequences to us and our non-PRC
stockholders.
The Enterprise Income Tax Law, or the EIT Law, and its implementing rules became effective on January 1, 2008. Under
the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered
a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise
income tax purposes. The implementing rules of the EIT Law define de facto management as “substantial and overall
management and control over the production and operations, personnel, accounting, and properties” of the enterprise.
On April 22, 2009, SAT issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment
Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of de facto Management
Bodies, or the Notice, further interpreting the application of the EIT Law and its implementation on non-Chinese
enterprise or group controlled offshore entities. Pursuant to the Notice, an enterprise incorporated in an offshore
jurisdiction and controlled by a Chinese enterprise or group will be classified as a “non-domestically incorporated
resident enterprise” if (i) its senior management in charge of daily operations reside or perform their duties mainly in
China; (ii) its financial or personnel decisions are made or approved by bodies or persons in China; (iii) its substantial
assets and properties, accounting books, corporate chops, board and shareholder minutes are kept in China; and (iv)
at least half of its directors with voting rights or senior management often resident in China. A resident enterprise would
be subject to an enterprise income tax rate of 25% 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 to whether the Notice is
applicable to an offshore enterprise incorporated by a Chinese natural person. Nor are detailed measures on imposition
44
Form 10-KPART I of tax from non-domestically incorporated resident enterprises are available. Therefore, it is unclear how tax authorities
will determine tax residency based on the facts of each case.
We may be deemed to be a resident enterprise by Chinese tax authorities. If the PRC tax authorities determine that we
are a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences
could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income
as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as interest
on financing proceeds and non-China source income would be subject to PRC enterprise income tax at a rate of 25%.
Second, although under the EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries would
qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to a 10% withholding tax,
as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with
respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise
income tax purposes. Finally, it is possible that future guidance issued with respect to the “resident enterprise”
classification could result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-
PRC stockholders and with respect to gains derived by our non-PRC stockholders from transferring our shares. Finally,
if we were treated as a “resident enterprise” by PRC tax authorities, we would be subject to taxation in both the U.S.
and China, and our PRC tax may not be creditable against our U.S. tax. We are actively monitoring the possibility of
“resident enterprise” treatment for the 2014 tax year and are evaluating appropriate organizational changes to avoid this
treatment, to the extent possible.
We face uncertainties with respect to indirect transfers of equity interests in PRC resident
enterprises by their non-PRC holding companies.
SAT released a circular on December 15, 2009 that addresses the transfer of shares by nonresident companies,
generally referred to as Circular 698. Circular 698, which is effective retroactively to January 1, 2008, may have a
significant impact on many companies that use offshore holding companies to invest in China. Circular 698 has the
effect of taxing foreign companies on gains derived from the indirect sale of a PRC company. Where a foreign investor
indirectly transfers equity interests in a PRC resident enterprise by selling the shares in an offshore holding company,
and the latter is located in a country or jurisdiction that has an effective tax rate less than 12.5% or does not tax foreign
income of its residents, the foreign investor must report this indirect transfer to the tax authority in charge of that PRC
resident enterprise. Using a “substance over form” principle, the PRC tax authority may disregard the existence of
the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of
avoiding PRC tax. As a result, gains derived from such indirect transfer may be subject to PRC withholding tax at a rate
of up to 10%.
SAT subsequently released public notices to clarify issues relating to Circular 698, including the Announcement
on Several Issues concerning the Enterprise Income Tax on the Indirect Transfers of Properties by Non-resident
Enterprises, or SAT Notice 7, which became effective on February 3, 2015. SAT Notice 7 abolished the compulsive
reporting obligations originally set out in Circular 698. Under SAT Notice 7, if a non-resident enterprise transfers its
shares in an overseas holding company, which directly or indirectly owns PRC taxable properties, including shares in
a PRC company, via an arrangement without reasonable commercial purpose, such transfer shall be deemed as direct
transfer of the underlying PRC taxable properties. Accordingly, the transferee shall be deemed as a witholding agent
45
Form 10-KPART I with the obligation to withhold and remit the EIT to the competent PRC tax authorities. Factors that may be taken into
consideration when determining whether there is a “reasonable commercial purpose” include, among other factors,
the economic essence of the transferred shares, the economic essence of the assets held by the overseas holding
company, the taxability of the transaction in offshore jurisdictions, and economic essence and duration of the offshore
structure. SAT Notice 7 also sets out safe harbors for the “reasonable commercial purpose” test.
There is little guidance and practical experience regarding the application of Circular 698 and the related SAT notices.
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 contact with
China. Moreover, the relevant authority has not yet promulgated any formal provisions or formally declared or stated how
to calculate the effective tax rates in foreign tax jurisdictions. As a result, we may become at risk of being taxed under
Circular 698 and the related SAT notices and we may be required to expend valuable resources to comply with Circular
698 and the related SAT notices or to establish that we should not be taxed under Circular 698 and the related SAT
notices, which could have a material and 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 and
adverse effect on our business.
We are subject to the Foreign Corrupt Practice Act, or FCPA, and other U.S. laws that prohibit improper payments
or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as
defined by the relevant statute, for the purpose of obtaining or retaining business. We have operations, agreements with
third parties, and make most of our sales in China. PRC anti-corruption laws also strictly prohibit bribery of government
officials. Our activities in China create the risk of unauthorized payments or offers of payments by the employees,
consultants, sales agents, or distributors of the 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 the 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 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 the Company liable for successor liability under FCPA violations committed by
companies in which we invest or that we acquire.
If we become directly subject to the scrutiny, criticism and negative publicity involving U.S.-listed
Chinese companies, we may have to expend significant resources to investigate and resolve the
matter which could harm our business operations, stock price and reputation and could result in a
loss of your investment in our stock, especially if such matter cannot be addressed and resolved
favorably.
46
Form 10-KPART I 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 the 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 the Company. This situation will be costly
and time consuming and distract our management from growing the Company. If such allegations are not proven to be
groundless, the 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 China. Accordingly, our public disclosure
should be reviewed in light of the fact that no governmental agency that is located in China where
substantially all of our operations and business are located 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 the 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.
The Chinese member firm of the KPMG network, of which our independent registered public
accounting firm is also a member, may be temporarily suspended from practicing before the SEC
if unable to continue to satisfy SEC investigation requests in the future. If a delay in completion of
our audit process occurs as a result, we could be unable to timely file certain reports with the SEC,
which may lead to the delisting of our stock.
47
Form 10-KPART I The vast majority of our sales are 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 our
annual reports may be located in China, and certain audit procedures may take place within China’s borders. The
Public Company Accounting Oversight Board, or the 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. On February 12, 2014, the accounting firms filed an appeal with the SEC regarding the administrative
law judge’s decision. On February 6, 2015, the accounting firms agreed to pay $500,000 each to settle this yearlong
dispute with the SEC, which allows them to avoid a temporary suspension of their right to audit U.S.-traded firms. As
part of the settlement, the SEC censures the accounting firms, which eventually began providing the documents, and
requires them to perform specific steps to satisfy SEC requests for similar materials over the next four years.
We cannot assure you, however, that the accounting firms, including the Chinese member firm of KPMG, will be able to
continue to satisfy SEC investigation requests to its satisfaction in the future due to compliance with the PRC laws and
regulations. A delay in completion of the audit process could delay the timely filing of our quarterly or Annual Reports
with the SEC. A delinquency in our filings with the SEC may result in NASDAQ initiating delisting procedures, which
could have a material and adverse effect on our results of operation and financial condition.
Our independent registered public accounting firm’s audit documentation related to their audit
reports included in our Annual Report may include audit documentation located in 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 the 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, 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.
The inability of the PCAOB to conduct inspections of our auditors’ work papers in China makes it more difficult to
evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors
48
Form 10-KPART I outside of China that are subject to PCAOB inspections. Investors may consequently lose confidence in our reported
financial information and procedures and the quality of our financial statements.
RISKS RELATING TO OUR STOCK
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 Global Select 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
Global Select Market. Reported average daily trading volume in our common stock for the three months immediately
prior to March 1, 2014, was approximately 76,179. 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.
The market price of our common stock is volatile, leading to the possibility of its value being
depressed at a time when you want to sell your holdings.
The market price of our common stock is volatile, and this volatility may continue. Numerous factors, many of which are
beyond our control, may cause the market price of our common stock to fluctuate significantly. These factors include,
among others:
• 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;
• 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
our industry;
• customer demand for our products;
•
•
investor perceptions of our industry in general and the Company in particular;
the operating and stock performance of comparable companies;
• general economic conditions and trends;
• major catastrophic events;
• announcements by us or our competitors of new products, significant acquisitions, strategic partnerships or
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 us or certain of our individual
stockholders or their family members.
49
Form 10-KPART I Securities class action litigation is often instituted against companies following periods of volatility in their stock price.
This type of litigation could result in substantial costs to us and divert our management’s attention and resources.
Moreover, securities markets may from time to time experience significant price and volume fluctuations for reasons
unrelated to operating performance of particular companies. For example, in July 2008, the securities markets in the
United States, China and other jurisdictions experienced the largest decline in share prices since September 2001.
These market fluctuations may adversely affect the price of our common stock and other interests in the Company at a
time when you want to sell your interest in us.
Our stockholder rights plan and provisions in our currently effective certificate of incorporation and
bylaws or of Delaware law might discourage, delay or prevent a change of control of the Company
or changes in our management and, therefore depress the trading price of the common stock.
Upon stockholders’ approval on July 20, 2012, we have adopted amended and restated certificate of incorporation
and bylaws, which contained provisions that are intended to deter coercive takeover practices and inadequate takeover
bids by making such practices or bids unacceptably expensive to the raider and to encourage prospective acquirers to
negotiate with our board of directors, rather than to attempt a hostile takeover.
These provisions include, among others:
•
the right of our board of directors to issue preferred stock without stockholder approval;
• division of our board of directors into three classes with staggered terms;
• elimination of the right of our stockholders to act by written consent;
• 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
requiring super majority stockholder vote to amend certain provisions of the amended and restated certificate of
incorporation and bylaws.
On January 8, 2015, our board of directors 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) 10 business days (or
a later date determined by our board of directors before the rights are separated from our common stock) after the
public announcement that a person or group has become an “acquiring person” by acquiring beneficial ownership
of 15% or more of our outstanding common stock or (ii) 10 business days (or a later date determined by our board of
directors before the rights are separated from our common stock) after a person or group begins a tender or exchange
offer that, if completed, would result in that person or group becoming an acquiring person. The issuance of preferred
stock pursuant to this stockholder rights plan would cause substantial dilution to a person or group that attempts to
acquire us on terms not approved by our board of directors. Our board of directors had previously adopted a similar
sotckholder rights plan on November 19, 2012, which expired on November 20, 2014.
In addition, our currently-in-effect bylaws authorize our stockholders who hold 25% of our entire capital stock issued
and outstanding and are entitled to vote to call a special meeting of the stockholders.
50
Form 10-KPART I We do not intend to pay dividends for the foreseeable future.
For the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business,
and we do not anticipate paying any cash dividends on our common stock. Accordingly, investors must be prepared
to rely on sales of their common stock after price appreciation to earn an investment return, which may never occur.
Investors seeking cash dividends should not purchase our common stock. Any determination to pay dividends in the
future will be made at the discretion of our board of directors and will depend on our results of operations, financial
condition, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors
deems relevant.
Stock prices of companies with business operations primarily in China have fluctuated widely in
recent years, and the trading prices of our common stock are likely to be volatile, which could result
in substantial losses to investors.
The trading prices of our common stock are likely to be volatile and could fluctuate widely in response to factors
beyond our control. For example, if one or more of the industry analysts or ratings agencies who cover us downgrades
us or our common stock, or publishes unfavorable research about us, the price of our common stock may decline. If
one or more of these analysts or agencies cease to cover the Company or fail to regularly publish reports on us, we
could lose visibility in the financial markets, which could cause the price of our common stock or trading volume to
decline. In addition, the performance and fluctuation of the market prices of other China-based, U.S.-listed health care
companies may affect the volatility in the price of and trading volume for our common stock. In recent years, a number
of PRC companies have listed their securities, or are in the process of preparing for listing their securities, on U.S. stock
markets. Some of these companies have experienced significant volatility, including significant price declines following
their initial public offerings. The trading performances of these PRC companies’ securities at the time of or after their
offerings may affect the overall investor sentiment towards PRC companies listed in the United States and consequently
may impact the trading performance of our common stock. These broad market and industry factors may significantly
affect the market price and volatility of our common stock, regardless of our actual operating performance.
In addition to market and industry factors, the price and trading volume for our common stock may be highly volatile
for specific business reasons. Any of these factors may result in large and sudden changes in the volume and price at
which our common stock will trade. We cannot give any assurance that these factors will not occur in the future again. In
the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted
securities class action litigation against that company. If we were involved in a class action lawsuit, it could divert
the attention of senior management, and, if adversely determined, could have a material and adverse effect on our
business, financial condition and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
We have no outstanding or unresolved comments from the SEC staff.
51
Form 10-KPART I ITEM 2. PROPERTIES.
The company’s corporate offices are leased and located at 18th Floor, Jialong International Building, 19 Chaoyang Park
Road, Chaoyang District, Beijing 100125, the People’s Republic of China.
Business
Location
Owned / Leased
Manufacturing Facilities
Taishan District, Tai’an Ctiy, Shandong Province, China
Gaoxin District, Tai’an Ctiy, Shandong Province, China
Huaxi District, Guiyang Ctiy, Guizhou Province, China
Qihe County, Shandong Province, China
Xiajin County, Shandong Province, China
Zhangqiu County, Shandong Province, China
Yanggu County, Shandong Province, China
Yishui County, Shandong Province, China
Huanjiang Maonan Autonomous County, Guangxi
Zhuang Autonomous Region, China
Plasma Stations
Fangchenggang City, Guangxi Zhuang Autonomous Region, China
Yuncheng County, Shandong Province, China
Ningyang County, Shandong Province, China
Cao County, Shandong Province, China
Huangping County, Guizhou Province, China
Puding County, Guizhou Province, China
Ziyun Miaozu Buyizu autonomous County, Guizhou Province, China
Owned
Owned
Owned
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Owned
Owned
Owned
Owned
Leased
We believe that all of our properties have been adequately maintained, are generally in good condition, and are suitable
and adequate for our business.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, we may become involved in various lawsuits and legal proceedings arising in the ordinary course of
business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may
arise from time to time that may harm our business. Other than the legal proceedings set forth below, we are currently
not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business,
financial condition or operating results.
Dispute with Jie’an over Certain Capital Injection into Guizhou Taibang
In May 2007, a 91% majority of Guizhou Taibang’s shareholders approved a plan to raise additional capital from
qualified strategic investors through the issuance of an additional 20,000,000 shares of Guizhou Taibang. The plan
required all existing Guizhou Taibang shareholders to waive their rights of first refusal to subscribe for the additional
52
Form 10-KPART I shares. The remaining 9% minority shareholder of Guizhou Taibang’s shares, Guizhou Jie’an Company, or Jie’an,
did not support the plan and did not waive its right of first refusal. In May 2007, Guizhou Taibang signed an Equity
Purchase Agreement with certain alleged strategic investors (who concealed their background), pursuant to which
such investors agreed to invest an aggregate of RMB51.0 million (approximately $8.3 million) in exchange for 21.4% of
Guizhou Taibang’s equity interests. Such Equity Purchase Agreement was not approved or ratified by over two-thirds
supermajority of Guizhou Taibang’s shareholders, which approval or ratification is required under the PRC Company
Law. At the same time, as an existing shareholder, Jie’an also subscribed for 1,800,000 shares, representing its pro rata
share of the 20,000,000 shares being offered. In total, Guizhou Taibang received RMB51.0 million (approximately $8.3
million) from the investors and RMB6.5 million (approximately $1.1 million) from Jie’an.
In June 2007, Jie’an brought a lawsuit against Guizhou Taibang, alleging that it had a right to acquire the 18,200,000
shares offered to the investors under the Equity Purchase Agreement. The trial court denied Jie’an’s request, and the
PRC Supreme Court ultimately sustained the original ruling in May 2009 and denied the rights of first refusal of Jie’an
over the 18,200,000 shares.
During the second quarter of 2010, Jie’an requested that Guizhou Taibang register its 1.8 million shares of additional
capital injection with the local AIC. Guizhou Taibang’s board of directors withheld its required ratification of Jie’an’s
request, pending the outcome of the ongoing litigation. In March 2012, Jie’an brought another lawsuit against Guizhou
Taibang for refusing to register the shares. In July 2013, the trial court dismissed the lawsuit for lack of jurisdiction.
Jie’an did not appeal the dismissal.
In December 2013, Jie’an brought a third lawsuit against Guizhou Taibang, requesting Guizhou Taibang to register
1.8 million shares under its name with the local AIC. In July 2014, the trial court denied Jie’an’s request to register
such shares. Despite the denial of Jie’an’s share registration request, the trial court, however, in its ruling, ordered
Guizhou Taibang to pay accumulated dividends of RMB13.8 million (approximately $2.2 million) associated with these
shares and the related interest expenses to Jie’an. Guizhou Taibang and Jie’an subsequently filed a cross-appeal. In
December 2014, the appellate court ruled in favor of Jie’an supporting its request to register 1.8 million shares and
ordered Guizhou Taibang to pay Jie’an its share of accumulated dividends of RMB18.3 million (approximately $3.0
million) associated with these shares plus the related interest expenses to Jie’an. In February 2015, Guizhou Taibang
paid RMB18.0 million (approximately $2.9 million) to the trial court to be held in escrow pending further appeal of this
case. Guizhou Taibang was in the process of preparing its appeal as of the date of this report.
In November 2013, Guizhou Taibang held a shareholders meeting and the shareholders passed resolutions, or the
November 2013 Resolutions, that, inter alia, (i) determined that it was no longer necessary for Guizhou Taibang to obtain
additional capital from investors; (ii) rejected Jie’an’s request that Jie’an subscribe for additional shares of Guizhou
Taibang alone and one or more other shareholders reduce their shareholding in Guizhou Taibang; and (iii) approved
the issuance of a total of 20,000,000 new shares to all existing shareholders on a pro rata basis. Jie’an subsequently
filed a fourth lawsuit against Guizhou Taibang in December 2013, requesting that the court declare the November 2013
Resolutions void. Both the trial court and the appellate court denied Jie’an’s request.
In March 2014, Guizhou Taibang held another shareholders meeting and the shareholders passed resolutions, or
the March 2014 Resolutions, that, inter alia, re-calculated the ownership percentage in Guizhou Taibang based on
the November 2013 Resolutions and the additional capital injections from existing shareholders. Guizhou Taibang
53
Form 10-KPART I subsequently updated the registration with the local AIC regarding the additional capital injections in August 2014.
In September 2014, Jie’an and another minority shareholder of Guizhou Taibang filed a lawsuit against Guizhou
Taibang, requesting that the court declare both the November 2013 Resolutions and the March 2014 Resolutions void
and instruct Guizhou Taibang to withdraw the AIC registration. In November 2014, the trial court suspended this case
pending the final outcome of the third lawsuit filed by Jie’an.
If the pending cases with Jie’an are ultimately ruled in Jie’an’s favor, our ownership interest in Guizhou Taibang may
be diluted to 71% and Jie’an may be entitled to receive accumulated dividends of RMB18.3 million (approximately
$3.0 million) and the related interest expenses (being its claimed share of Guizhou Taibang’s accumulated dividend
distributions associated with the 1.8 million shares and the acrrued interest from the date when Jie’an’s capital
contribution was deemed effective till December 31, 2014) from Guizhou Taibang. As of December 31, 2014, the
Company had maintained, on its balance sheet, payables to Jie’an in the amounts of RMB5.0 million (approximately $0.8
million) as received funds in respect of the 1.8 million shares in dispute, RMB1.4 million (approximately $0.2 million) for
the over-paid subscription price paid by Jie’an and RMB3.3 million (approximately $0.5 million) for the accrued interest.
As these cases are closely interlinked to the outcome of the disputes with certain individual investor described below,
based on our PRC litigation counsel’s assessment, we do not expect Jie’an to prevail. See “Item 1A—Risk Factors—
Risk Factors Relating to Our Business—Pending disputes regarding Guizhou Taibang’s equity ownership against us, if
not resolved in our favor, could result in significant dilution to our shareholding percentage in Guizhou Taibang.”
Dispute with Certain Individual Investor over Certain Capital Injection into Guizhou Taibang
In part due to the invalidity of the Equity Purchase Agreement with certain alleged strategic investors in May 2007,
which was never approved or ratified by Guizhou Taibang’s shareholders, such investors’ equity ownership in Guizhou
Taibang and the related increase in registered capital of Guizhou Taibang have never been registered with the local
AIC. In January 2010, one individual among such investors brought a lawsuit against Guizhou Taibang requesting to
register his 14.35% ownership interest in Guizhou Taibang with the local AIC and seeking the distribution of his share of
Guizhou Taibang’s dividends declared since 2007.
In October 2010, the trial court denied such individual investor’s right as shareholders of Guizhou Taibang and his
entitlement to share the dividends, which ruling was reaffirmed after a re-trial by the same trial court in December 2012.
After such ruling, Guizhou Taibang attempted to return the originally received fund of RMB34.2 million to such investor
by wiring the fund back to his bank account but was unable to do so due to the closure of his bank account. Another
investor, however, accepted the returned fund of RMB11.2 million (approximately $1.8 million) from Guizhou Taibang in
November 2010. In 2013, the same individual investor appealed the case to the PRC Supreme Court, which also denied
his claims for shareholder status in Guizhou Taibang and the related dividend distribution and accrued interest in
September 2013. Such investor subsequently attempted to seek for a re-trial by the PRC Surpreme Court, which request
was denied by the PRC Supreme Court in January 2014. He then applied to the PRC Supreme Procuratorate to request
for a review of the PRC Supreme Court’s decision and seek an appeal by the PRC Supreme Procuratorate to the
PRC Supreme Court for an ultimate re-trial on his behalf. The PRC Supreme Procuratorate accepted his application in
December 2014 and, with the assistance of our PRC litigation counsel, we are in the process of preparing our response
to such application. The PRC Supreme Procuratorate will consider our response in deciding whether to appeal to the
PRC Supreme Court on behalf of such investor, which decision process may take several months. The PRC Supreme
Procuratorate had not scheduled a hearing as of the date of this report.
54
Form 10-KPART I Based on our PRC litigation counsel’s assessment, we do not expect such individual investor to prevail in this pending
re-trial application process, but we cannot assure you that the PRC Supreme Procuratorate will decide not to appeal
for re-trial or the final outcome of such ultimate re-trial by the PRC Supreme Court (if the PRC Supreme Procuratorate
decides to appeal for re-trial) will be in our favor. In case the PRC Supreme Procuratorate decides to appeal for re-
trial on behalf of such investor and such ultimate re-trial by the PRC Surpreme Court is ruled in such investor’s favor,
our ownership interest in Guizhou Taibang may be diluted to 66.29% and such investor may be entitled to receive his
claimed share of accumulated dividends and the acrrued interests from Guizhou Taibang although he has not specified
the amount of the claimed damages in his appeal to the PRC Supreme Court or the re-trial application to the PRC
Supreme Procuratorate. As of December 31, 2014, Guizhou Taibang had maintained, on its balance sheet, payables to
the investors of RMB34.2 million (approximately $5.6 million) as originally received funds from such individual investor
in respect of the shares in dispute, RMB15.9 million (approximately $2.6 million) for the interest expenses, and RMB0.3
million (approximately $55,647) for the 1% penalty imposed by the Equity Purchase Agreement for any breach in the
event that Guizhou Taibang is required to return the original investment amount to such investor. See “Item 1A—Risk
Factors—Risk Factors Relating to Our Business—Pending disputes regarding Guizhou Taibang’s equity ownership
against us, if not resolved in our favor, could result in significant dilution to our shareholding percentage in Guizhou
Taibang.”
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
55
Form 10-KPART I 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.
2014
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
2013
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Closing Prices(1)
High
USD
37.98
48.07
55.84
69.50
28.93
27.67
29.21
30.30
Low
USD
26.80
35.73
44.76
49.06
14.71
21.35
23.08
26.76
(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 4, 2015, there were 439 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.
56
Form 10-KPART II
Securities Authorized for Issuance Under Equity Compensation Plans
The following table includes the information as of December 31, 2014 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)
-
1,432,454
1,432,454
-
$10.16
$10.16
-
1,488,545
1,488,545
(1) Excludes shares of restricted stock granted pursuant to our 2008 Equity Incentive Plan. The 552,125 shares of unvested
restricted stock at December 31, 2014 are issuable without the payment of any cash consideration by the grantee.
Effective May 9, 2008, our board of directors adopted the 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, 2014, 552,125 shares of restricted stock and options to purchase 1,432,454 share of our common stock
were outstanding. No awards may be granted under the 2008 Plan after May 9, 2018, except that any award granted
before then may extend beyond that date.
Recent Sales of Unregistered Securities
We have not sold any equity securities during the 2014 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 2014 fiscal year.
Purchases of Equity Securities
On January 27, 2014, the Company entered into a repurchase agreement with an individual stockholder, pursuant
to which the Company repurchased 2,500,000 shares of common stock for a consideration of $70,000,000. The
transaction was completed on February 28, 2014.
57
Form 10-KPART II ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated statement of comprehensive income data for 2014, 2013 and 2012 and the selected balance
sheet data as of December 31, 2014 and 2013 are derived from our audited consolidated financial statements included
elsewhere in this report. The selected consolidated financial data for 2011 and 2010 and the selected balance sheet
data as of December 31, 2012, 2011 and 2010 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.”
Revenues
Income From Operations
Net Income attributable
to China Biologic
Products, Inc.
Total Assets
Total Current Liabilities
Total Long Term Liabilities
Total Stockholders' equity
attributable to China
Biologic Products, Inc.
Total Equity
Capital Stock
Net Income Per Share
Basic
Diluted
For the Year Ended December 31,
2014
2013
2012
2011
2010
(U.S. dollars in thousands, except per share data)
243,252
111,159
203,357
86,933
184,813
74,489
153,092
32,217
139,695
68,568
70,917
54,602
45,222
18,182
31,543
446,847
120,682
50,904
403,781
63,439
36,373
311,047
47,719
5,909
248,893
67,822
2,029
220,922
71,446
4,432
212,087
237,692
195,470
135,512
99,200
275,262
303,970
257,419
179,041
145,044
3
3
3
3
2
2.85
2.71
2.05
1.96
1.73
1.62
0.73
0.37
1.34
1.30
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.
58
Form 10-KPART II
Overview
We are a biopharmaceutical company principally engaged in the research, development, manufacturing and sales
of human plasma-based pharmaceutical products in China. We have a strong product portfolio with over 20 different
dosage forms of plasma products. Our principal products are human albumin and IVIG. These products use human
plasma as their principal raw material. Sales of human albumin products represented approximately 39.3%, 44.1%
and 44.6% of our total sales for 2014, 2013 and 2012, respectively. Sales of IVIG products represented approximately
40.4%, 38.0%, and 39.0% of our total sales for 2014, 2013 and 2012, respectively. All of our products are prescription
medicines administered in the form of injections.
Our sales model focuses on direct sales to hospitals and inoculation centers and is complemented by distributor sales.
In 2014, we generated sales of $243.3 million, an increase of 19.6% from 2013, and recorded net income attributable to
the Company of $70.9 million, an increase of 29.9% from 2013.
Recent Development
Repurchase of Common Stock
On January 27, 2014, the Company entered into a repurchase agreement with an individual stockholder, pursuant
to which the Company repurchased 2,500,000 shares of common stock for a consideration of $70,000,000. The
transaction was completed on February 28, 2014.
Production Facility Certifications
Guizhou Taibang obtained the GMP certification for its placenta polypeptide production facility from CFDA in January
2014 and commenced commercial production shortly thereafter.
Guizhou Taibang obtained the GMP certification for its plasma production facility from CFDA and resumed commercial
production in March 2014.
Guizhou Taibang obtained the GMP certification for its production facility of human prothrombin complex concentrate,
or PCC, from CFDA and commenced commercial production in March 2014.
Shandong Taibang obtained the GMP certification for its PCC production facility from CFDA and commenced
commercial production in December 2014.
New VAT Rules
On June 18, 2014, the PRC Ministry of Finance and the PRC State Administration of Taxation jointly published a
notice to reduce and unify the value added tax, or VAT, rate on sales of a wide range of products in China, which took
effect on July 1, 2014. Pursuant to the notice, the VAT rate on sales of human blood and blood component based
biopharmaceutical products was reduced from 6% to 3%. The reduction in VAT rate had a favorable impact on the sales
59
Form 10-KPART II of our plasma products and net income in the second half of 2014 as our sales revenue is recognized as the invoiced
value of products sold minus VAT.
Follow-on Offering
In July 2014, we completed a follow-on offering of 1,782,500 shares of common stock at a price of $38.00 per share
to the public. In this offering, we sold 920,000 shares (including 120,000 shares sold pursuant to the exercise by the
underwriters of their option to purchase additional shares from us) and a selling stockholder sold 862,500 shares
(including 112,500 shares sold pursuant to the exercise by the underwriters of their option to purchase additional
shares from such selling stockholder). We raised net proceeds of $33.2 million from this offering, after deducting the
underwriting discounts and commissions and offering expenses payable by us. We did not receive any proceeds from
the sale of the shares by the selling stockholder.
Acquisition of Minority Interest
In August 2014, our wholly owned subsidiary, Guiyang Dalin Biologic Technologies Co., Ltd., or Dalin, entered into
several agreements with Guizhou Eakan Pharmaceutical Co., Ltd., or Guizhou Eakan, a then non-controlling interest
shareholder of Guizhou Taibang, to acquire from it an additional 19.84% equity interest in Guizhou Taibang. The total
consideration for the transaction was RMB535 million (approximately $86.8 million). Dalin completed the acquisition in
September 2014 and increased its registered equity interests in Guizhou Taibang to 76.23%.
Sales of Common Stock by Certain Directors and Officers
In September 2014, certain directors and officers of the Company sold small amounts of the Company’s common stock
in the open market for purposes of paying income tax in connection with the scheduled vesting of certain restricted
shares held by them.
Approval to Build Two New Plasma Stations in Hebei Province
In October 2014, Shandong Taibang received approval from the Hebei Provincial Health and Family Planning
Commission to build two new plasma collection stations in Hebei Province. The Company intends to acquire the
requisite land use rights and obtain the construction permits as soon as it completes the site selection process,
and seek to complete construction, staff recruitment and government inspection and certification process within
approximately 12 months thereafter. Each new collection station may commence operations only after it passes a
government inspection and certification process and obtains a collection license. The Company expects these two
new stations to reach their designed annual collection capacities in approximately three years after obtaining collection
licenses.
Shandong Employee Housing Development Project
In 2009, 107 employees, or the Employee-participants, of Shandong Taibang entered into agreements, or the Housing
60
Form 10-KPART II Project Agreements, with a real estate developer regarding a housing development project, pursuant to which the
developer agreed to develop and deliver residential units to the Employee-participants by the end of 2011 and the
Employee-participants paid the developer deposits equal to 80% of the purchase prices of the residential units. To
assist with their deposit payment, Shandong Taibang entered into separate agreements, or the Financial Assistance
Agreements, with the Employee-participants and provided them with advances of up to 50% of the purchase prices
of the residential units. These advances were to be repaid by deductions from the Employee-participants’ salaries. In
addition, Shandong Taibang also entered into a purchase agreement with the developer to purchase additional units
in the development project and made a deposit of RMB3.8 million (approximately $0.6 million). However, the developer
failed to deliver the residential units and is unlikely to be able to perform the Housing Project Agreements. In August
2014, the Company entered into agreements, or the Advance Payment Agreements, with the Employee-participants,
pursuant to which the Company made advance payments to the Employee-participants equal to the deposits that the
Employee-participants had paid the developer pursuant to the Housing Project Agreements and refunded them the
deductions previously made from their salaries pursuant to the Financial Assistance Agreements together with accrued
interest totaling RMB27.1 million (approximately $4.4 million). In November 2014, Shandong Taibang entered into
supplemental agreements to the Advance Payment Agreements, or the Supplemental Agreements, with the Employee-
participants, pursuant to which the Employee-participants transferred and assigned to Shandong Taibang their rights
under the Housing Project Agreements, including their rights to pursue legal actions against and recover damages from
the developer, and in return, Shandong Taibang waived its right to claim the advance payments and the refunds of the
deductions under the Advance Payment Agreements. Shandong Taibang launched legal actions against the developer
in Shandong to recover the funds paid by the Employee-participants and Shandong Taibang. In January 2015, the
Tai’an City Intermediate People's Court ruled in favor of Shandong Taibang and ordered the developer to repay us an
amount of RMB27.6 million (approximately $4.5 million) together with accrued interest and court fees. However, the
developer had not made any payment to us as of the date of this report. As of December 31, 2014, the Company made
a full provision of $5.1 million in the consolidated financial statements for all the receivables in respect of this employee
housing development project, including the deposits paid to the developer, the total advance payments and refunds
made under this employee housing development project, as well as the related fees and expenses because it became
probable that these receivables may not be recoverable after all legal means of collection were exhausted.
Financial Performance Highlights
The following are some financial highlights for 2014:
•
Sales: Sales increased by $39.9 million, or 19.6%, to $243.3 million for 2014 from $203.4 million for 2013.
• Gross Profit: Gross profit increased by $25.3 million, or 18.3%, to $163.2 million for 2014 from $137.9 million for
2013. As a percentage of sales, gross profit remained relatively stable at 67.1% and 67.8% in 2014 and 2013,
respectively.
•
•
•
Income from operations: Income from operations increased by $24.3 million, or 28.0%, to $111.2 million for 2014
from $86.9 million for 2013.
Net income attributable to the Company: Net income attributable to the Company increased by $16.3 million, or
29.9%, to $70.9 million for 2014 from $54.6 million for 2013.
Fully diluted net income per share: Fully diluted net income per share was $2.71 for 2014, as compared to $1.96
for 2013.
61
Form 10-KPART II Principal Factors Affecting our Financial Performance
The following are key factors that affect our financial condition and results of operations and we believe them to be
important to the understanding of our business:
Raw Material Supply and Prices
The primary raw material used in the production of our albumin and immunoglobulin products is human plasma. The
collection of human plasma in China is generally influenced by a number of factors such as government regulations,
geographical locations of plasma collection stations, sanitary conditions of plasma stations, living standards of the
donors, and cultural and religious beliefs. If we experience any shortage of plasma supply, we may not be able to fully
utilize our production capacity. We currently operate 10 plasma collection stations through Shandong Taibang and two
plasma stations through Guizhou Taibang. These plasma stations provide us with a stable source of plasma supply.
Prices of and Demand for Our Products
The demand for our products is largely affected by the general economic conditions in China because the prices of our
products are still not affordable to many patients. A significant improvement in the economic environment in China will
likely improve consumer income which in turn would make our products more affordable and consequently increase the
demand for our products. We have been able to expand our product range and consumer base by introducing new products
required by customers. We believe that our technical expertise is important in introducing products that are in demand.
Production Capacity
Our sales volume is limited by our annual production capacity. As we grow our business in the future, our ability to
fulfill additional and larger orders will depend on our ability to increase our production capacity. Our plan to expand
our production capacity will depend on the availability of capital to meet our needs of expansion or upgrading of
production lines, and the availability of stable plasma supply. To comply with applicable PRC laws and regulations,
we have obtained permits and licenses necessary for the current operations of our plasma collection stations and
production plants, and are required to apply for such permits and licenses to operate new plasma collection stations
and production plants. As a result, our expansion plan also depends on our ability to renew existing permits and
licenses and obtain new permits and licenses.
Competition
We face intense competition from local and foreign entities that manufacture and sell products that compete with
ours in the PRC. These competitors may have more capital, better research and development resources, expanded
manufacturing and marketing capabilities and more experience than we do. In our industry, we compete based upon
product quality, product cost, ability to produce a diverse range of products and logistical capabilities.
62
Form 10-KPART II Our profitability may be adversely affected if (i) competition intensifies; (ii) competitors reduce prices; (iii) PRC
government requires us to reduce the prices of our products; or (iv) competitors develop new products or product
substitutes with comparable medicinal applications or therapeutic effects which are more effective or less costly than
ours. See Item 1, “Business — Competition” for more information regarding this factor.
Taxation
China Biologic is subject to United States tax at gradual rates of up to 35%. No provision for income taxes in the United
States has been made as China Biologic has no U.S. taxable income.
Taibang Biological was incorporated in the BVI, but is not subject to taxation in that jurisdiction.
Taibang Holdings was incorporated in Hong Kong, and under the current laws of Hong Kong, is subject to a Profits Tax
of 16.5% on profits arising in Hong Kong. However, no provision for Hong Kong Profits Tax has been made as Taibang
Holdings has no taxable income.
According to the PRC government policy, new or high technology companies may enjoy a preferential income tax rate
of 15%, instead of 25% under the EIT Law. In 2011, Shandong Taibang renewed its high and new technology enterprise
qualification, which entitled it to the preferential income tax rate of 15% from 2011 to 2013. In October 2014, Shandong
Taibang obtained a notice from the Shandong provincial government that granted it the high and new technology
enterprise certificate. This certificate entitled Shandong Taibang to enjoy a preferential income tax rate of 15% for a
period of three years from 2014 to 2016. Shandong Taibang may apply for a renewal for an additional three years from
2017 to 2019 upon its expiration. According to Notice on Issues Concerning Relevant Tax Policies in Deepening the
Implantation of the Western Development Strategy jointly promulgated by the PRC Ministry of Finance, the PRC General
Administration of Customs and PRC State Administration of Taxation dated July 27, 2011, Guizhou Taibang, being a
qualified enterprise located in the western region of China, enjoys a preferential income tax rate of 15% effective from
January 1, 2011 to December 31, 2020. All of our other PRC subsidiaries are subject to the regular income tax rate of 25%.
Results of Operations
The following table sets forth key components of our results of operations for the periods indicated. Our historical
results presented below are not necessarily indicative of the results that may be expected for any other future period.
63
Form 10-KPART II For the Year Ended December 31,
2014
2013
2012
$
% of
Total Sales
$
% of
Total Sales
$
% of
Total Sales
(U.S. dollars in thousands, except percentage)
SALES
COST OF SALES
GROSS MARGIN
OPERATING EXPENSES:
243,252
100.0
203,357
100.0
80,026
163,226
32.9
67.1
65,484
137,873
32.2
67.8
Selling expenses
10,707
4.4
10,643
5.2
32,130
13.2
36,074
17.7
184,813
58,836
125,977
14,421
34,034
100
31.8
68.2
7.8
18.4
General and administrative
expenses
Research and development
expenses
Provision for other receivables
in respect of an employee
housing development project
4,162
5,068
Total operating expenses
52,067
INCOME FROM OPERATIONS
111,159
OTHER INCOME (EXPENSES):
Equity in income of equity
method investee
Change in fair value of
derivative liabilities
8,646
-
1.7
2.1
21.4
45.7
3.6
-
4,223
2.1
3,033
1.6
-
-
-
-
50,940
86,933
2,170
-
25.0
42.7
1.1
-
51,488
74,489
2,666
1,769
27.9
40.3
1.4
1.0
Interest expense
(3,698)
(1.5)
(1,135)
(0.6)
(1,270)
(0.7)
Interest income
Other income (expenses), net
Total other income, net
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
6,645
-
11,593
2.7
-
4.8
4,433
-
5,468
2.2
-
2.7
2,910
571
6,646
1.6
0.3
3.6
122,752
50.5
92,401
45.4
81,135
43.9
26,639
96,113
25,196
11.0
39.5
10.3
15,540
76,861
22,259
7.6
37.8
10.9
70,917
29.2
54,602
26.9
8.2
35.7
11.2
24.5
15,163
65,972
20,750
45,222
1.73
1.62
BASIC
DILUTED
2.85
2.71
2.05
1.96
64
Form 10-KPART II
Comparison of Years Ended December 31, 2014 and 2013
Sales
Our total sales increased by 19.6%, or $39.9 million, to $243.3 million for 2014, compared to $203.4 million for 2013,
primarily due to increases in the sales volumes of human albumin, IVIG and placenta polypeptide products. In addition,
the effect resulted from the foreign exchange appreciation of RMB against U.S. dollars contributed 0.9% of the sales
increase in U.S. dollars.
The following table summarizes the breakdown of sales by major types of products:
For the Year Ended December 31,
Change
2014
2013
$
%
$
%
Amount
%
(U.S. dollars in millions, except percentage)
Human albumin
95.6
39.3
89.7
44.1
5.9
6.6
Immunoglobulin products:
IVIG
Other immunoglobulin products
Placenta polypeptide
Others
Totals
For 2014 as compared to 2013:
98.4
19.7
24.0
5.6
40.4
8.1
9.9
2.3
77.3
19.7
12.2
4.5
38.0
9.7
6.0
2.2
243.3
100.0
203.4
100.0
21.1
-
11.8
1.1
39.9
27.3
-
96.7
24.4
19.6
•
the average price for our approved human albumin products, which represented 39.3% of our total sales, increased
by approximately 1.4% and, excluding the foreign exchange effect, their average price in RMB increased by
approximately 0.6%; and
•
the average price for our approved IVIG products, which represented 40.4% of our total sales, decreased by
approximately 0.2%, and excluding the foreign exchange effect, their average price in RMB decreased by
approximately 0.9%.
The average sales price of human albumin products increased slightly for 2014 as compared to 2013, as a result of
the combined effects of the higher government-imposed retail price ceiling, the reduced VAT rate and our sales effort
to increase market shares in tier-one cities and new markets. The higher retail price ceiling announced by NDRC that
became effective on February 1, 2013 provided us with more flexibility in pricing our human albumin products and
allowed us to increase our ex-factory prices in certain regional markets. The reduction of VAT rate from 6% to 3%
effective on July 1, 2014 also had a positive impact on our sales price of plasma products as our sales are recognized
as the invoiced price of the products sold minus VAT. We lowered sales price of human albumin products, however,
in order to expand our market shares in tier-one cities and certain new markets in 2014. The price decrease of IVIG
products was mainly attributable to the increased sales through distributors in tier-one cities and new markets, partially
65
Form 10-KPART II
offset by the reduced VAT rate. To improve our brand recognition and the market share of IVIG products in tier-one cities
and new markets, we reduced our sales prices to distributors in 2014.
The sales volumes of our products depend on market demand and our production volume. The production volumes
of our human albumin products depend on the plasma supply. The production volumes of our IVIG products depend
primarily on the plasma supply and, to a lesser extent, on our allocation of production capacity among various human
immunoglobulin products, which include IVIG and other hyper-immune products. The production volumes of our hyper-
immune products, which include human rabies immunoglobulin, human hepatitis B immunoglobulin and human tetanus
immunoglobulin products, are subject to the availability of specific vaccinated plasma and our production capacity. The
supply of specific vaccinated plasma requires several months of lead time. Our production facility currently can only
accommodate the production of one type of hyper-immune products at any given time and we rotate the production of
different types of hyper-immune products from time to time in response to market demand. As such, the sales volume
of any given type of hyper-immune products may vary significantly from period to period. Depending on the market
demand and profit margins of IVIG products and hyper-immune products at any given period, we also adjust the
production volume of IVIG products from time to time to optimize our product mix.
The sales volume of our human albumin products increased by 5.1% for 2014 as compared to 2013, mainly due to
the sales volume increase in Shandong Taibang, partially offset by the sales volume decrease in Guizhou Taibang as
a result of the planned production suspension at Guizhou Taibang from June 2013 to March 2014. The sales volume
of our IVIG products increased by 27.4% for 2014 as compared to 2013, mainly due to the increased market demand
resulted from the outbursts of Hand, Foot and Mouth Disease and the increased sales through distributors in tier-
one cities and new markets during 2014. In anticipation of a favorable market environment and our increased sales
capabilities in 2014, we had reserved a large volume of our 2013 IVIG inventories to be sold throughout 2014.
The sales increase of placenta polypeptide products was generally in line with the volume increase for 2014 as
compared to 2013. The sales volume of placenta polypeptide products increased by 101.0% for 2014 as compared to
2013, primarily due to the expanded production of placenta polypeptide at Guizhou Taibang after its receipt of the GMP
certification for the upgraded production facilities in January 2014.
Cost of sales & gross profit
Cost of sales
as a percentage of total sales
Gross Profit
Gross Margin
For the Years Ended December 31,
Change
2014
2013
Amount
%
(U.S. dollars in millions, except percentage)
$
$
80.0
32.9%
163.2
67.1%
$
$
65.5
32.2%
137.9
67.8%
$
$
14.5
25.3
22.1%
0.7%
18.3%
(0.7%)
Our cost of sales was $80.0 million, or 32.9% of our sales, for 2014, as compared to $65.5 million, or 32.2% of our sales
for 2013. Our gross profit was $163.2 million and $137.9 million for 2014 and 2013, respectively, representing gross
margins of 67.1% and 67.8%, respectively. Our cost of sales and gross margin are affected by the volume and pricing
of our finished products, raw material costs, production mix and respective yields, inventory impairments, production
cycles and routine maintenance costs.
66
Form 10-KPART II The increase in cost of sales for 2014 as compared to 2013 was primarily due to the increases in sales volume, cost
of plasma and overhead. In an effort to increase plasma collection volume and expand our donor base, we increased
the nutrition fees paid to donors consistent with the industry practice. We expect that the nutrition fees to be paid to
donors will continue to increase as a result of the rising living standards in China. Consequently, future improvements on
margins will need to be derived from increases in product pricing and volume, product mix, yields and manufacturing
efficiency. The increase in cost of sales as a percentage of sales for 2014 as compared to 2013 was mainly due to the
increase in cost of plasma and the increase in overhead, especially depreciation expenses, at Guizhou Taibang after its
production resumption, partially offset by the change of our product mix to include more products with higher margins.
Operating expenses
For the Years Ended December 31,
Change
2014
2013
Amount
%
(U.S. dollars in millions, except percentage)
Operating expenses
$
52.1
$
50.9
$
1.2
as a percentage of total sales
21.4%
25.0%
2.4%
(3.6%)
Our total operating expenses increased by $1.2 million, or 2.4%, to $52.1 million for 2014 from $50.9 million for 2013. As
a percentage of total sales, total expenses decreased by 3.6% to 21.4% for 2014 from 25.0% for 2013. The operating
expenses for 2014 included a provision of $5.1 million for all the receivables in respect of the employee housing
development project at Shandong Taibang as discussed under “—Recent Development—Shandong Employee Housing
Development Project” above. Excluding the effect of this provision, our operating expenses decreased by $3.9 million,
or 7.7%, for 2014 as compared to 2013, primarily due to the decrease in general and administrative expenses.
Selling expenses
For the Years Ended December 31,
Change
2014
2013
Amount
%
(U.S. dollars in millions, except percentage)
Selling expenses
$
as a percentage of total sales
10.7
4.4%
$
10.6
5.2%
$
0.1
0.9%
(0.8%)
For 2014, our selling expenses increased by $0.1 million, or 0.9%, to $10.7 million from $10.6 million for 2013. As a
percentage of total sales, our selling expenses for 2014 decreased by 0.8% to 4.4% from 5.2% for 2013. This decrease
was mainly due to a decrease in the per-unit selling expenses of placenta polypeptide during 2014. Guizhou Taibang
engaged a service provider from December 2011 to May 2014 for a fee to promote its sales of placenta polypeptide
products. We shifted to utilizing internal resources for promotional efforts in May 2014, which contributed to the
decrease in our selling expenses.
67
Form 10-KPART II General and administrative expenses
For the Years Ended December 31,
Change
2014
2013
Amount
%
(U.S. dollars in millions, except percentage)
General and administrative expenses
$
32.1
$
36.1
$
(4.0)
(11.1%)
as a percentage of total sales
13.2%
17.7%
(4.5%)
For 2014, our general and administrative expenses decreased by $4.0 million, or 11.1%, to $32.1 million from $36.1
million for 2013. As a percentage of total sales, general and administrative expenses decreased by 4.5% to 13.2% for
2014 from 17.7% for 2013, mainly due to a decrease in legal expenses and the amortization expenses of intangible
assets. In 2013, we incurred legal expenses in relation to the take-over defense against a competitor in China and the
legal disputes regarding the shares of Guizhou Taibang. We did not incur similar legal expenses for 2014. In addition,
we incurred amortization expenses in 2013 in relation to the acquisition of GMP certificates and other intangible
assets when we acquired a majority stake in Guizhou Taibang in 2008. Because these intangible assets had been fully
amortized by the end of 2013, we did not incur corresponding expenses in 2014.
Research and development expenses
For the Years Ended December 31,
Change
2014
2013
Amount
%
(U.S. dollars in millions, except percentage)
Research and development expenses
$
4.2
$
4.2
$
-
as a percentage of total sales
1.7%
2.1%
-
(0.4%)
For 2014, our research and development expenses remained stable, as compared to 2013. In 2014, we received
government grants totaling $2.1 million and recognized them as a reduction of research and development expenses.
Excluding this impact, our research and development expenses increased by $2.1 million for 2014 from 2013. As a
percentage of total sales, our research and development expenses, excluding the impact of the government grants,
increased by 0.5% to 2.6% for 2014 from 2.1% for 2013. The increase was mainly due to the expenditures paid for
certain clinical trial programs and the engagement of external experts for certain pipeline products in 2014.
Provision for other receivables in respect of an employee housing development project
We made a full provision of $5.1 million for all the receivables in respect of an employee housing development project
at Shandong Taibang because it became probable that these receivables may not be recoverable after all legal means
of collection were exhausted.
Equity in income of equity method investee
Our equity method investment represented our 35% equity interest in Huitian, our equity method investee. For 2014,
our equity in income of equity method investee increased by $6.4 million to $8.6 million from $2.2 million for 2013. As
a percentage of total sales, equity in income of equity method investee increased by 2.5% to 3.6% for 2014 from 1.1%
68
Form 10-KPART II for 2013. Huitian contributed its land use right to its subsidiary as capital in 2013 and disposed the subsidiary in 2014,
recognizing a gain of RMB116.7 million (approximately $19.0 million) for 2014. As a result, our equity income in Huitian
increased by $6.7 million.
Income tax expense
Income tax expense
Effective income tax rate
For the Years Ended December 31,
Change
2014
2013
Amount
%
(U.S. dollars in millions, except percentage)
$
26.6
$
15.5
$
11.1
21.7%
16.8%
71.6 %
4.9%
Our provision for income taxes increased by $11.1 million, or 71.6%, to $26.6 million for 2014 from $15.5 million for
2013. For 2014, the dividend withholding income tax attributable to Shandong Taibang increased by $6.2 million, as
compared to 2013, due to an increase in dividend distribution in Shandong Taibang. The dividends from Shandong
Taibang are subject to withholding tax at a rate of 10%.
Excluding the impact of dividend withholding income tax, our effective income tax rates were 14.4% and 13.9% for
2014 and 2013, respectively. The statutory tax rate applicable to our major operating subsidiaries in China for 2014 and
2013 was 15%.
Comparison of Years Ended December 31, 2013 and 2012
Sales
Our total sales increased by 10.1%, or $18.6 million, to $203.4 million for 2013, compared to $184.8 million for 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, the effect resulted from the foreign exchange appreciation of RMB against U.S. dollars
contributed 2.0% of the sales increase in U.S. dollars.
The following table summarizes the breakdown of sales by major types of products:
For the Years Ended December 31,
Change
2013
2012
$
%
$
%
Amount
in %
(U.S. dollars in millions, except percentage)
Human albumin
89.7
44.1
82.5
44.6
7.2
8.7
Immunoglobulin products:
IVIG
Other immunoglobulin products
Placenta polypeptide
Others
Totals
77.3
19.7
12.2
4.5
38.0
9.7
6.0
2.2
72.0
19.4
10.1
0.8
39.0
10.5
5.5
0.4
203.4
100.0
184.8
100.0
5.3
0.3
2.1
3.7
18.6
7.4
1.5
20.8
462.5
10.1
69
Form 10-KPART II
For 2013 as compared to 2012:
•
the average price for our approved human albumin products, which represented 44.1% of our total sales, increased
by approximately 10.1% and, excluding the foreign exchange effect, their average price in RMB term increased by
approximately 8.1%; and
•
the average price for our approved IVIG products, which represented 38.0% of our total sales, increased by
approximately 1.3%, and excluding the foreign exchange effect, their average price in RMB term remained relatively
stable.
The price increase of human albumin products was due to the higher retail price ceiling announced by NDRC that came
into effect on February 1, 2013. This higher retail price ceiling provided us with more flexibility in pricing our human
albumin products and allowed us to increase our ex-factory prices in certain regional markets. NDRC also adjusted
retail price ceilings for IVIG effective on October 8, 2012, and the ceilings were lower than the prevailing market prices
in some of our regional markets. As a result, some local governments revised tender price ceilings for IVIG products.
We sought approval from local governments for favorable pricing policies in selective regional markets and 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.
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 that
commenced in 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.
For 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% of our total sales in 2013.
Cost of sales & gross profit
Cost of sales
as a percentage of total sales
Gross Profit
Gross Margin
For the Years Ended December 31,
Change
2013
2012
Amount
%
(U.S. dollars in millions, except percentage)
$
$
$
$
65.5
32.2%
137.9
67.8%
58.8
31.8%
126.0
68.2%
$
$
6.7
11.4%
11.9
0.4%
9.4%
(0.4%)
Our total cost of sales was $65.5 million, or 32.2% of our sales, for 2013, as compared to $58.8 million, or 31.8% of
our sales for 2012. Our gross profit was $137.9 million and $126.0 million for 2013 and 2012, respectively, representing
gross margins of 67.8% and 68.2%, respectively. Our cost of sales and gross margin are affected by the volume and
70
Form 10-KPART II pricing of our finished products, raw material costs, production mix and respective yields, inventory impairments,
production cycles and routine maintenance costs.
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, which was 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 2013 consistent with
the industry practice.
Operating expenses
For the Years Ended December 31,
Change
2013
2012
Amount
%
(U.S. dollars in millions, except percentage)
Operating expenses
$
50.9
$
51.5
$
(0.6)
as a percentage of total sales
25.0%
27.9%
(1.2%)
(2.9%)
Our total operating expenses decreased by $0.6 million, or 1.2%, to $50.9 million for 2013, from $51.5 million for
2012. As a percentage of total sales, total expenses decreased by 2.9% to 25.0% for 2013 from 27.9% for 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.
Selling expenses
For the Years Ended December 31,
Change
2013
2012
Amount
%
Selling expenses
$
as a percentage of total sales
10.6
5.2%
(U.S. dollars in millions, except percentage)
$
14.4
$
(3.8)
7.8%
(26.4%)
(2.6%)
For 2013, our selling expenses decreased by $3.8 million, or 26.4%, to $10.6 million from $14.4 million for 2012. As a
percentage of total sales, our selling expenses for 2013 decreased by 2.6% to 5.2% from 7.8% for 2012. The decrease
was mainly due to more stringent control on selling expenses implemented in the second half of 2012.
71
Form 10-KPART II General and administrative expenses
For the Years Ended December 31,
Change
2013
2012
Amount
%
General and administrative expenses
$
as a percentage of total sales
36.1
17.7%
(U.S. dollars in millions, except percentage)
$
34.0
$
2.1
18.4%
6.2%
(0.7%)
For 2013, our general and administrative expenses increased by $2.1 million, or 6.2%, to $36.1 million, from $34.0
million for 2012. General and administrative expenses as a percentage of total sales decreased by 0.7% to 17.7%
for 2013 from 18.4% for 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
For the Years Ended December 31,
Change
2013
2012
Amount
%
(U.S. dollars in millions, except percentage)
Research and development expenses
$
4.2
$
3.0
$
1.2
as a percentage of total sales
2.1%
1.6%
40.0%
0.5%
For 2013, our research and development expenses increased by $1.2 million, or 40.0%, to $4.2 million, from $3.0 million
for 2012. As a percentage of total sales, our research and development expenses increased by 0.5% to 2.1% for 2013
from 1.6% for 2012. The increase of research and development expenses was primarily due to certain technical sup-
port services we engaged to improve the production yields on certain hyper-immune products during 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
%
(U.S. dollars in millions, except percentage)
Change in fair value of derivative liabilities
$
-
$
1.8
$
(1.8)
(100.0%)
as a percentage of total sales
-
1.0%
(1.0%)
Our warrants issued in June 2009 are classified as derivative liabilities carried at fair value. For 2013 and 2012, we recognized
a gain from the change in fair value of derivative liabilities in the amounts of nil and $1.8 million, respectively. The recognized
gain from the change in the fair value of derivative liabilities for 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 $8.55 and $9.22, respectively, as of the two warrants
exercise dates. All warrants had been fully exercised by the end of June 2012.
72
Form 10-KPART II Income tax expense
For the Years Ended December 31,
Change
2013
2012
Amount
%
(U.S. dollars in millions, except percentage)
Income tax expense
Effective income tax rate
$
15.5
$
16.8%
15.2
18.7%
$
0.3
2.0%
(1.9%)
Our provision for income taxes increased by $0.3 million, or 2.0%, to $15.5 million for 2013 from $15.2 million for 2012.
Our effective income tax rates were 16.8% and 18.7% for 2013 and 2012, respectively. The statutory tax rate applicable
to our major operating subsidiaries in the PRC for 2013 and 2012 was 15%. The decrease of the effective income tax
rate was mainly attributable to a decrease in the dividend withholding income tax with respect to Shandong Taibang.
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, 2014, we had $80.8 million 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:
Cash Flow
For the Year Ended December 31,
2014
2013
2012
(U.S. dollars in millions)
Net cash provided by operating activities
$ 93.5
$ 74.3
$ 71.1
Net cash used in investing activities
Net cash used in financing activities
Effects of exchange rate change in cash
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of the year
(13.4)
(142.8)
(0.6)
(63.3)
144.1
(25.6)
(38.5)
4.3
14.5
129.6
(26.8)
(5.1)
1.0
40.2
89.4
Cash and cash equivalents at end of the year
$ 80.8
$ 144.1
$ 129.6
Operating Activities
Net cash provided by operating activities was $93.5 million for 2014, as compared to $74.3 million and $71.1 million
for 2013 and 2012, respectively. For 2014, 2013 and 2012, our net income was $96.1 million, $76.9 million, and $66.0
million, respectively.
Our net non-cash operating expense was $11.9 million, $10.4 million and $11.1 million, respectively, for 2014, 2013 and
2012. Among the non-cash operating items, our depreciation and amortization expense was $7.7 million, $7.5 million
and $8.9 million, respectively, our stock compensation expense was $5.4 million, $5.1 million and $4.5 million, respectively,
the allowance for doubtful accounts was $5.1 million, $0.1 million and $0.1 million, respectively, and our equity in income
of an equity method investee was $8.6 million, $2.2 million and $2.7 million, respectively, for 2014, 2013 and 2012.
73
Form 10-KPART II We had a net cash outflow of working capital of 14.5 million, $13.0 million and $5.9 million for 2014, 2013 and 2012,
respectively. Among these cash outflows, the increases in inventory for 2014, 2013 and 2012 were $13.4 million,
$10.4 million and $3.8 million, respectively. As compared to 2012, the increase of inventories in 2013 was mainly
attributable to increase of raw materials due to the continued supply of plasma, our primary raw material, by plasma
stations of Guizhou Taibang while the production of plasma products at Guizhou Taibang were suspended from
June 2013 to March 2014. The increase in accounts receivable for 2014 from 2013 was $2.2 million, which was in line
with the expansion of our sales during this period. The increase in accounts receivable for 2013 from 2012 was $5.7
million, primarily due to an increase in the relative percentage of sales to direct-sale customers (such as hospitals
and inoculations centers) versus sales to distributors. We generally grant direct-sale customers payment terms of
up to 90 days, with a limited number of highly creditworthy customers receiving longer payment terms of up to six
months. However, we generally require distributors to pay upon delivery. Direct sales increased by 30% in the fourth
quarter of 2013 compared to the same period in 2012. Further, as part of our efforts to optimize the sales program,
we have increased direct sales to top class hospitals that receive such longer credit terms since mid-2013, which also
contributed to the increase in direct sales and accounts receivable in the fourth quarter of 2013. Sales to top class
hospitals as a percentage of total direct sales increased from 45% in the fourth quarter of 2012 to 59% in the same
period in 2013.
Investing Activities
Net cash used in investing activities for 2014 was $13.4 million, as compared to $25.6 million and $26.8 million for 2013
and 2012, respectively. The investing activities for 2014 mainly consisted of construction of a new production facility at
Shandong Taibang, for which we paid $17.2 million for acquisition of property, plant and equipment in 2014. In 2013
and 2012, we paid $20.5 million and $13.9 million, respectively, for construction and acquisition of property, plant and
equipment in connection with the construction work at Shandong Taibang and the upgrade of production facilities at
Guizhou Taibang. In addition, we made a refundable payment of $13.3 million to the local government in connection
with our bid for a land use right in Guizhou Province in 2012 and received a refund of $1.6 million and $2.1 million
in 2014 and 2013, respectively, due to a decrease in the size of the land provided by the local government. Further,
Guizhou Taibang made a time deposit of $6.6 million in 2013, which matured in 2014.
Financing Activities
Net cash used in financing activities for 2014 totaled $142.8 million, as compared to $38.5 million and $5.1 million
for 2013 and 2012, respectively. The net cash used in financing activities in 2014 mainly consisted of a payment of
$86.8 million for acquisition of noncontrolling interest in Guizhou Taibang, a dividend payment of $8.8 million by our
subsidiaries to noncontrolling interest shareholders and a payment of $70.0 million for repurchase of shares from an
individual stockholder, partially offset by proceeds of $33.2 million from the follow-on offering of the Company’s common
stock. The net cash used in financing activities in 2013 mainly consisted of a payment of $29.6 million for share
repurchase and a dividend payment of $16.9 million by our subsidiaries to the noncontrolling interest shareholders.
The net cash used in financing activities in 2012 was mainly due to a $14.3 million repayment of short-term bank loans
and a dividend payment of $7.1 million by our subsidiaries to a noncontrolling interest shareholder, partially offset by
cash provided by new short-term loans of $11.1 million and proceeds from the exercises of stock option and warrants
totaling $5.2 million.
74
Form 10-KPART II Management believes that the Company has sufficient cash on hand and continuing positive cash inflow from the sale
of its plasma-based products in the PRC market for its operations.
Obligations Under Material Contracts
The following table sets forth our material contractual obligations as of December 31, 2014:
Payments due by period
Less than
one year
One to
three years
Three to
five years
More than
five years
(U.S. dollars in millions)
31.6
26.3
1.7
0.5
5.7
65.8
-
40.0
0.2
0.2
0.7
41.1
-
-
-
-
-
-
-
-
-
0.1
-
0.1
Total
31.6
66.3
1.9
0.8
6.4
107.0
Contractual Obligations
Short-term bank loans
Long-term bank loans,
including current portion
Interest on short-term and
long-term bank loans
Operating lease commitment
Capital commitment
Total
Seasonality of our Sales
Our operating results and operating cash flows historically have not been subject to seasonal variations. This pattern
may change, however, as a result of new market opportunities or new product introductions.
Inflation
Inflation does not materially affect our business or the results of our operations.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect
on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to our investors.
Critical Accounting Policies
The preparation of financial statements in conformity with United States generally accepted accounting principles, or U.S.
GAAP, requires our management to make assumptions, estimates and judgments that affect the amounts reported in
the financial statements, including the notes thereto, and related disclosures of commitments and contingencies, if any.
We consider our critical accounting policies to be those that require the more significant judgments and estimates in the
preparation of financial statements, including the following:
75
Form 10-KPART II 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 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.
Fair Value Measurements
We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs
to the extent possible. We determine fair value based on assumptions that market participants would use in pricing an
asset or liability in the principal or most advantageous market. When considering market participant assumptions in
fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs,
which are categorized in one of the following levels:
• Level 1 Inputs: Unadjusted quoted prices for identical assets or liabilities in active markets accessible to the entity
at the measurement date.
• Level 2 Inputs: Other than quoted prices included in Level 1, inputs that are observable for the asset or liability,
either directly or indirectly, for substantially the full term of the asset or liability.
• Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable
inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or
liability at the measurement date.
The fair value measurement level of an asset or liability within the fair value hierarchy is based on the lowest level of any
input that is significant to the fair value measurement.
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. We maintain an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio.
In establishing the required allowance, management considers historical losses, the customers’ financial condition, the
amount of accounts receivable in dispute, the accounts receivable aging and customers’ payment patterns. We review
our allowance for doubtful accounts monthly. Past due balances are reviewed individually for collectability. Account
balances are charged off against the allowance after all means of collection have been exhausted and the potential for
recovery is considered remote. We do not have any off-balance-sheet credit exposure related to our customers.
76
Form 10-KPART II We generally ask our distributors to pay in advance before we deliver products, with few exceptions for a credit period
of no longer than 60 days. For hospitals and clinics, depending on the relationship and the creditability, we generally
grant a credit period of no longer than 90 days with exceptions to customers, which we believe are credit worthy, of up
to six months. We have provided a bad debt allowance of $6,211, $31,567 and nil respectively for 2014, 2013 and 2012.
Due to recovery of bad debt that we previously provided an allowance, the recoveries of bad debt provision was $30,673,
nil and $1,904 for 2014, 2013 and 2012, respectively.
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.
We review the inventory periodically for possible obsolete goods and cost in excess of net realizable value to determine
if any reserves are necessary. Provisions to write-down the carrying amount of obsolete inventory to its estimated net
realizable value amounted to $324,584, nil and nil for 2014, 2013 and 2012, respectively, and were recorded as cost of
sales in the consolidated statements of comprehensive income.
Long-Lived Assets
Long-lived assets, such as property, plant and equipment, and purchased intangible asset subject to amortization, are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment,
we first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value.
If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an
impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through
various valuation techniques including discounted cash flow models, quoted market values and third-party independent
appraisals, as considered necessary.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our operations are carried out in the PRC and we are subject to specific considerations and significant risks not
typically associated with companies in North America and Western Europe. Accordingly, our business, financial
condition and results of operations may be influenced by the political, economic and legal 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.
77
Form 10-KPART II Interest Rate Risk
We are exposed to interest rate risk primarily with respect to our bank loans. We have not used any derivative financial
instruments to manage our interest rate risk exposure. We have not been exposed nor do we anticipate being exposed
to material risks due to changes in interest rates. However, our future interest expenses may increase due to changes in
market interest rates.
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, 2014 would result in decrease of net income before provision for income taxes by
approximately $1.0 million for 2014.
Management monitors the banks’ prime rates in conjunction with our cash requirements to determine the appropriate
level of debt balances relative to other sources of funds. We have not entered into any hedging transactions in an effort
to reduce our exposure to interest rate risk.
Foreign Exchange Risk
All of our consolidated revenues and consolidated costs and majority of expenses are denominated in RMB. All of our
assets are denominated in RMB, except certain cash balances. However, certain of our loan facilities are denominated
in U.S. dollars and our reporting currency is U.S. dollars. As a result, we are exposed to foreign exchange risk as our
revenues and results of operations may be affected by fluctuations in the exchange rate between U.S. dollars and RMB.
If RMB depreciates against the U.S. dollars, the value of our RMB revenues, earnings and assets as expressed in our
U.S. dollar financial statements will decline. Assets and liabilities are translated at exchange rates at the balance sheet
dates and revenue and expenses are translated at the average exchange rates and stockholders’ equity is translated
at historical exchange rates. Any resulting translation adjustments are not included in determining net income but are
included in determining other comprehensive income, a component of stockholders’ equity. We have not entered into
any hedging transactions in an effort to reduce our exposure to foreign exchange risk.
The value of the RMB against the U.S. dollars and other currencies is affected by, among other things, changes in
China’s political and economic conditions. Although the People’s Bank of China regularly involved 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. dollars in the medium to long term. Moreover, it is possible that in the
future, PRC authorities may lift restrictions on fluctuations in RMB exchange rate and lessen involvement in the foreign
exchange market.
Account Balances
We maintain cash balances at financial institutions which, from time to time, may exceed Federal Deposit Insurance
Corporation insured limits for the banks located in the United States 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 and cash equivalents at banks and restricted cash and cash
deposits as of December 31, 2014 and December 31, 2013 amounted to $184.2 million and $180.9 million respectively,
78
Form 10-KPART II $0.1 million and $0.7 million of which are covered by insurance, respectively. We have not experienced any losses
in uninsured bank deposits and we do not believe that we are exposed to any significant risks on cash held 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.
Market for Human Albumin and IVIG
Our two major products, human albumin and IVIG, accounted for 39.3% and 40.4% of the total sales for 2014,
respectively. If the market demands for human albumin or IVIG cannot be sustained in the future or if there is substantial
price decrease in either or both products, our operating results could be materially and adversely affected.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated Financial Statements
The full text of our audited consolidated financial statements as of December 31, 2014, 2013 and 2012 begins on page
F-1 of this report.
Quarterly Financial Results
The following table sets forth certain unaudited financial information for each of the eight quarters ended December 31,
2014. The consolidated financial statements for each of these quarters have been prepared on the same basis as the
audited consolidated financial statements included in this annual report and, in the opinion of management, include all
adjustments necessary for the fair presentation of the results of operations for these periods. This information should
be read together with our audited consolidated financial statements and the related notes included elsewhere in this
annual report.
79
Form 10-KPART II Dec 31,
2014
Sep 30,
2014
Jun 30,
2014
Mar 31,
2014
Dec 31,
2013
Sep 30,
2013
Jun 30,
2013
Mar 31,
2013
(U.S. dollars in thousands, except per share data)
$ 57,987
$ 68,924
$ 60,074
$ 56,267
$ 42,592
$ 53,152
$ 53,581
$ 54,032
36,954
46,567
41,154
38,551
27,014
35,986
37,458
37,415
26,989
35,214
31,258
29,291
14,340
24,819
26,723
26,519
12,858
20,060
19,725
18,274
8,828
14,696
16,162
14,916
Sales
Gross profit
Earnings before
income tax expense
Net income attributable
to Company
Basic earnings per share
Diluted earnings per share
0.51
0.48
0.80
0.76
0.83
0.79
0.72
0.69
0.34
0.32
0.55
0.53
0.60
0.57
0.55
0.53
Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly
net earnings per share will not necessarily equal the total for the year.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are
designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded,
processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such
information is accumulated and communicated to our management, including to our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15(b) promulgated under the Securities Exchange Act, our management, with the participation
of our CEO and CFO, evaluated the design and operating effectiveness as of December 31, 2014 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, 2014, our disclosure controls and procedures
were effective at the reasonable assurance level to enable the Company to record, process, summarize and report
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 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
80
Form 10-KPART II accounting principles. Management is responsible for establishing and maintaining adequate internal control over
financial reporting.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2014. In
making this evaluation, management used the framework established in Internal Control - Integrated Framework (1992)
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, 2014.
Our internal control over financial reporting as of December 31, 2014 has been audited by our registered public
accounting firm as stated in their report which is included in Part II, Item 9A of this form 10-K.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
China Biologic Products, Inc.:
We have audited China Biologic Products, Inc.’s internal control over financial reporting as of December 31, 2013,
based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). China Biologic Products, Inc.’s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit
also included performing such other procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
81
Form 10-KPART II 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, 2014, based on criteria established in Internal Control – Integrated Framework (1992)
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of China Biologic Products, Inc. and subsidiaries as of December 31, 2014
and 2013, 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, 2014, and our report dated March 4, 2015 expressed
an unqualified opinion on those consolidated financial statements.
/s/ KPMG
Hong Kong, China
March 4, 2015
82
Form 10-KPART II Changes in Internal Controls over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(d) and
15d-15(f)) during the year ended December 31, 2014 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, 2014, but was not reported.
83
Form 10-KPART II ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by Item 10 of Part III is included in our Proxy Statement for our 2015 Annual Meeting of
Stockholders and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 of Part III is included in our Proxy Statement for our 2015 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 2015 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 2015 Annual Meeting of
Stockholders and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by Item 14 of Part III is included in our Proxy Statement for our 2015 Annual Meeting of
Stockholders and is incorporated herein by reference.
84
Form 10-KPART III 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.
85
Form 10-KPART IV 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 4, 2015
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)
/s/ Ming Yang
Ming Yang
/s/ Sean Shao
Sean Shao
/s/ Zhijun Tong
Zhijun Tong
/s/ Yungang Lu
Yungang Lu
/s/ David Hui Li
David Hui Li
/s/ Wenfang Liu
Wenfang Liu
/s/ Albert (Wai Keung) Yeung
Albert (Wai Keung) Yeung
/s/ Joseph Chow
Joseph Chow
/s/ Min Fang
Min Fang
Chief Financial Officer
(Principal Financial and Accounting Officer )
Director
Director
Director
Director
Director
Director
Director
Director
86
Date
March 4, 2015
March 4, 2015
March 4, 2015
March 4, 2015
March 4, 2015
March 4, 2015
March 4, 2015
March 4, 2015
March 4, 2015
March 4, 2015
Form 10-K
CHINA BIOLOGIC PRODUCTS, INC.
AND SUBSIDIARIES
Contents
F-1
F-2
F-3
F-4
F-5
Report 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-33
Notes to Consolidated Financial Statements
87
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, 2014 and 2013, 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, 2014. 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, 2014 and 2013, and the results of their
operations and their cash flows for each of the years in the three-year period ended December 31, 2014, 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, 2014, based
on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated March 4, 2015 expressed an unqualified
opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG
Hong Kong, China
March 4, 2015
F-1
Form 10-K CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
Current Assets
Cash and cash equivalents
Time deposit
Restricted cash deposits
Accounts receivable, net of allowance for doubtful accounts
Inventories
Prepayments and other current assets, net of allowance for
doubtful accounts
Total Current Assets
Property, plant and equipment, net
Land use rights, net
Deposits related to land use rights
Restricted cash and cash deposits, excluding current portion
Equity method investment
Other non-current assets
Total Assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Short-term bank loans, including current portion of long-term
bank loans
Accounts payable
Due to related parties
Other payables and accrued expenses
Income tax payable
Total Current Liabilities
Long-term bank loans, excluding current portion
Deferred income
Other liabilities
Total Liabilities
Stockholders’ Equity
Common stock:
par value $0.0001;
100,000,000 shares authorized;
27,865,871 and 27,341,744 shares issued at
December 31, 2014 and 2013, respectively;
24,806,167 and 25,862,040 shares outstanding
at December 31, 2014 and 2013, respectively
Additional paid-in capital
Treasury stock: 3,059,704 and 1,479,704 shares
at December 31, 2014 and 2013, 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,
2014
December 31,
2013
USD
USD
9
3
5
4
7
8
9
10
11
20
12
11
80,820,224
-
63,677,610
19,402,820
101,304,932
144,138,487
6,608,612
-
17,270,132
88,634,855
14,781,658
7,641,061
279,987,244
80,230,888
11,909,136
12,792,355
40,230,250
18,221,777
3,475,442
446,847,092
264,293,147
73,149,072
8,213,145
13,667,130
30,523,674
11,349,807
2,585,232
403,781,207
57,902,600
9,822,000
4,829,350
-
49,692,757
8,257,133
120,681,840
40,000,000
2,765,024
8,138,498
171,585,362
4,445,732
7,206,970
37,761,593
4,202,405
63,438,700
30,000,000
3,003,895
3,369,003
99,811,598
2,787
2,734
24,008,281
72,031,864
16,23
(76,570,621)
(29,594,080)
244,661,391
19,985,189
212,087,027
63,174,703
275,261,730
-
446,847,092
173,744,551
21,506,494
237,691,563
66,278,046
303,969,609
-
403,781,207
19
See accompanying notes to Consolidated Financial Statements.
F-2
Form 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
Provision for other receivables in respect of an
employee housing development project
Income from operations
Other income (expenses)
For the Years Ended
Note
December 31,
2014
December 31,
2013
December 31,
2012
USD
USD
USD
18
243,251,658
203,356,856
184,813,495
80,025,375
65,484,153
58,835,998
163,226,283
137,872,703
125,977,497
10,707,409
32,129,985
4,161,901
10,643,149
36,073,871
4,223,165
14,421,258
34,034,360
3,032,719
6
5,068,075
-
-
111,158,913
86,932,518
74,489,160
Equity in income of an equity method investee
10
8,646,181
2,170,473
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:
13
21
21
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.
-
-
6,644,886
4,433,326
2,665,881
1,769,140
2,910,297
(3,697,819)
(1,134,952)
(1,269,850)
-
11,593,248
122,752,161
26,639,527
96,112,634
25,195,794
70,916,840
-
5,468,847
92,401,365
15,540,301
76,861,064
22,259,513
54,601,551
570,511
6,645,979
81,135,139
15,163,147
65,971,992
20,749,803
45,222,189
2.85
2.71
2.05
1.96
1.73
1.62
24,427,196
25,685,064
96,112,634
26,410,819
27,572,111
76,861,064
26,153,540
26,839,723
65,971,992
(1,918,715)
9,126,218
1,735,492
94,193,919
85,987,282
67,707,484
24,798,384
23,951,559
21,163,655
69,395,535
62,035,723
46,543,829
See accompanying notes to Consolidated Financial Statements.
F-3
Form 10-K
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S
Form 10-K
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
96,112,634
76,861,064
65,971,992
For the Years Ended
December 31,
2014
USD
December 31,
2013
USD
December 31,
2012
USD
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation
Amortization
Loss (gain) on sale of property, plant and equipment
(Reversal of) provision for allowance for doubtful
accounts, net – accounts receivable
Allowance for doubtful accounts - other
receivables and prepayments
Write-down of obsolete inventories
Deferred tax expense
Share-based compensation
Change in fair value of derivative liabilities
6,989,222
758,232
172,032
(24,462)
5,068,075
324,584
6,096,650
1,365,734
(123,777)
31,567
65,094
-
5,792,418
3,088,320
828,296
(1,904)
110,123
-
3,483,890
112,632
1,127,433
5,396,271
5,050,796
-
-
4,544,927
(1,769,140)
(2,665,881)
Equity in income of an equity method investee
(8,646,181)
(2,170,473)
Excess tax benefits from share-based
compensation arrangements
Change in operating assets and liabilities:
Accounts receivable
Prepayment and other current assets
Inventories
Accounts payable
Other payables and accrued expenses
Due to related parties
Income tax payable
(1,611,399)
-
-
(2,191,118)
(9,236,125)
(5,667,386)
(624,159)
(13,418,971)
(10,432,492)
405,071
4,525,635
(276,984)
5,683,912
1,621,917
2,496,390
66,349
(446,911)
5,689,638
(268,498)
(3,750,200)
(2,184,674)
(5,244,915)
734,037
(904,655)
Net cash provided by operating activities
93,514,318
74,302,995
71,097,317
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for property, plant and equipment
Payment for intangible assets and land use rights
Refund of deposits related to land use right
Dividends received
Purchase of time deposit
Proceeds upon maturity of time deposit
Proceeds from sale of property, plant and equipment
(17,194,201)
(20,492,159)
(13,886,045)
(4,677,358)
1,635,200
-
-
6,608,612
220,135
(1,327,148)
(14,059,397)
2,100,150
565,425
(6,608,612)
-
194,749
-
1,109,115
-
-
83,134
Net cash used in investing activities
(13,407,612)
(25,567,595)
(26,753,193)
See accompanying notes to Consolidated Financial Statements.
F-5
Form 10-K
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
December 31,
2014
December 31,
2013
December 31,
2012
USD
USD
USD
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock option exercised
3,860,401
5,394,070
727,317
-
-
-
-
-
-
-
-
Proceeds from warrants exercised
Payment for share repurchase
Proceeds from short-term bank loans
Repayment of short-term bank loans
Proceeds from long-term bank loans
Repayment of long-term bank loans
-
-
4,500,000
(70,000,000)
(29,594,080)
-
44,500,340
9,693,000
11,076,100
(22,833,400)
(8,014,000)
(14,286,800)
70,000,000
30,000,000
(33,700,000)
-
Payment for cash deposit as security for long-term bank loans
(72,290,922)
(30,000,000)
Payment for cash deposit as security for short-term bank loan
(31,881,083)
Proceeds from maturity of cash deposit as security for
long-term bank loan
Net proceeds from reissuance of treasury stock
30,370,670
33,212,518
-
-
-
Acquisition of noncontrolling interest
Excess tax benefits from share-based
compensation arrangements
Dividend paid by subsidiaries to
noncontrolling interest shareholders
(86,830,499)
(1,963,913)
1,611,399
-
(8,846,984)
(16,931,149)
(7,120,693)
Contribution from noncontrolling interest shareholders
-
2,891,422
-
Net cash used in financing activities
(142,827,560)
(38,524,650)
(5,104,076)
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH
(597,409)
4,318,420
957,434
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS
(63,318,263)
14,529,170
40,197,482
Cash and cash equivalents at beginning of year
144,138,487
129,609,317
89,411,835
Cash and cash equivalents at end of year
80,820,224
144,138,487
129,609,317
Supplemental cash flow information
Cash paid for income taxes
Cash paid for interest expense
Noncash investing and financing activities:
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
Exercise of warrants that were liability classified
Restricted cash spent for property, plant and equipment
17,652,514
3,150,381
15,947,939
14,940,369
347,602
446,381
1,433,376
7,728,824
38,452
-
1,147,561
-
3,300,284
4,252,428
104,300
-
-
-
3,641,279
2,928,421
-
See accompanying notes to Consolidated Financial Statements.
F-6
Form 10-K
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 AND 2012
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
are prescription medicines that require government approval before the products are sold to customers. The Company
primarily sells its products to hospitals and inoculation centers directly or through distributors in the PRC.
Cash Concentration
The Company maintains cash balances at financial institutions which, from time to time, may exceed Federal Deposit
Insurance Corporation insured limits for its bank accounts located in the United States. Cash balances maintained at
financial institutions or state-owned banks in the PRC are not covered by insurance. Total cash and cash equivalents
at banks and restricted cash and cash deposits as of December 31, 2014 and December 31, 2013 amounted to
$184,186,306 and $180,858,848, respectively, of which $86,744 and $679,022 are insured, respectively. The Company
has not experienced any losses in uninsured bank deposits and does not believe that it is exposed to any significant
risks on cash held in bank accounts.
Sales Concentration
The Company’s two major products are human albumin and human immunoglobulin for intravenous injection (“IVIG”).
Human albumin accounted for 39.3%, 44.1% and 44.6% of the total sales for the years ended December 31, 2014, 2013
and 2012, respectively. IVIG accounted for 40.4%, 38.0% and 39.0% of the total sales for the years ended December
31, 2014, 2013 and 2012, 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, 2014, 2013 and 2012. No individual customer
represented 10% or more of trade receivables as at December 31, 2014 and 2013. The Company performs ongoing
credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers.
Purchase Concentration
There were no suppliers that comprised 10% or more of the total purchases during the years ended December 31,
2014, 2013 and 2012, respectively. There was one vendor that represented more than 10% of accounts payables as at
December 31, 2014. There were no vendors that represented more than 10% of accounts payables as at December 31, 2013.
F-7
Form 10-K
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements of the Company have been prepared in accordance with
generally accepted accounting principles in the United States of America (“GAAP”), and include the financial
statements of the Company and its majority owned subsidiaries. All significant intercompany balances and transactions
have been eliminated upon consolidation. The Company has no involvement with variable interest entities. The Company
accounts for investments over which it has significant influence but not a controlling financial interest using the equity
method of accounting.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates. Significant items subject to such
estimates and assumptions include the useful lives of 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 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.
Revenue Recognition
Revenue represents the invoiced value of products sold, net of value added taxes (VAT).
Revenue is recognized when persuasive evidence of an arrangement exists, delivery of the product has occurred and
the customer takes ownership and assumes risk of loss, the sales price is fixed or determinable and collection of the
relevant receivable is probable. The Company mainly sells human albumin and human immunoglobulin to hospitals,
inoculation centers and pharmaceutical distributors. For all sales, the Company requires a signed contract or purchase
order, which specify pricing, quantity and product specifications. Delivery of the product occurs when the customer
receives the product, which is when the risks and rewards of ownership have been transferred. Delivery is evidenced
by signed customer acknowledgement. The Company’s sales agreements do not provide the customer the right of
return, unless the product is defective in which case the Company allows for an exchange of product or return. For the
periods presented, defective product returns were inconsequential.
F-8
Form 10-K Fair Value Measurements
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of
unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market
participants would use in pricing an asset or liability in the principal or most advantageous market. When considering
market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between
observable and unobservable inputs, which are categorized in one of the following levels:
•
Level 1 Inputs: Unadjusted quoted prices for identical assets or liabilities in active markets accessible to the entity
at the measurement date.
•
Level 2 Inputs: Other than quoted prices included in Level 1, inputs that are observable for the asset or liability,
either directly or indirectly, for substantially the full term of the asset or liability.
•
Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable
inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or
liability at the measurement date.
The fair value measurement level of an asset or liability within the fair value hierarchy is based on the lowest level of any
input that is significant to the fair value measurement.
See Note 17 to the Consolidated Financial Statements.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and demand deposits. The Company considers all highly liquid
investments with original maturities of three-month or less at the time of purchase to be cash equivalents. Cash and
cash equivalents at December 31, 2014 and 2013 include $38,489,045 and $74,352,540 of certificates of deposit with
an initial term of three months or less.
As of December 31, 2014 and 2013, the Company maintained cash and cash equivalents at banks in the following
locations:
PRC, excluding Hong Kong
U.S.
Total
December 31, 2014
December 31, 2013
USD
77,627,358
2,651,088
80,278,446
USD
143,047,540
679,022
143,726,562
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’
F-9
Form 10-K 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
a controlling interest is accounted for using the equity method. Significant influence is generally presumed to exist
when the Company has an ownership interest in the voting stock between 20% and 50%, and other factors, such as
representation on the board of directors and participation in policy-making processes, are considered in determining
whether the equity method of accounting is appropriate. Under the equity method of accounting, the Company’s share
of the investee’s results of operations is included in other income (expenses) in the Company’s consolidated statements
of comprehensive income. Deferred taxes are provided for the difference between the book and tax basis of the
investment. The Company recognizes a loss if it is determined that other than temporary decline in the value of the
investment exists. The process of assessing and determining whether an impairment on a particular equity investment
is other than temporary requires a significant amount of judgment. To determine whether an impairment is other-than-
temporary, management considers whether the Company has the ability and intent to hold the investment until recovery
and whether evidence indicating the carrying value of the investment is recoverable outweighs evidence to the contrary.
No impairment loss was recognized by the Company for the years ended December 31, 2014, 2013 and 2012.
Government Grants
Government grants are recognized when there is reasonable assurance that the Company will comply with the
conditions attaching to them and the grants will be received. Grants that compensate research and development
F-10
Form 10-K expenses are recognized as a reduction to the related research and development expenses. Grants that compensate
the Company for the cost of property, plant and equipment and land use rights are recognized as deferred income and
are recognized over the useful life of the asset by way of other income.
For the year ended December 31, 2014, government grants of RMB12,963,600 (approximately $2,111,770), have been
recognized as a reduction of research and development expenses.
For the year ended December 31, 2013, the Company received government grants of RMB18,350,000 (approximately
$2,989,215) related to the technical upgrade of the manufacturing facilities in Guizhou Taibang, which was recorded as
deferred income. These grants are amortized as the related assets are depreciated. The grants amortized amounted to
$224,191 and nil for the years ended December 31, 2014 and 2013, respectively.
Land Use Rights
Land use rights represent the exclusive right to occupy and use a piece of land in the PRC for a specified contractual
term. Land use rights are carried at cost, less accumulated amortization. Amortization is calculated using the straight-
line method over the contractual period of the rights ranging from 40 to 50 years.
Research and Development Expenses
Research and development costs are expensed as incurred. Research and development expenses for the years ended
December 31, 2014, 2013 and 2012 were $4,161,901, $4,223,165 and $3,032,719, 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
$3,258,000 (or RMB20,000,000) for the products sold by Shandong Taibang Biological Products Co., Ltd. (“Shandong
Taibang”) and Guizhou Taibang Biological Products Co., Ltd. (“Guizhou Taibang”), respectively. There were no product
liability claims as of December 31, 2014.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and tax loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the consolidated statements of comprehensive income in the period that includes
the enactment date. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered
more likely than not that some portion or all of the deferred tax assets will not be realized.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being
sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being
realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
F-11
Form 10-K The Company records interest related to unrecognized tax benefits in interest expense and penalties in general and
administrative expenses.
Share-based Payment
The Company measures the cost of employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award and recognizes the cost over the period during which an employee is required
to provide service in exchange for the award, which generally is the vesting period.
Long-lived Assets
Long-lived assets, such as property, plant and equipment, and purchased intangible asset subject to amortization, are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment,
the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its
carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted
cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is
determined through various valuation techniques including discounted cash flow models, quoted market values and
third-party independent appraisals, as considered necessary.
Net Income per Share
Basic net income per share of common stock is computed by dividing net income attributable to common stockholders
by the weighted average number of common stock outstanding during the year using the two-class method. Under
the two-class method, net income is allocated between common stock and other participating securities based on
their participating rights in undistributed earnings. The Company’s nonvested shares were considered participating
securities since the holders of these securities participate in dividends on the same basis as common stockholders.
Diluted net income per share is calculated by dividing net income attributable to common stockholders as adjusted for
the effect of dilutive common stock equivalent, if any, by the weighted average number of common stock and dilutive
common stock equivalent outstanding during the year. Potential dilutive securities are not included in the calculation of
diluted earnings per share if the impact is anti-dilutive.
Segment Reporting
The Company has one operating segment, which is the manufacture and sales of human plasma products. Substantially
all of the Company’s operations and customers are located in the PRC, and therefore, no geographic information is
presented.
Contingencies
In the normal course of business, the Company is subject to loss contingencies, such as legal proceedings and claims
arising out of its business, that cover a wide range of matters, including, among others, government investigations
and tax matters. An accrual for a loss contingency is recognized when it is probable that a liability has been incurred
and the amount of loss can be reasonably estimated. Legal costs incurred in connection with loss contingencies are
expensed as incurred.
F-12
Form 10-K NOTE 3 – ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 2014 and 2013 consisted of the following:
Accounts receivable
Less: Allowance for doubtful accounts
Total
December 31, 2014
December 31, 2013
USD
19,836,768
(433,948)
19,402,820
USD
17,730,821
(460,689)
17,270,132
The activity in the allowance for doubtful accounts – accounts receivable for the years ended December 31, 2014, 2013
and 2012 are as follows:
Beginning balance
Provisions
Recoveries
Write-offs
Foreign currency translation adjustment
Ending balance
For the Years Ended
December 31, 2014
December 31, 2013
December 31, 2012
USD
460,689
6,211
(30,673)
-
(2,279)
433,948
USD
415,607
31,567
-
-
13,515
460,689
USD
414,092
-
(1,904)
-
3,419
415,607
NOTE 4 – PREPAYMENTS AND OTHER CURRENT ASSETS
Prepayments and other current assets as of December 31, 2014 mainly represented other receivables of $7,197,778
and prepayments of $3,158,311. Prepayments and other current assets as of December 31, 2013 mainly represented
other receivables of $3,236,990 and prepayments of $1,435,617.
The activity in the allowance for doubtful accounts – other receivables and prepayments for the years ended December
31, 2014, 2013 and 2012 are as follows:
For the Years Ended
December 31, 2014
December 31, 2013
December 31, 2012
Beginning balance
Provisions
Recoveries
Write-offs
Foreign currency translation adjustment
Ending balance
USD
75,704
65,094
-
-
2,153
142,951
USD
27,325
110,123
-
(65,710)
3,966
75,704
USD
142,951
5,068,075
-
-
(3,186)
5,207,840
F-13
Form 10-K
NOTE 5 – INVENTORIES
Inventories at December 31, 2014 and 2013 consisted of the following:
Raw materials
Work-in-process
Finished goods
Total
December 31, 2014
December 31, 2013
USD
52,010,104
22,128,405
27,166,423
101,304,932
USD
47,400,578
20,720,666
20,513,611
88,634,855
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 $324,584, nil and nil for the years ended December 31, 2014, 2013 and
2012, respectively, and were recorded as cost of sales in the consolidated statements of comprehensive income.
NOTE 6 – OTHER RECEIVABLES IN RESPECT OF AN EMPLOYEE HOUSING DEVELOPMENT
PROJECT
In 2009, 107 employees, or the Employee-participants, of Shandong Taibang entered into agreements, or the Housing
Project Agreements, with a real estate developer regarding a housing development project, pursuant to which the
developer agreed to develop and deliver residential units to the Employee-participants by the end of 2011 and the
Employee-participants paid the developer deposits equal to 80% of the purchase prices of the residential units. To
assist with their deposit payment, Shandong Taibang entered into separate agreements, or the Financial Assistance
Agreements, with the Employee-participants and provided them with advances of up to 50% of the purchase prices
of the residential units. These advances were to be repaid by deductions from the Employee-participants’ salaries. In
addition, Shandong Taibang also entered into a purchase agreement with the developer to purchase additional units
in the development project and made a deposit of RMB3,823,200 (approximately $622,799). However, the developer
failed to deliver the residential units and is unlikely to be able to perform the Housing Project Agreements. In August
2014, the Company entered into agreements, or the Advance Payment Agreements, with the Employee-participants,
pursuant to which the Company made advance payments to the Employee-participants equal to the deposits that the
Employee-participants had paid the developer pursuant to the Housing Project Agreements and refunded them the
deductions previously made from their salaries pursuant to the Financial Assistance Agreements together with accrued
interest totaling RMB27,071,684 (approximately $4,409,977). In November 2014, Shandong Taibang entered into
supplemental agreements to the Advance Payment Agreements, or the Supplemental Agreements, with the Employee-
F-14
Form 10-K participants, pursuant to which the Employee-participants transferred and assigned to Shandong Taibang their rights
under the Housing Project Agreements, including their rights to pursue legal actions against and recover damages from
the developer, and in return, Shandong Taibang waived its right to claim the advance payments and the refunds of the
deductions under the Advance Payment Agreements. As of December 31, 2014, the Company made a full provision
of $5,068,075 in the consolidated financial statements for all the receivables in respect of this employee housing
development project, including the deposits paid to the developer, the total advance payments and refunds made under
this employee housing development project, as well as the related fees and expenses, because it became probable that
these receivables may not be recoverable after all legal means of collection were exhausted.
NOTE 7 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 2014 and 2013 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, 2014
December 31, 2013
USD
32,375,433
58,946,498
8,230,842
99,552,773
USD
31,714,173
36,919,094
8,141,993
76,775,260
(30,779,714)
(25,658,760)
68,773,059
10,237,610
1,220,219
80,230,888
51,116,500
19,050,642
2,981,930
73,149,072
Depreciation expense for the years ended December 31, 2014, 2013 and 2012 was $6,989,222, $6,096,650 and
$5,792,418, respectively. No interest expenses were capitalized into construction in progress for the years ended
December 31, 2014, 2013 and 2012.
NOTE 8 – DEPOSITS RELATED TO LAND USE RIGHTS
In 2012, Guizhou Taibang made a refundable payment of RMB83,400,000 (approximately $13,585,860) 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, RMB23,000,000 (approximately $3,746,700) was refunded by the local
government. The remaining deposits will be refunded within one year following the completion of the bidding process.
NOTE 9 – RESTRICTED CASH AND CASH DEPOSITS
In August, 2013, the Company made a time deposit of RMB186,000,000 (approximately $30,299,400) 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”). In April 2014, due to the depreciation of RMB against
USD, additional deposit of RMB1,000,000 (approximately $162,900) was made as security for this loan. In July 2014,
the Company repaid the loan. The time deposit matured in August 2014 accordingly.
F-15
Form 10-K In February 2014, the Company made time deposits of RMB246,500,000 (approximately $40,154,850) and
RMB194,600,000 (approximately $31,700,340) with CMB BJ Branch as a security for a 24-month $40,000,000 loan and
an 18-month $30,000,000 loan respectively lent by CMB NY Branch (see Note 11).
In August 2014, the Company made a time deposit of RMB196,300,000 (approximately $31,977,270) with CMB BJ
Branch as a security for a 6-month RMB194,000,000 (approximately $31,602,600) loan lent by CMB BJ Branch (see
Note 11).
NOTE 10 – EQUITY METHOD INVESTMENT
The Company’s equity method investment as of December 31, 2014 and 2013 represented 35% equity interest
investment in Xi’an Huitian Blood Products Co., Ltd. (“Huitian”).
In October 2008, Shandong Taibang entered into an equity purchase agreement with one of the equity owners of
Huitian (“Seller”) to acquire 35% equity interest in Huitian. In connection with this transaction, in October 2008, Taibang
Biological Limited (“Taibang Biological”) entered into an entrust agreement (the “Entrust Agreement”) with Shandong
Taibang and the noncontrolling interest holder of Shandong Taibang, pursuant to which, Taibang Biological would pay
the cash consideration, including interest, of $6,502,901 (or RMB44,327,887) to the Seller, and would bear the risks and
benefits as a 35% equity owner in Huitian. In addition, Taibang Biological would pay Shandong Taibang RMB120,000
(approximately $19,548) per year as compensation for the administrative costs of Shandong Taibang’s holding of the
35% equity interest in Huitian on behalf of Taibang Biological. Such amount paid and received is eliminated upon
consolidation. Taibang Biological agreed to indemnify the noncontrolling interest holder of Shandong Taibang for
any loss arising from the Entrust Agreement and has pledged the Company’s equity interest in Shandong Taibang as
collateral against such loss.
The excess of carrying amount over the Company’s share of net assets of equity method investees is $1,333,075 and
$2,076,329 at December 31, 2014 and 2013, respectively, which comprises fair value adjustments for property, plant
and equipment and land use right of nil and $736,707 at December 31, 2014 and 2013, respectively, and goodwill of
$1,333,075 and $1,339,622 at December 31, 2014 and 2013, respectively. The fair value adjustments are amortized
over the remaining useful lives of related assets. The equity method goodwill is not amortized; however, the investment
is reviewed for impairment. Huitian contributed its land use right to its subsidiary as capital in 2013 and disposed the
subsidiary in 2014, recognizing a gain of RMB116.7 million (approximately $19.0 million) for the year ended December
31, 2014, which caused the Company’s equity income in Huitian increased by $6.7 million accordingly.
F-16
Form 10-K NOTE 11 – BANK LOANS
(a) Current
The Company’s bank loans at December 31, 2014 and 2013 consisted of the following:
Loans
Maturity
date
Annual
interest rate
December 31,
2014
December 31,
2013
Short-term bank loan, unsecured
May 12, 2014
Short-term bank loan, unsecured
December 22, 2014
Short-term bank loan, secured
February 12, 2015
6.00%
6.00%
5.04%
Current portion of long-term bank loans
August 11, 2015
See note (b)
Total
USD
-
-
31,602,600
26,300,000
57,902,600
USD
4,911,000
4,911,000
-
-
9,822,000
In August 2014, the Company entered into a credit facility agreement with CMB BJ Branch to finance the acquisition of
additional equity interest in Guizhou Taibang (see Note 24). Pursuant to the facility agreement, the Company obtained
a 6-month RMB194,000,000 (approximately $31,602,600) loan from CMB BJ Branch secured by a time deposit of
RMB196,300,000 (approximately $31,977,270).
Interest expense amounted to $1,178,626, $347,602 and $446,381 for the years ended December 31, 2014, 2013 and
2012, respectively.
The Company did not have any revolving line of credit as of December 31, 2014 and 2013.
(b) Non-current
Long-term bank loans
Less: current portion of long-term bank loans
Total non-current bank loans
December 31, 2014
December 31, 2013
USD
66,300,000
26,300,000
40,000,000
USD
30,000,000
-
30,000,000
In August, 2013, the Company entered into a credit facility agreement with CMB NY Branch to finance the share
repurchase (see Note 16). Pursuant to the facility agreement, CMB NY Branch lends to the Company an 18-month
$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 RMB187,000,000 (approximately $30,462,300) held at CMB BJ Branch. The
Company repaid the loan in July 2014.
The Company entered into a credit facility agreement with CMB NY Branch in February, 2014 to finance the share
repurchase (see Note 16). Pursuant to the facility agreement, CMB NY Branch lent to the Company a 24-month
$40,000,000 loan and an 18-month $30,000,000 loan, secured by time deposits of RMB246,500,000 (approximately
$40,154,850) and RMB194,600,000 (approximately $31,700,340), respectively, held at CMB BJ Branch. Both loans
bear an interest rate of 3-month LIBOR plus 1.3% per annum and a facility fee of 1.2% per annum. In July 2014, the
Company repaid $3,700,000 out of the 18-month $30,000,000 loan.
F-17
Form 10-K
NOTE 12 – OTHER PAYABLES AND ACCRUED EXPENSES
Other payables and accrued expenses at December 31, 2014 and 2013 consisted of the following:
Payables to potential investors (1)
Payable to Guizhou Eakan Investing Corp. (2)
Payable to Guizhou Jie’an Company (2)
Salaries and bonuses payable
Accruals for selling commission and promotion fee
Dividends payable to noncontrolling interest
Payables for construction work
Other tax payables
Advance from customers
Others
Total
December 31, 2014
December 31, 2013
USD
9,756,023
2,371,824
1,599,025
10,591,524
4,288,089
5,616,792
3,595,093
3,878,983
945,678
7,049,726
USD
9,403,649
-
-
8,217,129
3,566,693
1,411,094
4,427,423
2,119,024
2,908,853
5,707,728
49,692,757
37,761,593
(1) The payables to potential investors comprise deposits received from potential investors of $6,476,904 and
$6,508,712 as of December 31, 2014 and 2013, respectively, and related interest plus penalty on these deposits
totaling $3,279,119 and $2,894,937 as of December 31, 2014 and 2013, respectively.
In 2007, Guizhou Taibang received an aggregate amount of RMB50,960,000 (approximately $8,301,384) from
certain potential investors in connection with their subscription to purchase shares in Guizhou Taibang. In 2010, the
Company refunded RMB11,200,000 (approximately $1,824,480) to one of the potential investors. According to the
final judgment of the PRC Supreme Court, both the rights of these potential investors as shareholders of Guizhou
Taibang and their claims for the related dividend distribution have been denied in 2013. (See Note 19)
(2) These balances were recorded as “Due to related parties” at December 31, 2013. (See Note 20)
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.
F-18
Form 10-K
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,
2014, 2013 and 2012. Taibang Holdings did not earn any income that was derived in Hong Kong for the years ended
December 31, 2014, 2013 and 2012. The payments of dividends by Hong Kong companies are not subject to any Hong
Kong withholding tax.
PRC
The PRC’s statutory income tax rate is 25%. The Company’s PRC subsidiaries are subject to income tax at 25% unless
otherwise specified.
On February 12, 2009, Shandong Taibang received the High and New Technology Enterprise certificate from the
Shandong provincial government. This certificate entitled Shandong Taibang to pay income taxes at a 15% preferential
income tax rate for a period of three years from 2008 to 2010. On October 31, 2011, Shandong Taibang obtained a
notice from the Shandong provincial government that the High and New Technology Enterprise qualification has been
renewed for an additional three years from 2011 to 2013. In October 2014, Shandong Taibang obtained a notice from
the Shandong provincial government that granted it the High and New Technology Enterprise certificate. This certificate
entitled Shandong Taibang to enjoy a preferential income tax rate of 15% for a period of three years from 2014 to 2016.
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
a qualified enterprise located in the western region of the PRC, enjoys a preferential income tax rate of 15% effective
retroactively from January 1, 2011 to December 31, 2020.
The components of earnings (losses) before income tax expense by jurisdictions are as follows:
PRC, excluding Hong Kong
U.S.
BVI
Hong Kong
Total
December 31, 2014
December 31, 2013
December 31, 2012
For the Years Ended
USD
122,116,071
(8,032,150)
8,625,859
42,381
122,752,161
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
Income tax expense for the years ended December 31, 2014, 2013 and 2012 represents current income tax expense
and deferred tax expense:
December 31, 2014
December 31, 2013
December 31, 2012
For the Years Ended
Current income tax expense
Deferred tax expense
USD
15,427,669
112,632
15,540,301
USD
14,035,714
1,127,433
15,163,147
USD
23,155,637
3,483,890
26,639,527
F-19
Form 10-K
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, 2014
December 31, 2013
December 31, 2012
(in percentage to earnings before income tax expense)
PRC statutory income tax rate
Non-taxable income
Non-deductible expenses:
Share-based compensation
Others
Tax rate differential
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%
-
0.5%
0.5%
(2.2)%
(9.7)%
(1.4)%
(0.7)%
7.3%
2.4%
21.7%
25.0%
-
0.9%
0.7%
(1.0)%
(12.7)%
(1.4)%
1.7%
2.8%
0.8%
16.8%
25.0%
(0.7)%
1.9%
0.4%
(1.2)%
(11.0)%
(1.3)%
0.7%
4.0%
0.9%
18.7%
The PRC tax rate has been used because the majority of the Company’s consolidated pre-tax earnings arise in the PRC.
As of December 31, 2014 and 2013, significant temporary differences between the tax basis and financial statement
basis of assets and liabilities that gave rise to deferred taxes were principally related to the following:
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
- 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, 2014
December 31, 2013
USD
USD
3,345,926
10,401,398
13,747,324
(6,661,139)
7,086,185
(439,116)
(3,740,259)
(7,351,023)
(11,530,398)
3,345,926
(7,790,139)
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)
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
F-20
Form 10-K
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 $10,401,398 for tax loss carry forwards as of December 31, 2014, of which $6,051,100
and $4,350,298 relate to tax loss carryforwards of certain PRC subsidiaries and CBP, respectively. For PRC income tax
purposes, certain of the Company's PRC subsidiaries had tax loss carryforwards of $24,204,400, of which $1,147,907,
$5,195,417, $7,144,957, $5,342,603 and $5,373,516 would expire by 2015, 2016, 2017, 2018 and 2019, respectively, if
unused. For United States federal income tax purposes, CBP had tax loss carryforwards of approximately $12,794,994,
of which $1,268,307, $614,982, $1,113,597, $1,405,718, $2,350,326, $3,382,154, $978,837, $1,296,319 and $384,754
would expire by 2026, 2027, 2028, 2029, 2030, 2031, 2032, 2033 and 2034, respectively, if unused. In view of their
cumulative losses positions, management determined it is more likely than not that deferred tax assets of these PRC
subsidiaries will not be realized, and therefore full valuation allowances of $6,051,100 and $4,730,841 were provided as
of December 31, 2014 and 2013, 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
$610,039 and $2,827,749 were provided as of December 31, 2014 and 2013, 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, 2014 and December 31, 2013.
The following table presents the movement of the valuation allowance for deferred tax assets for the years ended
December 31, 2014, 2013 and 2012:
Beginning balance
Addition (deduction) during the year
Foreign currency translation adjustment
Ending balance
December 31, 2014
December 31, 2013
December 31, 2012
For the Years Ended
USD
7,558,590
(885,253)
(12,198)
6,661,139
USD
5,887,981
1,588,875
81,734
7,558,590
USD
7,167,986
(1,276,205)
(3,800)
5,887,981
According to the prevailing PRC income tax law and relevant regulations, dividends relating to earnings accumulated
beginning on January 1, 2008 that are received by non-PRC-resident enterprises from PRC-resident enterprises
are subject to withholding tax at 10%, unless reduced by tax treaties or similar arrangement. Dividends relating to
undistributed earnings generated prior to January 1, 2008 are exempt from such withholding tax. Further, dividends
received by the Company from its overseas subsidiaries are subject to the U.S. federal income tax at 34%, less any
qualified foreign tax credits. Based on the dividend policy the Company has provided the deferred tax liabilities of
$7,351,023 on undistributed earnings of $74 million, approximately 50% of Shandong Taibang’s total undistributed
earnings at December 31, 2014. 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 $161 million as of December 31, 2014.
As of January 1, 2012 and for each of the years ended December 31, 2012, 2013 and 2014, 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.
F-21
Form 10-K 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 $16,290). 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 2009.
NOTE 14 – OPTIONS AND NONVESTED SHARES
Options
Effective May 9, 2008, the Board of Directors adopted the China Biologic Products, Inc. 2008 Equity Incentive Plan, (“the
2008 Plan”). The 2008 Plan provides for grants of stock options, stock appreciation rights, performance units, restricted
stock, restricted stock units and performance shares. A total of five million shares of the Company’s common stock may
be issued pursuant to the 2008 Plan. The exercise price per share for the shares to be issued pursuant to an exercise
of a stock option will be no less than the fair market value per share on the grant date, except that, in the case of an
incentive stock option granted to a person who holds more than 10% of the total combined voting power of all classes
of the Company’s stock or any of its subsidiaries, the exercise price will be no less than 110% of the fair market value
per share on the grant date. No awards may be granted under the 2008 Plan after May 9, 2018, except that any award
granted before then may extend beyond that date. All the options to be granted will have 10-year terms.
For the year ended December 31, 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.
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 year ended December 31, 2014, no stock options to purchase common stock were granted to any directors or
employees.
F-22
Form 10-K A summary of stock options activity for the years ended December 31, 2012, 2013 and 2014 is as follows:
Outstanding as of January 1, 2012
Granted
Exercised
Forfeited and expired
Outstanding as of December 31, 2012
Granted
Exercised
Forfeited and expired
Outstanding as of December 31, 2013
Granted
Exercised
Forfeited and expired
Outstanding as of December 31, 2014
Vested and expected to vest as
of December 31, 2014
Exercisable as of December 31, 2014
Number of
Options
1,994,600
900,000
(90,990)
(155,001)
2,648,609
Weighted
Average
Exercise
Price
USD
9.24
9.61
7.99
9.69
9.39
33,000
10.48
(648,379)
(150,854)
1,882,376
-
(417,002)
(32,920)
1,432,454
1,432,454
1,139,954
8.32
6.78
9.98
-
9.26
11.44
10.16
10.16
10.26
Weighted Average
Remaining
Contractual
Term in years
Aggregate
Intrinsic Value
USD
7.71
5,197,076
(468,322)
7.65
18,374,422
(10,923,644)
7.20
35,518,897
(17,529,500)
81,753,119
81,753,119
64,938,469
6.53
6.53
6.30
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, and the weighted average option fair value of $7.58 per share or an aggregate
of $6,817,649 on the date of grant during the year ended December 31, 2012, were determined based on the Black-
Scholes option pricing model using the following weighted average assumptions:
Expected volatility
Expected dividends yield
Expected term (in years)
Risk-free interest rate
For the Years Ended
December 31, 2013
December 31, 2012
104.00%
0%
5.38
0.72%
104.00%
0%
6.01
0.82%
Fair value of underlying common stock (per share)
$ 10.48
$ 9.61
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 years ended December 31, 2014, 2013 and 2012, the Company recorded stock compensation expense of
$1,669,573, $3,773,073 and $4,335,595, respectively, in general and administrative expenses.
F-23
Form 10-K As of December 31, 2014, approximately $1,894,057 of stock compensation expense with respect to stock options is to
be recognized over weighted average period of approximately 1.39 years.
Nonvested shares
For the years ended December 31, 2012, 2013 and 2014, nonvested shares were granted to certain directors and
employees (collectively, the “Participant”). Pursuant to the nonvested share grant agreements between the Company
and the Participant, the Participant will have all the rights of a stockholder with respect to the nonvested shares. The
nonvested shares granted to directors generally vest in one or two years. The nonvested shares granted to employees
generally vest in four years.
A summary of nonvested shares activity for the year ended December 31, 2012, 2013 and 2014 is as follow:
Outstanding as of January 1, 2012
Granted
Vested
Forfeited
Outstanding as of December 31, 2012
Granted
Vested
Forfeited
Outstanding as of December 31, 2013
Granted
Vested
Forfeited
Outstanding as of December 31, 2014
Number of
nonvested shares
Grant date weighted
average fair value
USD
-
120,000
-
-
120,000
306,500
(63,750)
-
362,750
299,000
(107,125)
(2,500)
552,125
-
9.85
-
-
9.85
22.94
9.85
-
20.91
51.88
20.66
9.85
37.78
For the years ended December 31, 2014, 2013 and 2012, the Company recorded stock compensation expense of
$3,726,698, $1,277,723 and $209,332 in general and administrative expenses, respectively.
As of December 31, 2014, approximately $18,486,402 of stock compensation expense with respect to nonvested
shares is to be recognized over weighted average period of approximately 2.85 years.
NOTE 15 – 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, 2014 and
2013 was $32,137,551 and $30,796,531, respectively.
F-24
Form 10-K NOTE 16 – SHARE REPURCHASE
On January 27, 2014, the Company entered into a repurchase agreement with an individual shareholder, pursuant
to which the Company repurchased 2,500,000 shares of common stock for a consideration of $70,000,000. The
transaction was completed on February 28, 2014.
On August 2, 2013, the Company entered into a repurchase agreement with an individual shareholder, pursuant
to which the Company repurchased 1,479,704 shares of common stock for a consideration of $29,594,080. The
transaction was completed on August 8, 2013.
NOTE 17 – FAIR VALUE MEASUREMENTS
Management used the following methods and assumptions to estimate the fair value of financial instruments at the
relevant balance sheet dates:
• Short-term financial instruments (including cash and cash equivalents, time deposit, restricted cash deposits,
accounts receivable, other receivables, short-term bank loans including current portion of long-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 of these
instruments.
• Restricted cash and cash deposits, excluding current portion – The carrying amounts of the restricted cash and
cash 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 excluding current portion– 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 comparable maturities.
NOTE 18 – SALES
The Company’s sales are primarily derived from the manufacture and sale of Human Albumin and Immunoglobulin
products. The Company’s sales by significant types of product for the years ended December 31, 2014, 2013 and 2012
are as follows:
F-25
Form 10-K Human Albumin
Immunoglobulin products:
Human Immunoglobulin
for Intravenous Injection
Other Immunoglobulin products
Placenta Polypeptide
Others
Total
December 31, 2014
December 31, 2013
December 31, 2012
For the Years Ended
USD
95,547,952
USD
89,671,619
98,389,729
77,341,616
19,736,027
24,029,706
5,548,244
243,251,658
19,682,927
12,150,539
4,510,155
203,356,856
USD
82,450,825
72,005,196
19,377,603
10,088,754
891,117
184,813,495
NOTE 19 – COMMITMENTS AND CONTINGENCIES
Capital commitments
As of December 31, 2014, commitments outstanding for the purchase of property, plant and equipment approximated
$6,355,000.
Legal proceedings
Dispute with Jie’an over Raising Additional Capital in Guizhou Taibang
In May 2007, a 91% majority of Guizhou Taibang’s shareholders approved a plan to raise additional capital from
qualified strategic investors through the issuance of an additional 20,000,000 shares of Guizhou Taibang. The plan
required all existing Guizhou Taibang shareholders to waive their rights of first refusal to subscribe for the additional
shares. The remaining 9% minority shareholder of Guizhou Taibang’s shares, Guizhou Jie’an Company, or Jie’an,
did not support the plan and did not waive its right of first refusal. In May 2007, Guizhou Taibang signed an Equity
Purchase Agreement with certain alleged strategic investors (who concealed their background), pursuant to which
such investors agreed to invest an aggregate of RMB50,960,000 (approximately $8,301,384) in exchange for 21.4% of
Guizhou Taibang’s equity interests. Such Equity Purchase Agreement was not approved or ratified by over two-thirds
supermajority of Guizhou Taibang’s shareholders, which approval or ratification is required under the PRC Company
Law. At the same time, as an existing shareholder, Jie’an also subscribed for 1,800,000 shares, representing its pro
rata share of the 20,000,000 shares being offered. In total, Guizhou Taibang received RMB50,960,000 (approximately
$8,301,384) from the investors and RMB6,480,000 (approximately $1,055,592) from Jie’an.
In June 2007, Jie’an brought a lawsuit against Guizhou Taibang, alleging that it had a right to acquire the 18,200,000
shares offered to the investors under the Equity Purchase Agreement. The trial court denied Jie’an’s request, and the
PRC Supreme Court ultimately sustained the original ruling in May 2009 and denied the rights of first refusal of Jie’an
over the 18,200,000 shares.
During the second quarter of 2010, Jie’an requested that Guizhou Taibang register its 1.8 million shares of additional
capital injection with the local AIC. Guizhou Taibang’s board of directors withheld its required ratification of Jie’an’s
request, pending the outcome of the ongoing litigation. In March 2012, Jie’an brought another lawsuit against Guizhou
F-26
Form 10-K Taibang for refusing to register the shares. In July 2013, the trial court dismissed the lawsuit for lack of jurisdiction.
Jie’an did not appeal the dismissal.
In December 2013, Jie’an brought a third lawsuit against Guizhou Taibang, requesting Guizhou Taibang to register
1.8 million shares under its name with the local AIC. In July 2014, the trial court denied Jie’an’s request to register
such shares. Despite the denial of Jie’an’s share registration request, the trial court, however, in its ruling, ordered
Guizhou Taibang to pay accumulated dividends of RMB13,809,197 (approximately $2,249,518) associated with these
shares and the related interest expenses to Jie’an. Guizhou Taibang and Jie’an subsequently filed a cross-appeal.
In December 2014, the appellate court ruled in favor of Jie’an supporting its request to register 1.8 million shares
and ordered Guizhou Taibang to pay Jie’an its share of accumulated dividends of RMB18,339,227 (approximately
$2,987,460) associated with these shares plus the related interest expenses to Jie’an. In February 2015, Guizhou
Taibang paid RMB18,000,000 (approximately $2,932,200) to the trial court to be held in escrow pending further appeal
of this case. Guizhou Taibang was in the process of preparing its appeal as of the date of this report.
In November 2013, Guizhou Taibang held a shareholders meeting and the shareholders passed resolutions, or the
November 2013 Resolutions, that, inter alia, (i) determined that it was no longer necessary for Guizhou Taibang to obtain
additional capital from investors; (ii) rejected Jie’an’s request that Jie’an subscribe for additional shares of Guizhou
Taibang alone and one or more other shareholders reduce their shareholding in Guizhou Taibang; and (iii) approved
the issuance of a total of 20,000,000 new shares to all existing shareholders on a pro rata basis. Jie’an subsequently
filed a fourth lawsuit against Guizhou Taibang in December 2013, requesting that the court declare the November 2013
Resolutions void. Both the trial court and the appellate court denied Jie’an’s request.
In March 2014, Guizhou Taibang held another shareholders meeting and the shareholders passed resolutions, or
the March 2014 Resolutions, that, inter alia, re-calculated the ownership percentage in Guizhou Taibang based on
the November 2013 Resolutions and the additional capital injections from existing shareholders. Guizhou Taibang
subsequently updated the registration with the local AIC regarding the additional capital injections in August 2014.
In September 2014, Jie’an and another minority shareholder of Guizhou Taibang filed a lawsuit against Guizhou
Taibang, requesting that the court declare both the November 2013 Resolutions and the March 2014 Resolutions void
and instruct Guizhou Taibang to withdraw the AIC registration. In November 2014, the trial court suspended this case
pending the final outcome of the third lawsuit filed by Jie’an.
If the pending cases with Jie’an are ultimately ruled in Jie’an’s favor, the ownership interest in Guizhou Taibang may
be diluted to 71% and Jie’an may be entitled to receive accumulated dividends of RMB18,339,227 (approximately
$2,987,460) and the related interest expenses (being its claimed share of Guizhou Taibang’s accumulated dividend
distributions associated with the 1.8 million shares and the acrrued interest from the date when Jie’an’s capital
contribution was deemed effective till December 31, 2014) from Guizhou Taibang. As of December 31, 2014, the
Company had maintained, on its balance sheet, payables to Jie’an in the amounts of RMB5,040,000 (approximately
$821,016) as received funds in respect of the 1.8 million shares in dispute, RMB1,440,000 (approximately $234,576) for
the over-paid subscription price paid by Jie’an and RMB3,335,993 (approximately $543,433) for the accrued interest.
As these cases are closely interlinked to the outcome of the disputes with certain individual investor described below,
based on its PRC litigation counsel’s assessment, the Company does not expect Jie’an to prevail.
F-27
Form 10-K Dispute with Certain Investors over Raising Additional Capital in Guizhou Taibang
In part due to the invalidity of the Equity Purchase Agreement with certain alleged strategic investors in May 2007,
which was never approved or ratified by Guizhou Taibang’s shareholders, such investors’ equity ownership in Guizhou
Taibang and the related increase in registered capital of Guizhou Taibang have never been registered with the local
AIC. In January 2010, one individual among such investors brought a lawsuit against Guizhou Taibang requesting to
register his 14.35% ownership interest in Guizhou Taibang with the local AIC and seeking the distribution of his share of
Guizhou Taibang’s dividends declared since 2007.
In October 2010, the trial court denied such individual investor’s right as shareholders of Guizhou Taibang and his
entitlement to share the dividends, which ruling was reaffirmed after a re-trial by the same trial court in December 2012.
After such ruling, Guizhou Taibang attempted to return the originally received fund of RMB34,160,000 to such investor
by wiring the fund back to his bank account but was unable to do so due to the closure of his bank account. Another
investor, however, accepted the returned fund of RMB11,200,000 (approximately $1,824,480) from Guizhou Taibang
in November 2010. In 2013, the same individual investor appealed the case to the PRC Supreme Court, which also
denied his claims for shareholder status in Guizhou Taibang and the related dividend distribution and accrued interest
in September 2013. Such investor subsequently attempted to seek for a re-trial by the PRC Supreme Court, which
request was denied by the PRC Supreme Court in January 2014. He then applied to the PRC Supreme Procuratorate
to request for a review of the PRC Supreme Court’s decision and seek an appeal by the PRC Supreme Procuratorate to
the PRC Supreme Court for an ultimate re-trial on his behalf. The PRC Supreme Procuratorate accepted his application
in December 2014 and, with the assistance of its PRC litigation counsel, the Company is in the process of preparing
its response to such application. The PRC Supreme Procuratorate will consider the Company’s response in deciding
whether to appeal to the PRC Supreme Court on behalf of such investor, which decision process may take several
months. The PRC Supreme Procuratorate had not scheduled a hearing as of the date of this report.
Based on its PRC litigation counsel’s assessment, the Company does not expect such individual investor to prevail
in this pending re-trial application process, but the Company cannot assure that the PRC Supreme Procuratorate will
decide not to appeal for re-trial or the final outcome of such ultimate re-trial by the PRC Supreme Court (if the PRC
Supreme Procuratorate decides to appeal for re-trial) will be in favor of the Company. In case the PRC Supreme
Procuratorate decides to appeal for re-trial on behalf of such investor and such ultimate re-trial by the PRC Supreme
Court is ruled in such investor’s favor, the ownership interest in Guizhou Taibang may be diluted to 66.29% and such
investor may be entitled to receive his claimed share of accumulated dividends and the acrrued interests from Guizhou
Taibang although he has not specified the amount of the claimed damages in his appeal to the PRC Supreme Court or
the re-trial application to the PRC Supreme Procuratorate. As of December 31, 2014, Guizhou Taibang had maintained,
on its balance sheet, payables to the investors of RMB34,160,000 (approximately $5,564,664) as originally received
funds from such individual investor in respect of the shares in dispute, RMB15,850,231 (approximately $2,582,003) for
the interest expenses, and RMB341,600 (approximately $55,647) for the 1% penalty imposed by the Equity Purchase
Agreement for any breach in the event that Guizhou Taibang is required to return the original investment amount to such
investor.
F-28
Form 10-K NOTE 20 – RELATED PARTY TRANSACTIONS
The material related party transactions undertaken by the Company with related parties for the years ended December
31, 2014, 2013 and 2012 are presented as follows:
Commission expenses with related parties(1)
For the Years Ended
December 31, 2014
December 31, 2013
December 31, 2012
USD
2,249,716
USD
3,620,335
USD
3,591,836
The material related party balances at December 31, 2014 and 2013 are presented as follows:
Liabilities
Purpose
December 31, 2014
December 31, 2013
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
-
-
-
-
-
USD
351,955
2,383,472
2,929,903
1,541,640
7,206,970
(1) During the year ended December 31, 2011, Guizhou Taibang signed an agency contract with Guizhou Eakan Pharmaceutical
Co., Ltd. (“Guizhou Eakan”), one of the former Guizhou Taibang’s noncontrolling interest shareholders (see note 24), pursuant
to which Guizhou Taibang would pay commission to Guizhou Eakan for the promotion of the product of Placenta Polypeptide.
The agency contract expired on May 31, 2014 and Guizhou Eakan no longer provided the promotion services thereafter. As of
December 31, 2014 and 2013, Guizhou Taibang accrued commission payable of $8,145 and $351,955 for service rendered by
Guizhou Eakan. The commission expense for service rendered by Guizhou Eakan amounted to $2,249,716, $3,620,335, and
$3,591,836 for the years ended December 31, 2014, 2013 and 2012, respectively. In August 2014, the Company acquired the
equity interest owned by Guizhou Eakan in Guizhou Taibang and Guizhou Eakan was no longer a related party of the Company
at December 31, 2014.
(2) Guizhou Taibang has payables to Guizhou Eakan Investing Corp., amounting to approximately $2,371,824 and $2,383,472 as
of December 31, 2014 and 2013, respectively. Guizhou Eakan Investing Corp. is an affiliate of Guizhou Eakan. The Company
borrowed this interest free advance for working capital purpose for Guizhou Taibang. The balance is due on demand. In August
2014, the Company acquired the equity interest owned by Guizhou Eakan in Guizhou Taibang and Guizhou Eakan Investing
Corp. was no longer a related party of the Company at December 31, 2014.
(3)
In December 2013, Guizhou Taibang received a contribution of RMB17,898,000 (approximately $2,929,903) from Guizhou
Eakan, pending for the registration with the local AIC. In August 2014, the Company acquired the equity interest owned by
Guizhou Eakan in Guizhou Taibang and made the registration accordingly.
(4) Guizhou Taibang has payables to Jie’an, a noncontrolling interest shareholder of Guizhou Taibang, amounting to approximately
$1,599,025 and $1,541,640 as of December 31, 2014 and 2013, respectively. In 2007, Guizhou Taibang received additional
contributions from Jie’an of RMB6,480,000 (approximately $1,055,592) to subscribe for 1,800,000 shares in Guizhou Taibang.
However, due to a legal dispute among shareholders over raising additional capital as discussed in the legal proceeding section
(see Note 19), the contribution is subject to be returned to Jie’an. Following the Company’s acquisition of the equity interest
owned by Guizhou Eakan in Guizhou Taibang, Jie’an was not able to influence significantly the operation of Guizhou Taibang. As
a result, Jie’an was no longer regarded as a related party at December 31, 2014.
F-29
Form 10-K
NOTE 21 - NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income per share of common stock for the
periods indicated:
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
Change in fair value of warrants issued
to investors and placement agent
Net income allocated to common stockholders
used in diluted net income per common stock
Weighted average shares used in computing
basic net income per common stock
For the Years Ended
December 31,
2014
USD
70,916,840
(1,210,895)
December 31,
2013
USD
54,601,551
(456,261)
December 31,
2012
USD
45,222,189
(69,624)
69,705,945
54,145,290
45,152,565
-
-
(1,769,140)
69,705,945
54,145,290
43,383,425
24,427,196
26,410,819
26,153,540
Diluted effect of warrants issued to investors
-
-
Diluted effect of stock option
1,257,868
1,161,292
212,792
473,391
Weighted average shares used in computing
diluted net income per common stock
Net income per common stock – basic
Net income per common stock – diluted
25,685,064
27,572,111
26,839,723
2.85
2.71
2.05
1.96
1.73
1.62
During the year ended December 31, 2014 and 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 25) were
excluded from the calculation of diluted net income per common stock since they were antidilutive.
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.
F-30
Form 10-K
NOTE 22 – CHINA BIOLOGIC PRODUCTS, INC. (PARENT COMPANY)
The following represents condensed unconsolidated financial information of the Parent Company only:
Condensed Balance Sheets:
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, including current portion
Total Liabilities
Total Equity
Total Liabilities and Equity
December 31, 2014
USD
December 31, 2013
USD
2,651,088
89,580
368
279,497,751
282,238,787
3,851,760
66,300,000
70,151,760
212,087,027
282,238,787
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
Condensed Statements of Comprehensive Income:
For the Years Ended
Equity in income of subsidiaries
General and administrative expenses
Other expenses, net
Change in fair value of derivative liabilities
December 31,
2014
USD
December 31,
2013
USD
December 31,
2012
USD
78,948,990
(6,008,852)
(2,023,298)
-
62,457,106
(7,460,763)
(394,792)
-
51,063,576
(8,048,993)
(34,543)
1,769,140
Earnings before income tax expense
70,916,840
54,601,551
44,749,180
Income tax benefit
Net Income
-
-
473,009
70,916,840
54,601,551
45,222,189
Condensed Statements of Cash Flows:
For the Years Ended
December 31,
2014
USD
December 31,
2013
USD
Net cash (used in) provided by operating activities
(444,755)
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
-
2,416,821
1,972,066
679,022
2,651,088
F-31
197,001
-
405,920
602,921
76,101
679,022
December 31,
2012
USD
(160,272)
-
-
(160,272)
236,373
76,101
Form 10-K NOTE 23 – FOLLOW-ON OFFERING OF COMMON STOCK
On July 2, 2014, the Company completed a follow-on offering of 1,782,500 shares of common stock at a price of $38.00
per share, less the underwriting discounts and commissions and offering expenses. In this July 2014 follow-on offering,
the Company sold 920,000 shares (including 120,000 shares sold pursuant to the exercise by the underwriters of their
option to purchase additional shares from the Company) and a selling stockholder sold 862,500 shares (including
112,500 shares sold pursuant to the exercise by the underwriters of their option to purchase additional shares from
such selling stockholder). The Company raised net proceeds of approximately $33.2 million from this offering, after
deducting the underwriting discounts and commissions and offering expenses payable by the Company. The Company
did not receive any proceeds from the sale of the shares by the selling stockholder.
NOTE 24 – ACQUISITION OF ADDITIONAL EQUITY INTEREST IN GUIZHOU TAIBANG
On August 25, 2014, Guiyang Dalin Biotechnology ("Guiyang Dalin"), a wholly-owned subsidiary of the Company,
entered into an agreement to acquire an additional 19.84% equity interest in Guizhou Taibang from Guizhou Eakan, a
non-controlling interest shareholder of Guizhou Taibang. The total consideration of the transaction was RMB535 million
(approximately $86.8 million). The Company completed the acquisition on September 4, 2014 and increased its equity
interest in Guizhou Taibang to 76.23%.
NOTE 25 – SUBSEQUENT EVENT
Stockholder Rights Plan
On January 8, 2015, the Board of Directors (the “Board”) adopted a stockholder rights plan (the “Rights Agreement”).
Pursuant to the Rights Agreement, the Board of Directors authorized and declared a dividend distribution of one right
(a “Right”) for each outstanding share of the common stock, par value $0.0001 per share (the “Common Shares”),
of the Company to stockholders of record at the close of business on January 20, 2015 (the “Record Date”). Each
Right entitles the registered holder to purchase from the Company one one-thousandth of a share of the Series A
Participating Preferred Stock, par value $0.0001 per share (the “Preferred Shares”), of the Company at an exercise
price of $325.00 per one one-thousandth of a Preferred Share, subject to adjustment (the “Exercise Price”). However,
the Rights are not immediately exercisable and will become exercisable only upon the occurrence of certain events. In
particular, after January 8, 2015:
•
if a person or group acquires 15% or more of the Company’s Common Shares (including through derivatives), then
the Rights will become exercisable and each Right will entitle its holder (except the acquiring person or group) to
purchase, at the Exercise Price, a number of the Company’s Common Shares having a then-current market value of
twice the Exercise Price;
•
if after a person or group acquires 15% or more of the Company’s Common Shares, the Company merges into
another company, an acquiring entity merges into the Company or the Company sells or transfers more than 50% of
its assets, cash flow or earning power, then each Right will entitle its holder (except the acquiring person or group)
to purchase, for the Exercise Price, a number of shares of common stock of the person engaging in the transaction
having a then-current market value of twice the Exercise Price; or
F-32
Form 10-K
• after a person or group acquires 15% or more of the Company’s Common Shares, the Board may, at its option,
exchange the Rights (except for Rights held by the acquiring person or group), in whole or in part, for Common
Shares at an exchange ratio of one Common Share per Right (subject to adjustment).
The Board adopted the Rights Agreement to protect stockholders from coercive or otherwise unfair takeover tactics. In
general terms, it works by imposing a significant penalty upon any person or group that acquires 15% or more of the
Common Shares without the approval of the Board after January 8, 2015. As a result, the overall effect of the Rights
Agreement and the issuance of the Rights may be to render more difficult or discourage a merger, tender or exchange
offer or other business combination involving the Company that is not approved by the Board. However, neither
the Rights Agreement nor the Rights should interfere with any merger, tender or exchange offer or other business
combination approved by the Board. The Board of Directors may redeem the rights for $0.001 per right at any time
before an event that causes the rights to become exercisable. If not redeemed, the right will expire on January 8, 2017.
The Board had previously adopted a similar preferred shares rights agreement on November 19, 2012, which expired
on November 20, 2014.
Repayment of Bank Loan
In February 2015, the Company repaid the 6-month RMB194,000,000 (approximately $31,602,600) loan with CMB BJ
Branch. In the meanwhile, the time deposit of RMB196,300,000 (approximately $31,977,270) as a security for the loan
matured accordingly.
F-33
Form 10-K EXHIBIT INDEX
Exhibit
No.
Description
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)
88
Form 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)
89
Form 10-K 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.
*Filed herewith.
90
Form 10-K Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
China Biologic Products, Inc.:
We consent to the incorporation by reference in registration statements (No. 333-171069, 333-182624 and 333-196591)
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 4, 2015, with respect to the consolidated balance sheets of China Biologic Products, Inc. and subsidiaries
as of December 31, 2014 and 2013, 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, 2014, and the effectiveness
of internal control over financial reporting as of December 31, 2014, which reports appear in the December 31, 2014
annual report on Form 10-K of China Biologic Products, Inc.
/S/ KPMG
Hong Kong, China
March 4, 2015
91
Form 10-K EXHIBIT 31.1
I, David (Xiaoying) Gao, 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 4, 2015
/s/ David (Xiaoying) Gao
David (Xiaoying) Gao
Chief Executive Officer
(Principal Executive Officer)
92
Form 10-K
EXHIBIT 31.2
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 4, 2015
/s/ Ming Yang
Ming Yang
Chief Financial Officer
(Principal Financial and Accounting Officer)
93
Form 10-K
EXHIBIT 32.1
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, 2014 (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 4th day of March, 2015.
/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.
94
Form 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
The undersigned, Ming Yang, the Chief Financial 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, 2014 (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 4th day of March, 2015.
/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.
95
Form 10-K
Corporate
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
153
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.