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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 20-F
(Mark One)
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR
12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
OR
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report . . . . . . . . . . . . . . . . . . .
Commission file number: 001-32371
SINOVAC BIOTECH LTD.
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
Antigua, West Indies
(Jurisdiction of incorporation or organization)
No. 39 Shangdi Xi Road,
Haidian District, Beijing 100085
People’s Republic of China
(Address of principal executive offices)
Nan Wang
Interim Chief Financial Officer
No. 39 Shangdi Xi Road,
Haidian District, Beijing 100085
People’s Republic of China
Tel: +86-10-8289-0088
Fax: +86-10-6296-6910
E-mail: ir@sinovac.com
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
Common Shares, par value $0.001 per
share
Name of each exchange on which registered
NYSE Amex (to November 13, 2009)
NASDAQ Global Market (from November
16, 2009)
NASDAQ Global Select Market (from
January 3, 2011)
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
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Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as
of the close of the period covered by the annual report.
54,773,961 common shares as of December 31,
2011
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.
Yes No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes No
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 No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was
required to submit and post such files).
Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-
accelerated filer. See definition of ―accelerated filer and large accelerated filer‖ in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Indicate by check mark which basis of accounting the registrant has used to prepare the financial
statements included in this filing:
U.S. GAAP
International Financial Reporting
Standards as issued
by the International Accounting Standards
Board
Other
If ―Other‖ has been checked in response to the previous question, indicate by check mark which
financial statement item the registrant has elected to follow.
Item 17 Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
Yes No
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed
by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court.
Yes No
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INTRODUCTION
PART I
TABLE OF CONTENTS
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
ITEM 3. KEY INFORMATION
ITEM 4. INFORMATION ON THE COMPANY
UNRESOLVED STAFF COMMENTS
ITEM
4A.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
ITEM 8. FINANCIAL INFORMATION
ITEM 9. THE OFFER AND LISTING
ITEM
10.
ITEM
11.
ITEM
12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
ADDITIONAL INFORMATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II
ITEM
13.
ITEM
14.
ITEM
15.
ITEM
16A.
ITEM
16B.
ITEM
16C.
ITEM
16D.
ITEM
16E.
ITEM
16F.
ITEM
16G.
PART III
ITEM
17.
ITEM
18.
ITEM
19.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS
CONTROLS AND PROCEDURES
AUDIT COMMITTEE FINANCIAL EXPERT
CODE OF ETHICS
PRINCIPAL ACCOUNTANT FEES AND SERVICES
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
EXHIBITS
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1
1
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52
57
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59
60
68
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INTRODUCTION
In this annual report on Form 20-F, unless otherwise indicated or unless the context otherwise
requires,
―Sinovac,‖ ―we,‖ ―us,‖ ―our company,‖ and ―our‖ refer to Sinovac Biotech Ltd., its predecessor
entities and its consolidated subsidiaries
―China,‖ ―Chinese‖ or the ―PRC‖ refers to the People’s Republic of China, excluding, for the
purposes of this annual report on Form 20-F only, Taiwan and the special administrative regions
of Hong Kong and Macau;
―RMB‖ or ―renminbi‖ refers to the legal currency of China; and ―$‖ or ―U.S. dollars‖ refers to
the legal currency of the United States;
―shares‖ or ―common shares‖ refers to our common shares, par value $0.001 per share; and
―U.S. GAAP‖ refers to general accepted accounting principles in the United States.
Discrepancies in any table between the amounts identified as total amounts and the sum of the
amounts listed therein are due to rounding.
Our business is primarily conducted in China, and the financial records of our PRC subsidiaries are
maintained in renminbi, their functional currency. However, we use the U.S. dollar as our reporting
currency. At the transaction date, each asset, liability, revenue and expense is translated into the
functional currency by the use of the exchange rate in effect at that date. At the period end, foreign
currency monetary assets, and liabilities are re-evaluated into the functional currency by using the
exchange rate in effect at the balance sheet date. The resulting foreign exchange gains and losses are
included in operations.
For your convenience, this annual report contains translations from renminbi to U.S. dollars made at
the bid rate reported by the Oanda Corporation on December 31, 2011, which was RMB6.3647 to
$1.00. We make no representation that the renminbi or U.S. dollar amounts referred to in this annual
report could have been or could be converted into U.S. dollars or renminbi, as the case may be, at any
particular rate or at all. On April 10, 2012, the bid rate was RMB 6.3286 to $1.00.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. Key Information
A. Selected Financial Data
The following selected consolidated statements of income data for the fiscal years ended
December 31, 2009, 2010 and 2011 and consolidated balance sheet data as of December 31, 2010 and
2011 have been derived from our audited consolidated financial statements that are included in this
annual report beginning on page F-1. The following selected consolidated statements of income data
for the fiscal years ended December 31, 2007 and 2008 and consolidated balance sheet data as of
December 31, 2007, 2008 and 2009 have been derived from our audited consolidated financial
statements that are not included in this annual report.
Our historical results do not necessarily indicate results expected for any future periods. The
selected consolidated financial data should be read in conjunction with our audited consolidated
financial statements and related notes and Item 5 ―Operating and Financial Review and Prospects‖
below. Our audited consolidated financial statements are prepared and presented in accordance with
U.S. GAAP.
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Statement of income (loss) data
Sales
Cost of sales(1)
Gross profit
Operating expenses:
Selling, general and administrative
expenses(2)
Provision for doubtful accounts
Research and development expenses
Depreciation of property, plant and
equipment and amortization of
licenses and permits
Government grants recognized in
income
Total operating expenses
Operating income (loss)
Interest and financing expenses
Interest income
Other income (expenses)
Loss on disposal and write down of
equipment
Income (loss) before income taxes and
non-controlling interests
Income tax recovery (expenses)
Consolidated net income (loss)
Loss (income) attributable to non-
controlling interests(3)
Net income (loss) attributable to the
stockholders
Earnings (loss) per share
- basic
- diluted
Weighted average number of common
shares outstanding
- basic
- diluted
2008
2007
Year ended December 31,
2009
(in thousands, except share and per share data)
$ 33,541 $ 46,497 $ 84,197 $ 33,401 $ 56,842
21,127
35,714
20,063
64,134
16,719
16,682
9,936
36,561
6,502
27,039
2011
2010
11,498
456
965
17,313
24
2,767
18,165
18
4,406
18,885
1,921
8,508
22,372
(167 )
9,007
641
750
693
1,411
1,437
—
13,560
13,479
(478 )
161
29
(80 )
20,774
15,787
(702 )
179
32
(1,296 )
21,986
42,148
(534 )
143
(34 )
(1,924 )
28,801
(12,119 )
(1,178 )
1,133
96
(764 )
31,885
3,829
(388 )
1,397
280
(4 )
(126 )
(169 )
(1,237 )
(455 )
13,187
(1,974 )
11,213
15,170
(2,954 )
12,216
41,554
(11,141 )
30,413
(13,305 )
704
(12,601 )
4,667
(5,067 )
(400 )
(3,563 )
(4,206 )
(10,455 )
4,094
445
7,650 $
8,010 $ 19,958 $
(8,507 ) $
(845 )
0.19 $
0.19 $
0.19 $
0.19 $
0.47 $
0.46 $
(0.16 ) $
(0.16 ) $
(0.02 )
(0.02 )
$
$
$
40,254,192 42,426,703 42,580,945 53,064,968 54,608,919
40,637,876 42,450,606 42,975,007 53,064,968 54,608,919
(1) Excludes depreciation of land-use rights and amortization of licenses and permits of $418,867,
$546,623 and 290,526 for 2009, 2010 and 2011, respectively.
(2) Includes stock-based compensation expense of $422,860, $459,901 and $206,301 in 2009, 2010
and 2011, respectively.
(3) The presentation and disclosure for non-controlling interests have been changed retrospectively
with the adoption of new authoritative guidance effective January 1, 2009.
Balance sheet data
Cash and cash equivalents
Restricted cash
Total assets
Short-term loans
Total current liabilities
Long-term loans payable
Net assets
2008
2009
2010
2011
$ 32,894 $ 74,953 $ 101,585 $ 104,287
—
64
215,908
145,477
4,713
17,698
40,642
51,013
17,321
—
129,921
70,658
—
214,358
10,436
45,758
10,058
126,440
—
83,203
8,024
21,279
2,188
49,714
Non-controlling interests
Capital stock
Total stockholders’ equity
7,185
43
15,377
13,808
55
43
$ 49,714 $ 70,658 $ 126,440 $ 129,921
21,317
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B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Risks Related to Our Company
Our business growth relies on our ability to react to infectious disease threats and to continually
introduce new vaccine products into clinical trials and the commercial market. Our failure to
effectively develop and commercialize new products could materially and adversely affect our
business, financial condition, results of operations and prospects.
The biopharmaceutical market in general and the vaccine product market in particular are
developing rapidly as a result of ongoing infectious disease threats and new trends in the related
research and technology developments. Consequently, our success depends on our ability to react to
disease and technology development trends and to identify, develop and commercialize in a timely and
cost-effective manner effective vaccine products that meet evolving market needs.
Whether we are successful in developing and commercializing new products is determined by our
ability to:
accurately assess disease and technology trends and market needs;
maintain strong research and development capabilities;
optimize our manufacturing and procurement processes to predict and control costs;
manufacture and deliver products in a timely manner and in sufficient quantities;
increase customer awareness and acceptance of our products;
minimize the time and cost required to obtain required regulatory clearances and approvals;
anticipate and compete effectively with other vaccine product developers, manufacturers and
marketers;
price our products competitively; and
construct product lines in time of which meet the new China good manufacturing practice, or
GMP, standards implemented on March 1, 2011.
Although we were profitable from 2007 through 2009, we incurred losses in 2010 and 2011 and may
not be able to return to profitability again in the future.
Biopharmaceutical product development is a highly speculative undertaking and involves a
substantial degree of risk. We have incurred substantial losses since our inception. Although we first
became profitable for the year ended December 31, 2007 and were profitable from 2007 through 2009,
we incurred losses in both 2010 and 2011. We cannot assure you when we will be profitable again in
the future. We incurred net losses attributable to stockholders of $8.5 million and $0.8 million in 2010
and 2011, respectively. Our losses have principally stemmed from increased spending on research and
development, increased selling expenses and deprecation related to new subsidiaries of Sinovac Dalian
and Changping site of Sinovac Beijing. The increased spending on R&D is one of our core strategies to
maintain our long term growth opportunity. R&D expenses incurred on non-government sponsored
projects are not capitalized in our financial statements. We expect our R&D spending will have a
negative impact on our future net earnings. If we keep incurring losses in the future, such losses will
have an adverse impact on our working capital, total assets, stockholders’ equity and cash flow. We
cannot assure you that we will not incur additional losses in the future.
Increased sales of our vaccines to PRC government agencies and our strategy to capture market
share in China’s growing market for publicly funded inoculations expose us to risks relating to
doing business with the government.
We have increased sales of our vaccines to PRC government agencies. We are also pursuing a
strategy to capture market share in China’s growing market for publicly-funded inoculations. While our
increased sales to PRC government agencies afford us the opportunity to expand our sources of
revenue and to further enhance our brand and reputation in China, we are exposed to various risks
relating to doing business with the government. Demand and ability to pay for our products may be
affected by government budgetary cycles, shifting availability of public funds and changes in policy.
Funding reductions, delays in payment or unilateral demands for changes to the terms of our contracts
by our government customers could adversely impact our results of operations and financial condition,
exacerbate the existing seasonality of our revenues and make it difficult for us to allocate resources or
anticipate demand for our products. More importantly, we have little or no control over government
procurement decisions, and government agencies that contract to purchase our products may reduce or
cancel orders, or demand price adjustments or other
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changes to their contracts with us without our consent. Any of the above mentioned actions taken by
government agencies could have a material adverse effect on our results of operations and expected
earnings, or result in our failure to meet, or having to adjust downwards, our sales and gross margin
guidance or estimates, which could adversely affect our stock price and result in substantial losses to
you. In addition, many of the remedies that are available to us when dealing with private parties, such
as making claims for breach of contract or taking other legal actions, may not be available or
practicable in our dealings with government agencies.
We currently have limited revenue sources. A reduction in revenues of Healive, Bilive or Anflu
would cause our revenues to decline and could materially harm our business.
We generate all of our revenues from sales of our vaccine products. We derive a substantial
percentage of our revenues from a small number of vaccine products. 39.3% of our sales in 2009, 37.6%
of our sales in 2010 and 25.0% in 2011 were attributable to Healive. Revenue from sales of Healive
was $33.0 million, $12.5 million and $14.2 million in 2009, 2010 and 2011, respectively. We began
marketing and selling Bilive in 2005, but sales of this product were limited before 2007. After Healive
was included into the EPI program, we adjusted our marketing strategy to sell Bilive primarily in the
private market, which resulted in an increase in sales of Bilive. Revenue from sales of Bilive was $6.2
million, $3.6 million and $12.7 million in 2009, 2010 and 2011, respectively. As Bilive is a combined
hepatitis A and B vaccine, while Healive is a hepatitis A vaccine, an increase in Bilive sales may result
in a corresponding decrease in Healive sales in the private market as customers may substitute Bilive
for Healive if they are sold in the same market segment. We target Healive towards the EPI market and
Bilive towards the private pay market, respectively, in order to prevent competition between the two
products. As a result of this relative lack of product diversification, an investment in our company
would be more risky than investments in companies that offer a wider variety of products or services.
Maintaining and increasing revenue from the sale of flu vaccine is critical to our success. We began
marketing and selling Anflu in 2006 and revenue from the sale of Anflu was $15.2 million in 2009,
$7.6 million in 2010 and $8.1 million in 2011. In 2011, 14.3% of our revenue came from the sale of
Anflu. However, the competition in the flu market is fierce as there are over 10 vaccine companies
manufacturing seasonal flu vaccines in China and several multinational companies have announced
that they plan on investing in manufacturing flu vaccines in China.
We expect a small number of our key products, which will likely shift over time, to continue to
account for a significant portion of our net revenues for the foreseeable future. As a result, continued
market acceptance and popularity of these products are critical to our success and a reduction in
demand due to, among other factors, the introduction of competing products by our competitors, the
entry of new competitors, or end-users’ dissatisfaction with the quality of our products, could
materially and adversely affect our financial condition and results of operations.
We could be subject to costly and time-consuming product liability actions and, because our
insurance coverage is limited, our exposure to such claims could cause significant financial burden.
We manufacture vaccines that are injected into people to protect against infectious illnesses. If our
products do not function as anticipated, whether as a result of flaws in our design, unanticipated health
consequences or side effects, misuse or mishandling by third parties, or faulty or contaminated supplies,
they could injure the vaccinees and, as a result, subject us to product liability lawsuits. Claims against
us also could be based on failure to immunize as anticipated. Any product liability claim brought
against us, with or without merit, could have a material adverse effect on us. Meritless and
unsuccessful product liability claims can be time consuming, expensive to defend and could result in
the diversion of management’s attention from managing our core business or result in associated
negative publicity. For example, in November 2008, a minor in Beijing died two days after she
received a dose of Healive. An autopsy was conducted and the government investigation confirmed
that the death was caused by myocarditis. However, in June 2009, the parents of the deceased initiated
a lawsuit against us and three other defendants in Beijing’s Haidian District People’s Court claiming
damages of RMB616,858. On November 19, 2010, Beijing’s Haidian District People’s Court absolved
Sinovac of liability in the matter.
Our business exposes us to potential product liability risks that are inherent in the testing,
manufacturing and marketing of biopharmaceutical products. We currently do not carry product
liability insurance for Healive, Bilive or Anflu. In addition, we have no clinical trial liability insurance
for our clinical trials. In 2011, we generated $435,000 from exporting our products; however, we do
not currently carry any product liability insurance for international market sales, although we are in the
process to have one. Our current levels of insurance coverage may not be sufficient to satisfy liability
resulting from product liability claims. A successful product liability claim or series of claims could
have a material adverse impact on our business, financial condition and results of operations.
Any pandemic threat may abate, or alternative vaccines or technologies may be adopted, before our
vaccines achieve significant sales.
We have devoted significant resources to researching and developing various vaccines to address the
pandemic threat of infectious diseases, including SARS, avian flu and swine flu, and will continue to
devote resources to the development of our vaccines to address any new needs.
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However, the threat of a pandemic outbreak may subside before we realize any return on our
investment in our research and development. For example, although we believe we were the first
company to complete a Phase I clinical trial of an inactivated SARS vaccine in December 2004, we did
not proceed with the Phase II and Phase III trials as the SARS epidemic subsequently subsided. Other
organizations may obtain licenses for their own pandemic vaccines, or government health organizations
may acquire adequate stockpiles of pandemic vaccine or adopted other technologies or strategies to
prevent or limit outbreaks before our pandemic vaccine achieves significant sales. We may not achieve
a return on our investment before the threat of a pandemic outbreak subsides or a competing product is
adopted.
Failure to achieve and maintain effective internal controls could have a material adverse effect on
our business, results of operations and the trading price of our common shares.
We are subject to the reporting obligations under U.S. securities laws. Section 404 of the Sarbanes-
Oxley Act of 2002 and related rules require public companies to include a report of management on
their internal control over financial reporting in their annual reports. This report must contain an
assessment by management of the effectiveness of a public company’s internal control over financial
reporting. In addition, an independent registered public accounting firm for a public company must
attest to and report on the effectiveness of our internal control over financial reporting.
During the preparation of our consolidated financial statements for the year ended December 31,
2010, we identified a material weakness in our internal control over financial reporting. We remediated
this material weakness during 2011 and have concluded that our internal control over financial
reporting was effective for our fiscal year ended December 31, 2011. However, we cannot assure you
that any material weakness or deficiency in our internal control over financial reporting will not be
identified in the future. We may not always be able to maintain an effective internal control over
financial reporting. If we fail to maintain effective internal control over financial reporting in the future,
we and our independent registered public accounting firm may not be able to conclude that we have
effective internal control over financial reporting at a reasonable assurance level. This could in turn
result in the loss of investor confidence in the reliability of our financial statements and negatively
impact the trading price of our common shares, inhibiting our ability to raise sufficient capital on
favorable terms. Furthermore, we have incurred and anticipate that we will continue to incur
considerable costs and use significant management time and other resources in an effort to comply with
Section 404 and other requirements of the Sarbanes-Oxley Act.
If we fail to comply with our listing obligations, we risk being de-listed from the NASDAQ Global
Select Market, which could have a material adverse effect on the trading market for our common
shares, reduce our ability to raise funds and otherwise have significant negative consequences on
the Company.
Our common shares have been listed on the NASDAQ Global Market since November 2009 and we
were added to the NASDAQ Global Select Market on January 3, 2011. On January 18, 2012, we
received a NASDAQ Staff Deficiency Letter indicating that we no longer complied with the
requirement that the audit committee of a NASDAQ-listed company shall consist of at least three
independent directors, due to the departure of Ms. Chup Hung Mok effective December
2011. NASDAQ provided us with a cure period in order to regain compliance of until the earlier of our
next annual shareholders meeting or January 4, 2013; or if the next annual shareholders’ meeting is
held before July 2, 2012, then we must evidence compliance no later than July 2, 2012. In March 2012,
we appointed Mr. Meng Mei as a new director of our board and as the chairman of our compensation
committee and a member of our audit committee and nominating and corporate governance committee.
We received a letter from NASDAQ on March 30, 2012 indicating that we had regained compliance
with NASDAQ requirement. We cannot assure you, however, that we will always be able to comply
with the requirements of the NASDAQ Global Select Market in the future. If for any reasons we are
unable to comply with the requirements of the NASDAQ Global Select Market in the future, our shares
could be delisted from trading on that exchange. De-listing of our common shares could have a
material adverse effect on the liquidity and price of our common shares and make it more difficult for
us to raise additional capital on favorable terms, if at all. In addition, de-listing by the NASDAQ
Global Select Market might negatively impact our reputation and, as a consequence, our business.
If we are unable to successfully compete in the highly competitive biopharmaceutical industry, our
business could be harmed.
We operate in a highly competitive environment and we expect the competition to increase further
in the future. Our competitors include large pharmaceutical, biotechnology companies and academic
research institutions, both domestic and international. Many of these competitors have greater
resources than us. New competitors may also enter into the markets in which we currently compete.
Accordingly, even if we are successful in launching a product, we may not be able to outperform a
competing product for any number of reasons, including the possibility that the competitor may:
have launched its competing product first or the competing product may have, or be perceived
as having, better efficacy, stronger brand recognition, or other advantages;
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have greater access to certain raw materials;
have more efficient manufacturing processes and greater manufacturing capacity;
have greater marketing capabilities;
have greater pricing flexibility;
have more extensive research and development and technical capabilities;
have proprietary patent portfolios or other intellectual property rights that may present an
obstacle to our conduct of business;
have greater knowledge of local market conditions where we seek to increase our international
sales;
have capability to maintain a competitive management team; or
have investment capability to acquire businesses when the opportunity is not available to us.
The technologies applied by our competitors and us are rapidly evolving, and new developments
frequently result in price competition and product obsolescence. In addition, we may be impacted by
competition from generic forms of our products, substitute products or imports of products from lower-
priced markets. For a detailed description of our competitors in hepatitis A vaccines, hepatitis A and B
vaccines and influenza vaccines, please see ―Item 4. Information on the Company — B. Business
overview — Competition.‖
We may not be able to maintain market share in China for with our commercialized vaccine, which
could adversely affect our ability to increase our revenues.
Our market share is estimated based on the batch release number published by the National
Institutes for Food and Drug Control, or NIFDC, which represents the market share estimated based on
published supply quantity, but not the actual sales number in the market. Although we supplied 31% of
the total hepatitis A vaccine market in China, or 67% of the inactivated hepatitis A vaccine market in
2007, we supplied 23%, 13.2% and 7% of the total hepatitis A vaccine market, or 52%, 35% and 32.4%
of the inactivated hepatitis A vaccine market in 2009, 2010 and 2011, respectively. Going forward, we
may not be able to compete with other hepatitis A suppliers for either private pay market or
government paid market, which could adversely affect our ability to increase our revenues from
hepatitis A vaccine.
We have been marketing and selling seasonal flu vaccines since 2006. Our market share was 11.3% in
2009, 12% in 2010 and 8% in 2011. The flu vaccine market in China is highly competitive.
Multinational companies are increasing investment in localized flu vaccine manufacturing plants. Our
revenue growth could be adversely impacted if we are not able to maintain our market share in this
highly competitive market.
We may not be able to capture market share in the government-funded hepatitis A vaccine market,
or other government-funded vaccine markets, which could adversely affect our revenues, and if we
do capture market share in these markets, we may need to sell our vaccines a lower price, which
could adversely affect our gross margin.
Hepatitis A vaccines have been included in the Expanded Program of Immunization, or EPI, in
China since 2007. The PRC Government purchase hepatitis A vaccines for each 18-month-old child,
which has resulted in a decline in demand of hepatitis A vaccines in the private market for the cohort
group. We cannot assure you that we will be able to maintain our sales volume in the private hepatitis
A vaccine market.
We expect the EPI to increase the overall size of the hepatitis A vaccine market in China, as well as
other vaccine markets in China. However, we may not be able to capture market share in these
government-funded vaccine markets. For example, domestic suppliers of freeze-dried, live attenuated
hepatitis A vaccine may be able to supply this market at a lower cost and with higher quantities of
vaccine than we can. If we are unable to capture market share in these government-funded vaccine
markets, our sales volume may not grow significantly. Moreover, if we do successfully capture market
share in these government-funded vaccine markets, we may need to sell our vaccines at a lower price
than we do in the private market. Any reduction in the average selling price of our vaccines could
adversely affect our gross margin.
Although the hepatitis A vaccines have been included in the EPI, most provincial and municipal
governments are not able to afford the two shots of inactivated hepatitis A vaccines due to the
insufficient financial support, which constrains the purchase of inactivated hepatitis A vaccines in
government-funded market. Most provincial and municipal governments prefer to purchase the lower
priced live attenuated hepatitis A vaccines; however, a few affluent provincial and municipal
governments, such as Beijing, Tianjin, Shanghai and Jiangsu province, have started to purchase
inactivated hepatitis A vaccines. Our revenue growth could be adversely impacted if we are not able to
successfully enter into the government-funded markets of these cities.
We may not be able to expand the sales of Bilive, the combined hepatitis A and B vaccine, in China.
We started to market Bilive in 2005. The sales of Bilive were very limited compared to other products
sold by us from 2005 to 2008. Since 2009, our revenue derived from Bilive has grown rapidly, and the
trend continued in 2011. We sold 946,000 doses,
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684,000 doses and 1.8 million doses of Bilive in 2009, 2010, and 2011, respectively. Although there is
currently no competition for Bilive in China, we cannot assure you that other organizations will not
launch similar type of vaccines in the future. Also, as both hepatitis A and hepatitis B vaccines are
included in the National Immunization Program, the coverage of which is expected to be expanded as
required by the PRC government, we may not be able to further expand our sales of Bilive in the
private pay market or we may not be able to achieve the similar level of growth in the future.
If end users, such as hospitals, physicians and vaccinees, do not accept our products, we may be
unable to generate significant revenue.
Even if we have obtained the regulatory approval for commercialization of our vaccines, they still may
not gain market acceptance among centers for disease control, or CDCs, hospitals, physicians,
vaccinees and the medical community, which would limit our ability to generate revenue and would
adversely affect our results of operations. CDCs, hospitals and physicians may not recommend
products developed by us or our collaborators until clinical data or other factors demonstrate superior
or comparable safety and efficacy of our products as compared to other available treatments. Even if
the clinical safety and efficacy of our products are established, hospitals and physicians may elect not
to recommend these products for a variety of reasons, including the reimbursement policies of
government and third-party payers. There are other vaccines and treatment options for the conditions
that many of our products and product candidates target, such as hepatitis A and B and influenza. In
order to successfully launch a product, we must educate physicians and vaccinees about the relative
benefits of our products. If our products are not perceived as easy and convenient to use, are perceived
to present a greater risk of side effects or are not perceived to be as effective as other available
treatments, CDCs, hospitals, physicians and vaccinees might not adopt our products. A failure of our
products to gain commercial acceptance would have a material adverse effect on our business, financial
condition and results of operations.
We may not achieve the expected return on our investment in the development of animal vaccine
products.
We are new to the animal vaccine market in China. In 2011, we developed and launched our first
animal vaccine product, RabEnd, an animal rabies vaccine. China’s animal vaccine market differs
significantly from the human vaccine market with regard to development stage, distribution channel
and governing authorities. We may not achieve the expected returns on our investment in developing
animal vaccine products. We established a new sales team to market our animal vaccine products to
animal hospitals and CDCs. We also participated in the government tendering process. We cannot
assure you, however, that we will succeed in our efforts to penetrate the animal vaccine market or that
our animal vaccine products will be well received by our target customers. Failure of our animal
vaccine products to gain market acceptance will negatively affect our business, financial condition and
results of operations.
Our growth may be adversely affected if market demand for our vaccine products does not meet our
expectations. We may encounter problems of inadequate supply or oversupply, which would
materially and adversely affect our financial condition and results of operations, as well as damage
our reputation and brand.
Our growth may be adversely affected if market demands for our vaccine products do not meet our
expectations. The production of vaccine products is a lengthy and complex process. As a result, our
ability to match our production to market demand is imprecise and may result in a failure to meet
market demand, which could materially and adversely affect our financial conditions and results of
operations as well as damage our reputation and corporate brand. For example, many vaccinees receive
their seasonal flu vaccinations in the three-month period from September to November in anticipation
of an upcoming flu season and we expect this period to be one of the most significant sales periods for
this product each year. In anticipation of the flu season, we intend to build up inventory of our Anflu
product in line with what we believe will be the anticipated demand for the product. If actual demand
does not meet our expectations, we may be required to write off significant inventory and may
otherwise experience adverse consequences in our financial condition. If we overestimate demand, we
may purchase more raw materials than required. If we underestimate demand, our third-party suppliers
may have inadequate raw material inventories, which could interrupt our manufacturing, delay
shipments and result in lost sales.
If we are unable to enroll sufficient vaccinees and identify clinical investigators for our clinical
trials, our development programs could be delayed or terminated.
The rate of completion of our clinical trials, and those of our collaborators, is significantly
dependent upon the rate of enrollment of vaccines and clinical investigators. Vaccinees enrollment is a
function of many factors, including:
efforts of the sponsor and clinical sites involved to facilitate timely enrollment;
vaccine referral practices of physicians;
design of the protocol;
eligibility criteria for the study in question;
perceived risks and benefits of the drug under study;
the size of the vaccine population;
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availability of competing therapies;
availability of clinical trial sites; and
proximity of and access by vaccines to clinical sites.
We may have difficulty obtaining sufficient vaccinee enrollment or clinician participation to conduct
our clinical trials as planned and we may need to expend substantial funds to obtain access to resources
or delay or modify our plans significantly. These considerations may lead us to consider the
termination of development of a product for a particular indication.
A setback in any of our clinical trials or field trials could adversely affect our share price.
In January 2012, we initiated phase III clinical trials for enterovirus 71 vaccine against hand foot and
mouth disease after positive results were achieved in phase I and II clinical trials conducted in 2011. In
addition, we filed applications to conduct clinical trials for pneumococcal conjugate vaccine,
pneumococcal polysaccharides vaccine and rubella vaccine in early 2011. Our product pipeline also
includes vaccines for human rabies, varicella and rotavirus. Setbacks in any phase of the clinical trials
or field trials of our product candidates could have a material adverse effect on our business and our
future prospects and financial results and would likely cause a decline in the price of our common
shares. We may not achieve our projected development goals in the time frames we announce and
expect. If we fail to achieve one or more milestones as contemplated, the market price of our common
shares could decline.
We set goals for and make public statements regarding our anticipated timing of the accomplishment
of objectives material to our success, such as the commencement and completion of clinical trials and
other milestones. The actual timing of these events can vary dramatically due to factors such as delays
or failures in our clinical trials, the uncertainties inherent in the regulatory approval process and delays
in achieving manufacturing or marketing arrangements sufficient to commercialize our products. We
may not complete our clinical trials or make regulatory submissions or receive regulatory approvals as
planned. Also, we may not be able to adhere to our currently anticipated schedule for the launch of any
of our products. If we fail to achieve one or more milestones as contemplated, the market price of our
shares could decline.
We rely on third parties to conduct our clinical trials and those third parties may not perform
satisfactorily, including failing to meet established deadlines for the completion of such trials.
After we obtain approval to conduct clinical trials for our product candidates, we rely on qualified
research organizations, medical institutions and clinical investigators to enroll qualified vaccinees and
conduct our clinical trials. Our reliance on these third parties for clinical development activities reduces
our control over the clinical trial process. Furthermore, these third parties may also have relationships
with other entities, some of which may be our competitors. If these third parties do not successfully
carry out their contractual duties, including meeting expected deadlines, our efforts to obtain regulatory
approvals for and commercialize our vaccine candidates may be delayed or prevented.
If any of our third-party suppliers or manufacturers cannot adequately meet our needs, our business
could be harmed.
While we use raw materials and other key materials supplies that are generally available from
multiple commercial sources, certain raw materials that we use to cultivate our influenza vaccines, such
as embryonated eggs, are in short supply or difficult for suppliers to produce in accordance with our
specifications. If the third-party suppliers were to cease production or otherwise fail to supply us with
quality raw materials, and we were unable to contract on acceptable terms for these materials with
alternative suppliers, our ability to deliver our products to the market would be adversely affected.
In addition, if we fail to secure long-term supply sources for some of the raw materials we use, our
business could be harmed. For example, we do not have a long-term supply agreement for the hepatitis
B vaccine we use for Bilive production. We source the hepatitis B vaccine entirely from Beijing
Temple of Heaven Biological Products Co., Ltd., or Beijing Temple of Heaven. In an agreement dated
October 15, 2002, we agreed to purchase all hepatitis B vaccine to be used in our Bilive production
exclusively from Beijing Temple of Heaven for 10 years and to enter into a separate supply agreement
in the future to specify the pricing, quantity, delivery and payment terms of the hepatitis B vaccine
supply relationship. The agreement will expire in October 2012. We cannot assure you that Beijing
Temple of Heaven will continue to furnish us with hepatitis B vaccine for the following years.
From time to time, concerns are raised with respect to potential contamination of biological
materials that are supplied to us. These concerns can further tighten market conditions for materials
that may be in short supply or available from limited sources. Moreover, regulatory approvals to
market our products may be conditioned upon obtaining certain materials from specified sources. Any
efforts to substitute material from an alternate source may be delayed by pending regulatory approval
of such alternate source. Although we work to mitigate the risks associated with relying on sole
suppliers, there is a possibility that material shortages could impact product development and
production.
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Our business is highly seasonal. This seasonality will contribute to our operating results fluctuating
considerably throughout the year.
Our business is highly seasonal. For example, the influenza season generally runs from
November through March of the next year and the largest percentage of influenza vaccinations is
administered between September and November of each year. As a result, we expect to realize most of
our annual revenues from Anflu during this period. You should expect this seasonality in our business
to contribute to significant quarterly fluctuations in our operating results.
We rely on a limited number of facilities for the manufacturing of our products in accordance with
relevant regulatory requirements. Any disruption to our existing manufacturing facilities or in the
development of new facilities could reduce or restrict our sales and harm our reputation.
According to the China GMP standards, each product can only be produced in one dedicated
production facility. We manufacture all our human vaccine products and store them in the same facility
located in Beijing and our only animal vaccine product is manufactured and stored in one facility in
Tangshan. We also conduct some of our primary research and development activities out of the same
facilities. Although we have purchased facilities in Changping District, Beijing and also established a
joint venture in Dalian, Liaoning province, the production lines that will be used for manufacturing
pipeline products in the future are still under construction. We do not maintain back-up facilities for the
current available products, so we are dependent on our existing facility for the continued operation of
our business. A natural disaster or other unanticipated catastrophic events, including power
interruptions, water shortage, storms, fires, earthquakes, terrorist attacks and wars, could significantly
impair our ability to manufacture our products and operate our business, as well as delay our research
and development activities. Our facility and certain equipment located in this facility would be difficult
to replace and could require substantial replacement lead-time. Catastrophic events may also destroy
any inventory located in our facility. We currently do not carry business interruption insurance to
compensate for losses that may occur as a result of these catastrophic events. Therefore, the occurrence
of such an event could materially and adversely affect our business. In 2010, we purchased
manufacturing facilities in Changping District, Beijing and Dalian, Liaoning province. The projects
will require significant build-out before they will be operational. We may experience difficulties in
expanding our manufacturing capabilities to the new facilities. Moreover, we may not realize the
anticipated benefits of our new facilities. Any of these factors could reduce or restrict our sales and
harm our reputation and have a material adverse effect on our business, financial condition, results of
operations and prospects.
We will need additional capital to upgrade the production plant for our existing products or expand
the facility, to continue development of our product pipeline and to market existing and future
products on a large scale. We cannot guarantee that we will find adequate sources of capital in the
future.
We closed a public offering of our common shares on February 2, 2010, and received net proceeds
of approximately $61.8 million, after deducting underwriting discounts and commissions and offering
expenses payable by us. The proceeds will be used in research and development, facility expansion and
international collaboration and potential merger and acquisition.
In the long run, we will need to raise additional funds from the capital markets to finance equipment
expenditures, to acquire intellectual property, to expand the production facility for our pipeline
products, such as pneumococcal polysaccharides vaccine, pneumococcal conjugate vaccine, to continue
the development and commercialization of our product candidates and for other corporate purposes. As
of December 31, 2011, we had approximately $104.3 million in cash and cash equivalents. Although
we believe that we have adequate near-term cash resources, we will need to undertake significant
future financings in order to:
establish and expand manufacturing capabilities;
proceed with the research and development of other vaccine products, including clinical trials of
new products;
commercialize our products, including the marketing and distribution of new and existing
products;
seek and obtain regulatory approvals;
develop or acquire other product candidates or technologies;
protect our intellectual property; and
finance general and administrative and research activities that are not related to specific
products under development.
In the past, we funded most of our research and development and other expenditures through
government grants, working capital, bank loans and proceeds from private placements and public
offering of our common shares. We may raise additional funds in future because our current operating
and capital resources may be insufficient to meet future requirements.
If we continue to raise additional funds by issuing equity securities, it will result in further dilution
to our existing shareholders because the shares may be sold at a time when the market price is low and
shares issued in equity financing transactions will normally be sold at a discount to the current market
price. Any additional equity securities issued also may provide for rights, preferences or privileges
senior or otherwise preferential to those of holders of our existing common shares. Unforeseen
problems including materially negative developments relating to, among other things, disease
developments, product sales, new product
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rollouts, clinical trials, research and development programs, our strategic relationships, our intellectual
property, litigation, regulatory changes in our industry, the Chinese market generally or general
economic conditions, could interfere with our ability to raise additional funds or materially adversely
affect the terms upon which such funding is available.
If we raise additional funds by issuing debt securities, these debt securities would have rights,
preferences and privileges senior to those of holders of our common shares, and the terms of the debt
securities issued could impose significant restrictions on our operations. If we raise additional funds
through collaborations and licensing arrangements, we might be required to relinquish significant rights
to certain of our technologies, marketing territories, product candidates or products that we would
otherwise seek to develop or commercialize ourselves, or be required to grant licenses on terms that are
not favorable to us. In the past, we have also received research grants from the PRC government to
finance the development of our vaccine products. We may not receive additional grants in the future.
We do not know whether additional financing will be available to us on commercially acceptable
terms when needed. If adequate funds are not available or are not available on commercially acceptable
terms, we may be unable to continue developing our products. In any such event, our ability to bring a
product to market and obtain revenues could be delayed and competitors could develop products
sooner than we do.
The interests of the existing minority shareholder in Sinovac Biotech Co., Ltd., or Sinovac Beijing,
and/or the interests of the existing minority shareholder of Sinovac Dalian, may diverge from our
own and this may adversely affect our ability to manage Sinovac Beijing and/or Sinovac Dalian.
Sinovac Beijing, our principal operating subsidiary, is a Sino-foreign equity joint venture in which
we own a 73.09% interest and SinoBioway Group Co., Ltd, or SinoBioway, an affiliate of Peking
University, owns a 26.91% interest. SinoBioway’s interests may not be aligned with our interests at all
times. If SinoBioway’s and our interests diverge, SinoBioway may exercise its right under PRC laws to
protect its own interest, which may be adverse to us. For example, under China’s joint venture
regulations, unanimous approval of members of a joint venture’s (such as Sinovac Beijing) board of
directors who are present at a board meeting is required for any amendment to the joint venture’s
articles of association, the termination or dissolution of the joint venture company, an increase or
decrease in the registered capital of the joint venture company or a merger or de-merger of the joint
venture. SinoBioway appoints the legal representative of Sinovac Beijing, who also serves as the
chairman of the five-director board of Sinovac Beijing. Accordingly, SinoBioway has the ability to
take actions that bind Sinovac Beijing or to block any action that requires unanimous board approval.
Further, if we wish to transfer our equity interest in Sinovac Beijing, in whole or in part, to a third-
party, SinoBioway has a right of first refusal to purchase our interest under China’s joint venture
regulations.
In addition to its statutory rights as a minority shareholder, SinoBioway has additional rights under
the joint venture contract and under the articles of association of Sinovac Beijing. The joint venture
contract and articles of association require the consent of each of Sinovac Beijing’s shareholders and/or
unanimous board approval on matters such as a major change in the business line of the company,
expansion or amendment of the business scope of the company, transfer of the registered capital by a
shareholder, creation of a mortgage or pledge upon the company’s assets, a change in the
organizational form of the company and designation or removal of the general manager.
To date, SinoBioway has been cooperative with us in handling matters with respect to the business
of Sinovac Beijing. We cannot assure you, however, that SinoBioway will continue to act in a
cooperative manner in the future.
In November 2009, we entered into an agreement with Dalian Jin Gang Group to establish Sinovac
Dalian. In January 2010, we established Sinovac Dalian which focuses on the research, development,
manufacturing and commercialization of vaccines, such as mumps, varicella and rabies for human use.
Pursuant to the joint venture agreement, we have made the initial cash contribution of RMB60 million
in exchange for a 30% equity interest in Sinovac Dalian, and Dalian Jin Gang Group has made an asset
contribution of RMB140 million including the manufacturing facilities, production lines and land use
rights, in exchange for the remaining 70% interest in Sinovac Dalian. We have also entered into an
agreement with Dalian Jin Gang Group, under which we have agreed, subject to the approval of the
PRC government to increase our shareholding in Sinovac Dalian to 55% through purchasing 25%
equity interest in Sinovac Dalian from Dalian Jin Gang Group for a consideration of RMB50 million
on or before December 31, 2010. The transaction was completed on December 31, 2010, and we
currently own a 55% equity interest in Sinovac Dalian while Dalian Jin Gang Group currently holds a
45% equity interest in the entity.
To date, Dalian Jin Gang Group has been cooperative with us in handling matters with respect to the
business of Sinovac Dalian. We cannot assure you, however, that Dalian Jin Gang Group will continue
to act in a cooperative manner in the future.
Some of the predecessor shareholders of Sinovac Beijing and Tangshan Yian Biological
Engineering Co., Ltd., or Tangshan Yian, were enterprises owning state-owned assets, or EOSAs.
Their failures to comply with PRC legal requirements in asset or share transfers could, under
certain circumstances, result in such transfers being invalidated by government authorities. If this
occurs, we could lose our ownership of intellectual property rights that are vital to our business as
well as our equity ownership in Sinovac Beijing and Tangshan Yian.
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Sinovac Beijing is currently owned 73.09% by us and 26.91% by SinoBioway. Tangshan Yian is
wholly owned by us. Some of the predecessor shareholders of Sinovac Beijing and Tangshan Yian,
including Shenzhen Kexing Biological Engineering Ltd., or Shenzhen Kexing, SinoBioway, Tangshan
Medicine Biotech Co., Ltd., Tangshan Yikang Biotech Co., Ltd. and Tangshan Yian itself (as Sinovac
Beijing’s former shareholder), were EOSAs. Under applicable PRC laws, when EOSAs sell, transfer or
assign assets or equity investments in their possession or under their control to third parties, they are
required to obtain an independent appraisal of the transferred assets or shares and file such appraisal
with or obtain approval of such appraisal from PRC government authorities. Since 2004, EOSAs have
also been required to make such assets or equity transfers at government-designated marketplaces. Our
acquisitions of intellectual property rights and some equity interests were subject to these requirements.
The technologies related to hepatitis A vaccine, hepatitis A and B vaccine and influenza vaccine that
are vital to our business were directly or indirectly transferred to us by Tangshan Yian.
Tangshan Yian failed to file with the government authorities the appraisal of the hepatitis A vaccine
technology that it transferred to Sinovac Beijing in 2001 as its capital contribution to Sinovac Beijing.
Under PRC laws, Tangshan Yian also failed to:
obtain the appraisal of the hepatitis A and B vaccine technology that it transferred for no
consideration to Beijing Keding Investment Co., Ltd., or Beijing Keding, in 2002 (Beijing
Keding subsequently transferred the technology to Sinovac Beijing as Beijing Keding’s capital
contribution to Sinovac Beijing) and to file such appraisal with government authorities; and
obtain the appraisal of the influenza vaccine technology that it transferred to Sinovac Beijing in
2004 and to file such appraisal with government authorities.
These failures subject us to the risk of losing ownership or control of these vaccine technologies.
In addition, before we acquired our 73.09% equity interest in Sinovac Beijing and 100% equity
interest in Tangshan Yian, both companies had undergone multiple changes in their shareholders and
these shareholders’ shareholdings. Some of the EOSA shareholders of Sinovac Beijing and Tangshan
Yian, including SinoBioway and Tangshan Medicine Biotech Co., Ltd., have sold, transferred or
assigned their respective equity interests in Sinovac Beijing and Tangshan Yian without fully
complying with laws to appraise the equity interests, to file such appraisals with or obtain regulatory
approval of such appraisals from PRC government authorities or to make equity interest transfers at the
government-designated marketplaces as required for transactions completed after 2004. Similar to the
asset transfers, such failures subject us to the risk of losing the ownership or control of our equity
interests in Sinovac Beijing and Tangshan Yian.
PRC government authorities may take court actions to invalidate the transfers of the assets or equity
investments discussed above for non-compliance with applicable appraisal, filing, approval and
designated marketplace requirements. We cannot guarantee that government authorities will not take
such legal actions or that such legal actions, if commenced, will not be successful. If these transfers are
invalidated, we would lose title to these assets and investments. Because we depend on these
technologies and because Sinovac Beijing and Tangshan Yian constitute all of our operations, our loss
of these technologies or equity interests in Sinovac Beijing and/or Tangshan Yian would materially and
adversely affect our business operations and financial condition.
We became a public company through our acquisition of a public shell company, where we were the
accounting acquirer and assumed all known and unknown potential liabilities of our predecessor
entity.
In September 2003, we engaged in a share exchange with Net-Force Systems Inc. This transaction
was accounted for as a reverse merger in which Sinovac Biotech Co., Ltd. was deemed the accounting
acquirer and Net-Force, which was originally incorporated in 1999, was the legal acquirer. Although
we disposed of all the assets and liabilities of Net-Force to a company controlled by its then president
and CEO, we cannot guarantee that we will not be liable for any liabilities related to the conduct by
Net-Force of its business prior to its acquisition by us.
We depend on our key personnel, the loss of whom would adversely affect our operations. If we fail
to attract and retain the talent required for our business, our business will be materially harmed.
We are a small company with 614 full-time employees as of December 31, 2011, and we depend to
a great extent on principal members of our management and scientific teams. If we lose the services of
any key personnel, in particular Dr. Weidong Yin, our President and Chief Executive Officer, the loss
could significantly impede the achievement of our research and development objectives and delay our
product development programs and the approval and commercialization of our product candidates. We
do not currently have any key man life insurance policies. We have entered into employment
agreements with our executive officers, under which they have agreed to restrictive covenants relating
to non-competition and non-solicitation. These employment agreements do not, however, guarantee
that we will be able to retain the services of our executive officers in the future. In addition, recruiting
and retaining additional qualified scientific, technical and managerial personnel and research partners
will be critical to
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our success. Competition among biopharmaceutical and biotechnology companies for qualified
employees in China is intense and turnover rates are high. There is currently a shortage of employees in
China with expertise in our areas of research and clinical and regulatory affairs, and this shortage is
likely to continue. We may not be able to retain existing personnel or attract and retain qualified staff in
the future. If we fail to hire and retain personnel in key positions, we may be unable to develop or
commercialize our product candidates in a timely manner.
We may encounter difficulties in managing our growth, which could adversely affect our results of
operations.
We have experienced a period of rapid and substantial growth that has placed and, if such growth
continues, will continue to place a strain on our administrative and operational infrastructure. If we are
unable to manage this growth effectively, our business, results of operations or financial condition may
be materially and adversely affected. Our ability to manage our operations and growth effectively
requires us to continue to improve our operational, financial and management controls, reporting
systems and procedures and hiring programs. We may not be able to successfully implement these
required improvements.
International expansion may be costly, time consuming and difficult. If we do not successfully
expand internationally, our growth strategy and prospects would be materially and adversely
affected.
We have entered into selected international markets and intend to continue to expand the sales of our
products into new international markets. In expanding our business internationally, we have entered,
and intend to continue to enter, markets in which we have limited or no experience and in which our
brand may be less recognized. To further promote our brand and generate demand for our products so
as to attract distributors in international markets, we expect to spend significantly more on marketing
and promotion than we do in our existing domestic markets. We may be unable to attract a sufficient
number of distributors, and our selected distributors may not be suitable for selling our products.
Furthermore, in new markets, we may fail to anticipate competitive conditions that are different from
those in our existing markets. These competitive conditions may make it difficult or impossible for us
to effectively operate in these markets. If our expansion efforts in existing and new internal markets are
unsuccessful, our growth strategy and prospects would be materially and adversely affected.
We are exposed to other risks associated with international operations, including:
political instability;
economic instability and recessions;
changes in tariffs;
difficulties of administering foreign operations generally;
limited protection for intellectual property rights;
obligations to comply with a wide variety of foreign laws and other regulatory approval
requirements;
increased risk of exposure to terrorist activities;
financial condition, expertise and performance of our international distributors;
export license requirements;
unauthorized re-export of our products;
potentially adverse tax consequences; and
inability to effectively enforce contractual or legal rights.
We may undertake acquisitions which may have a material adverse effect on our ability to manage
our business and may end up being unsuccessful.
Our growth strategy may involve the acquisition of new production lines, technologies, businesses,
products or services or the creation of strategic alliances in areas in which we do not currently operate.
These acquisitions could require that our management develop expertise in new areas, new geographies,
manage new business relationships and attract new types of customers. Furthermore, acquisitions may
require significant attention from our management, and the diversion of our management’s attention
and resources could have a material adverse effect on our ability to manage our business. We may also
experience difficulties integrating acquisitions into our existing business and operations. Future
acquisitions may also expose us to potential risks, including risks associated with:
the integration of new operations, services and personnel;
unforeseen or hidden liabilities;
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the diversion of resources from our existing businesses and technologies;
our inability to generate sufficient revenue to offset the costs of acquisitions; and
potential loss of, or harm to, relationships with employees or customers, any of which could
significantly disrupt our ability to manage our business and materially and adversely affect our
business, financial condition and results of operations.
We may be unable to ensure compliance with United States economic sanctions laws, especially
when we sell our products to distributors over which we have limited control.
The U.S. Department of the Treasury’s Office of Foreign Assets Control, or OFAC, administers
certain laws and regulations that impose penalties upon U.S. persons and, in some instances, foreign
entities owned or controlled by U.S. persons, for conducting activities or transacting business with
certain countries, governments, entities or individuals subject to U.S. economic sanctions, or U.S.
Economic Sanctions Laws. We will not use any proceeds, directly or indirectly, from sales of our
common shares, to fund any activities or business with any country, government, entity or individual
with respect to which U.S. persons or, as appropriate, foreign entities owned or controlled by U.S.
persons, are prohibited by U.S. Economic Sanctions Laws from conducting such activities or
transacting such business. However, we sell our products in international markets through independent
non-U.S. distributors which are responsible for interacting with the end-users of our products. We may
not be able to ensure that such non-U.S. distributors comply with all applicable U.S. Economic
Sanctions Laws. Moreover, if a U.S. distributor conducts activities or transacts business with a country,
government, entity or individual subject to U.S. economic sanctions, such actions may violate U.S.
Economic Sanctions Laws. As a result of the foregoing, actions could be taken against us that could
materially and adversely affect our reputation and have a material and adverse effect on our business,
financial condition, results of operations and prospects.
Failure to comply with the U.S. Foreign Corrupt Practices Act and other applicable anti-
corruption laws could subject us to penalties and other adverse consequences and corrupt practices
by our competitors may place us at a competitive disadvantage.
Our executive officers, employees and other agents may violate applicable law in connection with
the marketing or sale of our products, including the U.S. Foreign Corrupt Practices Act, or the FCPA,
and applicable anti-corruption law in China and other jurisdictions in which our products are sold or
registered for sale. The FCPA generally prohibits United States issuers from engaging in bribery or
other prohibited payments to foreign officials for the purpose of obtaining or retaining business and
requires issuers to maintain reasonable internal controls. The PRC also strictly prohibits bribery of
government officials. We have adopted a policy regarding compliance with the FCPA and other
applicable anti-corruption laws to prevent, detect and correct such corrupt practice. However,
corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in
the PRC and the countries in which we seek to do business. While we have implemented measures to
ensure compliance with the FCPA and other applicable anti-corruption laws by all individuals involved
with our company, it is possible that our compliance policies and procedures may be insufficient or
may fail to prevent our employees or other agents from engaging in inappropriate conduct for which
we might be held responsible. If our employees or other agents are found to have engaged in such
practices, we could suffer severe penalties and other consequences that may have a material adverse
effect on our business, financial condition and results of operations. In addition, our brand and
reputation, our sales activities or the price of our common shares could be adversely affected if we
become the target of any negative publicity as a result of actions taken by our employees or other
agents.
In addition, there may be corrupt practices in the healthcare industry in China and other countries in
which we conduct business. For example, in order to secure agreements with CDCs or hospitals in
China, our competitors may engage in corrupt practices in order to influence decision-makers in
violation of the anti-corruption laws of China and the FCPA. As competition persists and intensifies in
our industry, we may lose potential clients, client referrals and other opportunities to the extent that our
competitors engage in such practices or other illegal activities.
We may become a passive foreign investment company, which could result in adverse United States
federal income tax consequences to U.S. Holders of our common shares.
Based on the market price of our common shares, the value of our assets and the composition of our
income and assets, we do not believe we were a ―passive foreign investment company,‖ or PFIC, for
U.S. federal income tax purposes for our taxable year ended December 31, 2011. A non-U.S.
corporation will be a PFIC for any taxable year if either (1) at least 75% of its gross income for such
year is passive income or (2) at least 50% of the value of its assets (based on an average of the
quarterly values of the assets) during such year is attributable to assets that produce passive income or
are held for the production of passive income. We must make a separate determination after the close
of each year as to whether we were a PFIC for that year. The composition of our income and assets will
be affected by how, and how quickly, we use any cash we generate from our operations or raise in any
offering. Because the value of our assets for purposes of the PFIC test will generally be determined by
reference to the market price of our common shares, fluctuations in the market price of our common
shares may cause us to become a PFIC for any year. If we are a PFIC for any year during which a U.S.
Holder (as defined in ―Item 10. Additional Information — E. Taxation — United States Federal
Income Taxation‖) holds our common shares, certain adverse U.S. federal income tax consequences
could apply to such U.S. Holder. See ―Item 10. Additional Information — E. Taxation — United States
Federal Income Taxation — Passive Foreign Investment Company.‖
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Risks Related to Government Regulation
We may not be able to comply with applicable GMP guidelines and other regulatory requirements,
which could have a material adverse effect on our business, financial condition and results of
operations.
We are required to comply with applicable GMP regulations, which include, among other things,
requirements relating to personnel, premise and equipment, raw material and products, qualification
and validation, documents management, production management, quality control and assurance and
products distribution and recall. Manufacturing facilities must be approved by governmental authorities
before they can be used to commercially manufacture our products and are subject to inspection by
regulatory agencies. We have been required to comply with the new GMP standards implemented by
the SFDA since March 1, 2011. The new GMP standards are similar to the GMP standards
implemented by the World Health Organization, or the WHO. All the vaccine manufacturers are
required to meet the new GMP standards and obtain certifications for their manufacturing facilities by
December 31, 2013. Any manufacturer who fails to meet the deadline will be forced to suspend
production. We cannot assure you that we will be able to meet the new GMP standards within the
required timeframe.
If we fail to comply with applicable regulatory requirements at any stage during the regulatory
process, including following any product approval, we may be subject to sanctions, including:
fines;
product recalls or seizure;
injunctions;
refusal of regulatory agencies to review pending market approval applications or supplements to
approval applications;
total or partial suspension of production;
civil penalties;
withdrawals of previously approved marketing applications; and
criminal prosecution.
We can only sell products that have received regulatory approval. Many factors affect our ability to
obtain such approvals.
Pre-clinical and clinical trials of our products, and the manufacturing and marketing of our
technologies, are subject to extensive, costly and rigorous regulation by governmental authorities in the
PRC and in other countries. Even if we complete pre-clinical and clinical trials successfully, we may
not be able to obtain applicable regulatory approvals. We cannot market any product candidate until we
have both completed our clinical trials and obtained the necessary regulatory approvals for that product
candidate.
Conducting clinical trials and obtaining regulatory approvals are uncertain, time consuming and
expensive processes. The process of obtaining required regulatory approvals from the SFDA and other
regulatory authorities often takes many years and can vary significantly based on the type, complexity
and novelty of the product candidates. For example, it took us approximately ten years to develop and
obtain regulatory approval to commercialize Healive, and it took us five and a half years and four and a
half years, respectively, to develop and obtain regulatory approval to commercialize Bilive and Anflu.
There can be no assurance that all of the clinical trials pertaining to our vaccines in development
will be completed within the time frames currently anticipated by us. We could encounter difficulties in
enrolling vaccinees for clinical trials or encounter setbacks during the conduct of clinical trials that
result in delays or cancellation. Data obtained from pre-clinical and clinical studies are subject to
varying interpretations that could delay, limit or prevent regulatory approval, and failure to observe
regulatory requirements or inadequate manufacturing processes are examples of other problems that
could prevent approval. In addition, we may encounter delays or rejections in the event of additional
regulation from future legislation, administrative action or changes in the SFDA policy or if unforeseen
health risks become an issue with the participants of clinical trials. Clinical trials may also fail at any
stage. Results of early trials frequently do not predict results of later trials, and acceptable results in
early trials may not be repeated. For these reasons, we do not know whether regulatory authorities will
grant approval for any of our product candidates in the future. In addition, production permits for our
products are valid for only five years and we need to apply for renewal six months prior to their
expirations. The approving process for our renewal applications could be lengthy and there is no
assurance that we will be granted renewal in a timely manner or at all.
Delays in obtaining the SFDA or foreign approvals of our products or products that we distribute for
others could result in substantial additional costs and adversely affect our ability to compete with other
companies. Even if regulatory approval is ultimately granted, there can be no assurance that we can
maintain the approval or that the approval will not be withdrawn. Any approval received may also
restrict the intended use and marketing of the product we want to commercialize.
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Outside the PRC, our ability to market any of our potential products is contingent upon receiving
marketing authorizations from the appropriate foreign regulatory authorities. These foreign regulatory
approval processes include all of the risks associated with the SFDA approval process described above
and may include additional risks.
Because the medical conditions our vaccines are intended to prevent represent significant public
health threats, we are at risk of governmental actions detrimental to our business, such as product
seizure, compulsory licensing, resumed price controls and additional regulations.
In response to a pandemic or the perceived risk of a pandemic, governments in China and other
countries may take actions to protect their citizens that could affect our ability to control the production
and export of pandemic vaccines or otherwise impose burdensome regulations on our business. For
example, an outbreak of influenza could subject our manufacturing locations to seizure by the PRC
government. The PRC government may also grant compulsory licenses to allow competitors to
manufacture products that are protected by our patents, use our technology developed using funds
received from government agencies or resume its price control over vaccines although such control has
recently been lifted in China.
We deal with hazardous materials that may cause injury to others. These materials are regulated by
environmental laws that may impose significant costs and restrictions on our business.
Our research and development programs and manufacturing operations involve the controlled use of
potentially harmful biological materials and other hazardous materials. We cannot completely
eliminate the risk of accidental contamination or injury to our employees or others from the use,
manufacture, storage, handling or disposal of hazardous materials and certain waste products. In the
event of contamination or injury, we could be held liable for any resulting damages, and any liability
could exceed our resources or any applicable insurance coverage we may have. We are also subject to
PRC laws and regulations governing the construction and operation of production facilities that may
have an impact on the environment and the use, manufacture, storage, handling or disposal of
hazardous materials and waste products, such as the PRC Environmental Impact Assessment Law, the
PRC Prevention and Control of Water Pollution Law and PRC Environmental Protection Law, as well
as waste-disposal standards set by the relevant governmental agencies. It is likely that China will adopt
stricter pollution controls as the country is experiencing increasingly serious environmental pollution.
Although we passed an environmental examination of our facilities conducted in 2004 by the Beijing
Environment Protection Bureau on our hepatitis A vaccine production line and passed the same
examination on our seasonal flu vaccine production line and filling and packaging line in 2005 and
2008, respectively, we cannot assure you that we will continue to pass similar environmental
examinations on any future production facilities that we may construct. In addition, according to the
PRC Environmental Impact Assessment Law, after the approval of previous environmental impact
assessment report, if there is any material change in the nature, scale, location, production technology
used and measures adopted to prevent damages to ecology, new environmental impact assessment
reports need to be filed for approval. We are now producing Bilive vaccine using our production
facility for hepatitis A vaccine and producing Panflu and Panflu.1 vaccines using our production
facility for seasonal flu or Anflu vaccine, and have also upgraded the production capacity for our
production facility for influenza vaccines, but we have not filed new environmental impact assessment
reports. We are also using our filling and packaging line that was originally established to fill and
package Panflu vaccine to package all our products. This is because we believe that the technologies
and impacts on the environment involved in the production, filling and packaging of the additional
vaccines are very similar to those involved in the production, filling and packaging of the vaccines that
the lines were originally set up for, as a result of which no material changes have occurred that would
require the filing of new environmental impact assessment reports. However, there is no assurance that
the relevant environment protection authorities will share the same view with us. If we fail to comply
with applicable environmental laws and regulations or with the environmental conditions attached to
our operating licenses, our operating licenses could be revoked and we could be subject to civil,
criminal and administrative penalties. We may also have to incur significant costs to comply with
future environmental laws and regulations. Moreover, we do not currently have a pollution and
remediation insurance policy to mitigate against any risk related to environmental pollution or violation
of environmental law.
We have already obtained the approval of the environmental impact assessment report from Beijing
Municipal Environmental Protection Bureau for the construction plan of our facilities in Changping
District, Beijing. If we change the construction plan by adding any new facilities, we will need to
obtain another approval of the environmental impact assessment report for the new facilities. If we fail
to obtain such approval, we cannot commence our construction of the new facilities.
Failure to commence development of land which we have been granted right to use within the
required timeframe may cause us to lose our land use right.
Sinovac Dalian was granted land use rights to two parcels of land, with an aggregate area of
95,685.6 square meters (approximately 1,030,000 square feet) located in the Economic and Technical
Development Zone of Dalian, Liaoning province by the local government. According to the relevant
PRC regulations, a parcel of land may be treated as idle land if development of the land has not been
commenced within one year after the commencement date stipulated in the land use rights grant
contract or the
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issuance date of the construction land approval certificate. Land users can extend the deadline for
commencing the construction work for one year. All of our facilities of Sinovac Dalian are located at
one of the two parcels of the land with an aggregated area of 55,606 square meters (approximately
598,582 square feet). However, as of the date of this annual report, we have not commenced
development of the other parcel of the land with 40,080 square meters (approximately 431,418 square
feet), which Sinovac Dalian was granted right to use and we expect construction work on the land to
commence by the end of 2012. It is possible that the PRC government may treat the land as idle land,
in which case we may have to pay idle land fees or penalties, change the intended use of the land, find
another parcel of land, or even be required to forfeit the land to the PRC government. Although our
financial condition may be adversely affected if we are required to pay idle land fees on penalty or
forfeit the land, we do not believe there will be a material impact over the proposed production of
mumps vaccine products and other pipeline products by Sinovac Dalian.
Risks Related to Our Intellectual Property
Our hepatitis and influenza vaccine technology is not patented. If we are unable to protect our
technologies from competitors with patents or other forms of intellectual property protection, our
business may be harmed.
Our success depends, in part, on our ability to protect our proprietary technologies. We try to protect
the technology that we consider important to our business by filing PRC patent applications and relying
on trade secret and pharmaceutical regulatory protection.
We have no patent protection for our hepatitis or influenza vaccines. We have four issued patents
and a number of pending patent applications relating to our pipeline products in the PRC. The process
of seeking patent protection in China can be lengthy and expensive and we cannot assure you that our
pending patent applications, or any patent applications we may make in the future with respect to other
products, will result in issued patents, or that any patents issued in the future will be able to provide us
with meaningful protection or commercial advantage. Our patent applications may be challenged,
invalidated or circumvented in the future.
In addition to patents, we rely on trade secrets and proprietary know-how to protect our intellectual
property. We have entered into confidentiality agreements (which include, in the case of employees,
non-competition provisions) with many of our employees, consultants, outside scientific collaborators,
sponsored researchers and other advisors. These agreements provide that all confidential information
developed or made known to the individual during the course of the individual’s relationship with us is
to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of
our employees, the agreements provide that all of the technology which is conceived by the individual
during the course of employment is our exclusive property. These agreements may not provide
meaningful protection or adequate remedies in the event of unauthorized use or disclosure of our
proprietary information. In addition, it is possible that third parties could independently develop
information and techniques substantially similar to ours or otherwise gain access to our trade secrets.
We cannot assure you that our current or potential competitors, many of whom have substantial
resources and have made substantial investments in competing technologies, do not have and will not
develop products that compete directly with our products despite our intellectual property rights.
Intellectual property rights and confidentiality protections in China may not be as effective as in the
United States or other countries. Policing unauthorized use of proprietary technology is difficult and
expensive, and we might need to resort to litigation to enforce or defend patents issued to us or to
determine the enforceability, scope and validity of our proprietary rights or those of others. The
experience and capabilities of PRC courts in handling intellectual property litigation varies, and
outcomes are unpredictable. Further, such litigation may require significant expenditures of cash and
management efforts and could harm our business, financial condition and results of operations. An
adverse determination in any such litigation could materially impair our intellectual property rights and
may harm our business, prospects and reputation.
We may be exposed to infringement or misappropriation claims by third parties, which, if
determined adversely to us, could cause substantial liabilities to us, or we may be unable to sell some
of our products.
Third parties may bring intellectual property infringement claims against us in the future.
Our commercial success also depends significantly on our ability to operate without infringing the
patents and other proprietary rights of third parties. Even after reasonable investigation, we may not
know with certainty whether we have infringed upon a third party’s patent due to the complexity of
patent claims, the inadequacy of patent clearance search procedures in the PRC and the fact that a third
party may have filed a patent application without our knowledge while that product was under
development by us. Patent applications are maintained in secrecy until their publication 18 months after
the filing date. The publication of discoveries in the scientific or patent literature frequently occurs
substantially later than the date on which the underlying discoveries were made and patent applications
were filed. China, similar to many other countries, adopts the first-to-file system under which the first
party to file a patent application (instead of the first to invent the subject invention) may be awarded a
patent. There may also be technologies licensed to us or acquired by us that are subject to infringement,
misappropriation or other claims by others which could damage our ability to rely on such technologies.
If a third party claims that we infringe upon its proprietary rights, any of the following may occur:
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we may become involved in time-consuming and expensive litigation, even if the claim is
without merit;
we may become liable for substantial damages for past infringement if a court decides that our
technology infringes upon a competitor’s patent;
a court may prohibit us from selling or licensing our product without a license from the patent
holder, which may not be available on commercially reasonable terms, if at all, or which may
require us to pay substantial royalties or grant cross licenses to our patents;
we may have to reformulate our product so that it does not infringe upon others’ patent rights,
which may not be possible or could be very expensive and time-consuming; and
we may be subject to injunctions prohibiting the manufacture and sale of our products or the use
of our technologies.
If any of these events occurs, our business will suffer and the market price of our common shares
could decline.
The success of our business may depend on licensing vaccine components from, and entering into
collaboration arrangements with, third parties. We cannot be certain that our licensing or
collaboration efforts will succeed or that we will realize any revenue from them.
The success of our business strategy depends, in part, on our ability to enter into licensing and
collaboration arrangements and to manage effectively the resulting relationships. Our ability to enter
into agreements with commercial partners depends in part on our ability to convince them of the value
of our technology and know-how. This may require substantial time and effort on our part. While we
anticipate expending substantial funds and management effort, we cannot assure you that strategic
relationships will result or that we will be able to negotiate additional strategic agreements in the future
on acceptable terms, if at all. Furthermore, we may incur significant financial commitments to
collaborators in connection with potential licenses and sponsored research agreements. In addition, we
may not be able to control the areas of responsibility undertaken by our strategic partners and may be
adversely affected should these partners prove unable to carry a product candidate forward to full
commercialization or should they lose interest in dedicating the necessary resources toward developing
any such product quickly.
Third parties may terminate our licensing and other strategic arrangements if we do not perform as
required under these arrangements. Generally, we expect that agreements for rights to develop
technologies will require us to exercise diligence in bringing product candidates to market and may
require us to make milestone and royalty payments that, in some instances, could be substantial. Our
failure to exercise the required diligence or make any required milestone or royalty payments could
result in the termination of the relevant license agreement, which could have a material adverse effect
on us and our operations. In addition, these third parties may also breach or terminate their agreements
with us or otherwise fail to conduct their activities in connection with our relationships in a timely
manner. If we or our partners terminate or breach any of our licenses or relationships, we may:
lose our rights to develop and market our product candidates;
lose patent and/or trade secret protection for our product candidates;
experience significant delays in the development or commercialization of our product
candidates;
not be able to obtain any other licenses on acceptable terms, if at all; and
incur liability for damages.
Licensing arrangements and strategic relationships in our industry can be very complex, particularly
with respect to intellectual property rights. Disputes may arise in the future regarding ownership rights
to technology developed by or with other parties. These and other possible disagreements between us
and third parties with respect to our licenses or our strategic relationships could lead to delays in the
research, development, manufacture and commercialization of our product candidates. These disputes
could also result in litigation or arbitration, both of which are time-consuming and expensive. These
third parties also may pursue alternative technologies or product candidates either on their own or in
strategic relationships with others in direct competition with us.
Any cessation or suspension of our collaborations with scientific advisors and academic institutions
may increase our costs in research and development, lengthen our new vaccines development
process and lower our efficiency in new products development.
We work with scientific advisors and academic collaborators who assist us in our research and
development efforts. Almost all of our pre-clinical and research programs are heavily reliant upon such
collaborators and we generally benefit considerably from the resources, technology and experience
these collaborations can provide. These scientists are not, however, our employees and may have other
commitments that limit their availability to us. If a conflict of interest arises between their work for us
and their work for another entity, we may lose the services of these scientists and institutions. Any
cessation or suspension of our collaborations with scientific advisors and academic institutions may
increase our research and development costs, lengthen our
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new vaccines development process and lower our efficiency in new products development. In addition,
although our scientific advisors and academic collaborators generally sign agreements not to disclose
our confidential information, it is possible that valuable proprietary knowledge may become publicly
known which would compromise our competitive advantage.
We may lose the right to use “科兴” (Kexing) on our vaccine products and/or as part of our trade
name.
We currently use ―科兴‖ (Kexing) as part of Sinovac Beijing’s Chinese trade name in the PRC. We
also intend to use ―科兴‖ (Kexing) as part of the Chinese trade name of Sinovac Dalian in the PRC.
Shenzhen Kexing currently owns the ―科兴‖ trademark registered in China for Class 5
(Pharmaceuticals) under the International Classification of Goods and Services. To protect our interest
in using ―科兴‖ in our trade name, we applied to register ―科兴‖ in China for Class 42 (Scientific &
Technological Services & Research) in 2006 and the PRC Trademark Office of the State
Administration for Industry and Commerce approved our application in 2010. The ―科兴‖ trademark
owned by Shenzhen Kexing has not been identified as ―Well-known Trademark‖ by the relevant PRC
authorities since we first started using ―科兴‖ in the trade name of Sinovac Beijing in 2001. If the ―科
兴‖ trademark owned by Shenzhen Kexing is ever officially identified as a ―Well-Known Trademark‖,
however, we may be subject to trademark infringement claim for the use of ―科兴‖ in our trade name.
Although the trademark application and the trade name approval systems are administered separately in
China, it is possible that we may lose our ability to use the ―科兴‖ trademark in our trade name due to a
successful trademark infringement claim, which may adversely affect our ability to maintain and
protect our brands, cause us to incur litigation costs and divert resources and management attention.
Risks Related to Doing Business in China
Adverse changes in political, economic and other policies of the PRC government could have a
material adverse effect on the overall economic growth of China, which could reduce the demand
for our products and materially and adversely affect our competitive position.
All of our business operations are conducted in China, and over 99% of our sales are currently made
in China. Accordingly, our business, financial condition, results of operations and prospects are
affected significantly by economic, political and legal developments in China. The Chinese economy
differs from the economies of most developed countries in many respects, including:
the extent of government involvement;
the level of development;
the growth rate;
the control of foreign exchange;
the allocation of resources;
an evolving regulatory system; and
lack of sufficient transparency in the regulatory process.
While the Chinese economy has experienced significant growth in the past 20 years, growth has
been uneven, both geographically and among various sectors of the economy. The Chinese government
has implemented various measures to encourage economic growth and guide the allocation of resources.
Some of these measures benefit the overall Chinese economy, but may also have a negative effect on
us. For example, our financial condition and results of operations may be adversely affected by
government control over capital investments or changes in tax regulations that are applicable to us.
The Chinese economy has been transitioning from a planned economy to a more market-oriented
economy. Although in recent years the Chinese government has implemented measures emphasizing
the utilization of market forces for economic reform, the reduction of state ownership of productive
assets and the establishment of sound corporate governance in business enterprises, a substantial
portion of the productive assets in China is still owned by the Chinese government. The continued
control of these assets and other aspects of the national economy by the Chinese government could
materially and adversely affect our business. The Chinese government also exercises significant control
over Chinese economic growth through the allocation of resources, controlling payment of foreign
currency-denominated obligations, setting monetary policy and providing preferential treatment to
particular industries or companies. Efforts by the Chinese government to slow the pace of growth of the
Chinese economy could result in hospitals spending less, which in turn could reduce demand for our
products.
Moreover, the political relationship among foreign countries and China is subject to sudden
fluctuation and periodic tension. Changes in political conditions in China and changes in the state of
foreign relations are difficult to predict and could adversely affect our product export and international
collaborations. This could lead to a decline in our profitability in the future.
Any adverse change in the economic conditions or government policies in China could have a
material adverse effect on overall economic growth and the level of healthcare investments and
expenditures in China, which in turn could lead to a reduction in demand for our products and
consequently have a material adverse effect on our businesses.
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Future changes in laws, regulations or enforcement policies in China could adversely affect our
business.
Laws, regulations and enforcement policies in China, including those regulating our business, are
evolving and subject to future change. Future changes in laws, regulations or administrative
interpretations, or stricter enforcement policies by the Chinese government, could impose more
stringent requirements on us, including fines or other penalties. Changes in applicable laws and
regulations may also increase our operating costs. Compliance with such requirements could impose
substantial additional costs or otherwise have a material adverse effect on our business, financial
condition and results of operations. These changes may relax some requirements, which could be
beneficial to our competitors or could lower market entry barriers and increase competition. Further,
regulatory agencies in China may, sometimes abruptly, change their enforcement practices. Therefore,
prior enforcement activity, or lack of enforcement activity, is not necessarily predictive of future
actions. Any enforcement actions against us could have a material and adverse effect on us and the
market price of our shares of common stock. In addition, any litigation or governmental investigation
or enforcement proceedings in China may be protracted and may result in substantial cost and diversion
of resources and management attention, negative publicity, damage to our reputation and decline in the
price of our common shares.
We rely on dividends paid by our PRC subsidiaries for our cash needs. If they are unable to pay us
sufficient dividends due to statutory or contractual restrictions on their abilities to distribute
dividends to us, our various cash needs may not be met.
We are a holding company, and we rely on the dividends paid by our PRC subsidiaries, including
majority-owned subsidiary, Sinovac Beijing, our wholly owned subsidiaries, Tangshan Yian and
Sinovac R&D (formerly known as Sinovac Biological), and our 55%-owned joint venture, Sinovac
Dalian, for our cash needs, including the funds necessary to pay any dividends and other cash
distributions to our shareholders, service any debt we may incur and pay our operating expenses. The
payment of dividends in China is subject to limitations. Regulations in the PRC currently permit
payment of dividends by our PRC subsidiaries only out of accumulated profits as determined in
accordance with accounting standards and regulations in China. For instance, Tangshan Yian is
required to set aside at least 10% of its after-tax profits each year to contribute to its reserve fund until
the accumulated balance of such reserve fund reaches 50% of the registered capital of Tangshan Yian.
Tangshan Yian is also required to reserve a portion of its after-tax profits to its employee welfare and
bonus fund, the amount of which is subject to its board of directors. Sinovac Beijing is required to set
aside, at the discretion of its board of directors, a portion of its after-tax profits to its reserve fund,
enterprise development fund and employee welfare and bonus funds. These funds are not distributable
in cash dividends. In addition, if Sinovac Beijing, Tangshan Yian or Sinovac R&D (formerly known as
Sinovac Biological) incurs debt on its own behalf in the future, the instruments governing the debt may
restrict either company’s ability to pay dividends or make other distributions to us.
Restrictions on currency exchange may limit our ability to receive and use our revenues effectively.
We receive over 99% of our revenues in renminbi, which currently is not a freely convertible
currency. A portion of our revenues may be converted into other currencies to meet our foreign
currency obligations, including, among others, payment of dividends declared by our subsidiaries.
Under China’s existing foreign exchange regulations, Sinovac Beijing, Tangshan，Sinovac R&D,
Tangshan Yian, and Sinovac Dalian are able to pay dividends in foreign currencies without prior
approval from the State Administration of Foreign Exchange, or the SAFE, by complying with certain
procedural requirements. However, we cannot assure you that the PRC government will not take future
measures to restrict access to foreign currencies for current account transactions.
Our PRC subsidiaries’ ability to obtain foreign exchange is subject to significant foreign exchange
controls and, in the case of amounts under the capital account, requires the approval of and/or
registration with PRC government authorities, including the SAFE. In particular, if we finance our PRC
subsidiaries by means of foreign currency from us or other foreign lenders, the amount is not allowed
to exceed the difference between the amount of total investment and the amount of the registered
capital as approved by the Ministry of Commerce and registered with the SAFE. Further, such loans
must be registered with the SAFE. If we finance our PRC subsidiaries by means of additional capital
contributions, the amount of these capital contributions must first be approved by the relevant
government approval authority. These limitations could affect the ability of our PRC subsidiaries to
obtain foreign exchange through debt or equity financing.
Fluctuation in the value of the renminbi may have a material adverse effect on your investment.
The value of the renminbi against the U.S. dollar, Euro and other currencies is affected by, among
other things, changes in China’s political and economic conditions and China’s foreign exchange
policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of
the renminbi to the U.S. dollar. Under the new policy, the renminbi was permitted to fluctuate within a
narrow and managed band against a basket of certain foreign currencies. This change in policy caused
the renminbi to appreciate approximately more than 21.5% against the U.S. dollar over the following
three years. Since reaching a high against the U.S. dollar in July 2008, however, the renminbi has
traded within a narrow band against the U.S. dollar until June 2010, when the renminbi began to further
appreciate against the U.S. dollar as a result of the PRC government’s announcement on June 19, 2010
that it would further increase the flexibility of the renminbi exchange rate. These changes in currency
policies resulted in an appreciation of the renminbi against the U.S. dollar by 31.5% between July 21,
2005 and December 31, 2011.
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It is difficult to predict how long the current situation may last and when and how it may change again.
There remains significant international pressure on the PRC government to adopt an even more flexible
currency policy, which could result in a further and more significant appreciation of the renminbi
against foreign currencies. As a portion of our costs and expenses is denominated in renminbi, a
resumption of the appreciation of the renminbi against the U.S. dollar would further increase our costs
in U.S. dollar terms. In addition, as our operating subsidiaries in China receive revenues in renminbi,
any significant depreciation of the renminbi against the U.S. dollar may have a material adverse effect
on our revenues in U.S. dollar terms and financial condition, and the value of, and any dividends
payable on, our common shares. For example, to the extent that we need to convert U.S. dollars into
renminbi for our operations, appreciation of the renminbi against the U.S. dollar would have an adverse
effect on the renminbi amount we receive from the conversion. Conversely, if we decide to convert our
renminbi into U.S. dollars for the purpose of making payments for dividends on our common shares or
for other business purposes, appreciation of the U.S. dollar against the renminbi would have a negative
effect on the U.S. dollar amount available to us.
Our business benefits from certain government tax incentives. Expiration, reduction or elimination
of these incentives will increase our tax expenses and in turn decrease our net income.
Pursuant to the PRC Enterprise Income Tax Law, or the EIT Law, and its implementation rules, both
effective from January 1, 2008, both domestic companies and the foreign invested enterprises, or the
FIEs, are subject to a unified income tax rate of 25%. Tax exemption or reduction with fixed terms
enjoyed by enterprises including us will continue until the expiry of the prescribed period. Preferential
tax treatments will continue to be granted to high and new technology enterprises that conduct business
in encouraged sectors, whether FIEs or domestic companies. Sinovac Beijing reconfirmed its ―High
and New Technology Enterprises,‖ or HNTE, status according to the new criteria and obtained the
corresponding certificate with a three-year valid period on September 14, 2011. As a result, subject to
satisfaction of applicable criteria as confirmed by the competent authorities, Sinovac Beijing was
entitled to a reduced enterprise income tax, or EIT, rate of 15% from 2011 to 2013. Tangshan Yian is
subject to a 25% income tax rate but is subject to an income tax preferential exemption from income
taxes for two years and a 50% reduction in income taxes for the three years from 2008 to 2013. The
PRC government could eliminate any of these preferential tax treatments before their scheduled
expiration. Expiration, reduction or elimination of such tax incentives will increase our tax expenses
and in turn decrease our net income.
The EIT Law could affect tax exemptions on dividends received by us and increase our enterprise
income tax rate.
We are incorporated under the laws of Antigua and Barbuda. As a foreign legal person, dividends
derived from our subsidiaries in the PRC were exempt from income tax under PRC law before
January 1, 2008. Under the EIT Law and its implementation rules, if we are deemed as a non-PRC tax
resident enterprise without an office or premises in the PRC, withholding tax at the rate of 10% will be
applicable to dividends received by us from Tangshan Yian, unless the tax is entitled to reduction or
elimination in accordance with any future PRC laws or regulations or an applicable tax treaty between
the PRC and Antigua and Barbuda. As of the date of this annual report, Antigua and Barbuda has not
entered into any such tax treaties with the PRC. According to the Arrangement between Mainland of
China and Hong Kong Special Administrative Region Arrangement on the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income agreed between China
and Hong Kong in August 2006, dividends paid by a foreign-invested enterprise in China to its direct
holding company in Hong Kong will be subject to withholding tax at a rate of no more than 5% (if the
Hong Kong investor owns directly at least 25% of the shares of the foreign-invested enterprise for a
period of greater than 12 months), or otherwise 10%. In 2009, Sinovac Biotech (Hong Kong) Ltd., or
Sinovac Hong Kong, paid 10% withholding tax rate on the dividend received from Sinovac Beijing due
to the holding period of the subsidiary less than 12 months from the date of the transfer the ownership
of Sinovac Beijing to Sinovac Hong Kong. As of the date of this annual report, Sinovac Hong Kong
has not received approval from Chinese tax authorities to apply 5% withholding tax rate on dividend
received from Sinovac Beijing for 2010 and 2011. Whether the favorable rate will be applicable to
dividends received by Sinovac Hong Kong from our PRC subsidiaries is subject to the approval of the
PRC tax authorities because it is unclear whether Sinovac Hong Kong is considered as the beneficial
owner of the dividends in substance. The PRC tax authorities has the discretion to assess whether a
recipient of the PRC-sourced income is only an agent or a conduit, or lacks the requisite amount of
business substance, in which case the application of the tax arrangement may be denied. This
withholding tax imposed on dividends paid to us by our PRC subsidiaries would reduce our net income
attributable to the stockholders.
In addition, the EIT Law provides that, if an enterprise incorporated outside the PRC has its ―de
facto management organization‖ located within the PRC, such enterprise may be recognized as a PRC
tax resident enterprise and thus may be subject to enterprise income tax at the rate of 25% on its
worldwide income. Under the implementation rules of the EIT Law, ―de facto management
organization‖ means the organization which is essentially in charge of overall management and control
with respect to the operation, personnel, books and accounts, and assets of the enterprise in question.
As substantially all members of our management are located in the PRC, we may be deemed a PRC tax
resident enterprise and therefore be subject to an enterprise income tax rate of 25% on our worldwide
income, although the dividends that we receive from our PRC subsidiaries would be exempt from PRC
withholding tax if we are recognized as a PRC tax resident.
Under the EIT Law, dividends payable by us and gains on the disposition of our shares may be
subject to PRC taxation.
If we were considered a PRC resident enterprise under the EIT Law, our shareholders who are
deemed non-resident enterprises may be subject to the EIT at the rate of 10% upon the dividends
payable by us or upon any gains realized from the transfer of our shares, if such income is deemed
derived from China, provided that (i) such foreign enterprise investor has no establishment or premises
in China, or (ii) it has an establishment or premises in China but its income derived from China has no
real connection with such establishment or premises. If we were required under the EIT Law to
withhold PRC income tax on our dividends payable to our non-PRC enterprise shareholders, or if any
gains realized from the transfer of our shares by our non-PRC enterprise shareholders were subject to
the EIT, such shareholders’ investment in our shares would be materially and adversely affected.
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Recent PRC regulations relating to the establishment of offshore special purpose companies by PRC
residents may subject our PRC resident shareholders to personal liability and limit our ability to
acquire PRC companies or to inject capital into our PRC subsidiary, limit our PRC subsidiary’s
ability to distribute profits to us, or otherwise adversely affect our financial position.
SAFE issued a public notice in October 2005, or the SAFE Notice 75, requiring PRC residents to
register with the local SAFE branch before establishing or controlling any company outside of China,
or an offshore special purpose company, for the purposes of overseas capital raising with assets or
equities of PRC companies. In addition, the PRC resident who is the shareholder of an offshore special
purpose company is required to amend its SAFE registration with the local SAFE branch, with respect
to that offshore special purpose company, in the event of any increase or decrease of capital, transfer of
shares, merger, division, equity investment or creation of any security interest over the assets located in
China or other material changes in share capital. If any PRC shareholder fails to make the required
SAFE registration and amendment, the PRC subsidiaries of that offshore special purpose company may
be prohibited from distributing their profits and the proceeds from any reduction in capital, share
transfer or liquidation, to the offshore special purpose company. Moreover, failure to comply with the
SAFE registration and amendment requirements described above could result in liability to our PRC
beneficial owners or our PRC subsidiaries under PRC laws for evasion of applicable foreign exchange
restrictions.
SAFE Notice 75 applies retroactively to PRC residents who have established or controlled an
offshore special purpose company that made onshore investments in the PRC prior to the issuance of
the SAFE Notice 75. In May 2007, SAFE issued relevant guidance to its local branches with respect to
the operational procedures for SAFE registration under SAFE Notice No. 75. This guidance
standardized more specific and stringent supervision on registrations relating to SAFE Notice No. 75.
Mr. Weidong Yin has made the required SAFE registration with respect to his investments in our
company and Mr. Heping Wang has made the SAFE registration only in Beijing in 2007 but not with
respect to his indirect investment in Tangshan Yian. The failure of our beneficial owners who are PRC
residents to make their SAFE registrations or timely amend their SAFE registrations pursuant to the
SAFE Notice 75 or the failure of future beneficial owners of our company who are PRC residents to
comply with the registration procedures set forth in the SAFE Notice 75 may subject such beneficial
owners or our PRC subsidiaries to fines and legal sanctions and may also result in a restriction on our
PRC subsidiaries’ ability to distribute profits to us or otherwise adversely affect our business.
As it is uncertain how the SAFE Notice 75 will be interpreted or implemented, we cannot predict
how and to what extent it will affect our business operations or future strategy. For example, we may
be subject to a more stringent review and approval process with respect to our foreign exchange
activities, such as remittance of dividends, re-investments of profits and foreign currency-denominated
borrowings, which may adversely affect our results of operations and financial condition. In addition, if
we decide to acquire a PRC company with equity interests or assets, we or the owners of such company,
as the case may be, may not be able to complete the necessary approvals, filings and registrations for
the acquisition. This may restrict our ability to implement our acquisition strategy and adversely affect
our business and prospects.
PRC regulation of loans and direct investment by offshore holding companies to PRC entities may
delay or prevent us from making loans or additional capital contributions to our PRC operating
subsidiaries and affiliated entities.
In funding our PRC subsidiaries, we must comply with PRC legal requirements relating to foreign
debt registration and to PRC foreign-investment companies’ ―registered capital‖ and ―total investment.‖
―Registered capital‖ refers to the capital contributed to or paid into a PRC foreign-investment company
in cash or in kind, and ―total investment‖ refers to the amount of a PRC foreign-investment company’s
registered capital plus all external borrowings by such company. The amounts of a PRC foreign-
investment company’s registered capital and total investment are set forth in the company’s
constitutional documents and approved by the competent government authority in advance and, in the
case of Sinovac Beijing and Sinovac Dalian, must be approved by their minority shareholders,
SinoBioway or Dalian Jin Gang Group, respectively, as well.
Loans by us or Sinovac Hong Kong to Sinovac Beijing, Sinovac R&D (formerly known as Sinovac
Biological), Tangshan Yian or Sinovac Dalian cannot exceed the difference between such company’s
registered capital and total investment, unless the company has obtained the approval of the approval
authority and, in the case of Sinovac Beijing or Sinovac Dalian, the approval of SinoBioway or Dalian
Jin Gang Group, respectively, also to increase the amount of total investment. Further, such loans must
be registered with the SAFE or its local counterpart.
We may also decide to finance our PRC subsidiaries by making additional capital contributions.
These additional contributions must be approved by the government approval authority and, in the case
of Sinovac Beijing or Sinovac Dalian, by SinoBioway or Dalian Jin Gang Group, respectively, also.
We cannot assure you that we will be able to obtain these government registrations or approvals, or the
approval of SinoBioway or Dalian Jin Gang Group, on a timely basis, if at all, with respect to future
loans or additional capital contributions by us to our subsidiaries or affiliates. If we fail to receive such
registrations or approvals, our ability to capitalize our PRC operations would be negatively affected,
which could adversely and materially affect the liquidity of our subsidiaries and our ability to expand
our business.
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Because we are incorporated under Antigua and Barbuda law, substantially all of our operations,
property and assets are located in China and all of our directors and officers and substantially all of
their assets are located outside of the United States, you may be unable to protect your shareholder
rights.
We are incorporated in Antigua and Barbuda. Our corporate affairs are governed by our articles of
incorporation and by-laws and by the International Business Corporations Act and common law of
Antigua and Barbuda. The rights of shareholders to take legal action against our directors, officers and
us, actions by minority shareholders and the fiduciary responsibilities of our directors to us are to a
large extent governed by the International Business Corporations Act and common law of Antigua and
Barbuda. The common law of Antigua and Barbuda is derived in part from comparatively limited
judicial precedent in Antigua and Barbuda as well as from English common law, which has persuasive,
but not binding, authority on a court in Antigua and Barbuda. The rights of our shareholders and the
fiduciary responsibilities of our directors under Antigua and Barbuda law are not as clearly established
as they would be under statutes or judicial precedents in the United States. Among other things,
Antigua and Barbuda has a less developed body of securities laws as compared to the United States,
and provides significantly less protection to investors. Further, Antigua and Barbuda’s body of
securities law, and the experience of its courts in addressing corporate and securities law issues of a
type often experienced by public companies, is likely less developed than that of some of the other
jurisdictions where publicly traded China-based companies are incorporated, such as the Cayman
Islands.
It may be difficult or impossible for you to bring an action against us or our directors or officers in
Antigua and Barbuda or to enforce or protect your rights under U.S. securities laws or otherwise. Even
if you are successful in bringing an action of this kind, you may be unable to enforce a judgment
against our assets or the assets of our directors and officers under the laws of Antigua and Barbuda.
There is doubt as to whether Antigua and Barbuda courts would enforce judgments of United States
courts obtained in actions against us or our directors or officers that are predicated upon the civil
liability provisions of the Securities Act, or in original actions brought against us or such persons
predicated upon the Securities Act. There is no treaty in effect between the United States and Antigua
and Barbuda providing for such enforcement, and there are grounds upon which Antigua and Barbuda
courts may not enforce judgments of United States courts. In addition, Antigua and Barbuda
corporations may not have standing to initiate a shareholder derivative action before the federal courts
of the United States.
PRC courts may recognize and enforce foreign judgments in accordance with the requirements of
the PRC Civil Procedures Law based either on treaties between the PRC and the country where the
judgment is made or on reciprocity between jurisdictions. If there are no treaties or reciprocity
arrangements between the PRC and a foreign jurisdiction where a judgment is rendered, matters
relating to the recognition and enforcement of the foreign judgment in the PRC may be resolved
through diplomatic channels. The PRC does not have any treaties or other arrangements with the
United States or Antigua and Barbuda that provide for the reciprocal recognition and enforcement of
foreign judgments. As a result, it is generally difficult to enforce in the PRC a judgment rendered by a
U.S. or Antigua and Barbuda court.
As a result of all of the above, as well as the fact that substantially all of our property, assets and
operations are located in China and all of our directors and officers and substantially all of their assets
are located outside of the United States, you may be unable to protect your shareholder interests
through actions against us or our management, directors or major shareholders.
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
Our legal and commercial name is Sinovac Biotech Ltd. Our principal executive offices are located
at No. 39, Shangdi Xi Road, Haidian District, Beijing 100085, PRC. Our telephone number at this
address is +86-10-8289-0088. Our registered address is located at 36 Long Street, in the City of Saint
John in Antigua and Barbuda. Our agent for service of process in the United States is Law Debenture
Corporate Services Inc., located at 400 Madison Avenue, 4th Floor, New York.
We are a holding company and conduct our business in China through our 73.09% majority-owned
subsidiary, Sinovac Beijing, our wholly owned subsidiaries, Tangshan Yian, Sinovac R&D (formerly
known as Sinovac Biological) and Sinovac Hong Kong, and our 55%-owned joint venture Sinovac
Dalian. Sinovac Beijing was incorporated on April 28, 2001, Tangshan Yian was incorporated on
February 9, 1993, Sinovac Hong Kong was incorporated on October 21, 2008, Sinovac R&D (formerly
known as Sinovac Biological) was incorporated on May 7, 2009, and Sinovac Dalian was established
on January 19, 2010.
We were incorporated in Antigua and Barbuda on March 1, 1999. Before we adopted our current
name on October 21, 2003, we were called Net-Force System Inc. and were primarily engaged in the
online gaming business. We were quoted on the OTC Bulletin Board on February 21, 2003. In
September 2003, we issued ten million new shares to Lily Wang, one of our then principal shareholders
to acquire a 51% equity interest in Sinovac Beijing. Ms. Wang had contracted to purchase these shares
from certain of Sinovac Beijing’s then shareholders for cash immediately before the above 51% share
transfer. However, this 51% equity interest
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in Sinovac Beijing was transferred to us directly from those shareholders and was recorded under
applicable PRC law transfer documents as a cash transaction. Lily Wang was responsible for paying
the cash to those shareholders. The transfer of the Sinovac Beijing equity interest to us was registered
and approved by PRC government authorities in August 2004. In September 2004, we acquired an
additional 20.6% equity interest in Sinovac Beijing for approximately $3.3 million in cash. In
October 2011, we further acquired an additional 1.53% equity interest in Sinovac Beijing through
contributing the dividends declared to Sinovac Hong Kong but unpaid in amount of $2.9 million. We
currently own 73.09% of the equity interest in Sinovac Beijing.
In January 2004, we entered into a share purchase agreement with Heping Wang and issued him 3.5
million of our common shares and a promissory note in the amount of $2.2 million to acquire from him
a 100% equity interest in Tangshan Yian. Mr. Wang had contracted to purchase these shares from
Tangshan Yian’s then two shareholders immediately before the above 100% share transfer. However,
this 100% equity interest in Tangshan Yian was transferred to us directly from those shareholders and
was recorded under applicable PRC law transfer documents as a cash transaction. Heping Wang was
responsible for paying the cash to the two shareholders. The transfer of the Tangshan Yian equity
interest by Mr. Wang to us was registered and approved by PRC government authorities in
November 2004.
In the first quarter of 2008, we issued and sold an aggregate of 2.5 million common shares at $3.90
per share to Sansar Capital Management. We received approximately $9.75 million in gross proceeds
from this private placement of our common shares.
In October 2008, we established Sinovac Hong Kong, a wholly owned subsidiary focused primarily
on registering and distributing current and newly-developed vaccine products in Hong Kong and
exporting our products abroad. In addition, Sinovac Hong Kong seeks research and development
collaboration opportunities with third parties in Hong Kong.
In November 2009, we entered into an agreement with Dalian Jin Gang Group to establish Sinovac
Dalian. In January 2010, we established Sinovac Dalian which will focus on the research, development,
manufacturing and commercialization of vaccines, such as rabies, varicella, mumps and rubella
vaccines for human use. We plan to manufacture live attenuated vaccines and vero cell cultured
vaccines at the production facilities of Sinovac Dalian. Pursuant to the joint venture agreement, we
have made an initial cash contribution of RMB60 million in exchange for a 30% equity interest in
Sinovac Dalian and Dalian Jin Gang Group has made an asset contribution of RMB140 million
including manufacturing facilities, production lines and land use rights, in exchange for the remaining
70% interest in Sinovac Dalian. We have also entered into an agreement with Dalian Jin Gang Group,
under which we have agreed, subject to the approval of the PRC government, to increase our
shareholding in Sinovac Dalian to 55% through purchasing 25% equity interest in Sinovac Dalian from
Dalian Jin Gang Group Co., Ltd., or Dalian Jin Gang Group for a consideration of RMB50 million on
or before December 31, 2010. The transaction was completed before December 31, 2010, and Sinovac
has increased the shareholding to 55% and Dalian Jingang holds 45%.
In February 2010, we closed a public offering of our common shares. We issued and sold 11.5
million common shares at the price of $5.75 per share. We received net proceeds of approximately
$61.8 million, after deducting underwriting discounts and commissions and offering expenses payable
by us.
In February 2010, we entered into an agreement to acquire buildings, land use rights and utility
facilities in Changping District, Beijing for a total consideration of approximately RMB123.6 million.
As of December 31, 2011, we have paid RMB90.1 million and the remaining payable of RMB33.5
million ($5.3 million) will be due before December 31, 2012. To finance this purchase, we borrowed a
five-year bank loan of RMB90 million ($14.1 million) from China Construction Bank, for which we
have received RMB76.5M ($12.2 million) as of December 31, 2011. We have already completed the
construction of a new warehouse and in the process of setting up a new filling and packaging line in
compliance with the WHO standards and a production line for EV71 vaccine.
We have increased the capital investment to Tangshan Yian with the total amount of $2.2 million.
The increased investment is primarily used for the construction of a GMP-compliant animal rabies
vaccine production plant.
In October 2011, we purchased an additional 1.53% interest of Sinovac Beijing and increased our
ownership from 71.56% to 73.09% through contributing declared but unpaid dividends in the amount
of $2,906,308 (RMB18,605,600).
For additional information regarding our principal capital expenditures, see ―— D. Property, Plants
and Equipment.‖
Investor inquiries should be directed to us at the address and telephone number of our principal
executive offices set forth above. Our website is http://www.sinovac.com. The information contained
on our website does not form part of this annual report.
B. Business Overview
We are a fully integrated China-based biopharmaceutical company that focuses on the research,
development, manufacturing and commercialization of vaccines that protect against infectious diseases.
We have successfully developed a portfolio of market leading products, consisting of vaccines against
the hepatitis A, hepatitis B and influenza viruses. In 2002, we launched our first product, Healive,
which was the first inactivated hepatitis A vaccine developed, produced and marketed by a China-
based
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manufacturer. In 2005, we received regulatory approvals in China for the production of Bilive, a
combined hepatitis A and B vaccine, and Anflu, a split viron influenza vaccine. In April 2008, we
received regulatory approval in China for the production in China of our whole viron pandemic H5N1
influenza (avian flu) vaccine, which is the only vaccine approved for sale to the Chinese national
vaccine stockpiling program. In September 2009, we were granted a production license for Panflu.1,
which was the first approved vaccine in the world against the influenza A H1N1 virus (swine flu). In
2011, our animal rabies vaccine was approved by the Ministry of Agriculture for commercialization. In
December 2011, Sinovac Dalian, an operating subsidiary of the Company obtained the production
license from the SFDA for its mumps vaccine product. Sinovac Dalian, applied for the GMP
certification of its mumps vaccine production plant with the SFDA in March 2012 and is currently is
waiting for notification of the inspection date from the SFDA. Our pipeline consists of various vaccine
candidates in the pre-clinical and clinical development phases in China. We obtained approval from
SFDA to commence human clinical trials of a vaccine for EV71 (hand, foot and mouth disease) on
December 23, 2010. In 2011, phase I and II clinical trials of the EV 71 vaccine were completed. We
initiated phase III clinical trial in January, 2012. We filed an application for the clinical trials of
pneumococcal conjugate vaccine, pneumococcal polysaccharides vaccine and rubella vaccine in early
2011. Our product pipeline also includes human vaccines for rotavirus, human rabies, and varicella that
are in pre-clinical development.
Our Products
We specialize in the sales, marketing, manufacturing, and development of vaccines for infectious
disease with significant unmet medical need. Set forth below is a table that outlines our current
marketed products and those that we have developed or are developing.
Pre-
clinical
File
IND
Obtain Clinical
Approval from
SFDA
Phase I Phase II Phase III On sale
(1)
(2)
Product
Healive
Bilive
Indication
Hepatitis A
Hepatitis A &
B
Anflu
Influenza
Panflu Whole
Viron Pandemic
Influenza Vaccine
Pandemic
Influenza
Virus
Split Viron
Pandemic
Influenza Vaccine
Pandemic
Influenza
Virus
Panflu.1
RabEnd
Influenza A
H1N1 virus
Rabies Virus
(in animals)
EV71 Vaccine
EV71 Virus
Mumps Vaccine Mumps
.......................................................................
Pneumococcal
Conjugate
Vaccine
Pneumococcus
Pneumococcal
Polysaccharides
Pneumococcus
Vaccine
Rubella Vaccines Rubella
Rotavirus
Vaccine
Rabies Vaccine
for Humans
Varicella Vaccine
Rotavirus
Rabies Virus
(in humans)
Varicella-
zoster virus
(Herpesvirus
3, Human)
(1) Our Panflu whole viron pandemic influenza vaccine did not undergo Phase III clinical trials
because none were required by the relevant authorities in order to receive regulatory approval.
(2) Our Panflu Split Viron Pandemic Influenza Vaccine will not undergo Phase III clinical trials
because none were required by the relevant authorities in order to receive regulatory approval.
Healive. In May 2002, we obtained the final PRC regulatory approval for the production of
Healive, the first inactivated hepatitis A vaccine developed in China. The hepatitis A virus,
which is endemic in China and other developing countries, primarily impacts the liver by
causing it to swell and preventing it from functioning properly. The disease is highly
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contagious and can be spread by close personal contact, by consuming contaminated food or by
drinking water that has been contaminated by hepatitis A. According to the WHO, as no specific
treatment exists for hepatitis A, prevention is the most effective approach against the disease. In
February 2008, the Chinese government included hepatitis A vaccine into its national
immunization program, and announced plans to expand vaccination to newborns nationwide by
the end of 2010. According to the NIFDC lot release records, 29.37 million doses of hepatitis A
vaccines were approved and released in 2011 in China. Administered intramuscularly, Healive is
available in different doses for use by both adults (1.0 ml dose) and children (0.5 ml dose). Our
production line to manufacture our hepatitis vaccines, Healive and Bilive, interchangeably has an
aggregate combined production capacity of approximately 10 million doses annually. In 2009,
2010 and 2011, we sold approximately 3.1 million 2.6 million and 2.7 million doses of Healive,
which generated approximately $33.0 million, $12.6 million and $14.1 million in revenues,
respectively. Since we launched Healive in 2002, we have sold a total of approximately 31 million
doses as of December 31, 2011. We are selling Healive in Mongolia and Nepal and are currently
seeking the regulatory approval to sell Healive in India and Ukraine.
Bilive. In June 2005, we obtained the final PRC regulatory approval for the production of Bilive,
the first combined inactivated hepatitis A and B vaccine developed and marketed in China. Bilive
is a combination vaccine formulated with purified inactivated hepatitis A virus antigen, which we
manufacture, and recombinant (yeast) hepatitis B surface antigen, which we source from a third-
party supplier. Bilive vaccinations must be privately paid by the recipients under China’s current
vaccination program. Bilive is designed for boost immunization or for users in the private-pay
market who prefer the convenience of one inoculation rather than two. Similar to hepatitis A,
hepatitis B is endemic in China, a major disease worldwide and a serious global public health
issue. A substantial percentage of people infected with the hepatitis B virus carry chronic or
lifelong infections. The chronically infected are at a high risk of death from cirrhosis of the liver or
liver cancer. Currently, we are the only supplier in China that produce a combined inactivated
hepatitis A and B vaccine, and our market share in China, according to the NIFDC lot release
records, is 100% in 2011. Bilive is available in different doses for use in both adults and children.
The 1.0 ml dose is for non-immune adults and adolescents 16 years of age and older. The 0.5 ml
dose is for pediatric use in non-immune infants, children and adolescents from one year up to and
including 15 years of age. The standard Bilive vaccination schedule consists of three doses. The
second dose is administered one month after the first dose and the third dose is administered six
months after the first dose. Booster vaccinations are recommended five years after the initial
immunization. Our production line to manufacture our hepatitis vaccines, Healive and Bilive,
interchangeably has an aggregate combined production capacity of approximately 10 million doses
annually. In 2009, 2010 and 2011, we sold approximately 946,000, 684,000 and 1.8 million doses
of Bilive, which generated approximately $6.2 million, $3.6 and $12.7 million in revenues,
respectively.
Anflu. In October 2005, we received the final approval from the SFDA to produce our Anflu
vaccine against influenza. We began marketing Anflu in September 2006. The primary influenza
vaccine used worldwide is the split viron vaccine, which contains virus particles disrupted by
detergent treatment. The market penetration of the seasonal flu vaccine in China is significantly
below that in the developed markets. We are the first Influenza Vaccine Supply, or IVS, task force
member from a developing country that collaborates with world-class partners in influenza vaccine
research. Our Anflu vaccine is an inactivated split viron influenza vaccine formulated from three
split inactivated viron solutions. Anflu is produced with the virus strains recommended by the
WHO each year and, we believe, is the only flu vaccine, among all produced by other domestic
manufacturers that do not contain preservatives. According to the NIFDC lot release records,
41.83 million doses of influenza vaccines were approved and released in China in 2011, compared
to 48.2 million doses in 2010. Our production line to manufacture our flu vaccines, Anflu, Panflu
and Panflu.1, interchangeably has an annual production capacity of approximately 8 million doses
of Anflu. We sold 5.1 million, 2.4 million and 2.2 million doses of Anflu in 2009, 2010 and 2011,
which generated approximately $15.2 million, $7.6 million and $8.1 million in revenues,
respectively. Anflu is registered for sale in the Philippines. We are currently seeking the regulatory
approval to sell Anflu in India and Mexico.
Panflu. In April 2008, we were granted a production license for Panflu by the SFDA. Panflu is the
only approved vaccine available in China against the H5N1 influenza virus although we received
the virus strains at the same time as other manufacturers globally, which demonstrated our strong
research and development capability. The vaccine is approved for supply within China to the
Chinese national vaccine stockpiling program and may not be sold directly to the Chinese
commercial market. Panflu is also registered for sale in the Hong Kong market. Our production
line to manufacture our flu vaccines, Anflu, Panflu and Panflu.1, interchangeably has an annual
production capacity of approximately 20 million doses of Panflu or 20 million doses of Panflu.1
given the yield of virus strain received from WHO. We started to sell Panflu in August 2009. Our
revenue from the sale of Panflu amounted to $64,318, $2.4 million and $7.8 million in 2009, 2010
and 2011, respectively.
Panflu.1. In September 2009, we were granted a production license for Panflu.1 by the SFDA.
Panflu.1 is the first approved vaccine in the world against the influenza A H1N1 virus. The
outbreaks of influenza A H1N1 was caused by a new virus that has not been seen previously in
either human beings or animals. We received orders of 20.97 million doses as of the date of this
annual report. According to the NIFDC lot release records, we were ranked No. 2 in market share
in China in 2009 and No. 3 in 2010. Our production line to manufacture our flu vaccines, Anflu,
Panflu and Panflu.1, interchangeably has an annual production capacity of approximately 20
million doses of Panflu or20 million doses of Panflu.1. We started to sell
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Panflu.1 in September 2009. Our revenue from the sale of Panflu. 1 amounted to approximately
$29.7 million, $7.2 million, and $14 million in revenues in 2009, 2010, and 2011 respectively.
Panflu.1 is also registered for sale in Mexico.
Split viron pandemic influenza vaccine. Our split viron pandemic influenza vaccine has been
developed in conjunction with our whole viron pandemic influenza vaccine. Split viron vaccines
are considered to have a better safety profile than whole viron vaccines, both of which are for the
governmental stockpiling program. This product has been developed to address the needs of young
children, who may be more susceptible to adverse reactions to whole viron pandemic influenza
vaccine than to a split viron vaccine. The production license was granted on November 11, 2011,
which was approved to be used among the teenagers aged from 12 to 17.
RabEnd. Animal rabies is the leading cause of transmission that results in human rabies. Animal
vaccination can reduce the incidence of rabies in humans by reducing human contact with rabid
animals. On January 18, 2008, China approved compulsory vaccination for dogs. The construction
of animal rabies vaccine production line in Tangshan has been completed. We launched RabEnd,
the inactivated animal rabies vaccine, in China in September 2011 after obtainingthe required
approvals, including the production license, the New Animal Drug Certificate and the GMP
Certificate.
Our pipeline consists of vaccine candidates in the clinical and pre-clinical development phases in China,
including human vaccines for the EV71 virus, pneumococcal, rotavirus, rabies, varicella and rubella
that have completed or are in pre-clinical development. And we are waiting for the GMP certification
notice for our mumps vaccine plant from SFDA.
EV71 virus. Enterovirus 71, or EV71, causes hand, foot and mouth disease, or HFMD, among
children under ten years old. HFMD is a common and usually mild childhood disease; however,
HFMD caused by EV71 has shown a higher incidence of neurologic involvement, and a higher
acute fatal incidence. There have been a number of outbreaks of HFMD caused by EV71 in the
Asia-Pacific region since 1997 including in China, Malaysia, Singapore, Australia , Vietnam and
Taiwan. According to the China CDC in 2009, over 1.1 million cases were reported in China, with
over 353 reported fatalities. In 2010, over 1.7 million cases were reported in China, with over 880
reported fatalities. And in 2011, over 1.6 million cases were reported in China, with over 500
fatalities. There is no identified treatment for enterovirus infections and no vaccine is currently
available. We have started our research and development of the EV71 vaccine since 2007, and our
animal model has shown good safety and immunogenicity. In December 2009, the SFDA accepted
our application to commence human clinical trials, which is the first clinical trial application for
the EV71 vaccine in China. We have obtained the approval from SFDA to commence clinical
trials on December 23, 2010 and have initiated phase I clinical trial for EV71 vaccine on
December 30, 2010. We completed phase I and II clinical trials in 2011and initiated the phase III
clinical trial in January 2012. We have five pending PRC patent applications relating to the EV71
vaccine in China. Our EV71 vaccine will target children five years old or under, who numbered
approximately 80 million in China.
Pneumococcal Conjugate Vaccine. Pneumococcal is a leading cause of serious illness in children
and adults throughout the world. The disease is caused by a common bacterium, the
pneumococcus, which can attack different parts of the human body. According to the WHO,
pneumococcal disease is the leading vaccine-preventable killer of children under five years old in
the world. At least one million children die of pneumococcal disease every year, most of them
young children in developing countries. Since the U.S. commenced vaccination programs against
this disease, the pneumococcal disease incidence has decreased by 94% in the U.S. Currently, in
China, the only similar product is available from Pfizer (Prevnar). No domestic producer has a
license to supply this vaccine. Our pneumococcal conjugate vaccine will primarily target children
two years old or under, who numbered approximately 32 million in China. We filed an application
for clinical trials with the SFDA in March 2011.
Pneumococcal Polysaccharides vaccine. Pneumococcal polysaccharide vaccine, or PPV, is a
vaccine used to prevent Streptococcus pneumoniae (pneumococcus) infections such as pneumonia
and septicemia. In the United States, PPV is recommended for adults 65 years of age or older,
adults with serious long-term health problems, smokers, and children older than two years with
serious long-term health problems. The WHO recommendations are similar. The safety of the
current polysaccharide vaccines in older children and non-pregnant adults is well documented. We
filed an application for clinical trials to the SFDA in February 2011.
Rabies in humans. Rabies is an infection of the central nervous system acquired through the bite
of a rabid animal. The WHO recognizes rabies as the infectious disease with the highest fatality
rate in humans, which is 100% when left untreated. Rabies is prevalent in China and the only
preventative treatment against rabies in humans is vaccination. China is among the countries most
threatened by rabies. Based on available data, approximately 2,400 fatal human cases of rabies are
reported each year in China. We are conducting pre-clinical study of a human rabies vaccine.
Varicella. Varicella is a highly contagious infectious disease caused by the varicella-zoster virus
(Herpesvirus 3, Human). It usually affects children, is spread by direct contact or respiratory route
via droplet nuclei and is characterized by the appearance on the skin and mucous membranes of
successive crops of lesions that are easily broken and become scabbed. Varicella is relatively
benign in children, but may be complicated by pneumonia and encephalitis in adults. According to
the
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NIFDC lot release records, 14.2 million doses of varicella vaccines were approved and released in
China in 2011, compared to 13.6 million doses in 2010. We are conducting pre-clinical trials of a
human vaccine for Varicella.
Mumps and Rubella. Mumps is a viral disease of the human species, caused by the mumps virus.
It is a significant threat to health in the developing countries. According to the NIFDC, in 2011, 13
million doses of vaccines for mumps were approved for sale in China. Rubella is a disease caused
by the rubella virus and an acute infection is normally associated with the symptoms of fever and
systemic rash. We are expecting GMP inspection on the production plant of mumps and we expect
our mumps vaccine to be approved for commercialization in the second half of 2012. We
completed the pre-clinical study for rubella vaccine and submitted the clinical trial application to
SFDA in April 2011. Our long-term objective is to launch an MMR vaccine, a mixture of three
live attenuated viruses, administered via injection for immunization against measles, mumps and
rubella, in five years. According to the NIFDC lot release records, 26.3 million doses of MMR
were approved and released in China in 2011, compared to 26.6 million doses in 2010. In
February 2008, the Chinese government included MMR vaccine in its national immunization
program.
Rotavirus. Rotavirus is a common cause of severe diarrheal disease in infants and young children
worldwide. Primarily transmitted by the fecal—oral route, rotaviruses affect the vast majority of
children worldwide under the age of three, and in particular affect children under one year old in
most developing countries. WHO highly recommends each country to include a rotavirus vaccine
in its national immunization program. The rotavirus vaccine mainly targets young infants under
one year old, numbering approximately 16 million in China. There is currently only one supplier
of Rotavirus in China. According to the NIFDC, in 2011, 5.8 million doses of vaccines for
rotavirus were approved for sale in China, which we believe do not fully satisfy market demand.
We are conducting pre-clinical trials of a human vaccine for rotavirus derived from the virus strain
licensed by us from an entity in the U.S.
Research and Development
We have established a leadership position in the research and development of vaccines in China. Since
our inception, we have successfully developed and marketed Healive, Bilive, Anflu, Panflu and
Panflu.1 and RabEnd, and have made significant advances in the prevention of SARS. We believe that
we were the first company in the world to complete a Phase I clinical trial of a SARS vaccine. In
addition, our avian influenza vaccine product, Panflu, is the only approved vaccine available in China
against the H5N1 influenza virus. Our Panflu.1 is the first approved vaccine in China and the world
against the influenza A H1N1 virus. We believe our R&D capabilities provide us with a key
competitive advantage. We intend to continue to focus our research and development efforts on
developing vaccines for infectious diseases with significant unmet medical needs, such as pandemic
influenza (H5N1), influenza A H1N1 and EV71, as well as the vaccine products with extensive market
demand in China and other developing countries, such as pneumococcal vaccines, rotavirus vaccine
and human rabies vaccine. We have started our research and development of the EV71 vaccine since
2007, and we obtained the approval to commence clinical trials for EV71 vaccine from SFDA on
December 23, 2010. Phase I and II clinical trial were completed in 2011. We initiated phase III clinical
trial on EV71 vaccine in January 2012. In 2008, we initiated the research and development projects on
pneumococcal conjugate vaccine and pneumococcal polysaccharide vaccine, rotavirus vaccine, and
other vaccines. We have completed the preclinical studies on pneumococcal conjugate vaccine and
pneumococcal polysaccharide vaccine. The applications for commencing human clinical studies were
submitted to SFDA in 2011.
In 2008, we restructured our R&D team in Beijing to better utilize our scientific and personnel
resources. In 2009, we built a R&D center of approximately 13,300 square feet in the campus of our
Beijing headquarter, which we expect will meet our current R&D demand to conduct three to five
research projects at the same time. In 2011, we built a lab of 6,778 square feet, which is focused on
maintaining quality control of our pipeline products.
In order to achieve our R&D goal, part of our R&D strategy is to focus on in-house development and to
establish collaborations with domestic and international partners on technology and virus strains use
rights licensing . We have entered into collaborations with a group of leading universities, colleges and
research institutes that have strong vaccine research capabilities and proven track records in China. In
most cases, we will own the commercial rights to the products that result from our existing R&D
strategic collaborations. Set forth below are examples of projects on which we have collaborated:
Partner
National Institute for Viral
Disease Control and Prevention
of China CDC
Institute of Laboratory Animal
Sciences, University of
Agriculture
University of Sydney
National Institute for Viral
Disease Control and Prevention
of China CDC
Tianjin CanSino Biotechnology
Inc.
United States Public Health
Services
Projects
Universal Pandemic
Influenza Vaccine
(National High-Tech
Research and Development
Plan)
Inactivated Animal Rabies
Scope of Collaborations
Vaccine development
Inactivated animal rabies
vaccine development
EV71
EV71
Animal model
Obtaining virus strain
Pneumococcal vaccine
Co-development
Rotavirus
Patent license to transfer
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within the Department of Health
and Human Services
of virus strain
The continuous investment in R&D is one of our strategies, which, we believe, will ensure the
company’s future growth. Our research and development expenses were $4.4 million, $8.55 million
and $ 9.0 million in 2009, 2010 and 2011, respectively. We have obtained financial support from the
PRC government to conduct preclinical and clinical research of vaccines for government-sponsored
programs, including SARS and pandemic influenza. We received government research funding in the
amount of $1.3 million, $372,012 and $893,000 in 2009, 2010 and 2011, respectively.
Sales and Marketing
Our sales strategy is to maintain our market share and competitive advantage in the private vaccine
sales market while leveraging this strength to established a presence in the government-paid market.
We also will continue to maintain and develop stable, solid and long-term relationships with the
various provincial and municipal CDCs that constitute our key customer base. To this end, we engage
in various marketing activities to promote our products and services. We provide our services based on
our well understanding of the demands of CDC. For instance, we regularly hold academic symposia for
our CDC customers during which a group of experts and scholars invited by us give lectures to the
CDC personnel and update them on the latest research progress in diseases and vaccines. We also assist
our CDC customers in ―grass roots‖ disease prevention efforts. In addition, we collaborate with
provincial and municipal CDCs to offer training programs related to disease control and prevention
with a view to enhancing the public’s awareness and knowledge about epidemic prevention and control.
We also employ traditional marketing tools to promote our products such as exhibiting posters at
scientific conferences and publishing academic papers in academic journals, such as the Chinese
Journal of Vaccines and Immunization and Chinese Journal of Epidemiology.
In 2011, we successfully implemented our strategy of increasing our sales of Bilive in private
market to offset the decrease in sales of Healive in private market due to its inclusion in China’s EPI
program. Revenue generated from Bilive in private market increased by 249% to $12.7 million in 2011.
And combining the sales revenue of $7.3 million generated from Healive in private market, the sales
generated from hepatitis vaccines in private pay market totaled approximately $20 million, compared
to $12.6 million in 2010. Meanwhile, we have implemented a special task force composing of
experienced sales professionals focusing on EPI sales, which resulted in $8.2 million generated from
EPI sales in 2011, increasing 71% compared to $4.8 million in 2010.
Unlike many of our competitors who typically rely on third-party distributors to sell to the CDCs,
China’s dominant channel for vaccine sales, our sales and marketing team, which comprised 165 staff
members in 31 provinces throughout China as of December 31, 2011, in most cases, sells directly to
the CDCs. This network enables us to better control the supply chain and gain a deeper understanding
of the end market. Our sales network has a national coverage across China. We enter into sales
agreements with CDCs each time a CDC places a purchase order. Pursuant to the sales agreements,
CDCs typically agree not to re-sell our products to regions outside the territory the pertinent CDC
covers administratively. Our sales team has created stable relationships with our customers by
providing them with technical support and trainings. We believe these efforts have contributed to our
reputation for quality and brand awareness in the Chinese vaccine market.
We intend to increase our sales to international markets and enhance awareness of our products
outside of China. Our products are currently registered in Hong Kong (Panflu and Anflu), Mexico
(Panflu.1), Nepal (Healive) and the Philippines (Anflu). We have already exported some of our product
to Philippines, Nepal and Mongolia. We are currently seeking regulatory approval to sell a number of
our products in countries such as India (Healive), Mexico (Anflu), and Pakistan (Healive and Anflu),
and Ukraine (final bulk of Healive). We will continue to explore the globalization of our portfolio and
develop products targeting other potential international markets where we believe we can be successful.
In addition, we have also entered into various distribution agreements with international healthcare
companies such as Glovax to distribute products in different parts of the world. Such business
partnerships enable us to explore business opportunities internationally.
In May 2011, we agreed to terminate the exclusive distribution agreement entered into with LG Life
Sciences, Ltd. on February 29, 2006 in response to a request of LG Life Sciences to terminate the
agreement in February 2011. According to the agreement, Sinovac shall exclusively help LGLS
register and market its hepatitis B vaccine in China. Due to LGLS’ reassessment of the market potential
of the vaccine, it decided to terminate the agreement. We do not think there will be any material
impact on our business.
On June 14, 2011, we terminated the exclusive distribution agreement entered into with Parenteral
Biotech Ltd. on April 15, 2009. According to the agreement, Parenteral is obligated to assist us to
register and market our Anflu product in India on an exclusive basis. After a reassessment of the
registration process of Anflu, however, we decided to terminate this agreement.
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Seasonality
Our business is highly seasonal. For example, the influenza season generally runs from
November through March of the next year, and the largest percentage of influenza vaccinations is
administered between September and November of each year. As a result, we expect to realize most of
our annual revenues from Anflu during this period. You should expect this seasonality in our business
to contribute to significant quarterly fluctuations in our operating results. In the first quarter, our strong
winter-season sales are usually offset by the slow-down of business during the Chinese New Year
holiday season that effectively lasts more than half a month. During this holiday season, many
businesses in China, including CDCs and most departments in hospitals are either closed or
substantially reduce the level of their activities. See ―Item 3. Key Information — D. Risk Factors —
Risks Related to Our Company — Our business is highly seasonal. This seasonality will contribute to
our operating results fluctuating considerably throughout the year.‖
Suppliers
We obtain the raw materials from local and overseas suppliers. We generally maintain at least two
suppliers for each key raw material we use, with the exception of the hepatitis B antigens we use for
Bilive production. We source the hepatitis B antigens we use for Bilive production entirely from
Beijing Temple of Heaven, pursuant to a long-term supply agreement. In an agreement dated
October 15, 2002, we agreed to purchase all hepatitis B antigens to be used in our Bilive production
exclusively from Beijing Temple of Heaven for ten years and to enter into a separate supply agreement
in the future to specify the pricing, quantity, delivery and payment terms of the hepatitis B antigens
supply relationship. The agreement will expire in October, 2012. It is uncertain whether Beijing
Temple of Heaven will continue to furnish us with hepatitis B vaccine after the expiry of the
agreement. Raw materials generally have been in good supply and the prices we pay for them have
remained stable. We target to maintain our gross margin in the event of rising raw materials costs by
improving our production processes and technical methods.
Manufacturing, Safety and Quality Assurance
We have four manufacturing bases located in Haidian District and Changping District of Beijing,
Dalian City of Liaoning Province, and Tangshan City of Hebei Province.
We have two production lines and one filling and packaging line located in our principal
manufacturing facility in Haidian District of Beijing. All of our three lines are Chinese GMP-certified.
Our Healive and Bilive share the same production line, which has an aggregate annual capacity of 10
million doses. Our Anflu production line has an annual capacity of eight million doses, which can
also be used to produce Panflu and Panflu.1. The annual capacity of the current filling and packaging
line is 20 million doses. Our Healive, Bilive and Anflu facilities received their GMP certificates
initially in March 2002, June 2005 and October 2005, respectively and renewed their GMP
certificates for another five years in 2008, 2010 and 2010 respectively. The GMP certification was
granted to our filling and packaging facility on February 2, 2009. We are required to meet the newly
implemented GMP standards by December 31, 2013
Our new production site in Changping District of Beijing is still under construction, which will
be used to produce our EV71 vaccine. The EV71 vaccine production line has a designed annual
capacity of 10 to 20 million doses. Meanwhile, we are also building a new filling and packaging line
in Changping site. The two lines are designed and constructed in compliance with the new China
GMP standard, which is very similar to the WHO GMP standard.
Our production site in Dalian focuses on the manufacturing of live attenuated vaccine and human
rabies vaccine. In December, 2011, we have obtained the production license from SFDA for our
mumps vaccine. In March 2012, we applied for the GMP certification inspection with SFDA, and
currently we are waiting for the notification of GMP inspection from SFDA.
Our production site in Tangshan city focuses on the manufacturing animal vaccines.
Each of our production sites has its own department responsible for quality assurance, or QA.
These QA departments are directly supervised by a QA team at our headquarter, which is responsible
for establishing QA procedures for production of our human vaccine products. We are establishing QA
procedures for the production of our animal vaccine products, which differs from the QA procedures
for our human vaccine products due to differences in authorities and policies governing these two types
of products. The QA departments at the subsidiary level are responsible for executing the QA
procedures established by our headquarter level QA team during the manufacturing process. In addition,
the headquarter level QA team also provides training to our subsidiary level QA teams on a regular
basis.
We have four production sites in China. Each of them has its own quality assurance departments,
who are under the supervision of QA team of Sinovac Beijing. The QA team at parent level is
responsible for establishing quality assurance system and procedures for the three human vaccine
productions. QA departments of each subsidiary manufacturing human vaccines is responsible to
execute based on the system established by the parent company. Timely training is provided by QA
team at parent level to the QA team at subsidiaries. The parent company’s QA team is also assisting
Tangshan Yian on establish animal vaccine production quality assurance procedures, but the quality
governing organization and policies are different from human vaccine.
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We have established an Adverse Effect After Immunization, or AEFIs, response system under
which a team of experts, professors and doctors responds to AEFIs within 24 hours to handle any
emergency reported from users of our vaccine products. We also ensure that we have an effective
internal reporting system to report any serious adverse event, or SAE, related to vaccine use to the
SFDA promptly as mandated by the SFDA and the Ministry of Health of the PRC.
Collaborations
We licensed from MedImmune, LLC certain rights to use patented reverse genetics technology
pertaining to virus strain production for vaccines, including the H5N1 influenza virus strain. We have
agreed to pay an upfront license fee and to pay milestone payments of up to an aggregate of $6.5
million conditional upon the achievement of certain amount of cumulative net sales of licensed
products in China (including Hong Kong and Macau), as well as royalty payments in single digit of net
sales of the licensed products in China (including Hong Kong and Macau). As of December 31, 2011,
an upfront license fee was included in the account payable and accrued liabilities. No milestone
payments have been paid or are payable because the cumulative net sales target has not been achieved.
In August 2009, we entered into a patent license agreement with the National Institutes of Health, or
PHS, an agency of the United States Public Health Services within the Department of Health and
Human Services. PHS grants us a non-exclusive license to make and use its certain licensed products.
PHS also grants us the right to use the relevant information for development of its licensed products.
We have agreed to pay PHS a license issue royalty of $80,000 and a non-refundable minimum annual
royalty of $7,500, and royalty payments on net sales with a range in single digit depending on the sales
territory and the customers. The Company has also agreed to pay PHS benchmark royalties upon
achieving each benchmark as specified in the patent license agreement. In 2011, the Company recorded
a license issue royalty of $21,125 (2010 - $7,500; 2009 - $90,274) in research and development
expenses.
In July 2009, Tangshan Yian entered into a research agreement with University of Sydney on
protective research of EV71 vaccine in animal model. The research purpose is to evaluate the efficacy
of EV71 vaccine on mice after challenging mice with EV71 virus. Based on the agreement, the animal
model was established by the University of Sydney and the study results showed good efficacy profile
of EV71 vaccine candidate with cross protection against other sub-type of EV71 virus. On July 20,
2009, Tangshan Yian entered into a transfer agreement with Sinovac Beijing. Therefore, Sinovac
Beijing has the ownership of this research and has full right to use it.
In March 2009, we entered into a technology transfer agreement with Tianjin CanSino
Biotechnology Inc., a non-related company, to develop a 7-valent pneumococcal conjugate vaccine.
The collaboration term under the technology transfer agreement is from the signing date to eight years
after the first sales of the vaccine developed under the technology transfer agreement in the Chinese
market. Under this technology transfer agreement, we agreed to make milestone payments of up to $3
million and royalty payment based on net sales in Chinese market. Each of the future milestone
payments is subject to certain conditions, including the PRC government approvals at different stages,
which are uncertain. We also agreed to make royalty payments in eight years after the first sales of the
vaccine developed under the technology transfer agreement in the Chinese market. The percentage of
royalty payments for the portion of annual net sales below RMB100 million will be in the teens and the
percentages of royalty payments for the portion above RMB100 million will be of single digits. The
sales of the pneumococcal vaccine in the Chinese market are also subject to the PRC government
approval. Both parties agreed to work together to develop international markets for the products. On
December 14, 2011, we entered into an amendment to the technology transfer of another six serotypes
and related technology to us for $300,000 to develop a 13-valent pneumococcal conjugate vaccine. As
of the date of this annual report, we have paid a total of $1 million in milestone payments to this party.
In December 2008, we entered into a distribution agreement with IP-BIOTECH, a trade company in
Philippines, we appointed IP-BIOTECH to be the exclusive distributor of Anflu in the Philippine
market. We obtained registration approval for Anflu with Northern hemisphere influenza strains for
the period 2010-2011 in November 2011, and we have distributed 170,500 doses of our Anflu in
Philippines since 2010.
In July 2008, Sinovac Beijing and Tangshan Yian entered into the co-development agreement with
the Institute of Laboratory Animal Sciences of the University of Agriculture to jointly develop the
animal rabies vaccine. Sinovac Beijing is responsible for assigning technical personnel to develop an
animal rabies vaccine. The Institute of Laboratory Animal Sciences is responsible for making
development strategy and provides guidance on the roadmap design for vaccine development and to
assist Tangshan Yian on regulatory applications with the animal rabies vaccine. Tangshan Yian is
responsible for establishing the R&D center and commercial production line for animal rabies vaccine
and carrying out vaccine development project, applying for the New Drug Certificate for animal rabies
vaccine, and providing the financial resources, etc. Tangshan Yian will be the applicant for and the
exclusive owner of the future new drug certificate, production license and any patent or know-how in
connection with the animal rabies vaccine. In 2011, the animal vaccine has been approved for sales.
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In June 2008, we entered into the collaboration agreement with the National Institute for Viral
Disease Control and Prevention of China CDC on the separation, selection, cultivation and verification
of EV71 virus strain, through which we obtained the appropriate EV71 virus strain with good
immunogenicity and cross protection effects for vaccine production.
In November 2006, Sinovac Beijing entered into a co-development agreement with National
Institute for Viral Disease Control and Prevention of China CDC to jointly develop a universal
pandemic influenza vaccine, which was included in the ―863 National High-Tech Research and
Development Plan.‖ The purpose of the project is to obtain the approval from the SFDA to commence
the clinical trials.
In February 2006, we entered into an exclusive distribution agreement with LGLS under, which
LGLS granted us an exclusive right to market and distribute its hepatitis B vaccine, Euvax B, in
mainland China for five years from the date we obtain regulatory approval for the sale of the product in
China. This is the first strategic alliance that we have made with a major vaccine supplier to capitalize
upon our local knowledge and technology expertise in the vaccine industry. On March 7, 2007, we
filed the application for regulatory approval for product registration for sales of Euvax B in China.
During 2008, we worked with LGLS and the NIFDC on the vaccine’s testing and verification of drug
standards to speed up the sample tests. In July 2009, the NIFDC completed the sample tests and
verification of drug standards for Euvax B and the sample test report has been forwarded to the Center
for Drug Evaluation of SFDA, or CDE. On December 26, 2009, we submitted the supplementary
documents required by the CDE for technology evaluation as part of the approval process and obtained
the approval from SFDA to commence clinical trials in China in April 2010. Due to the reassessment
of hepatitis B vaccine market potential in China, LGLS has decided to terminate the agreement. We
accepted the termination request. We do not think there will be any material impact on our business.
In August 2005, we entered into a distribution agreement with Glovax C.V., a Dutch
biopharmaceutical company with operations in Mexico, pursuant to which we appointed Glovax to be
the exclusive distributor of our vaccine products in the Mexican market. We obtained the registration
approval for our H1N1 vaccine in Mexico on October 13, 2009, and GMP license for both Anflu and
Healive from Mexico government.
In December 2004, we signed a pandemic influenza vaccine co-development agreement with China
CDC to jointly develop a pandemic influenza vaccine. Pursuant to this co-development agreement, we
agreed, among other things, to conduct pandemic influenza vaccine R&D based on our established
vaccine R&D technical platform and to apply for the new drug certificate, production license and
patents for the pandemic influenza vaccine. China CDC agreed, among other things, to strategize
development of the pandemic influenza vaccine, provide us with scientific guidance to vaccine
technicalities and conduct certain pandemic related research and vaccine development-related analysis
and testing. Both parties agreed to be responsible for certain specified expenditures associated with the
vaccine development and to jointly apply for government R&D funds. However, the co-development
agreement expressly provides that we will be the applicant for and owner of the future new drug
certificate, production license and any patent or know-how in connection with the pandemic influenza
vaccine. In return, we have agreed to fund and support China CDC’s influenza-related investigation
and other pandemic control efforts after we gain profits from the sale of pandemic influenza vaccines.
The regulatory approval for production of our whole viron pandemic influenza vaccine was obtained in
April 2008.
Competition
The pharmaceutical, biopharmaceutical and biotechnology industries both within China and globally
are intensely competitive and are characterized by rapid and significant technological progress, and our
operating environment is increasingly competitive. In recent years, SFDA increased the quality
standard of some vaccine products by issuing a new version of Pharmacopeia. As a result, some
vaccine products manufactured by multinational companies can no longer be sold in China. However,
according to the SFDA, there are approximately 40 vaccine companies in China, of which we believe
approximately 10 are our direct competitors. In addition, multinational companies have started to
localize their vaccine production in China by making acquisitions and by forming joint ventures with
Chinese companies, which is expected to further intensify the competition.
Even with the advent of private medical and healthcare insurance programs in China and the
government vaccine purchase program’s expanded vaccine list, most Chinese citizens must pay for
their own vaccines because these insurance programs do not typically cover vaccines and the
government vaccine purchase program covers only infants and young children. We believe the
consumer market is health conscious yet price sensitive and accordingly would favor our products over
both cheaper but less safe vaccines provided by local manufacturers and comparable quality but more
expensive vaccines manufactured by some of our international competitors. Our competitors, both
domestic and international, include large integrated multinational pharmaceutical and biotechnology
companies, domestic state-owned entities and domestic private companies that currently engage in or
have engaged in or may engage in efforts related to the discovery and development of new
biopharmaceuticals and vaccines. Many of these entities have substantially greater research and
development capabilities and financial, scientific, manufacturing, marketing and sales resources than
we do, as well as more experience in research and development, clinical trials, regulatory matters,
manufacturing, marketing and sales.
There are multiple vaccines products approved for sale worldwide. Many of these vaccine products
are marketed by our major competitors and are in the areas of hepatitis A, hepatitis B and influenza.
Specifically, with respect to the hepatitis A vaccine, we
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consider Kunming Institute of Biological Product, Changchun Institute of Biological Products,
Changchun Changsheng Life Sciences Ltd, and Pukang Biological Co., Ltd., and as our major
competitors. With respect to the hepatitis A and B vaccines, we are the only company to supply
hepatitis A and B vaccine in 2011. Finally, with respect to the influenza vaccines, we consider Hualan
Biological Engineering Inc., Changchun Changsheng Life Sciences Ltd, Sanofi Pasteur S.A.,
Changchun Institute of Biological Products and Aleph Biological Co., Ltd. (Dalian Yalifeng) as our
major competitors.
We believe we enjoy a number of advantages over our PRC domestic and multinational competitors.
Generally, we believe that the principal competitive factors in the markets for our products and product
candidates include:
vaccine development capability;
safety and efficacy profile;
product price;
ease of application;
length of time to receive regulatory approval;
product supply;
enforceability of patent and other proprietary rights;
marketing and sales capability; and
post sales service.
Intellectual Property and Proprietary Technology
Protection of our intellectual property and proprietary technology is very important for our business.
We rely primarily on a combination of trademark, patent and trade secret protection laws in China and
other jurisdictions, as well as employee and third-party confidentiality agreements to safeguard our
intellectual property, know-how and our brand. Our ability to protect and use our intellectual property
rights in the continued development and commercialization of our technologies and products, operate
without infringing the proprietary rights of others and prevent others from infringing our proprietary
rights is crucial to our continued success. We will be able to protect our products and technologies
from unauthorized use by third parties only to the extent that they are covered by valid and enforceable
patents, trademarks or copyrights, or are effectively maintained as trade secrets, know-how or other
proprietary information.
We have no patent protection for our hepatitis or influenza vaccines. We have three issued patents
and a number of pending patent applications relating to our pipeline products in the PRC.
With respect to, among other things, proprietary know-how that is not patentable and processes for
which patents are difficult to enforce, we rely on trade secret protection and confidentiality agreements
to safeguard our interests. We believe that many elements of our vaccine products, clinical trial data
and manufacturing processes involve proprietary know-how, technology or data that are not covered by
patents or patent applications. We have taken appropriate security measures to protect these elements.
We have entered into confidentiality agreements (which include, in the case of employees, non-
competition provisions) with many of our employees, consultants, outside scientific collaborators,
sponsored researchers and other advisors. These agreements provide that all confidential information
developed or made known to the individual during the course of the individual’s relationship with us is
to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of
our employees, the agreements provide that all of the technology which is conceived by the individual
during the course of employment is our exclusive property and require our employees to assign to us all
of their inventions, designs and technologies they develop during their terms of employment with us
and cooperate with us to secure patent protection for these inventions if we wish to pursue such
protection.
We also rely on administrative protection afforded new drugs through the protection period or
monitoring period provided by the SFDA. During the protection period or monitoring period, third
parties’ applications for manufacturing or importing the same drug are not accepted by the SFDA. Our
vaccines, Healive and Bilive, were granted protection periods that expired in December 2007 and
January 2008, respectively.
We maintain nineteen registered trademarks in China, including Sinovac, Sinovac Chinese name and
its logo, Healive, its Chinese name and logo, Bilive and its Chinese name, Anflu and its Chinese name,
Panflu, its Chinese name and the logo, sPanflu and its Chinese name, PANFLU.1 and its Chinese name,
EVLIVE for EV71 vaccine and its Chinese name We have registered ―Sinovac‖ trademark in Canada,
Columbia, India, Korea, Malaysia, Thailand and the United States respectively and we have registered
―Sinovac‖ as trademarks under the ―Madrid international trademark registration system,‖ which can be
used in the member countries of Madrid Union, including France, United Kingdom, Germany, etc.
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We currently use ―科兴‖ (Kexing) as part of Sinovac Beijing’s Chinese trade name in the PRC. We
also intend to use ―科兴‖ (Kexing) as part of the Chinese trade name of Sinovac Dalian in the PRC.
Shenzhen Kexing currently owns the ―科兴‖ trademark registered in China for Class 5
(Pharmaceuticals) under the International Classification of Goods and Services. To protect our interest
in using ―科兴‖ in our trade name, we applied to register ―科兴‖in China for Class 42 (Scientific &
Technological Services & Research) in 2006 and the PRC Trademark Office of the State
Administration for Industry and Commerce approved our application in 2010. The ―科兴‖ trademark
owned by Shenzhen Kexing has not been identified as ―Well-known Trademark‖ by the relevant PRC
authorities since we first started using ―科兴‖ in the trade name of Sinovac Beijing in 2001. If the ―科
兴‖ trademark owned by Shenzhen Kexing is ever officially identified as a ―Well-Known trademark‖,
however, we may be subject to trademark infringement claim for the use of ―科兴‖ in our trade name.
Although the trademark application and the trade name approval systems are administered separately in
China, it is possible that we may lose our ability to use the ―科兴‖ trademark in our trade name due to a
successful trademark infringement claim, which may adversely affect our ability to maintain and
protect our brands, cause us to incur litigation costs and divert resources and management attention. As
our brand name is becoming more recognized in the vaccine market, we are working to maintain,
increase and enforce our rights in our trademark portfolio, the protection of which is important to our
reputation and branding.
We have registered our domain names, including http://www.sinovac.com.cn, with the China
Internet Network Information Center.
Despite any measures we take to protect our intellectual property, no assurance can be made that
unauthorized parties will not attempt to copy aspects of our products or manufacturing processes or
otherwise our proprietary technology or to obtain and use information that we regard as proprietary
Insurance
We maintain property insurance coverage with an annual aggregate insured amount of
approximately RMB321 million ($51 million) to cover our property and facilities from claims arising
from fire, earthquake, flood and a wide range of other natural disasters. We do not currently carry
product liability insurance for Healive, Bilive, Anflu, Panflu or Panflu.1. Moreover, we do not carry
liability insurance to cover liability claims that may arise from the incidents relating to the clinical
trials of our vaccine products because such insurance program has not become available in mainland
China. Our insurance coverage may not be sufficient to cover any claim for product liability or damage
to our fixed assets. We do not maintain any business interruption insurance. In 2011, we generated
$435,000 from exporting our products; however, we do not currently carry product liability insurance
for international market sales. See ―ITEM 3. Key Information — D. Risk factors—Risks related to our
company—we could be subject to costly and time-consuming product liability actions and carry limited
insurance coverage.‖
Regulatory Framework of the Pharmaceutical Industry in the PRC
The testing, approval, manufacturing, labeling, advertising and marketing, post-approval safety
reporting, and export of our vaccine products or product candidates are extensively regulated by
governmental authorities in the PRC and other countries.
In the PRC, the SFDA regulates and supervises biopharmaceutical products under the
Pharmaceutical Administration Law, the Implementing Regulations on Pharmaceutical Administration
Law, the Administration of Registration of Pharmaceuticals Procedures, and other relevant rules and
regulations which are applicable to manufacturers in general. Every step of our biopharmaceutical
production is subject to the requirements on the manufacture and sale of pharmaceutical products as
provided by these laws and regulations, including but not limited to, the standards of clinical trial,
declaration, approval and transfer of new medicine registrations, applicable industry standards of
manufacturing, distribution, packaging, advertising and pricing.
Pre-clinical Laboratory Studies and Animal Studies. Pre-clinical studies include in-vitro
laboratory evaluation of the product candidate, as well as in-vivo animal studies to assess the potential
safety and efficacy of the product candidate. Pre-clinical studies must be conducted in compliance with
Good Laboratory Practice for Non-clinical Studies of Pharmaceuticals, or GLP. With respect to
vaccines, the pre-clinical studies should also comply with Technical Guidance for Pre-clinical Studies
on Preventive Vaccines. We must submit file package for IND (investigational new drug application)
to provincial SFDA. The files should include pharmaceutical research, pharmacology and toxicology
research, together with the records of manufacturing and testing and the sample of product candidate.
We cannot commence human clinical trials until we get IND Application. We cannot assure that
submission of an IND will result in the SFDA allowing human clinical trials to begin, or that, once
begin, issues will not arise that result in the suspension or termination of such human clinical trials.
Human Clinical Trials. Clinical trials involve the administration of the product candidate to
healthy volunteers or vaccinees under the supervision of principal investigators, who are generally
physicians or an independent third party not employed by us or under our control. Clinical trials
typically are conducted in three sequential phases, but the phases may overlap or be combined. In
Phase I, the initial introduction of the drug into human subjects, the drug is usually tested for safety
(adverse effects), dosage
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tolerance, and pharmacologic action. Phase II usually involves studies in a limited vaccinee population
to evaluate preliminarily the efficacy of the drug for specific, targeted conditions and to determine
dosage tolerance, appropriate dosage and to identify possible adverse effects and safety risks. Phase III
trials generally further evaluate clinical efficacy and test further for safety within an expanded vaccinee
population. Clinical trials have to be conducted in compliance with the Good Clinical Trial Practice of
Pharmaceuticals, or GCP. With respect to vaccines, we also have to comply with the SFDA’s
Requirements on Application for Clinical Trial of New Preventive Biological Products. The sample
vaccine products must be tested by the NIFDC before they may be used in the clinical trials. We or the
SFDA may suspend clinical trials at any time on various grounds, including a finding that subjects are
being exposed to an unacceptable health risk.
After three phases of human clinical trials, we will apply for NDA (New Drug Application). We will
submit to the provincial level SFDA the NDA file package, which includes clinical trial research report,
pharmaceutical research data, and records of manufacturing and testing three product batches, to apply
for a new drug certificate. For vaccines, we have to comply with the SFDA’s Guidelines for Clinical
Trial Report on Vaccines.
New Drug Certificate. The provincial level SFDA will conduct a preliminary examination of our
application for a new drug certificate. Once it decides to accept our application based upon such
preliminary examination, the provincial level SFDA will, within five days, conduct an on-site
examination on the circumstances of our clinical trials. Then the provincial level SFDA will submit its
opinion, together with our application materials, to the Centers for Drug Evaluation (CDE). CDE will
review our application materials, and give their technical option to SFDA. The SFDA will decide
whether or not to issue a new drug certificate to us. We consider obtaining the new drug certificate for
our product candidates a significant milestone in our business.
Production Permit. Simultaneously with the application of new drug certificate, we also apply to
the provincial level SFDA for a production license to manufacture the new drug to be approved by the
SFDA. The production license application will be examined with similar stage procedure as for the
new drug certificate, first by the provincial level SFDA followed by the CDE, and SFDA the last. After
the provincial level SFDA accepts the application, conducts the on-site examination and forms its
opinion, the provincial level SFDA will transfer the file to the CDE, and CDE will review the
application files and give technical option. If CDE is satisfied with our application materials, it will
notify us to apply for the on-site production inspection within six months after being so notified. The
Center for Drug Certification (CCD) will conduct an on-site inspection on our production procedures
within thirty days after receipt of our application and take samples from three batches of our products,
and NIFDC will test the selected samples and later submit its testing reports to the CDE. The CCD
shall submit the on-site production inspection report to within ten days after completion of the on-site
inspection. The CDE will form a comprehensive opinion based upon the technical review and
evaluation opinion, the on-site production inspection report and the testing results of the samples, and
submit its opinion and relevant materials to the SFDA. The SFDA will decide whether or not to issue
the production permit to us. If the product approval and production approval both meet the criteria, the
SFDA will issue the production permit together with the new drug certificate at the same time. The
production permit is valid for a term of five years and must be renewed before its expiration. During
the renewal process, our production facilities will be re-evaluated by the appropriate governmental
authorities and must comply with the effective standards and regulations.
Under certain circumstances, for instance, where drugs are developed to cure a disease without
effective therapeutic methods, the SFDA provides a special proceeding for its review of the new drug
certificate application and production permit application relating to such drugs.
The SFDA will specify a monitoring period ranging from three to five years when approving the
first production permit for most new drugs. During this monitoring period, the manufacturers holding
the new drug certificates must regularly report, among other things, the production process, efficacy,
stability and side effects of the new drugs involved to the provincial level SFDA. During the same
period, the SFDA will not accept any new application for approval of the same drug involved.
However, if a third party has filed an application for the same drug and obtained the clinical trial permit
before the monitoring period commences, the third party may still obtain a new drug certificate and
production permit for the same drug.
We may also be required to conduct clinical trials prior to commencing the manufacture of
pharmaceutical products for which there are published state pharmaceutical standards.
GMP Certificate. After receiving a new drug certificate and production permit, we will further need
to submit to the SFDA an application for a Good Manufacturing Practice Certificate, or GMP
Certificate. A GMP Certificate is used to approve the quality system, including Quality Assurance, or
QA, and Quality Control, or QC, management, production management, material and product,
qualification and validation, facility and equipment, etc. The SFDA has issued GMP standards for
pharmaceutical manufacturers to minimize the risks arising out of the production process of drugs that
will not be identified or eliminated through testing the final products. The application for a GMP
Certificate should be approved or rejected within six months from the application date.
A GMP Certificate is valid for five years and we should apply for a renewal of our GMP Certificate
no later than six months prior to the expiration of our GMP Certificate.
We cannot commence the manufacture of a new drug unless and until we have obtained a valid new
drug certificate, production permit and GMP certificate.
Batch Approval. Our vaccine products cannot be distributed in the market before they obtain the
batch approval. We need to apply for batch release approval by the NIFDC. For each batch of products,
we will provide samples taken from cold rooms by inspectors, together with manufacturing records,
self-testing records and other quality control documents. The testing institute will
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review the documents and test the samples and issue a batch approval within approximately two
months, if our manufacture procedures and the quality of the products are ascertained to meet the
standards as approved by the SFDA. With the batch approval, we may distribute the approved batch of
vaccines to the market.
Regulatory Framework of the Animal Vaccine Products in the PRC
The testing, approval, manufacturing, labeling, advertising and marketing, and export of our vaccine
products or product candidates are extensively regulated by governmental authorities in the PRC and
other countries. In the PRC, the Ministry of Agriculture, or the MOA, regulates and supervises
veterinary biopharmaceutical products under the Chinese veterinary pharmacopoeia, the Regulations on
Veterinary Drug Administration, the Method of Registration of Veterinary Drug and other relevant
rules and regulations which are applicable to manufacturers in general. Every step of our
biopharmaceutical production is subject to the requirements on the manufacture and sale of Veterinary
pharmaceutical products as provided by these laws and regulations, including but not limited to, the
standards of clinical testing, declaration, approval and transfer of new medicine registrations,
applicable industry standards of manufacturing, distribution, packaging, advertising and pricing.
Pre-clinical Tests. Pre-clinical tests include in-vitro laboratory evaluation of the product candidate, as
well as in-vivo animal studies to assess the potential safety and efficacy of the product candidate. Pre-
clinical tests must be conducted in compliance with the Method of New Veterinary Drug Registration.
With respect to vaccines, the pre-clinical tests should also comply with the Announcement No. 442 and
No. 683 of the MOA. We must submit the results of the pre-clinical tests, together with manufacturing
information, analytical data to the MOA as part of an investigational new drug application, which must
be approved before we may commence clinical studies. We cannot assure that submission of an
investigational new drug application will result in the MOA allowing animal clinical studies to begin,
or that, once studies begin, issues will not arise that result in the suspension or termination of such
animal clinical studies.
Clinical Studies. Clinical studies involve the administration of the product candidate to the target
species under the supervision of the veterinary administration department, who are generally
veterinarians or an independent third party not employed by us or under our control. Clinical studies
typically are conducted in one phase. Clinical studies generally further evaluate clinical efficacy and
test further for safety within an expanded animal population. Clinical studies have to be conducted in
compliance with the Good Clinical Practice in the Guidance for Industry VICH GL9. We or the MOA
may suspend clinical studies at any time on various grounds, including a finding that animals are being
exposed to an unacceptable health risk. Assurance about the integrity of the clinical study data, and that
due regard has been given to animal welfare and protection of the personnel involved in the study, the
environment and the human and animal food chains.
After clinical studies, we will submit a report containing the results of the pre-clinical and clinical
studies to the MOA, together with other detailed information, including information on the
manufacture and composition of the product candidate, to apply for a new veterinary drug certificate.
For vaccines, we have to comply with the Announcement No. 442 and No. 683 of the MOA.
New Veterinary Drug Certificate. The Center for Veterinary Drug Evaluation of the MOA will
conduct a formal examination of our application for a new veterinary drug certificate. Once it decides
to accept our application based upon such formal examination, it will notify us within 10 working days
and a group of experts will conduct a preliminary examination on our materials. The Center for
Veterinary Drug Evaluation will distribute its opinion to the applicant, and the applicant will
supplement the materials and tests according to the opinion. The applicant will then submit a
supplemental application to the Center for Veterinary Drug Evaluation. The Center for Veterinary Drug
Evaluation’s experts will reexamine on the supplemental application. If the Center for Veterinary Drug
Evaluation is satisfied with our materials, it will ask for samples from three batches of our products and
they will inspect the selected samples and later submit its inspection reports to the MOA. The Center
for Veterinary Drug Evaluation will form a comprehensive opinion based upon the technical
examination and evaluation opinion, and the inspection results of the samples, and submit its opinion
and relevant materials to the MOA. The MOA will decide whether or not to issue a new veterinary
drug certificate to us. We consider obtaining the new veterinary drug certificate for our product
candidates a significant milestone in our business.
GMP Certificate. After conducting the workshop, we will need to submit an application for a Good
Manufacturing Practice Certificate, or GMP Certificate to the MOA. A GMP Certificate is used to
approve the manufacturing equipment, process and workshop used in producing a particular drug. The
MOA has issued GMP standards for veterinary pharmaceutical manufacturers to minimize the risks
arising out of the production process of veterinary drugs that will not be identified or eliminated
through testing the final products. The application for a GMP Certificate will be examined through a
two-stage procedure. The first stage is the static examination and the second stage is the dynamic
examination. In the first stage, the MOA will conduct an examination in the static circumstance and
will give us a notice to applying for the dynamic examination if they accept our static examination.
After that, we will apply for the dynamic examination and if successful, the MOA will issue us a GMP
certificate.
A GMP Certificate is valid for five years and we should apply for a renewal of our GMP Certificate
no later than six months prior to the expiration of our GMP Certificate.
Production License. After receiving the GMP certificate, we can apply to the MOA for a
production license to manufacture the new veterinary drug. The MOA will issue the production license
certificate to us within 40 working days. The production license is
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valid for a term of five years and must be renewed before its expiration. During the renewal process,
our production facilities will be re-evaluated by the appropriate governmental authorities and must
comply with the then effective standards and regulations.
Product Permission Number. After receiving the production license we can apply to MOA for a
product permission number to manufacture the new drug. We should offer our GMP certificate, the
production license certificate and the new veterinary drug certificate. The MOA will decide whether or
not to issue the product permission number to us within 20 working days.
We cannot commence the manufacturing of a new drug unless and until we have obtained a valid
new drug certificate, GMP certificate, production license and product permission number.
Under certain circumstances, for instance, where drugs are developed to cure a disease without
effective therapeutic methods, the MOA provides for a special proceeding for its review of the new
veterinary drug certificate application and production permit application relating to such drugs.
The MOA will specify a monitoring period ranging from three to five years when approving the
first production permit for most new drugs. During this monitoring period, the MOA will not accept
any new application for approval of the same drug involved. However, if a third party has filed an
application for the same drug and obtained the clinical trial permit before the monitoring period
commences, the third party may still obtain a new drug certificate and production permit for the same
drug.
We can directly apply for product permission number of pharmaceutical products for which there
are published state pharmaceutical standards.
Batch Approval. Our vaccine products cannot be distributed in the market before they are approved
for sale by China Institute of Veterinary Drug Control. We have to apply for examination or inspection,
or both examination and inspection, of each batch of our products by the China Institute of Veterinary
Drug Control. For each batch of products, we will provide China Institute of Veterinary Drug Control
with samples together with manufacturing records, internal inspection records and other quality control
documents. The China Institute of Veterinary Drug Control will review the documents and/or inspect
the samples and issue a batch approval within approximately three months if our manufacture
procedures and the quality of the products are ascertained to meet the standards as approved by the
MOA. With the batch approval, we may distribute the approved batch of vaccines to the market.
Organizational Structure
The following diagram illustrates our company’s organizational structure, and the place of
incorporation, ownership interest and affiliation of each of our subsidiaries as of the date of this report.
* Dalian Jingang Group Co., Ltd. owns the remaining 45% equity interest in Sinovac Dalian.
**SinoBioway Group Co., Ltd., an affiliate of Peking University, owns the remaining 26.91% equity
interest in Sinovac Beijing.
***The former name is Beijing Sinovac Biological Technology Co., Ltd.
C. Property, Plants and Equipment
We are headquartered in the Peking University Biological Industry Park in Beijing in a 48,900
square-foot facility, of which approximately 16,700 square feet are used as office space and
approximately 32,200 square feet are used for the production plant
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for Healive and Bilive, where the production equipment for hepatitis vaccines is located. We own the
above-described 48,900-square-foot facility in Beijing. In August 2004, we signed two 20-year leases
with SinoBioway, pursuant to which we leased two buildings of approximately 28,000 and 13,300
square feet, respectively, located at the Peking University Biological Park in Beijing. We house our
Anflu manufacturing and R&D center in these two buildings. In June 2007, we signed another 20-year
lease with SinoBioway, in order to expand Sinovac Beijing’s production facilities in Beijing, pursuant
to which we leased one building of approximately 37,000 square feet, located at Peking University
Biological Park. Part of our administrative offices and filling and packaging facilities are located in this
building. In September, 2010, we entered an agreement with SinoBioway, under which we lease a
space of 6,778 square feet. The lease term is five years and we used it for our research and
development function.
We have two production lines and one filling and packaging line located in the Peking University
Biological Park. Our production line to manufacture our hepatitis vaccines, Healive and Bilive,
interchangeably has an aggregate combined production capacity of approximately 10 million doses
annually. Our production line to manufacture our flu vaccines, Anflu, Panflu and Panflu.1,
interchangeably has an annual production capacity of approximately 8 million doses of Anflu, or the
equivalent of 20 million doses of Panflu or 20 million doses of Panflu.1. Our filling and packaging line
is used for all products we manufacture with an annual capacity of 20 million doses.
We conduct research and development and manufacturing of animal vaccines in a 40,000-square-
foot facility in Tangshan, Hebei province. In Tangshan, we obtained a state-owned land use certificate
of a parcel of granted land with an area of approximately 214,200 square feet. We have obtained GMP
license and production license for our animal rabies vaccine. .
In February 2010, we entered into an agreement to acquire buildings, land use rights and utility
facilities in Changping District, Beijing for a total consideration of approximately RMB123.6 million.
We have paid the initial payment of RMB90.1 million and will pay the balance of the purchase price in
two installments before December 31, 2012. Under this agreement, we acquired five existing buildings
with a total built-out area of 32,322.66 square meters (approximately 347,900 square feet) on 29,021.61
square meters (approximately 312,400 square feet) of land, located in Changping District, Beijing. The
site was previously used to manufacture medicinal products. We are constructing a new filling and
packaging line and a production line for EV71 vaccine, based on the new China GMP standard, and
other supporting infrastructures. We completed construction of the cold storage facility, which was put
into use by year-end. The construction of a cold warehouse was completed and the construction for a
new filing and packaging line in compliance with new China GMP standard and an EV71 vaccine
production plant is in progress. We are financing the acquisition and construction of this site through
short-term and long-term borrowings from commercial banks in China.
In November 2009, we entered into an agreement with Dalian Jin Gang Group to establish Sinovac
Dalian. In January 2010, we established Sinovac Dalian which will focus on the research, development,
manufacturing and commercialization of vaccines, such as rabies, varicella, mumps and rubella
vaccines for human use. Sinovac Dalian has seven existing buildings with a total built-out area of
20,000 square meters (approximately 215,280 square feet) on 95,685.60 square meters (approximately
1,030,000 square feet) of land, located at DD Port, Economic and Technical Development Zone, Dalian
City, Liaoning province. Currently, Sinovac Dalian is waiting for the GMP certification notice from
SFDA for its mumps vaccine.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 5. Operating and Financial Review and Prospects
You should read the following discussion and analysis of our financial condition and results of
operations in conjunction with our consolidated financial statements and the related notes included
elsewhere in this annual report on Form 20-F. This discussion may contain forward-looking statements
based upon current expectations that involve risks and uncertainties. Our actual results may differ
materially from those anticipated in these forward-looking statements as a result of various factors,
including those set forth under “ITEM 3. Key Information — D. Risk Factors” or in other parts of this
annual report on Form 20-F.
A. Operating Results
Overview
We are a fully integrated, China-based biopharmaceutical company that focuses on the research,
development, manufacturing and commercialization of vaccines that protect against infectious diseases.
We have successfully developed a portfolio of market leading products, consisting of vaccines against
the hepatitis A, hepatitis B and influenza viruses. In 2002, we launched our first product, Healive,
which was the first inactivated hepatitis A vaccine developed, produced and marketed by a China-
based manufacturer. In 2005, we received regulatory approvals in China for the production of Bilive, a
combined hepatitis A and B vaccine, and Anflu, a split viron influenza vaccine. In April 2008, we
received regulatory approval in China for the production in China of our whole viron pandemic H5N1
influenza (avian flu) vaccine, which is the only vaccine approved for sale to the Chinese national
vaccine stockpiling program. In September 2009, we were granted a production license for Panflu.1,
which was the first approved vaccine in the world against the influenza A H1N1 virus (swine flu). Our
pipeline consists of various vaccine candidates
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in the pre-clinical and clinical development phases in China. In 2011, we launched a clinical study on a
vaccine for EV71 (hand, foot and mouth disease). And in 2011, we completed Phase I and Phase II
clinical studies for the EV71 vaccine and results were announced that the vaccine candidate has good
safety profile and good immunogenicity, which is ready to enter into Phase III trial. We also filed an
application to commence the human clinical trials for our 13-valent pneumococcal conjugate vaccine
and Rubella vaccine to the SFDA. In December 2011, Sinovac Dalian, an operating subsidiary of the
Company obtained the production license from the SFDA for its mumps vaccine products. Sinovac
Dalian, applied for GMP certification of its mumps vaccine production plant with the SFDA in
March 2012 and is currently waiting for notification of the inspection date from the SFDA. Our product
pipeline also includes human vaccines for rabies, meningitis, and varicella that have completed or are
in pre-clinical development. In 2011, we also received the approval from The Ministry of Agriculture
for the animal rabies vaccine. And the vaccine was launched to the market by the end of 2011.
In May 2002, we obtained the final PRC regulatory approval for the production of Healive. We sold
approximately 5.8 million, 2.6 million and 2.7 million doses of Healive in 2009, 2010 and 2011,
respectively. In June 2005, we obtained the final PRC regulatory approval for the production of Bilive,
and began selling this product in July 2005. We sold approximately 946,000, 684,000, and 1.8 million
doses of Bilive in 2009, 2010 and 2011, respectively. In October 2005, we received the final PRC
regulatory approval for the production of our Anflu vaccine against influenza. We sold approximately
5.1 million, 2.5 million and 2.2 million doses of Anflu in 2009, 2010 and 2011, respectively. In
April 2008, we received the government approval for production of our Panflu, a whole viron vaccine
against the H5N1 strain of pandemic influenza virus. We have received a production assignment from
the PRC government to begin production of Panflu. We received a new order to replace the previously
ordered products that were granted to us in October 2010 and in June 2011. We completed the second
production order as of December 31, 2011. In September 2009, we were granted a license for the
production of Panflu.1 by the SFDA. We started to sell Panflu in August 2009 and recognized revenue
from the sale of approximately 20,000, 730,000 and 2.3 million doses of Panflu in 2009, 2010 and
2011, respectively. We started to sell Panflu.1 in September 2009 and generated revenue of $29.7
million, $7.2 million and $14.0 million in 2009, 2010 and 2011, respectively. Sales of Panflu and
Panflu.1 represented 13.7% and 24.6%, respectively, of total revenue in 2011, compared with 7.2% and
21.5%, respectively, in 2010. Panflu and Panflu.1 were all sold to the PRC government. Our sales of
Panflu and Panflu.1 were dependent on government purchases. Loss of such government purchase
would have a material adverse effect on our total sales.
Our proprietary rights
Healive was co-developed by Tangshan Yian and the NIFDC. In April 2001, Tangshan Yian
contributed its proprietary rights to Healive to Sinovac Beijing as its capital contribution to Sinovac
Beijing. In 2002, the NIFDC, Tangshan Yian and Sinovac Beijing agreed that Sinovac Beijing owns
the right to market and sell Healive, and that Sinovac Beijing was required to pay the NIFDC
approximately $1 million for the Healive technology consulting fee that Tangshan had not paid by that
time. We obtained Healive’s new drug certificate from the SFDA in December 1999, the production
license in May 2002, and final PRC regulatory approval for production of Healive in May 2002.
Production of Healive commenced in July 2002.
Bilive was initially developed by Tangshan Yian. In March 2002, Tangshan Yian and Beijing
Keding entered into an agreement under which Tangshan Yian transferred to Beijing Keding its
proprietary rights to Bilive at no cost. In August 2002, Sinovac Beijing acquired the proprietary rights
to Bilive from Beijing Keding in consideration of a 10.7% equity interest in Sinovac Beijing and a cash
payment of $18,116. Beijing Keding is owned by Dr. Weidong Yin and three other senior officers of
Sinovac Beijing. We received the production license for Bilive from the SFDA in January 2005. In
June 2005, we obtained the final PRC regulatory approval for production of Bilive. The cost of the
proprietary rights to Bilive was expensed as purchased in-process research and development.
Production of Bilive commenced in June 2005.
In March 2003, Sinovac Beijing acquired the proprietary rights to Anflu from Tangshan Yian at the
vendor’s cost. In November 2004, we completed the acquisition of 100% of the shares of Tangshan
Yian. We received the final PRC regulatory approval for the production of Anflu in October 2005. The
cost of the proprietary rights to Anflu was expensed as purchased in-process research and development.
Sinovac Beijing started to research and develop the H5N1 vaccine in 2004. In 2004, Sinovac Beijing
entered an agreement with the National Institute for Biological Standards and Controls, or NIBSC, an
England based laboratory under the WHO, on transferring the H5N1 virus strain. According to the
agreement, Sinovac Beijing as the recipient would receive the materials and information from NIBSC.
The agreement indicated that Sinovac Beijing can only use received materials and information for
academic in-house research purposes. In April 2008 Sinovac Beijing received a production license for
H5N1 from the Chinese government and started to produce H5N1 vaccines for the government
stockpiling program in June 2008.
In 2011, the Company licensed from MedImmune, LLC certain rights to use patented reverse
genetics technology pertaining to virus strain production for vaccines, including the H5N1 influenza
virus strain. The Company has agreed to pay an upfront license fee, pay milestone payments up to an
aggregate of $6.5 million based upon the achievement of cumulative net sales of licensed products in
China (including Hong Kong and Macau), as well as royalty payments in single digit of net sales of the
licensed products in China (including Hong Kong and Macau). As of December 31, 2011, an upfront
license fee was included in the account payable and accrued liabilities, no milestone payments have
been paid or are payable because the cumulative net sales target has not been achieved.
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Amortization expense for these proprietary rights was $397,878, $546,623 and $268,345 in 2009,
2010 and 2011, respectively.
Research and Development Programs
Due to the risks inherent in the clinical trial process and the early stage of development of our
products, we did not track our internal research and development costs for each of our research and
development programs. We use our research and development resources, including employees and our
technology, across multiple product development programs. As a result, we cannot state precisely the
costs incurred for each of our research and development programs or our clinical and pre-clinical
product candidates. However, the table below presents our best estimate of our total research and
development costs allocable to our leading research and development programs for the periods
indicated. We have allocated direct and indirect costs to each program based on certain assumptions
and our review of the status of each program, payroll related expenses and other overhead costs based
on estimated usage by each program
Research and development
programs
Panflu
Panflu.1
Rabies for animal
EV71 vaccine
Pneumococcal conjugate vaccine
Pneumococcal Polysaccharides
vaccine
Rotavirus
Varicella
Rabies for humans
Mumps Vaccine
Mumps Vaccine- pilot production
Universal pandemic influenza
Others
Total
2009
Year ended December 31,
2010
(in thousands of dollars)
2011
287
977
263
404
334
335
—
—
365
—
—
900
792
4,657
87
—
508
2,756
580
581
118
124
903
1,019
—
796
1,166
8,638
—
—
1,027
1,945
435
435
216
324
1,035
—
1,480
109
2,000
9,007
R&D Project Status
Projects
EV 71 Vaccine
Cost
Incurred
(in
thousands)
5,574
$
Current Status
In the Phase
III clinical
trial
Estimated
Completion
Date
2014
Estimated
Completion
Cost
(in
thousands)
$ 12,000
Funding
Sinovac
Beijing
Pneumococcal
$
1,350
IND Filed
2016
$ 3,000
Sinovac
Polysaccharides
Vaccine (23 and
24 valent)
Pneumococcal
$
1,350
IND Filed
2016
$ 6,000
Sinovac
Conjugate Vaccine
(13-valent)
Mumps
$
1,019
GMP
Inspection
December 2012
$ 1,800
Sinovac
Dalian
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Significant additional expenditures are generally required to complete clinical trials, setting up
designated production plant, apply for regulatory approvals, improving the production process, and
bring product candidates to market. The eventual total cost of each clinical trial is dependent on a
number of uncertain variables such as trial design, the length of trials, the number of clinical sites and
the number of subjects. The process of obtaining and maintaining regulatory approvals for new
therapeutic products is lengthy, expensive and uncertain. We anticipate that we will determine which of
our early stage product candidates is best suited for further development, as well as how much funding
to direct to each program, on an on-going basis in response to the scientific and clinical success and
commercial potential of each product candidate.
We identified the EV71 vaccine which fights hand foot and mouth diseases as our most important
pipeline product. As of December 31, 2011, we have completed Phase II clinical trial and commenced
Phase III clinical trial in early 2012. The Phase III clinical trial commenced in January 2012 and is
expected to be completed by July 2013, with about 10,000 volunteers of children from 6 to 35 months.
The expenses of Phase III clinical trial is estimated approximately US$10 million. We have
commenced the construction of production plant for EV 71 vaccine with total estimated capital
expenditure of approximately US$8 million. We expect to complete the construction by June 2012,
followed by validation.
The risks associated with the EV71 clinical trials are the uncertainties of the pandemic situation
which could affect the evaluation on the efficacy of the vaccine during the phase III clinical studies.
We expect to obtain the new drug certificate for the EV71 vaccine and launch to the market in the
year of 2014. However, the risks and uncertainties of this pipeline product are identified by the
following:
(1) The technology used to produce the vaccine developed in the research and development stage
will not meet the mass production requirements, therefore affecting the quality of the vaccine.
(2) The quality standard of the vaccine might be changed by the regulator.
(3) We might fail the clinical trials.
(4) The market demand for the vaccine will be diminished due to the reduced threat of hand, foot
and mouth diseases.
Government Grants
The PRC government has provided grants to us which are accounted for as income in the period in
which the research and development expenses are recorded and the conditions imposed by government
authorities are fulfilled. We received government research and development funding in the amount of
$1.3 million, $370,000 and $ 893,000, for 2009, 2010 and 2011, respectively. In 2011, we also received
$700,000 of interest subsidy related to our Changping facility construction project which was offset
against interest expenses incurred on borrowing to finance the project.
Research and development expenses qualified for government grants were $251,436, $43,278 and
$686,258 in 2009, 2010 and 2011, respectively. In 2011, we also received and recognized in our
income statement $331,153 of general incentives and $595,883 of interest subsidy from the
government, compared to $1,398,289 and $147,521 in 2010.
Deferred government grants the unamortized portion of the amount received by us in 2007 for
construction of a pandemic influenza vaccine production facility, was $2.3 million as of December 31,
2011 as compared with $2.5 million as of December 31, 2010. The condition for the grant is that we
make the entire facility available for the manufacturing of pandemic influenza vaccines whenever
requested by the Chinese government. We recognized government grant relating to the production
facility of $197,347, $265,547 and $278,067 as income in 2009, 2010 and 2011, respectively.
Critical Accounting Policies and Estimates
Our consolidated financial information has been prepared in accordance with U.S. GAAP, which
requires us to make judgments, estimates and assumptions that affect (1) the reported amounts of our
assets and liabilities, (2) the disclosure of our contingent assets and liabilities at the end of each fiscal
period and (3) the reported amounts of revenues and expenses during each fiscal period. We
continually evaluate these estimates based on our own historical experience, knowledge and assessment
of current business and other conditions, our expectations regarding the future based on available
information and reasonable assumptions, which together form our basis for making judgments about
matters that are not readily apparent from other sources. Since the use of estimates is an integral
component of the financial reporting process, our actual results could differ from those estimates. Some
of our accounting policies require a higher degree of judgment than others in their application.
When reviewing our financial statements, you should consider (1) our selection of critical
accounting policies, (2) the judgment and other uncertainties affecting the application of those policies
and (3) the sensitivity of reported results to changes in conditions and assumptions. We believe the
following accounting policies involve the most significant judgment and estimates used in the
preparation of our financial statements.
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Revenue Recognition
Sales revenue is recognized when persuasive evidence of an arrangement exists, the price is fixed and
determinable, delivery has occurred and there is a reasonable assurance of collection of the sales
proceeds. We generally obtain purchase authorizations from our customers for a specified amount of
products at a specified price and consider delivery to have occurred when the customer takes title of the
products. We provides our customers with a limited right of return. The product return provision for
seasonal influenza vaccine at year end is estimated based on actual sales returns because the returned
products are known by the end of the flu season which is generally end of March. As of December 31,
2011, reserves for seasonal influenza vaccine returns are approximately $1 million (December 31, 2010
- $3.2 million). The product return provisions for inactivated hepatitis A vaccine and combined
inactivated hepatitis A&B vaccine are estimated based on historical return and exchange levels,
external data with respect to inventory levels as well as the remaining shelf lives of the products in the
distribution channel. As of December 31, 2011, reserves for inactivated hepatitis A vaccine and
combined inactivated hepatitis A&B vaccine returns are $1.7 million (December 31, 2010 - $2.6
million). Sales return provision on inactivated hepatitis A and combined inactivated hepatitis A&B
represents 8.3% and 16% of private pay market sales in 2011 and 2010, respectively. For H1N1 and
H5N1 vaccines, customers do not have a right of return.
Deferred revenue is generally relating to government stockpiling programs and advances received
from customers. For government stockpiling programs, we generally obtain purchase authorizations
from the government for a specified amount of products at a specified price and revenue is recognized
when the government takes delivery of the products. If the products expire prior to delivery, revenue
related to the portion of deferred revenue relating to these expired products is recognized once cash has
been received and the products have expired and passed government inspection.
Shipping and handling fees billed to customers are included in sales. Costs related to shipping and
handlings are part of selling expenses in the consolidated statements of income. In 2011, $1.2 million
related to shipping and handling costs was included in selling expenses in the accompanying
consolidated statements of income (loss), compared to $1.1 million in 2010 and $1.4 million in 2009.
Allowance for Doubtful Accounts
We extend unsecured credit to our customers in the ordinary course of business but mitigate the
associated risks by performing credit checks and actively pursuing past due accounts. An allowance for
doubtful accounts is established and recorded based on management’s assessment of the credit history
with the customer and current relationships with them.
We also maintain an allowance for doubtful accounts for estimated losses based on our assessment
of the collectability of specific customer accounts and the aging of the accounts receivable. We analyze
accounts receivable and historical bad debts, customer concentrations, customer solvency, current
economic and geographic trends, and changes in customer payment terms and practices when
evaluating the adequacy of our current and future allowance. In circumstances where we are aware of a
specific customer’s inability to meet its financial obligations to us, a specific allowance for bad debt is
estimated and recorded, which reduces the recognized receivable to the estimated amount we believe
will ultimately be collected. We monitor and analyze the accuracy of the allowance for doubtful
accounts estimate by reviewing past collectability and adjust it for future expectations to determine the
adequacy of our current and future allowance. Our reserve levels have generally been sufficient to
cover credit losses. Our allowance for doubtful accounts as of December 31, 2011 was $3.9 million,
compared to $4.2 million as of December 31, 2010. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be
required.
Inventory Provision
We write off all the unsold seasonal influenza vaccines at the end of the fiscal year. In addition, we
estimate an inventory provision for the existing products in the warehouse after considering the sales
forecasts, the conditions of the raw material inventory, as well as the expiring date of Healive and
Bilive inventory. The inventory provision in 2009, 2010 and 2011 was $593,451, $6.8 million and $4.0
million, respectively. The change of inventory provision is based on a review of our inventory
expiration dates at year-end and estimated sales of 2012.
Amortization of Intangible Assets
We have amortized the value of intangible assets, being licenses and permits, over an estimated 10-
year or 20-year useful life. The estimated life of intangible assets is inevitably subjective, however, at
least once per year, we evaluate impairment and reevaluate the market opportunities for the intangible
assets’ products and determine whether the remaining useful life estimate is still reasonable. In 2010
and 2011, we found no impairment of intangible assets.
The following table shows the effect of a change in the estimated useful life of licenses and permits
of 10% for 2011:
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Useful life
Amortization expense
Loss for the year
Loss per share
Changes from reported
amount based on
hypothetical 10% Decrease
in Useful Life
9/18 years
As Reported
10/20 years
157,117 $
733,468 $
0.01 $
268,345 $
844,696 $
0.02 $
Changes from reported
amount based on
hypothetical 10% Increase
in Useful Life
11/22 years
467,698
1,044,048
0.02
$
$
$
Given the nature of estimating the useful life of long-term assets, it is not yet possible to provide a
meaningful assessment of historical accuracy of the useful life estimates employed. It is very likely that
the useful life of the licenses and permits will be different from the estimate employed, and the changes
could be material. Changes in the estimated life of the licenses and permits will not have a bearing on
the total amount charged to operations over the life of the assets, but could change the results of
operations and financial position in any given period.
Leases
In 2004, we entered into two operating lease agreements with SinoBioway with respect to Sinovac
Beijing’s production plant and laboratory in Beijing, China with annual lease payments totaling
approximately RMB1.4 million. The leases commenced on August 12, 2004 and have a term of 20
years. One of the lease agreements was amended on August 12, 2010 with the rent increased from
RMB 452,600 to approximately RMB1.4 million per year.
In June 2007, we entered into another operating lease agreement with SinoBioway, with respect to
the expansion of Sinovac Beijing’s production plant in Beijing, China for an annual lease payment of
approximately RMB 2.0 million. The lease commenced in June 2007 and has a term of 20 years.
In September 2010, we entered into another operating lease agreement with SinoBioway with
respect to expansion of Sinovac Biological’s business on research and development for an annual lease
payment of RMB 816,202. The lease commenced on September 30, 2010 and has a term of five years.
The lease payment included in current and long-term prepaid expenses and deposits was $543,965 as of
December 31, 2011, compared to $653,888 as of December 31, 2010.
Income tax valuation allowance
In 2011, we recorded a $0.4 million long-term deferred income tax asset based on the difference in
timing of certain deductions for income tax and accounting purposes. Our ability to ultimately derive a
benefit from the deferred tax asset depends on the existence of sufficient taxable income of the
appropriate character within the carry forward period available under the tax law. We have reviewed
available information, both positive and negative, and have concluded that a full valuation allowance
for current deferred income tax assets of $2.8 million established in 2011 is required due to unlikely
utilization of it in the following year. However, realization is more likely than not for the long term
deferred income tax assets. If our evaluation of the circumstances is not correct, we will have to record
a charge to operations with respect to any over-accrual of the benefit.
Key Performance Indicator
Since the vaccine market in China is a fragment market in China, we did not use any industry trend
or indicator as our key performance indicator. Alternatively, we develop internal sales and revenue
target as our key performance indicator. As we revised our performance indicator, we communicated
the changes through our press releases throughout the year.
Recently Adopted Accounting Standards
Effective January 1, 2011, the Company adopted Accounting Standard Update (―ASU‖) 2009-13,
which amends ASC 605 Revenue Recognitions, Multiple-Deliverable Revenue Arrangements. The
amendments require an entity to allocate arrangement consideration at the inception of the arrangement
to all of its deliverables based on relative selling prices. The guidance eliminates the use of the residual
method of allocation and expands the ongoing disclosure requirements. The adoption of this guidance
did not have a material effect on the Company’s consolidated financial statements.
Effective January 1, 2011, the Company adopted ASU 2010-13, which amends ASC 718
Compensation — Stock Compensation, Effect of Denominating the Exercise Price of a Share-Based
Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. The
amendments clarify that a share-based payment award with an exercise price denominated in the
currency of a market in which a substantial portion of the entity’s equity securities trades shall not be
considered to contain a market, performance, or service condition. Therefore, such an award is not to
be classified as a liability if it otherwise qualifies as equity classification. The amendments are
effective for fiscal year beginning on or after December 15, 2010, with early adoption permitted. The
adoption of this guidance did not have a material effect on the Company’s consolidated financial
statements.
Effective January 1, 2011, the Company adopted ASU 2010-17, which amends ASC 605, Revenue
Recognition, Milestone Method of Revenue Recognition. The amendments provide guidance on
defining a milestone under ASC 605 and determining when it may
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be appropriate to apply the milestone method of revenue recognition for research or development
transactions. The amendments are effective for fiscal year beginning on or after June 15, 2010, with
early adoption permitted. The adoption of this guidance did not have a material effect on the
Company’s consolidated financial statements.
Effective January 1, 2011, the Company adopted ASU 2010-29, which amends ASC 805, Business
Combinations, and Disclosure of Supplementary Pro Forma Information for Business Combinations.
The ASU clarifies that if comparative financial statements are presented, the pro forma disclosures for
both periods presented should be reported as if the acquisition had occurred as of the beginning of the
comparable prior annual reporting period only and not as if it had occurred at the beginning of the
current annual reporting period. The ASU also expands the supplemental pro forma disclosure
requirements to include a description of the nature and amount of any material non-recurring
adjustments that are directly attributable to the business combination. The guidance in the ASU is
effective for business combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2010, and should be applied
prospectively. The adoption of this guidance did not have a material effect on the Company’s
consolidated financial statements.
Recently Issued Accounting Pronouncements not adopted as of December 31, 2011
In May 2011, the FASB issued ASU 2011-4, which amends the fair value measurement and
disclosure guidance in ASC 820, Fair Value Measurement, to converge US GAAP and IFRS
requirements for measuring amounts at fair value as well as disclosures about these measurements. The
amendments are effective for fiscal year beginning on or after December 15, 2011. The Company is
currently evaluating the effect that the adoption of this guidance will have on its consolidated financial
statements.
In June 2011, the FASB issued ASU 2011-5, which amends the presentation guidance in ASC 220,
Comprehensive Income, and will result in more converged guidance on how comprehensive income is
presented under US GAAP and IFRS, although some differences remain. The new US GAAP guidance
gives companies two choices of how to present items of net income, items of other comprehensive
income or separate consecutive statements. Companies will no longer be allowed to present OCI in the
statement of stockholders’ equity. Earnings per share would continue to be based on the net income.
Although existing guidance related to items that must be presented in other comprehensive income
(―OCI‖) has not changed, companies will be required to display reclassification adjustments for each
component of OCI in both net income and OCI. Also companies will need to present the components
of other comprehensive income in their interim and annual financial statements. The amendments are
effective for fiscal year beginning on or after December 15, 2011. In December 2011, the FASB issued
ASU 2011-12, which defers ASU 2011-05 requirement that companies present reclassification
adjustments for each component of accumulated other comprehensive income (―AOCI‖) in both net
income and OCI on the face of the financial statements. Companies are still required to present
reclassifications out of AOCI on the face of the financial statements or disclose those amounts in the
notes to the financial statements. The ASU also defers the requirement to report reclassification
adjustments in interim periods. The Company is currently evaluating the effect that the adoption of this
guidance will have on its consolidated financial statements.
In December 2011, the FASB issued ASU 2011-11, which amends the disclosure guidance in ASC
210, Balance Sheet. New disclosures are required to enable users of financial statements to understand
significant quantitative differences in balance sheets prepared under US GAAP and IFRS related to the
offsetting of financial instruments. The existing US GAAP guidance allowing balance sheet offsetting,
including industry-specific guidance, remains unchanged. The amendments are effective for annual
reporting periods beginning on or after January 1, 2013, and interim periods within those annual
periods. The amendments should be applied retrospectively for all prior periods presented. The
adoption of this guidance did not have a material effect on the Company’s consolidated financial
statements.
RESULS OF OPERATIONS
2009
Year ended December 31,
2010
(in thousands, except for percentages)
2011
Statement of income (loss) data
Sales
Cost of sales(1)
Gross profit
Operating expenses:
$ 84,197
20,063
64,134
100.0 % $ 33,401
23.8 % 16,719
76.2 % 16,682
100.0 % $ 56,842
50.1 % 21,127
49.9 % 35,715
100.0 %
37.2 %
62.8 %
Selling, general and
administrative expenses(2)
Provision for doubtful accounts
Research and development
expenses
Depreciation of property, plant
and equipment and
amortization of licenses and
permits
Government grants recognized
in income
Total operating expenses
Operating income (loss)
Interest and financing expenses
Interest income
Other income (expenses)
Loss on disposal and write down
of equipment
Income (loss) before income
taxes and non-controlling
interest
Income tax (expenses) recovery
Consolidated net income (loss) for
the period
Less: income (loss) attributable to
non-controlling interests
Net income (loss) attributable to
the stockholders
18,165
18
4,406
21.6 % 18,886
1,921
0.02 %
56.5 % 22,372
(167 )
5.8 %
39.4 %
(0.3 )%
5.2 %
8,508
25.5 %
9,007
15.8 %
693
0.8 %
1,411
4.0 %
1,437
2.5 %
(1,296 )
21,986
42,148
(534 )
143
(34 )
(1.5 )% (1,924 )
26.2 % 28,801
50.0 % (12,119 )
(0.6 )% (1,178 )
1,133
0.2 %
96
(0.0 )%
(5.7 )%
(764 )
86.3 % 31,885
(36.2 )% 3,829
(385 )
(3.5 )%
1,397
3.5 %
280
0.3 %
(1.3 )%
56.1 %
6.7 %
(0.7 )%
2.5 %
0.5 %
(169 )
(0.2 )% (1,237 )
(3.7 )%
(455 )
(0.8 )%
41,554
(11,141 )
49.4 % (13,305 )
704
(13.2 )%
(39.8 )% 4,667
(5,067 )
2.1 %
8.2 %
(8.9 )%
30,413
10,455
36.1 % (12,601 )
(37.7 )%
(400 )
(0.7 )%
(12.4 )% (4,094 )
(12.3 )%
445
0.8 %
$ 19,958
23.7 % $ (8,507 )
(25.5 )% $
(845 )
(1.5 )%
43
Table of Contents
(1) Excludes depreciation of land-use rights and amortization of licenses and permits of $418,867,
$546,623 and $290,526 for 2009, 2010 and 2011, respectively.
(2) Includes stock-based compensation expense of $422,860, $459,90l and $206,301 in 2009, 2010
and 2011, respectively.
Sales
Revenues from sales represent: 1) the invoiced value of goods, net of value added taxes, or VAT,
sales returns, trade discounts and allowances. See ―ITEM 5. Operating and Financial Review and
Prospects — A. Operating Results — Taxes and incentives.‖ We recognize revenues at the time when
our products are delivered, persuasive evidence of an arrangement exists, the price is fixed and final
and there is reasonable assurance of collection of the sales proceeds; 2) the value of goods produced for
government stockpiling program. We recognize revenue when cash has been received and the products
have expired and passed government inspection or are delivered per government instruction.
Our revenues, growth and results of operations depend on several factors, including the level of
acceptance of our products among doctors, hospitals and vaccinees, and our ability to maintain or
increase prices for our products at levels that provide favorable margins. The level of acceptance
among doctors, hospitals and vaccinees is influenced by the performance, promotion and academic
research, and pricing of our products.
We market and sell our vaccine products primarily through various provincial and municipal CDCs.
We enter into sales agreements with CDCs each time a CDC places a purchase order. Pursuant to these
sales agreements, CDCs typically agree not to re-sell our products to regions outside the territory the
pertinent CDC covers administratively. Since hepatitis A vaccines was included into government
sponsored expended immunization program in 2007, we have actively participated in the tender and
bidding organized by various provincial CDCs. We enter into sales agreements with the CDCs when
we win the bid.
Pricing
To gain market penetration, we price our Healive at levels that we believe offer attractive economic
returns to CDCs and their end customers, such as hospitals, taking into account the prices of competing
products in the market. We believe that our Healive and Bilive are competitively priced compared to
hepatitis vaccines available in China. In the government paid market, we priced our Healive in
reference to the price guidance set up by the government and adjusted the price from time to time in
order to win the bid. We priced Anflu competitively to offer attractive economic returns to CDCs. The
prices of our products are lower than those of foreign imports. Panflu and Panflu.1 pricing were
determined on a cost plus basis in consultation with the government.
The provincial governments in China may adjust the fee rates from time to time. If they reduce the
fee rates, some hospitals and distributors may be discouraged from purchasing our products, which
would reduce our sales. In that event, we may need to decrease the price of our products to provide our
customers acceptable returns on their purchases. We cannot assure you that our
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business, financial condition and results of operations will not be adversely affected by any reduction
in fees for the vaccines in the future.
Cost of sales
Our cost of sales primarily consists of material and component costs. Depreciation of property, plant
and equipment attributable to manufacturing activities is capitalized as part of inventory, and expensed
as cost of sales when product is sold. Cost of goods sold in 2009, 2010 and 2011 amounted to $20.1
million, $16.7 million, and $21.1 million, respectively. We produce our own products and conduct the
final product packaging in-house.
As we source a significant portion of our components and raw materials in China, we currently have
a relatively low cost base compared to vaccines manufacturers in more developed countries. We expect
the costs of components and raw materials in China will increase in the future as a result of further
economic development and inflation in China. In addition, our focus on new generations and
applications of our products may require higher cost components and raw materials. We plan to offset
increases in our cost of raw materials and components through more efficient product designs and
product assembly enhancements as well as through savings due to economies of scale.
Selling, general and administrative expense
Selling expenses consist primarily of salaries and related expenses for personnel engaged in sales,
marketing and customer support functions and costs associated with marketing activities and shipping.
Going forward, we expect to increase our expenditures on selling and marketing, both on an absolute
basis and as a percentage of revenue, to promote our products, especially Bilive and Anflu. We expect
the selling and marketing expenses to promote Bilive will increase in 2012 as we will increase the
promotion activities on this product in the private market.
General and administrative expense consists primarily of compensation for employees in executive
and operational functions, including finance and accounting, business development, and human
resources. Other significant costs include facilities costs, stock-based compensation, professional fees
for accounting and legal services and the income taxes we assumed for our employees as a result of
their exercising the stock options.
Research and development expenses
Our research and development expenses consist primarily of:
salaries and related expenses for personnel;
fees paid to consultants and clinical research organizations in conjunction with their
independent monitoring our clinical trials and acquiring and evaluating data in conjunction with
our clinical trials;
consulting fees paid to third parties in connection with other aspects of our product
development efforts;
costs of materials used in research and development; and
depreciation of facilities and equipment used to develop our products.
We expense both internal and external research and development costs as incurred, other than those
capital expenditures that have alternative future uses, such as the build-out of our plant. We expect our
research and development costs will continue to be substantial and that they will increase as we
advance our current portfolio of product candidates through clinical trials and move other product
candidates into pre-clinical and clinical trials.
Taxes and incentives
Under the current laws of Antigua, we are not subject to tax on our income or capital gains. In
addition, no Antigua withholding tax will be imposed on payments of dividends by us to our
shareholders. Sinovac was incorporated in Antigua and Barbuda and has historically been involved in a
number of business combinations and significant financing. As a result, Sinovac could be involved in
various investigations, claims and tax reviews that arise in the ordinary course of business activities.
Substantially all of our sales are conducted in the PRC. Under PRC law, Sinovac Beijing and
Tangshan Yian are both subject to EIT and VAT. Sinovac Beijing is classified as a HNTE. As such, it
was subject to a reduced EIT rate of 15% in 2009 and 2010 compared to a statutory rate of 25% for
most companies in China. In 2011, Sinovac Beijing’s HNTE status was reconfirmed and it will remain
subject to an EIT rate of 15% until 2013. For the three fiscal years ended December 31, 2009, 2010 and
2011, Sinovac Beijing incurred income tax expenses of $9.8 million, $1.0 million and $1.5 million,
respectively. VAT is charged based on the selling price of our products at a rate of 6%. Tangshan Yian
was subject to an EIT rate of 25% in 2009, 2010 and 2011. The statutory rate of 25% applies to
Sinovac R&D and Sinovac Dalian until they obtain the HNTE certificates.
Pursuant to the double tax arrangement between Hong Kong and PRC, dividends paid by a foreign-
invested enterprise in China to its direct holding company in Hong Kong are subject to withholding tax
at a rate of 5%, or otherwise 10%. Whether the favorable rate will be applicable to dividends received
by Sinovac Hong Kong from its PRC subsidiaries is subject to the approval
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of the PRC tax authorities because it is unclear whether Sinovac Hong Kong is considered as the
beneficial owner of the dividends in substance. The PRC tax authorities have discretion to determine
whether a recipient of the PRC-sourced income is only an agent or a conduit, or lacks the requisite
amount of business substance, in which case the application of the tax arrangement may be denied. As
of the date of this annual report, Sinovac Hong Kong has not obtained approval from the PRC tax
authorities to apply a 5% withholding tax rate on the dividends received from Sinovac Beijing in 2010
and 2011. As such, we applied a 10% withholding tax rate on such dividends declared. As of
December 31, 2011, our income taxes payable included withholding income taxes of $1.7 million
calculated based on $16.9 million distributed earnings of Sinovac Beijing multiplied by a 10%
withholding tax rate. The deferred income taxes liability as of December 31, 2011 was $nil compared
to $1.0 million based on 5% withholding income tax as of December 31, 2010.
Year ended December 31, 2011 Compared to Year Ended December 31, 2010
Sales. Sales increased by 70.2% to $56.8 million from $33.4 million in 2010. The revenue
generated from sales of hepatitis vaccines increased by 66.3%, In 2011, we adjusted our sales strategies
to gear to the overall China hepatitis vaccines market where the hepatitis A market gradually shifted
from private market to public market, there was no public market for combined hepatitis A and B
vaccines, and no competitive product with our Blive in Chinese private market exists. As a result, the
sales of Bilive increased by 248.9% compared to the sales of 2010 while sales of Healive to public
market increased by 89.5% compared to the sales in 2010. However, the significant increase in Bilive
in the private market and Healive in the public market were offset by a 15.3% decreased sales from
Healive in the private market in 2011. The increase in revenue was also attributed to the recognition of
$21.8 million of pandemic influenza vaccine sales on prior year orders as revenue. Sales of H1N1 and
H5N1 vaccines represented 24.6% and 13.7%, respectively, of total revenue in 2011, as compared to
21.5% and 7.2% of total revenues in 2010. The H1N1 and H5N1 vaccines were ultimately sold to
Chinese government. The table below sets forth a breakdown of our sales by product:
Sales
Hepatitis vaccines
Influenza vaccines
Total
Year ended December 31,
2010
2011
$ 26,939,386 $ 16,200,844
17,200,582
$ 56,841,892 $ 33,401,426
29,902,506
Cost of Sales. Compared with a 70.2% increase in total revenue, cost of sales increased by 26.4% to
$21.1 million in 2011 from $16.7 million in 2010. Cost of sales improved in 2011 mainly as a result of
1) inventory write-offs and provisions decreased from $6.8 million in 2010 to $4.0 million as a result of
improved coordination of production planning, 2) the cost of sales of 431,000 doses of Bilive was
recorded in prior year as inventory provision, 3) decrease in sales return provision of hepatitis vaccines,
which was primarily determined based on the inventory levels in the distribution channels and their
remaining shelf lives, which led to a less increase of cost of sales in proportion of sales increase.
However, a higher write-off of idle capacity was recorded in cost of sales because of the enhanced
control of production volume. In 2011, hepatitis and the influenza production facilities had idle
capacity of 48% and 30%, respectively, compared to the idle capacity of 11% and nil in 2010.
Gross Profit. Gross profit increased by 114.1% to $35.7 million in 2011 from $16.7 million in 2010.
Gross profit margin was 63.0% and 50.0% for 2011 and 2010, respectively. The increase of gross profit
margin in 2011 was mainly due to the decrease of cost of sales as a result of less inventory provision
and wrote-offs, less sales return provision and a recovery of prior year inventory provision for Bilive in
2011. In addition, the overall gross profit margin improved because the product mix sold in 2011
consisted of more H1N1vaccines which had higher gross profit margin. After deducting the
depreciation of land use rights and amortization of licenses and permits from our gross profit, our gross
profit margin was 62.5% and 48.3% for 2011 and 2010, respectively. The inventory write offs and
provision, included in the cost of sales, reduced the gross profit margin by 6.3% and 20.4% for 2011
and 2010, respectively.
Selling, General and Administrative Expenses. Selling, general and administrative expenses, or
SG&A expenses, include non-production related wages and salaries, stock-based compensation,
consulting fees, travel, accomodation, advertising, public company costs and professional fees. Our
SG&A expenses increased by 18.5% to $22.4 million in 2011 from $18.9 million in 2010. Our selling
expenses increased by 41.9% to $12.3 million in 2011 from $8.7 million in 2010. In 2011, we have
realigned our sales and marketing efforts to better address the changing Chinese vaccine market.
Selling expenses increased as a result of increased sales promotional expenses for selling Bilive in the
private market, expanded sales team to cover a wider geographic area, and increased compensation to
sales professionals to improve employee retention. General and administrative expenses remained at
about the same level as in 2010.
We recorded stock-based compensation of $206,301 in 2011 compared to $459,901 in 2010. In
December 2011, we granted 767,000 stock options to the employees at an exercise price of $2.37 per
share. The weighted average fair value of the stock options granted in 2011 was $1.35 per share. The
expected term was estimated to be 3,24 years and the expected volatility was estimated to be 86.91%.
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The options granted vest in installments from December 26, 2012 to 2014, and will expire on
December 25, 2017. As a result, as of December 31, 2011, we had unrecognized compensation costs of
$1,043,765. This unearned component will be recognized over a period of 39 months.
Research and Development Expenses. Research and development expenses increased by 5.9% to
$9.0 million from $8.5 million in 2010, primarily representing amounts spent on researching and
developing vaccines for hand foot and mouth disease, pneumococcal conjugate vaccine, universal
pandemic influenza, mumps and rabies in animals, net of government grants to fund these activities.
The PRC government research and development grants are offset against the qualified research and
development expenses incurred in the period the conditions imposed by government authorities are
fulfilled. In 2011, we received government research grants of $893,000 mainly related to EV71 R&D,
wherein $468,000 was offset against the qualified EV 71 clinical trial expenses and the remaining
$424,000 was deferred to offset future qualified research and development expenses. In 2010 we
received government research grants of $370,000. In 2011, we offset government research grant of
$686,000 against qualified research and development expenses compared to $43,000 in 2010.
Interest and Financing Expenses. Interest and financing expenses decreased by 67.4% to $385,000
in 2011 from $1.2 million in 2010. In 2011, we received $596,000 in interest subsidy from the
government as compared to $148,000 in 2010, which was recorded as a reduction to interest and
financing expenses. In addition, we received $700,000 (2010 - $nil) interest subsidy related to the
Changping facility construction project which was recorded to offset the interest capitalized in 2011.
Income Taxes Expenses. We had income tax expense of $5.1 million in 2011, compared to an
income tax recovery of $704,000 in 2010. The significant increase in the income tax expense was
attributed to $2.8 million deferred income tax expenses resulting from the reversal of the temporary
differences and a derecognition of the current portion of deferred income tax assets established in 2011.
As of December 31, 2011, included in income tax payable $1.7 million was related to withholding tax
on distributed earnings of $16.9 million from Sinovac Beijing, of which $725,000 was recorded in
2011 income tax expense. No earning was distributed from Tangshan Yian, Sinovac Dalian and
Sinovac R&D in 2010 and 2011 as these subsidiaries were not profitable.
Net Loss. Net loss decreased to a net loss of $845,000 in 2011 from a net loss of $8.5 million in
2010.
Year ended December 31, 2010 Compared to Year Ended December 31, 2009
Sales. Sales decreased to $33.4 million in 2010 from $84.2 million in 2009, excluding one-time
sales to the Ministry of Health and H1N1 vaccine sales, adjusted sales for the full year 2010 and 2009
were $26.2 million and $42.4 million respectively which yielded a 38.2% decline in full year sales
when comparing 2010 to 2009. The lower sales in 2010 were primarily attributable to adverse impact
of the negative external factors on the domestic vaccine market and the absence of government
purchases of hepatitis A vaccine for disease control in the flood region and lower H1N1 vaccine sales.
Our sales breakdown by product was as follows:
Sales
Hepatitis vaccines
Influenza vaccines
Total
Year ended December 31,
2009
2010
$ 16,200,844 $ 39,242,901
44,954,281
$ 33,401,426 $ 84,197,182
17,200,582
Sales of H1N1 vaccine represented 21.5% of total sales for the year ended December 31, 2010, as
compared to 35.3% in 2009. The H1N1 vaccine was sold to the Chinese government in accordance
with government purchase program.
Revenue decrease in 2010 was mainly attributed to the following factors:
(1) Unfavorable business environment.
(2) Hepatitis vaccine market shifted faster than we expected from private market to the public
market. Our hepatitis products are not currently preferred by a majority of provincial CDCs due to the
fact that our hepatitis A product needs two doses to complete the immunization process compared to
one dose of live attenuated hepatitis products.
We did not make any one time sales to government in 2010 compared to $12.1 million of Healive
sold to Chinese Ministry of Health to help with the disease control and prevention in flooding areas in
2009.
The seasonal flu vaccine market competition was fiercer than ever. The total released seasonal flu
vaccines by NIFDC increased to 48.1 million doses supplied by 13 manufactures compared to 32.6
million doses from 11 manufactures in 2009, but the demand of seasonal flu did not match the
increased supply.
We sold approximately 2.28 million doses Panflu.1 in 2010 compared to 10.08 million doses in
2009.
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Cost of Sales. Compared to a decrease of 152% in total revenue, cost of sales decreased by 16.7%
to $16.7 million in 2010 from $20.1 million in 2009. The Company recorded a $6.8 million inventory
write down in cost of sales in 2010 to reflect primarily the expiration of 2.95 million doses of the
influenza vaccine that were not sold in 2010 and inventory provision for total 1.1 million doses of
hepatitis A and hepatitis A&B vaccines. In addition, the sales return provision for hepatitis vaccines as
a percentage of private market sales was 16% compared to 4% in prior year, which also contribute to
higher cost of sales as we did not reverse the cost of reserved sales.
Gross Profit. Gross profit decreased by 74.0% to $16.7 million in 2010 from $64.1 million in
2009. Gross profit margin was 76.2% and 50.0% for 2009 and 2010, respectively. Lower gross profit
margin in 2010 is mainly because of $6.8 million in inventory write offs. After deducting depreciation
of land use rights and amortization of licenses and permits from our gross profit, our gross profit
margin was at 75.7% and 48.3%for2009 and 2010, respectively. The inventory write down, including
in the cost of sales, reduced the gross profit margin by 0.7% and 20.4% for 2009 and 2010, respectively.
Selling, General and Administrative Expenses. Selling, general and administrative expenses, or
SG&A expenses, include non-production related wages and salaries, stock-based compensation,
consulting fees, travel, occupancy, advertising, public company costs and professional fees. Our SG&A
expenses increased by 3.2% to $18.9 million in 2010 from $18.2 million in 2009. Our selling expenses
decreased by 12.1% to $8.7 million in 2010 from $9.9 million in 2009. The decrease in selling
expenses was mainly due to decreased sales in the private market. Our general and administrative
expenses increased by 45.8% to $12.1 million in 2010 from $8.3 million in 2009 in line with our
business expansion in Sinovac Beijing and Sinovac Dalian.
We recorded stock-based compensation of $459,901 in 2010 compared to $422,860 in 2009. We did
not grant any stock options in 2010. In 2009, we granted 1,708,500 stock options to the directors,
officers and certain employees at an exercise price of $1.60 per share. The stock options granted to our
directors, officers and employees in 2009 had a weighted average estimated fair value of $1.2 million
and $0.70 per share, respectively. We granted options with different vesting schedules. As a result, as
of December 31, 2010, we had unrecognized compensation costs of $343,027, which is recognized
over a period of 15 months.
Research and Development Expenses. Research and development expenses increased by 96.1% to
$8.6 million from $4.4 million in 2009, primarily representing amounts spent in researching and
developing vaccines for hand foot and mouth disease, pneumococcal conjugate vaccine, universal
pandemic influenza, mumps and rabies in animals, net of government grants to fund these activities.
The PRC government grants are brought into income in the period in which the research and
development expenses are recorded and the conditions imposed by government authorities are fulfilled.
In 2010 and 2009, we received government research grants of $370,000 and $1.3 million, respectively.
In 2010, we recognized government research grant income of $43,000 compared to $251,436 in 2009.
Interest and Financing Expenses. Interest and financing expenses decreased by 120.4% to $1.2
million in 2010 from $534,455 in 2009, mainly resulting from a higher balance of bank loan
throughout the year.
Income Taxes Expenses. We had an income tax recovery of $704,000 in 2010, compared to an
income tax expense of $9.9 million in 2009. As of December 31, 2010, we had deferred tax liability of
$1.0 million for undistributed earnings of $20.4 million in Sinovac Beijing. In 2009 and 2010,
Tangshan Yian had a net loss. Sinovac Dalian and Sinovac R&D also had losses in 2010.
Net Loss. Net profit decreased to a net loss of $8.5 million in 2010 from a net income of $20
million in 2009.
B. Liquidity and Capital Resources
We finance our operations primarily through short-term and long-term borrowings, proceeds from
our public offering, capital raised in our private placement, cash generated from operations and, to a
lesser extent, cash from government research grants. We believe that our current cash and cash
equivalents, and anticipated cash flow will be sufficient to meet our anticipated cash needs, including
our cash needs for working capital and capital expenditure, for the next 12 months. We may, however,
require additional cash due to changing business conditions or other future developments, including
any investments or acquisitions we may decide to pursue. If our existing cash is insufficient to meet our
requirements, we may seek to sell additional equity securities, debt securities or borrow from banks.
Cash Flows and Working Capital
The following table sets forth a summary of our net cash flows for the periods indicated:
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Net cash provided by (used in) operating
activities
Net cash used in investing activities
Net cash provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of
period
Cash and cash equivalents at end of period $
2009
Year ended December 31,
2010
(in thousands)
2011
$
48,412 $
(11,693 )
5,293
42,059
(14,279 ) $
(19,244 )
58,194
26,632
13,936
(13,790 )
613
2,701
32,894
101,585
74,953
74,953 $ 101,585 $ 104,287
Operating Activities
Net cash provided by operating activities was $13.9 million in 2011, compared to $14.3 million cash
used in operating activities in 2010. Net cash provided by our operating activities in 2011 resulted
primarily from (1) our net loss of $0.4 million, (2) an increase in inventories of $1.9 million, (3) a
decrease in deferred revenue of $2.7 million, (4) an increase in prepaid expenses and deposits of
$531,000. These items were partially offset by (1) an increase in inventory provision of $4.0 million,
(2) depreciation of property, plant and equipment and amortization of licenses and permits of $4.8
million, (3) write-offs for equipment and loss on disposal of $455,000, (4) an increase in accounts
receivable of $5.5 million and (4) an increase in accounts payable and accrued liabilities of $1.2
million. For a more detailed analysis of our accounts receivable, see ―— Accounts Receivable‖ below.
Net cash used in operating activities was $14.4 million in 2010, compared to $48.4 million cash
provided by operating activities in 2009. Net cash used in our operating activities in 2010 resulted
primarily from (1) our net loss of $12.6 million, (2) an increase in inventories of $8.6 million, (3) an
increase in income tax payable of $5.5 million, and (4) an increase in accounts payable and accrued
liabilities of $686,000. These items were partially offset by (1) an increase in inventory provision of
$6.8 million, (2) depreciation of property, plant and equipment and amortization of licenses and
permits of $4.23 million, (3) write-offs for equipment and loss on disposal of $1.24 million and (4) an
increase in accounts receivable of $1.0 million. For a more detailed analysis of our accounts receivable,
see ―— Accounts Receivable‖ below.
Investing Activities
Net cash used in investing activities was $13.8 million in 2011, compared to $19.2 million in 2010.
In 2011, cash used in investing activities included $15.0 million used to acquire property, plant and
equipment partially offset by proceeds from redemption of short term investment of $1.5 million and
$122,000 from the disposal of equipment.
Net cash used in investing activities was $19.2 million in 2010, compared to $11.7 million in 2009.
In 2010, cash used in investing activities included $24.8 million used to acquire property, plant and
equipment partially offset by proceeds from redemption of short term investment of $7.3 million and
$232,000 from the disposal of equipment.
Financing Activities
Net cash provided by financing activities was $613,000 in 2011 compared to $58.2 million in 2010.
In 2011, net cash provided by our financing activities included net proceeds of $749,000 from issuance
of common shares and government funding of $1.6 million. We also received loan proceeds of $11.4
million and made loan repayments of $10.7 million. We paid dividends of $5.9 million to and received
loan payment of $3.4 million from the non-controlling interest shareholder in Sinovac Beijing in 2011.
Net cash provided by financing activities was $58.2 million in 2010 compared to $5.3 million in
2009. In 2010, net cash provided by our financing activities included net proceeds of $62.3 million
from issuance of common shares and proceeds of $372,012 from government funding. We also
received loan proceeds of $20.0 million and made loan payments of $17.9 million. We paid dividends
of $3.3 million and loaned $3.3 million to non-controlling interest shareholders in Sinovac Beijing in
2010.
Accounts Receivable
Our total accounts receivable decreased by $4.5 million to $17.8 million as of December 31, 2011
from $22.4 million as of December 31, 2010. Our accounts receivable turnover time in 2011 was 245
days, as compared to 261 days in 2010 and 95 days in 2009. The decrease in our turnover time was
mainly due to more effective credit management.
Our maximum exposure to credit risk at the balance sheet date relating to accounts receivables is
summarized as follows:
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Aging within one year
Aging greater than one year, net off allowance for
doubtful accounts
Total trade receivable — net
$
$
Borrowings
December 31,
2010
2011
(in thousands)
19,745 $
16,025
2,250
21,995 $
827
16,852
As of December 31, 2011, we had $4.7 million in short-term borrowings, offset by $104.3 million in
cash, resulting in a liquid assets balance of $99.6 million, compared with $91.1 million at the end of
2010. We hold our cash and cash equivalents in interest-bearing dollar and renminbi denominated
accounts at registered banks. The following table summarizes our borrowings as of December 31, 2011:
Type
Bank
loan
Amount
RMB10 million
($1,571,166)
Interest
Rate
7.87%
floating(1)
Interest
Payment
quarterly
Maturity
Date
December 21,
2012
Purpose
operation
The loan agreement was under a general credit facility agreement with the China
Merchants Bank with a limit of RMB 30 million for the period from December 22,
2011 to December 21, 2012, of which RMB 20 million for working capital use and the
remaining for issuing financial guarantees.
Bank
loan
RMB20 million
($3,142,332)
8.67%
floating(2)
monthly
December 21,
2012
operation
The loan is guaranteed by a third party, with a guarantee fee of $63,000
(RMB400,000) over the term of the loan and the trade receivables of Sinovac Beijing
with a carrying value of not lower than RMB 35 million was pledged to the guarantee
company.
Bank
loan
RMB33,745,050
($5,301,907)
6.90%
floating(3)
quarterly
November 13,
2015
construction
of
Changping
facility
The loan is for construction of the Changping facility and as a maximum credit
amount of RMB200 million. We also obtained a credit with a maximum quota for
issuing letter of credits of RMB80 million. Plant and building of Sinvoac Beijing with
a net book value of $3.4 million (RMB 21.5 million) was pledged as collateral. Plant
and building of Sinovac Beijing with a net book value of $3.4 million (RMB21.5
million) was pledged as collateral.
Bank
loan
RMB76.5
million
($12,019,420)
6.9%
floating(3)
monthly
February 9,
2015
purchase of
Changping
Facility
The loan is exclusively for the purchase of the Changping facility. The total amount of
the loan is $14.14 million (RMB90 million) and is advanced to the Company in six
installments according to the agreement. Land and building of the Changping facility
of Sinovac Beijing with a net book value of $7.38 million (RMB 46.97 million) were
pledged as collateral.
(1) 20% above the prime rate of a one-year term loan published by the Bank of China.
(2) Annual interest rate at 10% above Bank of China’s prime rate for loans of six months to one year
plus 1.456% of financing fee per year.
(3) Annual interest rate at the bank’s prime lending rate and adjusted every 12 months.
Our weighted average effective interest rate was 5.78%, 5.56% and 6.71% for the years ended
December 31, 2009, 2010 and 2011, respectively.
Restrictions on Cash Dividends
We are a holding company, and we rely on dividends paid by our subsidiaries, Sinovac Beijing,
Sinovac Dalian, Sinovac R&D and Tangshan Yian, for our cash needs, mainly our operating expenses.
The payment of dividends in China is subject to limitations. Regulations in the PRC currently permit
payment of dividends only out of accumulated profits as determined in accordance with accounting
standards and regulations in China. Our subsidiary is also required to set aside at least a portion of its
after-tax profit based on PRC accounting standards each year to fund certain reserve funds. These
reserves can be used to recoup previous years’
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losses, if any, and, subject to the approval of the relevant PRC government authority, may be converted
into share capital in proportion to their existing shareholdings, or by increasing the par value of the
shares currently held by them. Such reserves, however, are not distributable as cash dividends. In
addition, at discretion of their board of directors, our subsidiaries may allocate a portion of its after-tax
profits based on PRC accounting standards to its enterprise development funds and employee welfare
and bonus funds. These funds also are not distributable as cash dividends. In addition, if Sinovac
Beijing, Sinovac Dalian, Sinovac R&D or Tangshan Yian incurs debt on its own behalf in the future,
the instruments governing the debt may restrict the ability of one or more of our PRC subsidiaries, as
the case may be, to pay dividends or make other distributions to us.
The ability of our subsidiary to convert renminbi into U.S. dollars and make payments to us is
subject to PRC foreign exchange regulations. Under these regulations, the renminbi is convertible for
current account items, including the distribution of dividends, interest payments, trade and service-
related foreign exchange transactions. Conversion of renminbi for capital account items, such as direct
investment, loan, security investment and repatriation of investment, however, is still subject to the
approval of the SAFE. See ―Item 10D. Exchange Controls.‖
Capital Expenditures
We made capital expenditures of $4.3 million, $24.8 million and $14.99 million in 2009, 2010 and
2011, respectively. We spent $9.15 million to build up Changping facility and $5.84 million on
purchasing equipment. As of December 31, 2011, our commitments of capital expenditures were
approximately $3.4 million, primarily for manufacturing facility expansion and purchase of Changping
facility. We will finance such commitments through short-term and long-term borrowings, proceeds
from our public offering and cash generated from operations.
C. Research and Development, Patents and Licenses, Etc.
See discussions under ―— ITEM 5A. Research and Development Programs.‖
D. Trend Information
Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties,
demands, commitments or events for the period from January 1, 2011 to December 31, 2011that are
reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity
or capital resources, or that caused the disclosed financial information to be not necessarily indicative
of future operating results or financial conditions.
E. Off-Balance Sheet Arrangements
We do not, and did not, have any interest in variable interest entities or any other off-balance sheet
arrangements that require disclosure.
F. Tabular Disclosure of Contractual Obligations
The following table summarizes our contractual obligations and commitments as of December 31,
2011 for the periods indicated:
Contractual obligations
Long-term debt obligations
(including interest)
R&D expenses, liabilities and
commitment
Operating lease obligations
Purchase of facilities commitments
Payments due by period
Total
Less than
1 year
—
—
1 – 3 years 3 – 5 years
(in thousands)
—
—
More than
5 years
$ 23,596 $
5,110 $
— $ 18,486 $
2,541
9,877
3,407
241
805
3,407
2,300
2,415
—
—
1,610
—
—
—
—
5,047
—
Accounts payable and accrued
liabilities
29,522
29,522
—
—
—
Total
$ 68,943 $ 39,085 $
4,715 $ 20,096 $
5,047
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G. Safe Harbor
This annual report on Form 20-F contains forward-looking statements that relate to future events,
including our future operating results and conditions, our prospects and our future financial
performance and condition, all of which are largely based on our current expectations and projections.
The forward-looking statements are contained principally in the sections entitled ―Item 3. Key
Information — D. Risk Factors,‖ ―Item 4. Information on the Company‖ and ―Item 5. Operating and
Financial Review and Prospects.‖ These statements are made under the ―safe harbor‖ provisions of the
U.S. Private Securities Litigation Reform Act of 1995. You can identify these forward-looking
statements by terminology such as ―may,‖ ―will,‖ ―expect,‖ ―anticipate,‖ ―future,‖ ―intend,‖ ―plan,‖
―believe,‖ ―estimate,‖ ―is/are likely to‖ or other and similar expressions. Forward-looking statements
involve inherent risks and uncertainties. A number of factors could cause actual results to differ
materially from those contained in any forward-looking statement, including but not limited to the
following:
our ability to maximize sales of our existing products within the Chinese market;
our ability to develop new vaccines;
our ability to improve our existing vaccines and lower our production costs;
our ability to expand our manufacturing facilities to meet need of the growing Chinese market
and other geographic markets;
our ability to acquire new technologies and products;
uncertainties in and the timeliness of obtaining necessary governmental approvals and licenses
for marketing and sale of our vaccines in certain overseas markets;
our ability to compete successfully against our competitors;
risks associated with our corporate structure and the regulatory environment in China; and
other risks outlined in our filings with the Securities and Exchange Commission, or the SEC,
including this annual report on Form 20-F.
The forward-looking statements made in this annual report on Form 20-F relate only to events or
information as of the date on which the statements are made in this annual report on Form 20-F. Except
as required by law, we undertake no obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events or otherwise, after the date on which
the statements are made or to reflect the occurrence of unanticipated events. You should read this
annual report on Form 20-F completely and with the understanding that our actual future results may
be materially different from what we expect.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
The following table sets forth information regarding our directors and executive officers as of the
date of this annual report:
Directors and Executive Officers
Weidong Yin
Kenneth Lee
Simon Anderson(1)(2)(3)
Yuk Lam Lo(1)(2)(3)
Meng Mei(1)(2)(3)
Age
47
44
50
63
57
Position/Title
Chairman, President, Chief Executive Officer
and Secretary
Director
Independent Director
Independent Director
Independent Director
Nan Wang
Ming Xia
45
38
Interim Chief Financial Officer, Vice
President, Business Development, Clinical
Research
Vice President, Sales and Marketing
(1) Member of the audit committee.
(2) Member of the nominating and corporate governance committee.
(3) Member of the compensation committee.
Dr. Weidong Yin has served as our chairman, president, chief executive officer and secretary since
September 2003. Mr. Yin is also the general manager of Sinovac Biotech and the chairman of Sinovac
Hong Kong, Tangshan Yian and Sinovac Dalian. He is the former general manager of Tangshan Yian
Bioengineering Co., Ltd., and previously he worked as a medical doctor in infectious disease at the
China Center for Disease Control and Prevention, Tangshan City, Hebei province. Dr. Yin has been
dedicated to hepatitis research for over 20 years and was instrumental in the development of our
Healive vaccine. In addition, Dr. Yin has been appointed as the principal investigator by the Chinese
Ministry of Science and Technology for many key
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governmental R&D programs such as ―Inactivated Hepatitis A vaccine R&D,‖ ―Inactivated SARS
vaccine R&D‖ and ―New Human Influenza Vaccine (H5N1) R&D.‖ He obtained his MBA from the
National University of Singapore.
Mr.Kenneth Lee has served as a director on the board of our company since May 2011. He is a
Principal at SAIF Partners, which is one of the largest and most successful growth venture capital funds
focused on China. SAIF Partners IV L.P. is the largest shareholder in Sinovac Biotech Ltd. Mr. Lee
has more than 15 years of experience across private equity investment, corporate finance, and business
development in China. Before becoming a member of the SAIF team in 2007, he had served as the
Chief Financial Officer of Topsec Holdings from 2006 to 2007. From 2004 to 2005, he worked as a
Principal at RimAsia Capital Partners. Prior to RimAsia Capital Partners, Mr. Lee served in various
positions at Delta Associates, the exclusive advisor to Asia Equity Infrastructure Fund, CNK
Telecommunications Limited, H&Q Asia Pacific, and Salomon Brothers Inc. in New York. Currently,
he is a non-executive director on the boards of Yayi International Inc. (OTC: YYIN) and China
Hanking Holdings Limited (SEHK: 03788). Mr. Lee graduated from Amherst College in
Massachusetts, USA in 1990 and obtained a Bachelor of Arts degree in Philosophy.
Mr. Simon Anderson has served as an independent director of our company since July 2004.
Mr. Anderson is a member of our audit, compensation, and nominating and corporate governance
committees. Mr. Anderson provides consulting expertise in the areas of regulatory compliance,
exchange listings and financial operations. He was admitted as a member of the Institute of Chartered
Accountants in British Columbia in 1986. Mr. Anderson serves as chief financial officer of companies
listed on North American stock exchanges, including IBC Advanced Alloys Corp., which manufactures
and processes alloys at its U.S. plants. Mr. Anderson also serves as a director of Simba Gold Corp., a
gold exploration company and War Eagle Mining Company Inc., a zinc exploration company.
Mr. Yuk Lam Lo has served as an Independent Director of our company since March 2006. Mr. Lo
is a member of the audit, compensation and nominating and corporate governance committees. Mr. Lo
was heavily involved in several committees of the HKSAR Government. He had been appointed a
Director of the Hong Kong Applied R&D Fund Co. Ltd., Chairman of the Biotechnology Committee of
the Hong Kong Industry & Technology Development Council, and Chairman of Biotechnology
Projects Vetting Committee of the Innovation and Technology Fund, HKSAR. Currently Mr. Lo is
serving as a Member of the Advisory Council for Food Safety of the Food and Health Bureau HKSAR,
a Director of the Chinese Manufacturers’ Association of Hong Kong (CMA) and Chairman of the
Innovation and Technology Committee of CMA. Mr. Lo is also the Hononary Founding Chairman of
Hong Kong Bio-Organization.In the educational area, Mr. Lo has been elected an Honorary Fellow of
the Hong Kong University of Science and Technology. He is a member of the Advisory Committee of
the Vocational Training Council, an Executive Vice-President of Asian College of Management,
Adjunct Professor of the Chinese University of Hong Kong and Honorary Professor of several
universities in China. In China, Mr. Lo was a Consultant to the Economic Bureau of Changchun and a
Member of the Advisory Committee of the Shenzhen Municipal Science and Technology Bureau. At
present, he is a Consultant of the Centre for Disease Control and Prevention of China. At present, he is
a Consultant of the Centre for Disease Control and Prevention of China. In the business sector, Mr. Lo
had worked almost 30 years as Asia Pacific President for 2 multi-national technology companies, Bio-
Rad (NYSE:BIO) and Perkin Elmer (NYSE:PKI) and is now the Chairman of Lo’s Associates
Ltd., vice-Chairman of Santai Eco-Fishery Ltd., vice-Chairman of APlus OTC Health Group
Ltd., Senior Advisor of Questmark Capital Management Sdn. Bhd., and Senior Director of Questmark
Asia Ltd.Mr. Lo is an Independent Director of South East Group Ltd. (0726.HK) and Shangpharma
(NYSE:SHP).
Mr. Mei Meng has served as an independent director of our company since March 2012. Mr. Mei
is the chairman of compensation committee, and member of the audit and nominating and corporate
governance committees. Mr. Mei founded TusPark, a science park established by Tsinghua University
in 1994, to incubate high growth companies. He has been the director of TusPark’s development
Center since its inception. Mr. Mei is also the Chairman of TusPark Co., Ltd., which is engaged in the
development, construction, and management of TusPark and is providing services to enterprises based
in TusPark. TusPark is also involved in venture capital investments in China. Mr. Mei sits on the
judging expert panel of China’s National Science & Technology Award. He has developed courses on
entrepreneurship and new venture formation as a Tsinghua University professor and an
entrepreneur. Mr. Mei holds a bachelor’s degree in automation from Tsinghua University.
Ms. Nan Wang has served as the Vice General Manager of Sinovac Beijing since 2001 where she
oversees business development and clinical research. From 1988 to 1993, Ms. Wang was a researcher
in biology at the Life Science College of Peking University, PRC. From 1993 to 2001, she worked as a
manager at SinoBioway. Ms. Wang received her bachelor’s degree in biology from Peking University
and her master degree from University of International Business and Economics, PRC. Ms. Wang also
received a diploma in financial management from Beijing College for Entrepreneurs, PRC in 2003.
Mr. Ming Xia has served as Vice President of Sinovac Beijing since 2011 where he oversees sales
and marketing departments. Mr. Ming Xia has over 15 years’ experience in vaccine sales and
marketing in China. He worked in Aventis Pasteur before joining Sinovac in 2002 and has served as
Regional Sales Manager, National Sales Manager and Sales Director at Sinovac. Mr. Xia obtained his
bachelor degrees in Biochemistry at Anhui University and in International Trade at Shanghai Institute
of Foreign Trade. Mr. Xia has made significant contributions to our sales revenue growth in previous
years with outstanding leadership and performance results. He kept his top record of generating sales
revenue for many years after joining Sinovac. He is a leader with creativity and developed the sales
strategy for our existing products. Mr. Ming Xia organized the reform on sales strategy to meet the
change of the market situation.
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B. Compensation
In 2011, the aggregate cash compensation paid to our directors and executive officers was
approximately $1.24 million. The total amount of compensation paid to executive directors in 2011
included payment made to Ms. Chup Hung Mok, a former independent director, who resigned from the
board effective December 31, 2011. No executive officer is entitled to any severance benefits upon
termination of his or her employment with our company. The bonus plan of executive officers is made
based on the annual performance of the company in different functions. Each vice president’s bonus is
determined based on a comparison of their actual performance in each of the functional areas they
supervise objectives set at the beginning of the years. The bonus payment plan is approved by the
board of the company they are serving. For options granted to officers and directors, see ―2003 Stock
Option Plan.‖
Our board of directors and shareholders approved the issuance of up to 5,000,000 common shares
upon exercise of options granted under our 2003 stock option plan. The following table summarizes, as
of March 31, 2012, the outstanding options that we granted to several of our directors, executive
officers, principal shareholders and to other individuals as a group under our 2003 Stock Option Plan.
Name
Simon
Anderson
Yuk Lam Lo
Xianping
Wang
Chuphung
Mok(1)
Common Shares Underlying
Outstanding Options
1.60
Exercise Price ($/Share) Grant Date
January 20,
2009
January 20,
2009
January 20,
2009
January 20,
2009
1.60
1.60
1.60
Expiration Date
January 19,
2014
January 19,
2014
January 19,
2014
January 19,
2014
50,000
50,000
50,000
50,000
(1) Ms. Chup Hung Mok resigned from the board in January 2012 for her personal reason.
We have not set aside or accrued any amount of cash to provide pension, retirement or other
similar benefits to our officers and directors. Our PRC subsidiaries and consolidated affiliated entities
as well as their subsidiaries are required by law to make contributions equal to certain percentages of
each employee’s salary for his or her retirement benefit, medical insurance benefits, housing funds,
unemployment and other statutory benefits.
2003 STOCK OPTION PLAN
Our board of directors adopted a Stock Option Plan on November 1, 2003. The purpose of the plan
is to attract and retain the best available personnel for positions of substantial responsibility, provide
additional incentive to employees, directors and consultants and promote the success of our business.
Our board of directors believes that our company’s long-term success is dependent upon our ability to
attract and retain superior individuals who, by virtue of their ability, experience and qualifications,
make important contributions to our business.
Set forth below is a summary of the principal terms of our Stock Option Plan.
Size of plan. We have reserved an aggregate of 5,000,000 of our common shares for issuance
under our 2003 Stock Option Plan. As of April 2, 2012, options to purchase an aggregate of
1,728,500 of our common shares were issued and outstanding and an aggregate of 3,221,000
common shares have been issued pursuant to options issued under the plan.
Administration. Our Stock Option Plan is administered by our board of directors. The board
will determine the provisions, terms and conditions of each option grant, including without
limitation the option vesting schedule or exercise installment, the option exercise price, payment
contingencies and satisfaction of any performance criteria.
Vesting schedule. The vesting schedules of options granted will be specified in the applicable
option agreements.
Option agreement. Options granted under our Stock Option Plan are evidenced by option
agreements that contain, among other things, provisions concerning exercisability and forfeiture
upon termination of employment or consulting arrangements by reason of death or otherwise, as
determined by our board. In addition, the option agreement also provides no option shares will be
issued under the plan unless the Securities Act has been fully complied with.
Option term. The term of options granted under the 2003 Stock Option Plan may not exceed ten
years from the date of grant.
Termination of options. Where the option agreement permits the exercise of the options granted
for a certain period of time following the recipient’s termination of services with us, the options
will terminate to the extent any is not exercised or purchased on the last day of the specified
period or the last day of the original term of the options, whichever occurs first.
Change of control. If a third-party acquires us through the purchase of all or substantially all of
our assets, a merger or
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other business combination, all outstanding stock options will become fully vested and
exercisable immediately prior to such transaction.
Termination of plans. Unless terminated earlier, the 2003 Stock Option Plan will expire in 2023.
Our board of directors has the authority to terminate our Stock Option Plan prior to the expiry of
the plan provided that such early termination shall not affect the options then outstanding under
the plan.
C. Board Practices
Board of Directors
Our Articles of Association prescribes that we should have a minimum of one and a maximum of 15
directors. Currently, our board of directors comprises five board members, three of whom are
independent. Under Antigua law, our directors have a duty of loyalty to act honestly, in good faith and
with a view to our best interests. Our directors also have a duty to exercise the skill they actually
possess and such care and diligence that a reasonably prudent person would exercise in comparable
circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our
Articles of Incorporation and by-laws, as amended and re-stated from time to time. A shareholder has
the right to seek damages if a duty owed by our directors is breached.
The functions and powers of our board of directors include, among others:
convening shareholders’ annual general meetings and reporting its work to shareholders at such
meetings;
declaring dividends and distributions;
appointing officers and determining the term of office of officers;
exercising the borrowing powers of our company and mortgaging the property of our company;
and
approving the transfer of shares of our company, including the registering of such shares in our
share register.
Terms of directors and Executive Officers
Our officers are elected by and serve at the discretion of the board of directors. Our directors are not
subject to a term of office and hold office until a successor is elected at the next annual shareholders’
meeting. A director will be removed from office automatically if, among other things, the director
(i) becomes bankrupt or makes any arrangement or composition with his creditors or (ii) dies or is
found by our company to be or becomes of unsound mind. None of our directors has a service contract
with us or any of our subsidiaries providing for benefits upon termination of employment.
Committees of the Board of Directors
Our board of directors has established an audit committee, a compensation committee and a
nominating and corporate governance committee.
Audit Committee
Our audit committee consists of Messrs. Simon Anderson, Yuk Lam Lo and Meng Mei, and is
chaired by Simon Anderson, all of whom satisfy the ―independence‖ requirements of Rule 5605 of the
NASDAQ Listing Rules and Rule 10A-3 under the Securities Exchange Act of 1934. The audit
committee oversees our accounting and financial reporting processes and the audits of the financial
statements of our company. The audit committee is responsible for, among other things:
selecting our independent auditors and pre-approving all auditing and non-auditing services
permitted to be performed by our independent auditors;
reviewing with our independent auditors any audit problems or difficulties and management’s
response;
reviewing and approving all proposed related-party transactions, as defined in Item 404 of
Regulation S-K under the Securities Act;
discussing the annual audited financial statements with management and our independent auditors;
reviewing major issues as to the adequacy of our internal controls and any special audit steps
adopted in light of material control deficiencies;
annually reviewing and reassessing the adequacy of our audit committee charter;
such other matters that are specifically delegated to our audit committee by our board of directors
from time to time;
meeting separately and periodically with management and our internal and independent auditors;
and
reporting regularly to the full board of directors.
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In 2011, our audit committee held meetings or passed resolutions by unanimous written consent
seven times.
Compensation Committee
Our compensation committee consists of Messrs. Simon Anderson, Yuk Lam Lo and Mr. Meng Mei
and is chaired by Mr. Meng Mei, all of whom satisfy the ―independence‖ requirements of Rule 5605 of
the NASDAQ Listing Rules Our compensation committee assists the board in reviewing and approving
the compensation structure of our directors and executive officers, including all forms of compensation
to be provided to our directors and executive officers. Members of the compensation committee are not
prohibited from direct involvement in determining their own compensation. Our chief executive officer
may not be present at any committee meeting during which his compensation is deliberated. The
compensation committee is responsible for, among other things:
approving and overseeing the compensation package for our executive officers;
reviewing and making recommendations to the board with respect to the compensation of our
directors;
reviewing and approving corporate goals and objectives relevant to the compensation of our
chief executive officer, evaluating the performance of our chief executive officer in light of
those goals and objectives, and setting the compensation level of our chief executive officer
based on this evaluation; and
reviewing periodically and making recommendations to the board regarding any long-term
incentive compensation or equity plans, programs or similar arrangements, annual bonuses,
employee pension and welfare benefit plans.
In 2011, our compensation committee held meetings or passed resolutions by unanimous written
consent three times.
Nominating and Corporate Governance Committee
Our nominating and corporate governance committee consists of Messrs. Simon Anderson, Yuk
Lam Lo and Mr. Meng Mei and is chaired by Mr. Yuk Lam Lo, all of whom satisfy the ―independence‖
requirements of Rule 5605 of the NASDAQ Listing Rules. The former chairman, Ms. Chup Hung Mok
resigned from the board effective December 31, 2011. The nominating and corporate governance
committee assists the board of directors in identifying individuals qualified to become our directors and
in determining the composition of the board and its committees. The nominating and corporate
governance committee is responsible for, among other things:
identifying and recommending to the board nominees for election or re-election to the board, or
for appointment to fill any vacancy;
reviewing annually with the board the current composition of the board in light of the
characteristics of independence, age, skills, experience and availability of service to us;
identifying and recommending to the board the directors to serve as members of the board’s
committees;
advising the board periodically with respect to significant developments in the law and practice
of corporate governance as well as our compliance with applicable laws and regulations and
making recommendations to the board on all matters of corporate governance and on any
corrective action to be taken; and
monitoring compliance with our code of business conduct and ethics, including reviewing the
adequacy and effectiveness of our procedures to ensure proper compliance.
In 2011, our nominating and corporate governance committee held meetings or passed resolutions
by unanimous written consent three times.
Interested Transactions
A director may vote in respect of any contract or transaction in which he or she is interested,
provided that the nature of the interest of any directors in such contract or transaction is disclosed by
him or her at or prior to its consideration and any vote in that matter.
Remuneration and Borrowing
The directors may determine remuneration to be paid to the directors. The compensation committee
assists the directors in reviewing and approving the compensation structure for the directors. The
directors may exercise all the powers of the company to borrow money and to mortgage or charge its
undertaking, property and uncalled capital, and to issue debentures or other securities whether outright
or as security for any debt obligations of our company or of any third party.
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D. Employees
As of December 31, 2009, 2010 and 2011, we had 400, 483 and 614 full-time employees. Of our
workforce as of December 31, 2011, about 85 employees are engaged in research and development and
165 employees are engaged in sales and marketing. None of our employees are represented by a labor
union or covered by a collective bargaining agreement. We consider our relationship with our
employees to be good.
E. Share Ownership
The following table sets forth information with respect to the beneficial ownership of our common
shares, as of December 31, 2011, by:
each of our directors and executive officers; and
each person/organization known to us to own beneficially more than 5% of our common shares.
The calculations in the table below are based on 54,773,961 common shares outstanding as of
December 31, 2011. Beneficial ownership is determined in accordance with the rules and regulations of
the SEC. In computing the number of shares beneficially owned by a person and the percentage
ownership of that person, we have included shares that the person has the right to acquire within 60
days, including through the exercise of any option, warrant or other right or the conversion of any other
security. These shares, however, are not included in the computation of the percentage ownership of
any other person.
Directors and Executive Officers:
Weidong Yin
Simon Anderson
Yuk Lam Lo
Nan Wang
Ming Xia
Institutional Shareholders (as of
March 28)
SAIF Partners IV(1)
Wellington Management Company, LLP
Shares Beneficially Owned
%
Number
6,134,250
97,400
50,000
40,500
36,000
10,595,720
3,464,387
11 %
*
*
*
*
19.4 %
6.3 %
* Less than 1%.
(1) According to the 13-D Filing made by SAIF Partners on December 29, 2011 (shares beneficially
owned as of December 31, 2010 – 6.88%)
None of our existing shareholders has different voting rights from other shareholders. We are not
aware of any arrangement that may, at a subsequent date, result in a change of control of our company.
As of December 31, 2011, 54,773,961 of our common shares were issued and outstanding.
Approximately 89% of the issued and outstanding shares are held by the record shareholders in the
United States.
For the options granted to our directors, officers and employees, please refer to ―— B.
Compensation of Directors and Executive Officers.‖
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
Please refer to ―Item 6. Directors, Senior Management and Employees — Share Ownership.‖
B. Related Party Transactions
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Transaction with Lo Yuk Lam
In connection to the establishment of the Sinovac Hong Kong, we have been using part of our
independent director’s office as our office. We pay our share of the utilities and property management
fees.
Transactions with Certain Directors and Affiliates
We entered into two operating lease agreements with SinoBioway, a non-controlling shareholder of
Sinovac Beijing, in 2004, with respect to Sinovac Beijing’s production plant and laboratory in Beijing
for total annual rent of approximately RMB1.4 million. The leases commenced on August 12, 2004 and
have a term of 20 years. One of the lease agreements was amended on August 12, 2010 to increase the
rent from RMB452,600 to RMB1,357,000 per year. We entered into another operating lease agreement
with SinoBioway in June 2007 with respect to Sinovac Beijing’s production plant in Beijing for an
annual rent of approximately RMB2.0 million. The lease commenced in June 2007 and has a term of
20 years. In September 2010, we entered into another operating lease agreement with SinoBioway with
respect to expansion of Sinovac R&D’s (formerly known as Sinovac Biological) business on research
and development for an annual rent of approximately RMB861,000. The lease commenced on
September 30, 2010 and has a term of five years. We incurred rent of $503,136, $581,941 and
$804,565 to SinoBioway for these leases in 2009, 2010 and 2011, respectively.
In 2009, 2010 and 2011, we incurred $121,119, $176,032 and $274,812, respectively, to our
directors for management consulting services and director fees.
Share Options
See ITEM 6.B. ―Directors, Senior Management and Employees — 2003 Stock Option Plan.‖
C. Interests of Experts and Counsel
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
We have appended consolidated financial statements filed as part of this annual report.
Legal and Administrative Proceedings
In November 2008, a death of a minor in Beijing was reported, which coincided with the
administration of Healive that we produced two days prior. According to the autopsy results, the
government investigation confirmed that the death was caused by myocarditis. However, in June 2009,
parents of the dead commenced a legal proceeding against us and other three defendants at Beijing
Haidian District People’s Court and claimed RMB616,858 as compensation. On November 19, 2010,
the Beijing’s Haidian District People’s Court absolved Sinovac of liability in the matter.
On October 18, 2010, the plaintiff, Beijing Acctrue Technology Co., Ltd., filed a case of software
copyright infringement against Sinovac Beijing and other five defendants. Under its claims against
Sinovac Beijing, the plaintiff only demanded Sinovac Beijing’s immediate cease of use of the
infringing software products without demanding the destruction and deletion of the software products
involved in such case, the damages for the losses suffered by plaintiff, the recovery for reasonable
expenses incurred to plaintiff and litigation fees.
Other than as described above, we are not currently a party to any serious litigation or other legal
proceedings brought against us. We are also not aware of any legal proceedings, investigation or claim,
or other legal exposure that has a more than remote possibility of having a material adverse effect on
our business, financial condition or results of operations. We may be subject to legal proceedings,
investigations and claims incidental to the conduct of our business from time to time.
Dividend Policy
We have never declared or paid any dividends, nor do we have any present plan to pay any cash
dividends on our common shares in the foreseeable future. We currently intend to retain most, if not all,
of our available funds and any future earnings to operate and expand our business.
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. Cash dividends on our
common shares, if any, will be paid in U.S. dollars.
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We are a holding company, and we rely on the dividends paid by our majority-owned subsidiary,
Sinovac Beijing and Sinovac Dalian, and wholly owned subsidiaries Sinovac R&D through Sinovac
HK and wholly owned Tangshan Yian, for our cash needs, including the funds necessary to pay any
dividends and other cash distributions to our shareholders, service any debt we may incur and pay our
operating expenses. The payment of dividends in China is subject to limitations. Regulations in the
PRC currently permit payment of dividends by our PRC subsidiaries only out of accumulated profits as
determined in accordance with accounting standards and regulations in China. Tangshan Yian is
required to set aside at least 10% of its after-tax profits each year to contribute to its reserve fund until
the accumulated balance of such reserve fund reaches 50% of the registered capital of Tangshan Yian.
Tangshan Yian is also required to reserve a portion of its after-tax profits to its employee welfare and
bonus fund, the amount of which is subject to its board of directors. Sinovac Beijing and Sinovac
Dalian are required to set aside, at the discretion of their boards of directors, a portion of their after-tax
profits to their reserve fund, enterprise development fund and employee welfare and bonus funds.
These funds are not distributable in cash dividends.
Furthermore, under the PRC Enterprise Income Tax Law promulgated on March 16, 2007, and its
implementation rules promulgated by the State Council of China on December 6, 2007, if we are
deemed as a non-PRC tax resident enterprise without an office or premises in the PRC, withholding tax
at the rate of 10% will be applicable to dividends received by us from Tangshan Yian, unless the tax is
entitled to reduction or elimination in accordance with any future PRC laws or regulations or an
applicable tax treaty between the PRC and Antigua and Barbuda. As of the date of this annual report,
Antigua and Barbuda has not entered into any such tax treaties with the PRC. Pursuant to the double
tax arrangement between Hong Kong and PRC, dividends paid by a foreign-invested enterprise in
China to its direct holding company in Hong Kong will be subject to withholding tax at a rate of no
more than 5% (if the foreign investor owns directly at least 25% of the shares of the foreign-invested
enterprise for a period greater than 12 months), or otherwise 10%. Whether the favorable rate will be
applicable to dividends received by Sinovac Hong Kong from our PRC subsidiaries is subject to the
approval of the PRC tax authorities because it is unclear whether Sinovac Hong Kong is considered as
the beneficial owner of the dividends in substance. The PRC tax authorities have discretion to assess
whether a recipient of the PRC-sourced income is only an agent or a conduit, or lacks the requisite
amount of business substance, in which case the application of the tax arrangement may be denied.
This new withholding tax imposed on dividends paid to us by our PRC subsidiaries would reduce our
net income attributable to the stockholders.
B. Significant Changes
Except as disclosed elsewhere in this annual report, we have not experienced any significant
changes since the date of our audited consolidated financial statements included in this annual
report.
ITEM 9. THE OFFER AND LISTING
A. Offer and Listing Details
The table below sets forth, for the periods indicated, the high and low closing prices on the
NASDAQ Global Market and the NASDAQ Global Select Market for our common shares.
Annual High and Low
2007
2008
2009
2010
2011
Quarterly High and Low
First quarter 2010
Second quarter 2010
Sales Price
High
Low
8.33
5.22
12.50
7.78
4.92
7.78
6.00
2.50
0.75
1.02
3.50
1.91
5.77
3.72
Third quarter 2010
Fourth quarter 2010
First quarter 2011
Second Quarter 2011
Third Quarter 2011
Fourth Quarter 2011
Monthly High and Low
October 2011
November 2011
December 2011
January 2012
February 2012
March 2012
April 2012 (through April 11, 2012)
59
4.71
5.06
4.92
4.55
3.33
2.88
2.41
2.47
2.88
2.36
2.25
2.24
2.05
3.50
3.58
3.98
2.77
1.91
1.92
1.92
1.93
2.11
2.10
2.05
1.92
1.78
Table of Contents
B. Plan of Distribution
Not applicable.
C. Markets
Our common shares traded on the OTC Bulletin Board from February 21, 2003 to December 7, 2004.
Since December 8, 2004, our common shares have been listed on the American Stock Exchange, now
the NYSE Amex. Since November 16, 2009, our common shares have been listed on the NASDAQ
Global Market under the symbol ―SVA.‖ Since January 3, 2011, our common shares have been
included into the NASDAQ Global Select Market under the symbol ―SVA.‖
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
We are an Antiguan company with limited liability and our affairs are governed by our Articles of
Incorporation, By-laws and the International Business Corporation Act. The following are summaries
of material provisions of our Articles of Incorporation, By-laws and the International Business
Corporations Act.
General
All of our outstanding common shares are fully paid and non-assessable. The common shares are
issued in registered form. Holders of common shares are entitled to receive share certificates. Our
shareholders who are non-residents of Antigua may freely hold and vote their common shares.
Dividends
The holders of our common shares are entitled to such dividends as may be declared by our board of
directors subject to the International Business Corporations Act.
Voting rights
Each common share is entitled to one vote on all matters upon which the common shares are entitled
to vote.
A quorum required for a meeting of shareholders consists of shareholders who hold at least a
majority of our shares at the meeting present in person or by proxy. Shareholders’ meetings are held
annually and may be convened by our board of directors on its own initiative or upon a request to the
directors by shareholders holding in aggregate at least five percent of our issued share capital. Advance
notice of at least 21 days is required for the convening of our annual general meeting and other
shareholders meetings.
Unless the International Business Corporations Act otherwise requires, resolutions to be passed by
the shareholders requires a simple majority vote. Important matters such as changes to our by-laws
require a resolution passed by a vote of shareholders holding a majority of all the outstanding and
issued shares.
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Transfer of Common Shares
Our shareholders may transfer common shares by endorsing the relevant share certificates,
completing a share transfer form or by other proper evidence of succession, assignment or authority to
transfer.
Liquidation
On a return of capital on winding up or otherwise (other than on conversion, redemption or purchase
of common shares), assets available for distribution among the holders of common shares shall be
distributed among the holders of the common shares on a pro rata basis. If our assets available for
distribution are insufficient to repay all of the paid-up capital, the assets will be distributed so that the
losses are borne by our shareholders proportionately.
Inspection of Books and Records
Holders of our common shares will have no general right under Antigua law to inspect or obtain
copies of our list of shareholders or our corporate records. They may, however, access such corporate
information as is publicly available in the Companies Registry in St. John’s, Antigua. We will also
provide our shareholders with annual audited consolidated financial statements.
Changes in Capital
We may from time to time by a resolution passed by a majority of the shares entitled to vote:
increase the share capital by such sum, to be divided into shares of such classes and amount, as
the resolution may prescribe;
consolidate and divide all or any of our share capital into shares of a larger amount than our
existing shares;
sub-divide our existing shares, or any of them into shares of a smaller amount provided that in
the subdivision the proportion between the amount paid and the amount, if any unpaid on each
reduced share shall be the same as it was in case of the share from which the reduced share is
derived; and
cancel any shares which, at the date of the passing of the resolution, have not been taken or
agreed to be taken by any person and diminish the amount of our share capital by the amount of
the shares so cancelled.
We may by special resolution reduce our share capital and any capital redemption reserve in any
manner authorized by law.
Differences in Corporate Law
The International Business Corporations Act is modeled after English law but does not follow many
recent English law statutory enactments. In addition, the International Business Corporations Act
differs from laws applicable to United States corporations and their shareholders. Set forth below is a
summary of the significant differences between the provisions of the International Business
Corporations Law applicable to us and the laws applicable to companies incorporated in the United
States and their shareholders.
Mergers and Similar Arrangements
Antigua and Barbuda law does not provide for mergers as that expression is understood under
United States corporate law. However, there are statutory provisions for amalgamation that facilitate
the consolidation of companies, provided that the arrangement is approved by a majority number of
each class of shareholders and creditors with whom the arrangement is to be made, and who must in
addition represent three-fourths in value of each such class of shareholders or creditors, as the case may
be, that are present and voting either in person or by proxy at a meeting, or meetings, convened for that
purpose. The convening of the meetings and subsequently the arrangement may be, but is not required
to be, sanctioned by the High Court of Antigua and Barbuda. While a dissenting shareholder has the
right to express to the court his view that the transaction ought not to be approved, the court can be
expected to approve the arrangement if it determines that:
the statutory provisions as to the dual majority vote have been met;
the shareholders have been fairly represented at the meeting in question;
the arrangement is such that a businessman would reasonably approve; and
the arrangement is not one that would more properly be sanctioned under some other provision
of the International Business Corporations Act.
When a take-over offer is made and accepted (within four months) by holders of 90% of the shares
affected, the offerer may, within a two-month period, require the holders of the remaining shares to
transfer such shares on the terms of the offer. An objection can be made to the High Court of Antigua
and Barbuda but this is unlikely to succeed unless there is evidence of fraud, bad faith or collusion.
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If the arrangement and reconstruction is thus approved, the dissenting shareholder would have no
rights comparable to appraisal rights, which would otherwise ordinarily be available to dissenting
shareholders of United States corporations, providing rights to receive payment in cash for the
judicially determined value of the shares.
Shareholders’ Suits
We are not aware of any reported class action or derivative action having been brought in a court in
Antigua and Barbuda. In principle, the company itself will normally be the proper claimant in actions
against directors, and derivative actions may not generally be brought by a minority shareholder.
However, based on English authorities, which would in all likelihood be of persuasive authority in
Antigua and Barbuda, there are exceptions to the foregoing principle, including when:
a company acts or proposes to act illegally or ultra vires;
the act complained of, although not ultra vires, required a special resolution, which was not
obtained; and
those who control the company are perpetrating a ―fraud on the minority.‖
Directors’ Fiduciary Duties
Under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the
corporation and its shareholders. This duty has two components: the duty of care and the duty of
loyalty. The duty of care requires that a director act in good faith, with the care that an ordinarily
prudent person would exercise under similar circumstances. Under this duty, a director must inform
himself of, and disclose to shareholders, all material information reasonably available regarding a
significant transaction. The duty of loyalty requires that a director act in a manner he reasonably
believes to be in the best interests of the corporation. He must not use his corporate position for
personal gain or advantage. This duty prohibits self-dealing by a director and mandates that the best
interest of the corporation and its shareholders take precedence over any interest possessed by a
director, officer or controlling shareholder and not shared by the shareholders generally. In general,
actions of a director are presumed to have been made on an informed basis, in good faith and in the
honest belief that the action taken was in the best interests of the corporation. However, this
presumption may be rebutted by evidence of a breach of one of the fiduciary duties. Should such
evidence be presented concerning a transaction by a director, a director must prove the procedural
fairness of the transaction, and that the transaction was of fair value to the corporation. As a matter of
Antigua and Barbuda law, a director of an Antigua and Barbuda company is in the position of a
fiduciary with respect to the company and therefore it is considered that he owes the following duties to
the company — a duty to act bona fide in the best interests of the company, a duty not to make a profit
out of his position as director (unless the company permits him to do so) and a duty not to put himself
in a position where the interests of the company conflict with his personal interest or his duty to a third-
party. A director of an Antigua and Barbuda company owes to the company a duty to act with skill and
care. It was previously considered that a director need not exhibit in the performance of his duties a
greater degree of skill than may reasonably be expected from a person of his knowledge and experience.
However, English and Commonwealth courts have moved towards an objective standard with regard to
the required skill and care and these authorities are likely to be followed in Antigua and Barbuda.
Shareholder Action by Written Consent
Under the Delaware General Corporation Law, a corporation may eliminate the right of shareholders
to act by written consent by amendment to its certificate of incorporation. Antigua and Barbuda law
and our by-laws provide that shareholders may approve corporate matters by way of a unanimous
written resolution signed by or on behalf of each shareholder who would have been entitled to vote on
such matter at a general meeting without a meeting being held.
Shareholder Proposals
Under the Delaware General Corporation Law, a shareholder has the right to put any proposal before
the annual meeting of shareholders, provided it complies with the notice provisions in the governing
documents. A special meeting may be called by the board of directors or any other person authorized to
do so in the governing documents, but shareholders may be precluded from calling special meetings.
Antigua and Barbuda law and our by-laws allow our shareholders holding not less than five per cent of
the paid up voting share capital of the Company to requisition a shareholder’s meeting. We are
obligated under our by-laws and the International Business Corporations Act to call shareholders’
annual general meetings.
Cumulative Voting
Under the Delaware General Corporation Law, cumulative voting for elections of directors is not
permitted unless the corporation’s certificate of incorporation specifically provides for it. Cumulative
voting potentially facilitates the representation of minority shareholders on a board of directors since it
permits the minority shareholder to cast all the votes to which the shareholder is entitled on a single
director, which increases the shareholder’s voting power with respect to electing such director. As
permitted
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under Antigua and Barbuda law, our by-laws will not provide for cumulative voting. As a result, our
shareholders are not afforded any less protections or rights on this issue than shareholders of a
Delaware corporation.
Removal of Directors
Under the Delaware General Corporation Law, a director of a corporation with a classified board
may be removed only for cause with the approval of a majority of the outstanding shares entitled to
vote, unless the certificate of incorporation provides otherwise. Under our by-laws, directors can be
removed by a majority vote of the shareholders.
Transactions with Interested Shareholders
The Delaware General Corporation Law contains a business combination statute applicable to
Delaware public corporations whereby, unless the corporation has specifically elected not to be
governed by such statute by amendment to its certificate of incorporation, it is prohibited from
engaging in certain business combinations with an ―interested shareholder‖ for three years following
the date that such person becomes an interested shareholder. An interested shareholder generally is a
person or a group who or which owns or owned 15% or more of the target’s outstanding voting stock
within the past three years. This has the effect of limiting the ability of a potential acquirer to make a
two-tiered bid for the target in which all shareholders would not be treated equally. The statute does not
apply if, among other things, prior to the date on which such shareholder becomes an interested
shareholder, the board of directors approves either the business combination or the transaction which
resulted in the person becoming an interested shareholder. This encourages any potential acquirer of a
Delaware public corporation to negotiate the terms of any acquisition transaction with the target’s
board of directors.
Antigua and Barbuda law has no comparable statute. As a result, we cannot avail ourselves of the
types of protections afforded by the Delaware business combination statute. However, although
Antigua and Barbuda law does not regulate transactions between a company and its significant
shareholders, it does provide that such transactions must be entered into bona fide in the best interests
of the company and not with the effect of constituting a fraud on the minority shareholders.
Dissolution; Winding Up
Under the Delaware General Corporation Law, unless the board of directors approves the proposal
to dissolve, dissolution must be approved by shareholders holding 100% of the total voting power of
the corporation. Only if the dissolution is initiated by the board of directors may it be approved by a
simple majority of the corporation’s outstanding shares. Delaware law allows a Delaware corporation
to include in its certificate of incorporation a supermajority voting requirement in connection with
dissolutions initiated by the board. Under the International Business Corporations Law, our company
may be dissolved, liquidated or wound up only by the vote of holders of two-thirds of our shares voting
at a meeting or the unanimous written resolution of all shareholders.
Variation of Rights of Shares
Under the Delaware General Corporation Law, a corporation may vary the rights of a class of shares
with the approval of a majority of the outstanding shares of such class, unless the certificate of
incorporation provides otherwise. Under Antigua and Barbuda law and our by-laws, if our share capital
is divided into more than one class of shares, we may vary the rights attached to any class only with the
vote at a class meeting of holders of two-thirds of the shares of such class or unanimous written
resolution.
Amendment of Governing Documents
Under the Delaware General Corporation Law, a corporation’s governing documents may be
amended with the approval of a majority of the outstanding shares entitled to vote, unless the certificate
of incorporation provides otherwise. As permitted by Antigua and Barbuda law, our by-laws may only
be amended with the vote of holders representing a majority of all our shares voting issued and
outstanding or the unanimous written resolution of all shareholders.
Indemnification of Directors and Executive Officers and Limitation of Liability
Antigua and Barbuda law does not limit the extent to which a company’s by-laws may provide for
indemnification of officers and directors, except to the extent any such provision may be held by the
Antigua and Barbuda courts to be contrary to public policy, such as to provide indemnification against
civil fraud or the consequences of committing a crime. Our by-laws permit indemnification of officers
and directors for losses, damages, costs and expenses incurred in their capacities as such unless such
losses or damages arise from negligence or illegal action of such directors or officers. This standard of
conduct is generally the same as permitted under the Delaware General Corporation Law to a Delaware
corporation. In addition, we have entered into indemnification agreements with our directors and senior
executive officers that provide such persons with additional indemnification beyond that provided in
our by-laws.
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Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our
directors, officers or persons controlling us under the foregoing provisions, we have been informed that
in the opinion of the SEC such indemnification is against public policy as expressed in the Securities
Act and is therefore unenforceable as a matter of United States law.
We have obtained directors and officers insurance providing indemnification for our directors for
certain liabilities.
Anti-takeover Provisions in the By-laws
Some provisions of our By-laws may discourage, delay or prevent a change in control of our
company or management that shareholders may consider favorable, including provisions that authorize
our board of directors to issue preference shares in one or more series and to designate the price, rights,
preferences, privileges and restrictions of such preference shares without any further vote or action by
our shareholders.
However, under Antigua and Barbuda law, our directors may only exercise the rights and powers
granted to them under our By-laws for what they believe in good faith to be in the best interests of our
company.
Rights of Non-resident or Foreign Shareholders
There are no limitations imposed by our by-laws on the rights of non-resident or foreign
shareholders to hold or exercise voting rights on our shares. In addition, there are no provisions in our
by-laws governing the ownership threshold above which shareholder ownership must be disclosed.
C. Material Contracts
We have not entered into any material contracts other than in the ordinary course of business and
other than those described in Item 4, ―Information on the Company‖ or elsewhere in this annual report
on Form 20-F.
D. Exchange Controls
Foreign Currency Exchange
Pursuant to the Foreign Currency Administration Rules promulgated in 1996 and amended in 1997
and various regulations issued by State Administration of Foreign Exchange, or SAFE, and other
relevant PRC government authorities, renminbi is freely convertible only to the extent of current
account items, such as trade related receipts and payments, interest and dividends. Capital account
items, such as direct equity investments, loans and repatriation of investment, require the prior approval
from SAFE or its local counterpart for conversion of renminbi into a foreign currency, such as U.S.
dollars, and remittance of the foreign currency outside the PRC.
Payments for transactions that take place within PRC must be made in renminbi. Unless otherwise
approved, PRC companies must repatriate foreign currency payments received from abroad. Foreign-
invested enterprises may retain foreign exchange in accounts with designated foreign exchange banks
subject to a cap set by SAFE or its local counterpart. Unless otherwise approved, domestic enterprises
must convert all of their foreign currency receipts into renminbi.
E. Taxation
Antigua and Barbuda Taxation
We and our securities holders, other than those resident in Antigua and Barbuda, are exempt from
Antigua and Barbuda income, corporation or profits tax, withholding tax, capital gains tax, capital
transfer tax, estate duty or inheritance tax. We are not subject to stamp or other similar duty on the
issuance, transfer or redemption of our common shares. Under Section 276 of the International
Business Corporations Act of Antigua and Barbuda, the tax exemption we and our securities holders
currently enjoy will continue in effect for a period of 50 years from our date of incorporation, which is
March 1, 1999. No reciprocal income tax treaty affecting us exists between Antigua and Barbuda and
the United States.
United States Federal Income Taxation
The following discussion describes the material U.S. federal income tax consequences to U.S.
Holders (as defined below) under current law of an investment in our common shares. This discussion
applies only to U.S. Holders that hold our common shares as capital assets (generally, property held for
investment) and have the U.S. dollar as their functional currency. This discussion is based on the tax
laws of the United States as in effect on the date of this annual report and on U.S. Treasury regulations
in effect or, in some cases, proposed as of the date of this annual report, as well as judicial and
administrative interpretations thereof available on or before such date. All of the foregoing authorities
are subject to change, which change could apply retroactively and could affect the tax consequences
described below.
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The following discussion does not deal with the tax consequences to any particular investor or to
persons in special tax situations such as:
banks and other financial institutions;
insurance companies;
regulated investment companies;
real estate investment trusts;
broker-dealers;
traders that elect to use a mark-to-market method of accounting;
U.S. expatriates;
tax-exempt entities;
persons liable for alternative minimum tax;
persons holding a common share as part of a straddle, hedging, conversion or integrated
transaction;
persons that actually or constructively own 10% or more of the total combined voting power of
all classes of our voting stock;
partnerships or other pass-through entities, or persons holding our common shares through such
entities; or
persons who acquired our common shares pursuant to the exercise of any employee share
option or otherwise as compensation.
INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE
APPLICATION OF THE U.S. FEDERAL INCOME TAX RULES TO THEIR PARTICULAR
CIRCUMSTANCES AS WELL AS THE ESTATE AND GIFT, STATE, LOCAL AND FOREIGN
TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF
OUR COMMON SHARES.
The discussion below of the U.S. federal income tax consequences to ―U.S. Holders‖ will apply to
you if you are a beneficial owner of our common shares and you are, for U.S. federal income tax
purposes:
an individual who is a citizen or resident of the United States;
a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes)
created or organized under the laws of the United States, any State thereof or the District of
Columbia;
an estate, the income of which is subject to U.S. federal income taxation regardless of its source;
or
a trust that (1) is subject to the primary supervision of a court within the United States and the
control of one or more U.S. persons for all substantial decisions or (2) has a valid election in
effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
If a partnership (or other entity taxable as a partnership for U.S. federal income tax purposes) is a
beneficial owner of our common shares, the tax treatment of a partner in the partnership generally will
depend upon the status of the partner and the activities of the partnership.
Taxation of Dividends and Other Distributions on Our Common Shares
Subject to the passive foreign investment company, or PFIC, rules discussed below, the gross
amount of any distributions we make to you with respect to our common shares generally will be
includible in your gross income in the year received as dividend income to the extent the distribution is
paid out of our current or accumulated earnings and profits (as determined under U.S. federal income
tax principles). To the extent the amount of the distribution exceeds our current and accumulated
earnings and profits, such excess amount will be treated first as a tax-free return of your tax basis in
your common shares, and then, to the extent such excess amount exceeds your tax basis, as capital gain.
We currently do not, and we do not intend to, calculate our earnings and profits under U.S. federal
income tax principles. Therefore, a U.S. Holder should expect that a distribution will generally be
reported as a dividend even if that distribution would otherwise be treated as a non-taxable return of
capital or as capital gain under the rules described above. Any dividends we pay will not be eligible for
the dividends-received deduction allowed to corporations in respect of dividends received from U.S.
corporations.
With respect to certain non-corporate U.S. Holders, including individual U.S. Holders, for taxable
years beginning before January 1, 2013, dividends may constitute ―qualified dividend income‖ eligible
to be taxed at the preferential rate applicable to capital gains (currently, a maximum rate of 15 percent),
provided that (1) our common shares are readily tradable on an established securities market in the
United States, or we are eligible for the benefits of a qualifying income tax treaty with the United
States that includes an exchange of information program, (2) we are neither a PFIC nor treated as such
with respect to you (as discussed
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below) for the taxable year in which the dividend was paid and the preceding taxable year and
(3) certain holding period requirements are met. Under Internal Revenue Service authority, common
shares are considered for the purpose of clause (1) above to be readily tradable on an established
securities market in the United States if they are listed on the NASDAQ Global Select Market, as our
common shares are. If we are treated as a ―resident enterprise‖ for PRC tax purposes under the EIT law
(see ―Item 10. Additional Information — E. Taxation — PRC Taxation‖), we may be eligible for the
benefits of the income tax treaty between the United States and the PRC. You should consult your tax
advisors regarding the availability of the lower capital gains rate applicable to qualified dividend
income for dividends paid with respect to our common shares.
Dividends generally will constitute foreign source income for foreign tax credit limitation purposes.
If the dividends are taxed as qualified dividend income (as discussed above), the amount of the
dividend taken into account for purposes of calculating the U.S. foreign tax credit limitation generally
will be limited to the gross amount of the dividend, multiplied by the reduced tax rate applicable to
qualified dividend income and divided by the highest tax rate normally applicable to dividends. The
limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of
income. For this purpose, dividends distributed by us with respect to our common shares generally will
constitute ―passive category income‖ but could, in the case of certain U.S. Holders, constitute ―general
category income.‖
If PRC withholding taxes apply to dividends paid to you with respect to the common shares (see
―Item 10. Additional Information — E. Taxation — PRC Taxation‖), subject to certain conditions and
limitations, such PRC withholding taxes may be treated as foreign taxes eligible for credit against your
U.S. federal income tax liability. The rules relating to the determination of the foreign tax credit are
complex, and you should consult your tax advisors regarding the availability of a foreign tax credit in
your particular circumstances.
Taxation of Disposition of Our Common Shares
Subject to the PFIC rules discussed below, you will recognize taxable gain or loss on any sale,
exchange or other taxable disposition of a common share equal to the difference between the amount
realized for the common share and your tax basis in the common share. Your tax basis in our common
shares will generally equal the cost of such shares. The gain or loss generally will be capital gain or
loss. If you are a non-corporate U.S. Holder, including an individual U.S. Holder, who has held the
common share for more than one year, you will be eligible for reduced tax rates. The deductibility of
capital losses is subject to limitations.
Any gain or loss you recognize on a disposition of our common shares generally will be treated as
U.S. source income or loss for foreign tax credit limitation purposes. However, if we are treated as a
resident enterprise for PRC tax purposes and PRC tax were to be imposed on any gain from the
disposition of the common shares (see ―Item 10. Additional Information — E. Taxation — PRC
Taxation‖), a U.S. Holder that is eligible for the benefits of the income tax treaty between the United
States and the PRC may elect to treat the gain as PRC source income. You should consult your tax
advisors regarding the proper treatment of gain or loss in your particular circumstances.
Passive Foreign Investment Company
Based on the market price of our common shares, the value of our assets, and the composition of our
income and assets, we do not believe we were a passive foreign investment company, or PFIC, for U.S.
federal income tax purposes for our taxable year ended December 31, 2011.
A non-U.S. corporation will be a PFIC for any taxable year if either:
at least 75% of its gross income for such year is passive income, or
at least 50% of the value of its assets (based on an average of the quarterly values of the assets)
during such year is attributable to assets that produce passive income or are held for the
production of passive income.
For purposes of the PFIC rules, passive income includes, among other things, dividends, interest,
royalties, rents, annuities, and net gains from certain commodity and foreign currency transactions,
subject to certain exceptions. Passive income generally does not include rents and royalties derived
from the active conduct of a trade or business (other than from a related person). We will be treated as
owning our proportionate share of the assets and earning our proportionate share of the income of any
other corporation in which we own, directly or indirectly, at least 25% (by value) of the stock.
We must make a separate determination after the close of each year as to whether we were a PFIC
for that year. The composition of our income and assets will be affected by how, and how quickly, we
use any cash we generate from our operations or raise in any offering. Because the value of our assets
for purposes of the PFIC test will generally be determined by reference to the market price of our
common shares, fluctuations in the market price of our common shares may cause us to become a PFIC
for any year. If we are a PFIC for any year during which you hold our common shares, we generally
will continue to be treated as a PFIC with respect to you for all succeeding years during which you hold
our common shares, unless we cease to be a PFIC and you make a ―deemed sale‖ election with respect
to our common shares. If such election is made, you will be deemed to have sold common shares you
hold at their fair market value and any gain from such deemed sale would be subject to the
rules described in the following two paragraphs. After the deemed sale election, your common shares
with respect to which such election was made will not be treated as shares in a PFIC unless we
subsequently become a PFIC.
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For each taxable year we are treated as a PFIC with respect to you, you will be subject to special tax
rules with respect to any ―excess distribution‖ you receive and any gain you recognize from a sale or
other disposition (including a pledge) of the common shares, unless you make a ―mark-to-market‖
election as discussed below. In addition, a step-up in the tax basis of stock in a PFIC may not be
available upon the death of an individual U.S. Holder. Distributions you receive in a taxable year that
are greater than 125% of the average annual distributions you received during the shorter of the three
preceding taxable years or your holding period for the common shares will be treated as an excess
distribution. Under these special tax rules:
the excess distribution or recognized gain will be allocated ratably over your holding period for
the common shares;
the amount allocated to the current taxable year, and any taxable years in your holding period
prior to the first taxable year in which we became a PFIC, will be treated as ordinary income;
and
the amount allocated to each other year will be subject to the highest tax rate in effect for
individuals or corporations, as applicable, for each such year, and the interest charge generally
applicable to underpayments of tax will be imposed on the resulting tax attributable to each
such year.
The tax liability for amounts allocated to years prior to the year of disposition or excess distribution
cannot be offset by any net operating losses for such years, and gains (but not losses) from a sale or
other disposition of the common shares cannot be treated as capital, even if you hold the common
shares as capital assets.
If we are treated as a PFIC with respect to you for any taxable year, to the extent any of our
subsidiaries are also PFICs or we make direct or indirect equity investments in other entities that are
PFICs, you will be deemed to own shares in such lower-tier PFICs directly or indirectly owned by us in
the proportion that the value of the common shares you own bears to the value of all of our common
shares, and you may be subject to the rules described in the preceding two paragraphs with respect to
the shares of such lower-tier PFICs that you would be deemed to own. You should consult your tax
advisors regarding the application of the PFIC rules to any of our subsidiaries.
A U.S. Holder of marketable stock (as defined below) in a PFIC may make a mark-to-market
election for such stock to elect out of the PFIC rules described above regarding excess distributions and
recognized gains. If you make a mark-to-market election for the common shares, you will include in
income for each year that we are a PFIC an amount equal to the excess, if any, of the fair market value
of the common shares as of the close of your taxable year over your adjusted basis in such common
shares. You will be allowed a deduction for the excess, if any, of the adjusted basis of the common
shares over their fair market value as of the close of the taxable year. However, deductions will be
allowable only to the extent of any net mark-to-market gains on the common shares included in your
income for prior taxable years. Amounts included in your income under a mark-to-market election, as
well as gain from the actual sale or other disposition of the common shares will be treated as ordinary
income. Ordinary loss treatment will apply to the deductible portion of any mark-to-market loss on the
common shares, as well as to any loss from the actual sale or other disposition of the common shares,
to the extent that the amount of such loss does not exceed the net mark-to-market gains previously
included for such common shares. Your basis in the common shares will be adjusted to reflect any such
income or loss amounts. If you make a valid mark-to-market election, any distributions we make would
generally be subject to the tax rules discussed above under ―— Taxation of Dividends and Other
Distributions on Our Common Shares,‖ except the lower capital gains rate applicable to qualified
dividend income would not apply.
The mark-to-market election is available only for ―marketable stock,‖ which generally is defined as
stock that is traded in greater than de minimis quantities on at least 15 days during each calendar
quarter (―regularly traded‖) on a qualified exchange or other market, as defined in applicable U.S.
Treasury regulations. Our common shares are listed on the NASDAQ Global Select Market, which is a
qualified exchange or other market for these purposes. Consequently, if the common shares remain
listed on the NASDAQ Global Select Market and are regularly traded, and you are a holder of common
shares, we expect the mark-to-market election would be available to you if we become a PFIC.
Because a mark-to-market election cannot be made for equity interests in any lower-tier PFICs that we
own, a U.S. Holder may continue to be subject to the PFIC rules described above regarding excess
distributions and recognized gains with respect to its indirect interest in any investments held by us that
are treated as an equity interest in a PFIC for U.S. federal income tax purposes.
Alternatively, a U.S. Holder of stock in a PFIC may make a ―qualified electing fund‖ election with
respect to such corporation to elect out of the PFIC rules described above regarding excess distributions
and recognized gains. A U.S. Holder that makes a qualified electing fund election with respect to a
PFIC will generally include in income such holder’s pro rata share of the corporation’s income on a
current basis. However, you may make a qualified electing fund election with respect to your common
shares only if we furnish you annually with certain tax information, and we currently do not intend to
prepare or provide such information.
Unless otherwise provided by the U.S. Treasury, each U.S. shareholder of a PFIC is required to file
an annual report containing such information as the U.S. Treasury may require. If we become a PFIC,
you should consult your tax advisors regarding any reporting requirements that may apply to you.
You are urged to consult your tax advisors regarding the application of the PFIC rules to your
investment in our common shares.
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Information Reporting and Backup Withholding
Dividend payments with respect to our common shares and proceeds from the sale, exchange or
redemption of our common shares may be subject to information reporting to the Internal Revenue
Service and possible U.S. backup withholding at a current rate of 28%. Backup withholding will not
apply, however, to a U.S. Holder that furnishes a correct taxpayer identification number and makes any
other required certification on Internal Revenue Service Form W-9 or that is otherwise exempt from
backup withholding. U.S. Holders that are required to establish their exempt status generally must
provide such certification on Internal Revenue Service Form W-9. U.S. Holders should consult their
tax advisors regarding the application of the U.S. information reporting and backup withholding rules.
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be
credited against your U.S. federal income tax liability, and you may obtain a refund of any excess
amounts withheld under the backup withholding rules by filing the appropriate claim for refund with
the Internal Revenue Service and furnishing any required information in a timely manner.
Additional Reporting Requirements
Certain U.S. Holders who are individuals are required to report information relating to an interest in
our common shares, subject to certain exceptions (including an exception for common shares held in
accounts maintained by certain financial institutions). U.S. Holders should consult their tax advisors
regarding the effect, if any, of these rules on their ownership and disposition of our common shares.
PRC Taxation
Under the EIT law, which took effect as of January 1, 2008, enterprises established under the laws
of non-PRC jurisdictions but whose ―de facto management body‖ is located in China are considered
―resident enterprises‖ for PRC tax purposes. Under the implementation regulations issued by the State
Council relating to the EIT law, ―de facto management bodies‖ are defined as the bodies that have
material and overall management control over the business, personnel, accounts and properties of an
enterprise. Substantially all of our management are currently based in China, and may remain in China
in the future. If we were treated as a ―resident enterprise‖ for PRC tax purposes, we would be subject to
PRC income tax on our worldwide income at a uniform tax rate of 25%. Dividends received by us from
our PRC subsidiaries and the capital gains derived from transferring our 71.56% interest to Sinovac
Hong Kong may be exempt from PRC withholding tax but be subject to PRC income tax at 25%.
Under the EIT law and its implementation regulations, dividends paid to a non-PRC investor are
generally subject to a 10% PRC withholding tax, if such dividends are derived from sources within
China and the non-PRC investor is considered to be a non-resident enterprise without any
establishment or place of business within China or if the dividends paid have no connection with the
non-PRC investor’s establishment or place of business within China, unless such tax is eliminated or
reduced under an applicable tax treaty. Similarly, any gain realized on the transfer of common shares
by such investor is also subject to a 10% PRC withholding tax if such gain is regarded as income
derived from sources within China, unless such tax is eliminated or reduced under an applicable tax
treaty.
If we were considered a PRC ―resident enterprise‖, it is possible that the dividends we pay with
respect to our common shares, or the gain you may realize from the transfer of our common shares,
would be treated as income derived from sources within China and be subject to the 10% PRC
withholding tax.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We are subject to the periodic reporting and other informational requirements of the Exchange Act.
Under the Securities Exchange Act of 1934, we are required to file reports and other information with
the SEC. Specifically, we are required to file annually a Form 20-F: (1) within six months after the end
of each fiscal year, which is December 31, for fiscal years ending before December 15, 2011 and
(2) within four months after the end of each fiscal year for fiscal years ending on or after December 15,
2011. Copies of reports and other information, when so filed, may be inspected without charge and
may be obtained at prescribed rates at the public reference facilities maintained by the Securities and
Exchange Commission at Judiciary Plaza, 100 F Street, N.E., Washington, D.C. 20549, and at the
regional office of the Securities and Exchange Commission located at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. The public may obtain information regarding the
Washington, D.C. Public Reference Room by calling the Commission at 1-800-SEC-0330. The SEC
also maintains a web site at http://www.sec.gov that contains reports, proxy and information statements,
and other information regarding registrants that make electronic filings with the SEC using its EDGAR
system. As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing
the furnishing and content of quarterly reports and proxy statements, and officers, directors and
principal shareholders are exempt from the reporting and short-swing profit recovery provisions
contained in Section 16 of the Exchange Act.
We will furnish the transfer agent of our common shares, with our annual reports, which will include
a review of operations and annual audited consolidated financial statements prepared in conformity
with U.S. GAAP, and all notices of shareholders’ meetings and other reports and communications that
are made generally available to our shareholders. The transfer agent will make such notices, reports and
communications available to holders of our common shares and, upon our request, will mail to all
record holders of our common shares the information contained in any notice of a shareholders’
meeting received by the transfer agent from us.
In accordance with the NASDAQ Rules, we will post this annual report on Form 20-F on our
website http://www.sinovac.com. In addition, we will provide hardcopies of our annual report free of
charge to shareholders upon request.
I. Subsidiary Information
For a listing of our subsidiaries, see ―Item 4. C. Information on the Company — Organizational
Structure.‖
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange Risk
Our revenues and costs and our expenses (other than U.S. dollar denominated professional, investor
relations and miscellaneous fees related to our operations as a public company) are currently
denominated entirely in renminbi. Our exposure to foreign exchange risk primarily relates to cash and
cash equivalents denominated in U.S. dollars as a result of our past issuances of common shares
through a private placement and proceeds from our public offering of common shares. Furthermore, the
renminbi prices of some of the materials and supplies for reagent kits that are imported from companies
in the United States, Finland and Sweden may be affected by fluctuations in the value of renminbi
against the currencies of those countries. We do not believe that
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we currently have any significant direct foreign currency exchange rate risk and have not hedged
exposures denominated in foreign currencies or any other derivative financial instruments.
The value of the renminbi against the U.S. dollar and other currencies may fluctuate and is affected
by, among other things, changes in China’s political and economic conditions. The conversion of
renminbi into foreign currencies, including U.S. dollars, has been based on rates set by the People’s
Bank of China. On July 21, 2005, the PRC government changed its decade-old policy of pegging the
value of the renminbi to the U.S. dollar. Under the new policy, the renminbi is permitted to fluctuate
within a narrow and managed band against a basket of certain foreign currencies. This change in policy
caused the renminbi to appreciate approximately 21.5% against the U.S. dollar over the following three
years. Since reaching a high against the U.S. dollar in July 2008, however, the renminbi has traded
within a narrow band against the U.S. dollar until June 2010, when the renminbi began to further
appreciate against the U.S. dollar as a result of the PRC government’s announcement on June 19, 2010
that it would further increase the flexibility of the renminbi exchange rate. These changes in currency
policies resulted in an appreciation of the renminbi against the U.S. dollar by approximately 31.5%
between July 21, 2005 and December 31, 2011. There remains significant international pressure on the
PRC government to adopt an even more flexible currency policy, which could result in a further and
more significant appreciation of the renminbi against the U.S. dollar. By way of example, assuming we
had converted a U.S. dollar denominated cash balance of $1.0 million as of December 31, 20111 into
renminbi at the exchange rate of $1.00 for RMB6.3647 as of December 31, 20111, such a cash balance
would have been RMB6.36 million. Assuming a further 1% appreciation of the renminbi against the
U.S. dollar, such a cash balance would have decreased to RMB6.30 million as of December 31, 2011.
Our financial statements are expressed in U.S. dollars but our subsidiaries’ functional currency is
renminbi. The value of our shares will be affected by the foreign exchange rate between U.S. dollars
and renminbi. To the extent we hold assets denominated in U.S. dollars, any appreciation of the
renminbi against the U.S. dollar could result in a change to our statement of operations and a reduction
in the value of our U.S. dollar denominated assets. On the other hand, a decline in the value of
renminbi against the U.S. dollar could reduce the U.S. dollar equivalent amounts of our financial
results, the value of your investment in our company and the dividends we may pay in the future, if any,
all of which may have a material adverse effect on the prices of our shares.
Interest Rate Risk
Our exposure to interest rate risk relates primarily to the interest expenses associated with our short-
term and/or long-term bank borrowings as well as interest income provided by excess cash invested in
demand and term deposits. Such borrowing and interest-earning instruments carry a degree of interest
rate risk. We have not historically used, and do not expect to use in the future, any derivative financial
instruments to manage our exposure to interest risk. We have not been exposed nor do we anticipate
being exposed to material risks due to changes in interest rates. The weighted effective interest rate on
our outstanding loans was 5.78%, 5.56% and 6.71% for the years ended December 31, 2009, 2010 and
2011. A hypothetical increase in interest rates of 1% would increase our annual interest and financing
expenses by $215,000 based on our outstanding indebtedness as of December 31, 2011.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND
USE OF PROCEEDS
A. — D. Material Modifications to the Rights of Security Holders
None.
F. Use of Proceeds
On February 2, 2010, we completed a follow-on public offering of our common shares. In this
follow-on offering, we issued and sold an aggregate of 11,500,000 common shares at $5.75 per share.
The common shares offered and sold were registered pursuant to the registration statement on Form F-
3 (File Number: 333-163165) effective on November 30, 2010 and the registration statement on
Form F-3 (File Number: 333-164559) effective on January 27, 2010. UBS Securities LLC and Piper
Jaffray & Co. were the representatives of the underwriters of the offering. We received net proceeds of
approximately $61.8 million, after deducting underwriting discounts and commissions and estimated
offering expenses payable by us. We intend to use the net proceeds we received from this offering for
the following purposes:
up to $30.0 million to fund the acquisition and expansion of production facilities and the
enhancement of production lines;
up to $15.0 million to fund the research and development of our product candidates and the
expansion of our product pipeline; and
the remaining amount for general corporate purposes.
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The foregoing use of our net proceeds received from this offering represents our current intentions
based upon our present plans and business condition. The amounts and timing of any expenditure will
vary depending on the amount of cash generated by our operations, competitive and technological
developments and the rate of growth, if any, of our business. Accordingly, our management will have
significant discretion in the allocation of the net proceeds we received from this offering. Depending on
future events and other changes in the business climate, we may determine at a later time to use the net
proceeds for different purposes, including repayment of certain of our outstanding bank borrowings.
Pending the use of the net proceeds, we intend to invest the net proceeds in a variety of capital
preservation instruments, including short-term, investment-grade, interest-bearing instruments.
We have spent approximately $16.4 million in acquisition of Sinovac Dalian and invested $4.4
million in research and development.
ITEM 15. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
In connection with the preparation of this annual report on Form 20-F, we carried out an evaluation
of the effectiveness of our disclosure controls and procedures, which is defined in Rules 13a-15(e) of
the Exchange Act, as of the period covered by this annual report. Based on this evaluation, our chief
executive officer and chief financial officer concluded that our system of disclosure controls and
procedures was effective as of December 31, 2011. Please see below under ―Management’s Annual
Report on Internal Control over Financial Reporting.‖
Changes in Internal Control over Financial Reporting
As previously reported, we identified a material weakness as of December 31, 2010 related to the
Company’s financial statement close process with respect to accounting estimates related to sales
provision, allowance for doubtful accounts provision and inventory provision, which was subsequently
remedied in 2011.
We implemented a number of changes in our internal control over financial reporting during the
year ended December 31, 2011. As of December 31, 2011, we have fully remediated the
aforementioned material weakness in our internal control over financial reporting. Our remediation
actions included the following:
Designed and implemented additional control procedures related to sales provision, allowance
for doubtful accounts provision and inventory provision;
Timely and accurately collected information with respect to products held in the distribution
channel and the related products’ shelve lives from the regional sales team to the financial
reporting department; and
Performed in-depth analysis including retrospective reviews with respect to significant
accounting estimates to evaluate appropriateness of the estimation method and make
necessary adjustments to reflect the change of business or market environment to arrive at
appropriate provisions.
As required by Rule 13a-15(d), under the Exchange Act, our management, including our chief
executive officer and chief financial officer, has conducted an evaluation of our internal control over
financial reporting to determine whether any changes occurred during the period covered since last
report have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting. Based on this evaluation, except as described above, it has been determined that
there has been no change during the period covered by this annual report that materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting. Our management
will continue to work to strengthen our internal controls over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, which is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our
internal control system was designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation and fair presentation of the consolidated financial statements for
external purposes in accordance with accounting principles generally accepted in the United States and
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of a company’s assets, (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated
financial statements in accordance with generally accepted accounting principles, and that a company’s
receipts and expenditures are being made only in accordance with authorizations of a company’s
management and directors, and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of a company’s assets that could have a
material effect on the consolidated financial statements.
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Our management conducted an assessment of the effectiveness of our internal control over financial
reporting as of December 31, 2011. In making this assessment, we used the criteria established within
the Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. This evaluation included review of the documentation of controls,
evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and
a conclusion on this evaluation. Based on this evaluation, we concluded that our internal control
process over financial reporting was effective as of December 31, 2011.
All internal control systems, no matter how well designed, have inherent limitations. Therefore,
even those systems determined to be effective may not prevent or detect misstatements and can provide
only reasonable assurance with respect to financial statement preparation and presentation. 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.
Ernst & Young LLP, an independent registered public accounting firm that audited the financial
statements included in this annual report, has issued an attestation report on the effectiveness of our
internal control over financial reporting.
Attestation Report of the Registered Public Accounting Firm
The attestation report issued by Ernst & Young LLP, an independent registered public accounting
firm, on the effectiveness of internal control over financial reporting can be found on page F-3 of this
annual report.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that we have at least one audit committee financial expert
serving on our Audit Committee. Our audit committee financial expert is Mr. Simon Anderson. Each
member of our Audit Committee, including Mr. Anderson, satisfies the ―independence‖ requirements
of the NASDAQ Marketplace rule and Rule 10A-3 under the Exchange Act.
ITEM 16B. CODE OF ETHICS
Our board of directors has adopted a code of ethics that applies to our directors, officers, employees
and agents, including certain provisions that specifically apply to our chief executive officer, chief
financial officer, vice presidents and any other persons who perform similar functions for us. We have
filed our code of business conduct and ethics as an exhibit our annual report on Form 20-F (file no.
001-32371) filed with the SEC on July 14, 2006, and posted the code on our website at
http://www.sinovac.com. We hereby undertake to provide to any person without charge, a copy of our
code of business conduct and ethics within ten working days after we receive such person’s written
request.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees by categories specified below in connection with
certain professional services rendered by Ernst & Young LLP, our principal external auditors, for 2009
and 2010. We did not pay any other fees to our auditors during the periods indicated below.
Audit fees(1)
Audit-related fees(2)
Tax consulting service fees(3)
2010
2011
$ 510,170 $ 524,000
115,054
—
—
(1) ―Audit Fees‖ means the aggregate fees billed in each of the fiscal years listed for professional
services rendered by our principal auditors for the audit of our annual financial statements and
review of financial statements included in our Form 20-Fs or services that are normally provided by
accountants in connection with statutory and regulatory engagements for those fiscal years.
(2) ―Audit-Related Fees‖ means the aggregate fees billed in each of the fiscal years listed for assurance
and related services rendered by our principal auditors that are reasonably related to the performance
of the audit or review of our financial statements and are not reported under ―Audit Fees.‖ The
services comprising the fees under this category include the work performed related to the
prospectus filed by us during the year ended December 31, 2010.
(3) ―Tax consulting service fees‖ means the aggregate fees billed in each of the fiscal years listed for
professional services rendered
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by our principal auditors for tax compliance, tax advice, and tax planning.
Before our independent auditors are engaged to render any services, the engagement is approved by
our audit committee.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
None.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS.
None.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not applicable.
ITEM 16G. CORPORATE GOVERNANCE
Our corporate governance practices do not differ in any significant way from those followed by
domestic companies under the listing standards of the NASDAQ Global Select Market.
PART III
ITEM 17. FINANCIAL STATEMENTS
We have elected to provide financial statements pursuant to Item 18.
ITEM 18. FINANCIAL STATEMENTS
The consolidated financial statements of our company are included at the end of this annual report.
ITEM 19. EXHIBITS
Exhibit Number
1.1*
Articles of Incorporation and By-laws
Description of Document
4.1
4.2
4.3
4.4
4.5
Translation of a Lease between Sinovac Beijing and SinoBioway related to a
building of approximately 28,000 square feet, dated August 12, 2004
(incorporated by reference to Exhibit 4.1 from our annual report on Form 20-F
(file no. 001-32371) filed with the Securities and Exchange Commission on
July 14, 2006)
Translation of a Lease between Sinovac Beijing and SinoBioway related to a
building of approximately 13,300 square feet, dated August 12, 2004
(incorporated by reference to Exhibit 4.2 from our annual report on Form 20-F
(file no. 001-32371) filed with the Securities and Exchange Commission on
July 14, 2006)
Translation of a Supplement Agreement to the Leases between Sinovac
Beijing and SinoBioway (incorporated by reference to Exhibit 4.3 from our
annual report on Form 20-F (file no. 001-32371) filed with the Securities and
Exchange Commission on July 14, 2006)
Stock Option Plan adopted on November 1, 2003 (incorporated by reference
to Exhibit 4.4 from our annual report on Form 20-F (file no. 001-32371) filed
with the Securities and Exchange Commission on July 14, 2006)
Form of Employment Agreement between the Registrant and Weidong Yin,
dated July 7, 2006 (incorporated by reference to Exhibit 4.5 from our annual
report on Form 20-F (file no. 001-32371) filed with the Securities and
Exchange Commission on July 14, 2006)
4.6
4.7
4.8
4.9
Translation of Form of Employment Agreement between the Registrant or its
subsidiary and any other senior executive officers of the Registrant or its
subsidiary (incorporated by reference to Exhibit 4.6 from our annual report on
Form 20-F (file no. 001-32371) filed with the Securities and Exchange
Commission on July 14, 2006)
Form of Non-disclosure, Non-competition and Proprietary Information
Agreement between the Registrant or its subsidiary and any other senior
executive officers of the Registrant or its subsidiary (incorporated by
reference to Exhibit 4.7 from our annual report on Form 20-F (file no. 001-
32371) filed with the Securities and Exchange Commission on July 14, 2006)
Translation of a Lease between Sinovac Beijing and SinoBioway related to
buildings of approximately 37,000 square feet, dated June 4, 2007
(incorporated by reference to Exhibit 4.8 from our annual report on Form 20-F
(file no. 001-32371) filed with the Securities and Exchange Commission on
March 31, 2008)
Share Purchase Agreement between Sinovac Biotech Ltd. and Sansar Capital
Management LLC dated January 22, 2008 (incorporated by reference to
Exhibit 4.9 from our annual report on Form 20-F (file no. 001-32371) filed
with the Securities and Exchange Commission on March 31, 2008)
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Exhibit
Number
4.10
4.11
4.12
4.13
4.14
8.1*
11.1
12.1*
12.2*
13.1*
13.2*
15.1*
Description of Document
Exclusive Promotion Service Agreement between Sinovac Beijing and
GlaxoSmithKline (China) Investment Co., Ltd., dated July 30, 2007
(incorporated by reference to Exhibit 4.10 from our annual report on Form 20-
F (file no. 001-32371) filed with the Securities and Exchange Commission on
March 31, 2008)
Equity Joint Venture Contract dated November 22, 2009 between Sinovac
Hong Kong and Dalian Jingang (English Translation) (incorporated by
reference to Exhibit 99.1 from our current report on Form 6-K (file no. 001-
32371) filed with the Securities and Exchange Commission on January 20,
2010)
Memorandum of Understanding dated November 22, 2009 between Sinovac
Hong Kong and Dalian Jingang (English Translation) (incorporated by
reference to Exhibit 99.2 from our current report on Form 6-K (file no. 001-
32371) filed with the Securities and Exchange Commission on January 20,
2010)
Equity Interest Transfer Agreement dated December 17, 2009 between
Sinovac Hong Kong and Dalian Jingang (English Translation) (incorporated
by reference to Exhibit 99.3 from our current report on Form 6-K (file no.
001-32371) filed with the Securities and Exchange Commission on January
20, 2010)
Asset Acquisition Agreement dated February 10, 210 between Sinovac
Beijing and Beijing Xingchang High-tech Development Co., Ltd. (English
Translation) (incorporated by reference to Exhibit 4.10 from our annual report
on Form 20-F (file no. 001-32371) filed with the Securities and Exchange
Commission on April 16, 2010)
List of Subsidiaries
Code of Business Conduct and Ethics (incorporated by reference to Exhibit
11.1 from our annual report on Form 20-F (file no. 001-32371) filed with the
Securities and Exchange Commission on July 14, 2006)
CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Consent of Ernst & Young LLP
101.INS**
XBRL Instance Document
101.SCH** XBRL Taxonomy Extension Scheme Document
101.CAL** XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF** XBRL Taxonomy Extension Definition Linkbase Document
101.LAB** XBRL Taxonomy Extension Label Linkbase Document
101.PRE** XBRL Taxonomy Extension Presentation Linkbase Document
* Filed with this annual report on Form 20-F
** XBRL (eXtensible Business Reporting Language) information is furnished and not filed or a part
of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of
1933, as amended, is deemed not filed for purposes of Section 18 of the Exchange Act of 1934, as
amended, and otherwise is not subject to liability under these sections.
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SINOVAC BIOTECH LTD.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Index
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm on Internal Control Over
Financial Reporting
Consolidated Balance Sheets as of December 31, 2011 and 2010
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the
Years Ended December 31, 2011, 2010 and 2009
Consolidated Statements of Changes in Equity for the Years Ended December 31, 2011,
2010 and 2009
Consolidated Statements of Cash Flows for the Years Ended December 31, 2011, 2010
and 2009
Notes to Consolidated Financial Statements
F-2
F-3
F-4
F-6
F-7
F-10
F-11
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SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it
has duly caused and authorized the undersigned to sign this annual report on its behalf.
Sinovac Biotech Ltd.
By: /s/ Weidong Yin
Name: Weidong Yin
Title: Chairman and Chief Executive Officer
Date: April 12, 2012
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Exhibit Number
1.1*
Articles of Incorporation and By-laws
Description of Document
EXHIBIT INDEX
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
Translation of a Lease between Sinovac Beijing and SinoBioway related to a
building of approximately 28,000 square feet, dated August 12, 2004 (incorporated
by reference to Exhibit 4.1 from our annual report on Form 20-F (file no. 001-
32371) filed with the Securities and Exchange Commission on July 14, 2006)
Translation of a Lease between Sinovac Beijing and SinoBioway related to a
building of approximately 13,300 square feet, dated August 12, 2004 (incorporated
by reference to Exhibit 4.2 from our annual report on Form 20-F (file no. 001-
32371) filed with the Securities and Exchange Commission on July 14, 2006)
Translation of a Supplement Agreement to the Leases between Sinovac Beijing and
SinoBioway (incorporated by reference to Exhibit 4.3 from our annual report on
Form 20-F (file no. 001-32371) filed with the Securities and Exchange Commission
on July 14, 2006)
Stock Option Plan adopted on November 1, 2003 (incorporated by reference to
Exhibit 4.4 from our annual report on Form 20-F (file no. 001-32371) filed with the
Securities and Exchange Commission on July 14, 2006)
Form of Employment Agreement between the Registrant and Weidong Yin, dated
July 7, 2006 (incorporated by reference to Exhibit 4.5 from our annual report on
Form 20-F (file no. 001-32371) filed with the Securities and Exchange Commission
on July 14, 2006)
Translation of Form of Employment Agreement between the Registrant or its
subsidiary and any other senior executive officers of the Registrant or its subsidiary
(incorporated by reference to Exhibit 4.6 from our annual report on Form 20-F (file
no. 001-32371) filed with the Securities and Exchange Commission on July 14,
2006)
Form of Non-disclosure, Non-competition and Proprietary Information Agreement
between the Registrant or its subsidiary and any other senior executive officers of
the Registrant or its subsidiary (incorporated by reference to Exhibit 4.7 from our
annual report on Form 20-F (file no. 001-32371) filed with the Securities and
Exchange Commission on July 14, 2006)
Translation of a Lease between Sinovac Beijing and SinoBioway related to
buildings of approximately 37,000 square feet, dated June 4, 2007 (incorporated by
reference to Exhibit 4.8 from our annual report on Form 20-F (file no. 001-32371)
filed with the Securities and Exchange Commission on March 31, 2008)
Share Purchase Agreement between Sinovac Biotech Ltd. and Sansar Capital
Management LLC dated January 22, 2008 (incorporated by reference to Exhibit 4.9
from our annual report on Form 20-F (file no. 001-32371) filed with the Securities
and Exchange Commission on March 31, 2008)
Exclusive Promotion Service Agreement between Sinovac Beijing and
GlaxoSmithKline (China) Investment Co., Ltd., dated July 30, 2007 (incorporated
by reference to Exhibit 4.10 from our annual report on Form 20-F (file no. 001-
32371) filed with the Securities and Exchange Commission on March 31, 2008)
Equity Joint Venture Contract dated November 22, 2009 between Sinovac Hong
Kong and Dalian Jingang (English Translation) (incorporated by reference to
Exhibit 99.1 from our current report on Form 6-K (file no. 001-32371) filed with
the Securities and Exchange Commission on January 20, 2010)
4.12
Memorandum of Understanding dated November 22, 2009 between Sinovac Hong
Kong and Dalian Jingang (English Translation) (incorporated by reference to
Exhibit 99.2 from our current report on Form 6-K (file no. 001-32371) filed with
the Securities and Exchange Commission on January 20, 2010)
76
Table of Contents
Exhibit Number
4.13
Description of Document
Equity Interest Transfer Agreement dated December 17, 2009 between Sinovac
Hong Kong and Dalian Jingang (English Translation) (incorporated by reference to
Exhibit 99.3 from our current report on Form 6-K (file no. 001-32371) filed with
the Securities and Exchange Commission on January 20, 2010)
Asset Acquisition Agreement dated February 10, 210 between Sinovac Beijing and
Beijing Xingchang High-tech Development Co., Ltd. (English Translation)
(incorporated by reference to Exhibit 4.10 from our annual report on Form 20-F
(file no. 001-32371) filed with the Securities and Exchange Commission on
April 16, 2010)
List of Subsidiaries
Code of Business Conduct and Ethics (incorporated by reference to Exhibit 11.1
from our annual report on Form 20-F (file no. 001-32371) filed with the Securities
and Exchange Commission on July 14, 2006)
CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Consent of Ernst & Young LLP
4.14
8.1*
11.1
12.1*
12.2*
13.1*
13.2*
15.1*
101.INS**
XBRL Instance Document
101.SCH**
XBRL Taxonomy Extension Scheme Document
101.CAL**
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**
XBRL Taxonomy Extension Label Linkbase Document
101.PRE**
XBRL Taxonomy Extension Presentation Linkbase Document
* Filed with this annual report on Form 20-F
** XBRL (eXtensible Business Reporting Language) information is furnished and not filed or a part
of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of
1933, as amended, is deemed not filed for purposes of Section 18 of the Exchange Act of 1934, as
amended, and otherwise is not subject to liability under these sections.
77
Table of Contents
SINOVAC BIOTECH LTD.
CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
December 31, 2011 and 2010
Index
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Sinovac Biotech Ltd.
We have audited the accompanying consolidated balance sheets of Sinovac Biotech Ltd. (the
―Company‖) as of December 31, 2011 and 2010, and the related consolidated statements of income
(loss) and comprehensive income (loss), changes in equity and cash flows for each of the three years in
the period ended December 31, 2011. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Sinovac Biotech Ltd. at December 31, 2011 and 2010, and the
consolidated results of its operations and its cash flows for each of the three years in the period ended
December 31, 2011, 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), Sinovac Biotech Ltd.’s internal control over financial reporting as of
December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
April 12, 2012 expressed an unqualified opinion thereon.
Vancouver, Canada
April 12, 2012
/s/ Ernst & Young LLP
Chartered Accountants
F-2
Table of Contents
Report of Independent Registered Public Accounting Firm
on Internal Control Over Financial Reporting
To the Board of Directors and Stockholders of
Sinovac Biotech Ltd.
We have audited Sinovac Biotech Ltd.’s internal control over financial reporting as of December 31,
2011, based on criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the ―COSO‖ criteria). Sinovac
Biotech Ltd.’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 Sinovac Biotech Ltd.’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, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, Sinovac Biotech Ltd. maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2011, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Sinovac Biotech Ltd. as of December 31,
2011 and 2010, and the related consolidated statements of income (loss) and comprehensive income
(loss), changes in equity and cash flows for each of the three years in the period ended December 31,
2011 and our report dated April 12, 2012 expressed an unqualified opinion thereon.
Vancouver, Canada
April 12, 2012
/s/ Ernst & Young LLP
Chartered Accountants
F-3
Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Consolidated Balance Sheets
December 31, 2011 and 2010
(Expressed in U.S. Dollars)
ASSETS
Current assets
Cash and cash equivalents
Short-term investments (note 3)
Accounts receivable – net (notes 4 and 9)
Inventories (note 5)
Due from related party (note 12(a))
Prepaid expenses and deposits (note 12(b))
Deferred tax assets (note 10)
Total current assets
Property, plant and equipment (notes 7 and 9)
Long-term inventories (note 6)
Long-term prepaid expenses (note 12 (b))
Prepayments for acquisition of equipment
Deferred tax assets (note 10)
Licenses and permits (note 8)
Total assets
LIABILITIES AND EQUITY
Current liabilities
Loans payable (note 9)
Accounts payable and accrued liabilities (notes 7 and 13)
Income tax payable (note 10)
Deferred revenue (note 20)
Deferred tax liability (note 10)
Dividends payable
Deferred government grants (note 19)
Total current liabilities
Deferred government grants (note 19)
Loans payable (note 9)
Long term payable for acquisition of assets
Deferred revenue (note 20)
Total long term liabilities
Total liabilities
Commitments and contingencies (notes 14 and 23)
2011
2010
$ 104,286,695 $ 101,585,490
1,512,447
—
22,370,296
17,834,407
14,541,554
8,113,428
3,397,522
—
887,187
1,804,555
2,682,069
—
132,039,085 146,976,565
75,627,881
5,248,237
408,656
828,902
419,114
1,336,254
64,036,228
395,516
517,957
576,232
507,062
1,348,364
$ 215,908,129 $ 214,357,924
$ 4,713,498 $ 10,435,887
22,091,190
958,411
9,707,688
1,005,186
—
1,559,589
29,522,495
3,351,127
429,416
—
795,106
1,830,566
40,642,208
45,757,951
2,277,428
17,321,327
—
10,369,695
29,968,450
2,464,565
10,057,775
4,842,509
3,478,629
20,843,478
70,610,658
66,601,429
EQUITY
Preferred stock
Authorized 50,000,000 shares at par value of $0.001 each Issued and
outstanding: nil
Common stock (note 16)
Authorized: 100,000,000 shares at par value of $0.001 each Issued
—
—
54,774
54,306
and outstanding: 54,773,961(2010 -54,305,961)
Additional paid-in capital
Accumulated other comprehensive income
Statutory surplus reserves (note 18)
Retained earnings
Total stockholders’ equity
Non-controlling interests (notes 11 and 15)
Total equity
Total liabilities and equity
105,383,346 104,152,182
6,883,834
11,473,110
3,876,084
9,978,325
11,808,271
2,696,227
129,920,943 126,439,516
15,376,528
21,316,979
145,297,471 147,756,495
$ 215,908,129 $ 214,357,924
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Table of Contents
Approved on behalf of the Board:
/s/ Weidong Yin
Director
/s/ Simon Anderson
Director
F-5
Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
Years ended December 31, 2011, 2010 and 2009
(Expressed in U.S. Dollars)
Sales (note 22)
2011
2010
$ 56,841,892 $ 33,401,426 $ 84,197,182
2009
Cost of sales - (exclusive of depreciation of land-use
rights and amortization of licenses and permits of
$290,526 (2010 - $546,623; 2009 - $418,867) (note 5)
Gross profit
21,127,410
16,718,727
20,063,361
35,714,482
16,682,699
64,133,821
Selling, general and administrative expenses (note 12)
22,372,095
18,885,270
18,165,201
Provision for doubtful accounts
(166,865 )
1,921,493
17,744
Research and development expenses - net of $686,258
(2010 - $43,278;2009 - $251,436) in government
research grants
9,006,550
8,507,796
4,405,618
Depreciation of property, plant and equipment and
amortization of licenses and permits
1,436,944
1,411,053
692,696
Government grants recognised as income
(763,677 )
(1,924,134 )
(1,295,563 )
Total operating expenses
Operating income (loss)
31,885,047
28,801,478
21,985,696
3,829,435
(12,118,779 ) 42,148,125
Interest and financing expenses – net of $595,883
(2010 - $147,520; 2009 - $321,596) in government
grants
Interest income
Other income (expenses)
(384,560 )
(1,178,072 )
(534,455 )
1,397,141
1,132,907
143,464
279,866
95,744
(33,550 )
Loss on disposal and write down of equipment
(454,973 )
(1,237,685 )
(169,678 )
Income (loss) before income taxes and non-
controlling interests
4,666,909
(13,305,885 ) 41,553,906
Income tax recovery (expenses) (note 10)
(5,066,603 )
703,882
(11,140,521 )
Consolidated net income (loss)
(399,694 )
(12,602,003 ) 30,413,385
Less: income (loss) attributable to non-controlling
interests
Net income (loss) attributable to stockholders
Net income (loss)
Other comprehensive income
Foreign currency translation adjustment
Total comprehensive income (loss)
445,002
(4,094,659 ) 10,454,997
$ (844,696 ) $ (8,507,344 ) $ 19,958,388
$ (399,694 ) $ (12,602,003 ) $ 30,413,385
3,639,992
3,240,298
99,473
3,547,617
(9,054,386 ) 30,512,858
Less: comprehensive income (loss) attributable to
non-controlling interests
Comprehensive income (loss) attributable to
stockholders
973,562
(3,205,680 ) 10,472,499
$ 2,266,736 $ (5,848,706 ) $ 20,040,359
Earnings (loss) per share (note 21) – basic
– diluted
$
$
(0.02 ) $
(0.02 ) $
(0.16 ) $
(0.16 ) $
0.47
0.46
Weighted average number of shares of common stock
outstanding
– Basic
– Diluted
54,608,919
54,608,919
53,064,968
53,064,968
42,580,945
42,975,007
The accompanying notes are an integral part of these financial statements.
F-6
Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Consolidated Statements of Changes in Equity
(Expressed in U.S. Dollars)
Accumulate
d
other
comprehens
ive
income (fore
ign
Additional translation Statutory earnings/ Total
stockholder
s’
(accumulat
ed
Common stock paid-in
Amoun
capital
t
Shares
exchange n surplus
Adjustment
)
reserves deficit)
equity
Non-
controlling Total
interest Equity
Retained
42,893,9
28 $
42,8
41,629,5
4,143,22
5,549,6
(1,651,5
49,713,7
7,185,34
94 $
06 $
5 $
84 $
34 ) $
75 $
56,899,1
24
9 $
— — 422,860
—
—
— 422,860
— 422,860
234,100
234 697,086
—
—
— 697,320
— 697,320
— — 115,677
—
—
— 115,677
— 115,677
— —
4,035
—
—
—
4,035
—
4,035
buyback
(note 16) (542,767 ) (543 ) (335,288 )
—
—
— (335,831 )
— (335,831 )
Other
compreh
ensive
income
(loss)
- Other
compreh
ensive
income
attributab
le to non-
controlli
ng
— —
—
—
—
—
—
17,502
17,502
Balance,
Decemb
er 31,
2008
Stock-
based
compens
ation
Exercise of
stock
options
Contributio
n from a
former
minority
sharehol
der
Subscriptio
ns
received
(note 16)
Share
interest
- Other
compreh
ensive
income
attributab
le to
stockhol
ders
Net income
for the
year
- Net
income
attributab
le to non-
controlli
ng
interest
- Net
income
attributab
le to
stockhol
ders
-Transfer to
statutory
surplus
reserve
(note 18)
Dividend to
non-
controlli
ng
interest
— —
—
81,971
—
—
81,971
—
81,971
— —
—
—
—
—
10,454,99
7
10,454,99
7
—
— —
—
—
19,958,38
8
19,958,38
8
—
19,958,38
8
— —
—
4,313,56
7
—
(4,313,56
7 )
—
—
—
— —
—
—
—
—
—
(3,849,60
(3,849,60
1 )
1 )
Balance,
Decemb
er 31,
2009
42,585,2
61 $
42,5
42,533,8
4,225,19
9,863,2
13,993,2
70,658,1
13,808,2
85 $
76 $
6 $
51 $
87 $
95 $
84,466,4
42
47 $
The accompanying notes are an integral part of these financial statements.
F-7
Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Consolidated Statement of Changes in Equity
(Expressed in U.S. Dollars)
Accumulate
d
other
comprehens
ive
Income (for
eign
Additional translation Statutory
Common stock paid-in
Amoun
capital
t
Shares
currency on surplus Retained
adjustment) reserves earnings
Total
Stockholder
s’
equity
Non-
controlling Total
equity
interests
Balance,
Decemb
er 31,
2009
Stock-
based
compens
ation
42,585,
42,5
42,533,8
4,225,1
261 $
85 $
76 $
9,863,2
51 $
96 $
13,993,
70,658,1
13,808,
287 $
95 $
247 $
84,466,4
42
— — 459,901
—
—
— 459,901
— 459,901
Exercise of
stock
options
(note
16)
220,700 221 409,734
—
—
— 409,955
— 409,955
Issuance of
new
common
stock
(note
16)
Share
issuance
cost
Non-
controlli
ng
interest
of
Sinovac
Dalian
(note 15)
Purchase
addition
al 25%
interest
in
Sinovac
Dalian
11,500,
000
11,50
0
66,113,50
0
—
—
66,125,00
0
—
66,125,00
0
—
— —
(4,279,69
4 )
—
—
—
(4,279,69
4 )
(4,279,69
4 )
—
— —
—
—
—
—
20,477,4
16
20,477,41
6
—
— —
—
—
—
—
(7,562,23
(7,562,23
7 )
7 )
—
(note
15)
Equity
adjustme
nt on
acquisiti
on of
addition
al 25%
in
Sinovac
Dalian
(note15)
Other
compreh
ensive
income
- Other
compreh
ensive
income
attributa
ble to
non-
controlli
ng
interests
- Other
compreh
ensive
income
attributa
ble to
stockhol
ders
Net loss
for the
year
- Net loss
attributa
ble to
non-
controlli
ng
interests
- Net loss
attributa
ble to
stockhol
ders
Transfer to
statutory
surplus
— —
(1,112,52
7 )
—
—
—
(1,112,52
7 )
1,112,52
7
—
— —
27,392
—
—
—
27,392 861,587 888,979
— —
— 2,658,638
—
— 2,658,638
— 2,658,638
— —
—
—
—
—
(4,094,65
(4,094,65
9 )
9 )
—
— —
— —
—
—
—
—
(8,507,34
—
(8,507,34
4 )
(8,507,34
4 )
—
—
—
—
4 )
9 )
(1,609,85
1,609,85
9
reserves
(note
18)
Dividend
distribut
ed to
non-
controlli
ng
interest
of
Sinovac
Beijing
Balance,
Decemb
er 31,
2010
— —
—
—
—
—
(3,285,90
(3,285,90
2 )
2 )
—
54,305,
54,3
104,152,
6,883,8
961 $
06 $
182 $
11,473,
110 $
34 $
3,876,0
126,439,
21,316,
84 $
516 $
979 $
147,756,
495
The accompanying notes are an integral part of these financial statements.
F-8
Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Consolidated Statement of Changes in Equity
(Expressed in U.S. Dollars)
Accumulate
d
other
comprehens
ive
income (for
eign
Additional currency
Common stock paid-in
Amoun
capital
t
Shares
translation Dedicated Retained
adjustment) reserves earnings
Total
stockholder
s’
equity
Non-
controlling Total
equity
interests
Balance,
Decemb
er 31,
2010
Stock-
based
compens
ation
54,305,9
61 $
54,3
06 $
104,152,
182 $
6,883,8
11,473,1
3,876,0
126,439,
21,316,9
34 $
10 $
84 $
516 $
147,756,
495
79 $
— — 206,301
—
—
— 206,301
— 206,301
Exercise of
stock
options
(note 16) 468,000 468 748,332
—
—
— 748,800
— 748,800
Subscriptio
ns
received
Equity
adjustme
nt on
acquisiti
on of an
addition
al 1.53%
in
Sinovac
Beijing
(note 11)
Other
compreh
ensive
income
- Other
compreh
ensive
income
attributa
ble to
non-
controlli
— —
3,360
—
—
—
3,360
—
3,360
— — 273,171
(16,941 )
—
— 256,230 (256,230 )
—
— —
—
—
—
528,560 528,560
ng
interests
- Other
compreh
ensive
income
attributa
ble to
stockhol
ders
Net income
for the
year
-Net
income
attributa
ble to
non-
controlli
ng
interest
- Net loss
attributa
ble to
stockhol
ders
Transfer to
statutory
surplus
reserves
Dividend
distribut
ed to
non-
controlli
ng
interest
— —
— 3,111,432
—
— 3,111,432
— 3,111,432
445,002 445,002
— —
—
—
—
(844,69
6 ) (844,696 )
— (844,696 )
— —
—
— 335,161
(335,16
1 )
—
—
—
— —
—
—
—
—
(6,657,78
3 )
—
(6,657,78
3 )
Balance,
Decemb
er 31,
2011
54,773,9
61 $
54,7
74 $
105,383,
346 $
9,978,3
11,808,2
2,696,2
129,920,
15,376,5
25 $
71 $
27 $
943 $
145,297,
471
28 $
The accompanying notes are an integral part of these financial statements.
F-9
Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Consolidated Statement of Cash Flows
December 31, 2011 and 2010
(Expressed in U.S. Dollars)
Cash flows from (used in) operating activities
Net income (loss)
Adjustments to reconcile net income to net cash
provided by operating activities:
- deferred income taxes
- stock-based compensation
- inventory provision
- provision for (recovery of) doubtful accounts
- write-down of equipment and loss on disposal
- research and development expenditures qualified for
government grant
- depreciation of property, plant and equipment and
amortization of licenses and permits
- deferred government grant recognized in income
- accretion expenses
Changes in:
- accounts receivable
- inventories
- income tax payable
- prepaid expenses and deposits
- deferred revenue
- accounts payable and accrued liabilities
2011
2010
2009
$
(399,694 ) $ (12,602,003 ) $ 30,413,385
2,845,195
206,301
4,034,169
(166,865 )
454,973
(1,708,489 )
459,901
6,805,541
1,921,493
1,237,685
1,261,823
422,860
593,451
17,744
169,678
(686,258 )
(43,278 )
(251,436 )
4,825,613
(432,543 )
377,410
5,474,602
(1,915,078 )
1,339,812
(530,715 )
(2,695,943 )
1,204,647
4,232,103
(416,019 )
117,064
2,239,139
(1,119,054 )
—
(5,019,696 )
1,003,642
(5,384,946 )
(8,597,440 )
6,758,750
(5,524,628 )
(903,696 )
468,782
426,040 12,722,284
5,118,740
(686,461 )
Net cash provided by (used in) operating activities
13,935,626
(14,278,545 ) 48,411,504
Cash flows from financing activities
- Loan proceeds
- Loan repayments
- Proceeds from issuance of common stock, net of share
issuance costs
- Repurchase of common shares
- Proceeds from shares subscribed
- Dividends paid to non-controlling shareholder of
Sinovac Beijing
- Government grants received
- Repayment from (loan to) non-controlling shareholder
of Sinovac Beijing
11,391,836
(10,658,840 )
19,989,083 17,687,473
(17,850,030 ) (10,232,422 )
748,800
—
3,360
62,255,261
—
—
697,320
(335,831 )
4,035
(5,862,676 )
1,592,925
(3,285,902 ) (3,846,501 )
1,318,857
372,012
3,397,522
(3,286,695 )
—
Net cash provided by financing activities
612,927
58,193,729
5,292,931
Cash flows used in investing activities
- Restricted cash
- Proceeds from disposal of equipment
- Proceeds from redemption of short-term investments
- Purchase of short-term investments
- Prepayments for acquisition of equipment
- Acquisition of property, plant and equipment
—
122,089
1,544,759
—
(467,183 )
(14,989,876 )
64,400
231,606
7,314,187
(1,475,209 )
(562,043 )
(24,817,168 )
(64,400 )
—
—
(7,308,873 )
—
(4,320,065 )
Net cash used in investing activities
(13,790,211 )
(19,244,227 ) (11,693,338 )
Exchange gain on cash and cash equivalents
1,942,863
1,961,321
48,013
Increase in cash and cash equivalents
2,701,205
26,632,278 42,059,110
Cash and cash equivalents, beginning of year
101,585,490
74,953,212 32,894,102
Cash and cash equivalents, end of year
$ 104,286,695 $ 101,585,490 $ 74,953,212
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amount capitalized
Cash paid for income taxes
$
$
455,851 $ 1,017,502 $ 914,546
881,596 $ 5,986,249 $ 3,066,447
Supplemental schedule of non-cash activities:
Acquisition of property, plant and equipment included
in accounts payable and accrued liabilities
$ 9,124,751 $ 3,958,740 $ 1,120,330
The accompanying notes are an integral part of these financial statements.
F-10
Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(Expressed in U.S. Dollars)
1. Basis of Presentation
The consolidated financial statements have been prepared in conformity with United States
generally accepted accounting principles (―US GAAP‖). They include the accounts of Sinovac
Biotech Ltd., which is incorporated under the laws of Antigua and Barbuda, and its wholly-
owned or controlled subsidiaries (collectively, the ―Company‖). All significant intercompany
transactions have been eliminated. Details of the Company’s subsidiaries are as follows:
Date of
incorporation or
establishment
October 2008
Place of
incorporation
(or
establishment)
/operation
Hong Kong
Percentage of
ownership as
of December
31, 2011
100%
Percentage
of ownership
as of
December
31, 2010
100%
April 2001
PRC
73.09%
71.56%
February 1993
PRC
100%
100%
May 2009
PRC
100%
100%
January 2010
PRC
55%
55%
Principal activity
Sales of vaccine
products
Research and
development,
production and
sales of vaccine
products
Research and
development,
production and
sales of vaccine
products
Research and
development of
vaccine products
Research and
development,
production and
sales of vaccine
products
Name
Sinovac Biotech
(Hong Kong) Ltd
(―Sinovac Hong
Kong‖)
Sinovac Biotech
Co., Ltd.
(―Sinovac
Beijing‖) (note
11)
Tangshan Yian
Biological
Engineering Co.,
Ltd (―Tangshan
Yian‖)
Sinovac
Biological
Technology
Co., Ltd.
(―Sinovac
R&D‖)
Sinovac (Dalian)
Vaccine
Technology
Co., Ltd.
(―Sinovac
Dalian‖) (notes
11 and 15)
Ownership in the subsidiaries located in the People’s Republic of China (―PRC‖ or ―China‖), as
well as licenses and permits, involve certain inherent risks due to the complexity of the
governmental rules in China. Such ownership could be challenged by PRC government
authorities. Each of these matters is subject to uncertainty, and it is possible that some of these
matters may result in unfavorable outcome for the Company.
F-11
Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(Expressed in U.S. Dollars)
2. Significant Accounting Policies
(a) Use of Estimates
In preparing the Company’s consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenue and expenses during the
reporting periods. Significant estimates made by management include: provision for
product returns, allowance for doubtful accounts, inventory provision, useful lives of
amortizable intangible assets, and realizability of deferred tax assets. On an ongoing
basis, management reviews its estimates to ensure that these estimates appropriately
reflect changes in the Company’s business and new information as it becomes
available. If historical experience and other factors used by management to make
these estimates do not reasonably reflect future activity, the Company’s consolidated
financial statements could be materially impacted.
(b) Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments that are readily convertible to
cash with maturities of three months or less when purchased. Cash equivalents as of
December 31, 2011 and 2010 are short-term deposits and investments with banks
with original maturities of three months or less.
(c) Short-term Investments
Short-term investments are classified as being available-for-sale and are reported at
fair value with all unrealized gains and temporary unrealized losses recognized in
other comprehensive income. Other-than-temporary credit losses that represent a
decrease in the cash flows expected to be collected on the short-term investments are
recognized in net income (loss). Related fees and costs are recorded in consolidated
statements of income when they are incurred.
(d) Accounts Receivable
The Company extends unsecured credit to its customers in the ordinary course of
business but mitigates the associated risks by performing credit checks and actively
pursuing past due accounts. The Company determines the allowance based on known
troubled accounts, historical experience, the age of the accounts receivable balances,
credit quality of the Company’s customers, current economic conditions, and other
factors that may affect customers’ ability to pay.
(e) Inventories
Inventories are stated at the lower of cost or replacement cost with respect to raw
materials and the lower of cost and net realizable value with respect to finished goods
and work in progress. Cost of work in progress and finished goods is generally
determined on weighted average cost basis and includes direct material, direct labour
and overhead. Net realizable value represents the anticipated selling price less
estimated costs of completion and distribution.
F-12
Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(Expressed in U.S. Dollars)
2. Significant Accounting Policies (continued)
(f) Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Significant additions and
improvements are capitalized, while repairs and maintenance are charged to expenses
as incurred. Equipment purchased for specific research and development projects
with no alternative uses are expensed. Assets under construction are not depreciated
until construction is completed and the assets are ready for their intended use. Gains
and losses from the disposal of property, plant and equipment are included in
operating income (loss).
Depreciation of property, plant and equipment generally is computed using the
straight-line method based on the estimated useful lives of the assets as follows:
30 years
term of leases, ranging from 28 to 49 years
5 to 10 years
Plant and building
Land-use rights
Machinery and
equipment
Motor vehicles
Office equipment and
furniture
Leasehold improvement Lesser of useful lives and term of lease
5 years
3 to 5 years
(g) Licenses and Permits
The Company capitalizes the patent payment and the purchase cost of vaccines if the
vaccine has received a new drug certificate from the State Food and Drug
Administration (―SFDA‖) of China. If the vaccine has not received a new drug
certificate, the purchase cost is expensed as in-process research and development.
Licenses and permits, in relation to the production and sales of pharmaceutical
products, are amortized on a straight-line basis over their respective useful lives,
which are estimated to be 10 years for inactivated hepatitis A and recombinant
hepatitis A&B licenses and 20 years for H5N1 license. Useful lives of licenses and
permits are subject to the uncertainties described in note 1.
F-13
Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(Expressed in U.S. Dollars)
2. Significant Accounting Policies (continued)
(h) Impairment of Long-Lived Assets
Long-lived assets including intangible assets subject to amortization are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying
value of the asset may not be recoverable from the future undiscounted net cash
flows expected to be generated by the asset. If the asset is not fully recoverable, an
impairment loss would be recognized for the difference between the carrying value of
the asset and its estimated fair value based on discounted net future cash flows. There
were no impairment adjustments to the carrying value of the long-lived assets for the
years ended December 31, 2011, 2010 and 2009.
(i) Income Taxes
The Company recognizes deferred tax liabilities and assets for the expected future tax
consequences of events that have been recognized in the Company’s financial
statements or tax returns using the liability method. Under this method, deferred tax
liabilities and assets are determined based on the temporary differences between the
financial statements and tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse. A valuation
allowance is provided for the portion of deferred tax assets that is more likely than
not to remain unrealized. Deferred tax assets and liabilities are measured using
enacted tax rates and laws.
On January 1, 2007, the Company adopted the guidance issued by the Financial
Accounting Standards Board (―FASB‖) ―Accounting for Uncertainty in Income
Taxes — an interpretation of FASB Statement No. 109 (―FIN 48‖), codified in the
FASB Accounting Standards Codification (―ASC‖) 740, Income Taxes. ASC 740
prescribes a more-likely—than-not threshold for financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. ASC 740
also provides guidance on the recognition and derecognition of income tax assets and
liabilities; classification of current and deferred income tax assets and liabilities
accounting for interest and penalties associated with tax positions; accounting for
income taxes in interim periods and income tax disclosures.
The tax benefit from an uncertain tax position is recognized only if it is more likely
than not that the tax position will be sustained upon examination by the appropriate
taxing authority, based on the technical merits of the position. The tax benefits
recognized from such a position are measured based on the amount that is greater
than 50% likely of being realized upon settlement. Liabilities associated with
uncertain tax positions are classified as long-term unless expected to be paid within
one year. Interest and penalties related to uncertain tax positions, if any, are recorded
in the provision for income taxes and classified with the related liability on the
consolidated balance sheet.
F-14
Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(Expressed in U.S. Dollars)
2. Significant Accounting Policies (continued)
The Company has reviewed the tax positions taken, or to be taken, in its tax return
for all tax years currently open to examination by a taxing authority in accordance
with the recognition and measurement standards of ASC 740. The Company is not
under examination by any authority for income tax purposes and has not applied any
income tax filing extension.
The Company is not subject to taxation in the U.S. The Company’s taxing
jurisdiction is Antigua and Barbuda. Sinovac Hong Kong’s taxing jurisdiction is
Hong Kong. Sinovac Canada has had no transactions/activities since inception. The
Company’s four subsidiaries, Sinovac Beijing, Tangshan Yian, Sinovac R&D and
Sinovac Dalian’s taxing jurisdiction is China. Income tax returns filed by the
Company and its active subsidiaries that are subject to examination are Sinovac
Beijing and Tangshan Yian for the years since 2004 and Sinovac R&D and Sinovac
Dalian for the year since 2010.
(j) Value-added Taxes
Value-added taxes collected from customers relating to product sales and remitted to
governmental authorities are presented on a net basis. Value-added taxes collected
from customers are excluded from revenue.
(k) Revenue Recognition
Sales revenue is recognized when persuasive evidence of an arrangement exists, the
price is fixed and determinable, delivery has occurred and there is a reasonable
assurance of collection of the sales proceeds. The Company generally obtains
purchase authorizations from its customers for a specified amount of products at a
specified price and considers delivery to have occurred when the customer takes title
of the products. The Company provides its customers with a limited right of return.
The product return provision for seasonal influenza vaccine at year end is estimated
based on actual sales returns because the returned products are known by the end of
the flu season which is generally end of March. As of December 31, 2011, reserves
for seasonal influenza vaccine returns are approximately $1 million (December 31,
2010 - $3.2 million). The product return provisions for inactivated hepatitis A
vaccine and combined inactivated hepatitis A&B vaccine are estimated based on
historical return and exchange levels, external data with respect to inventory levels as
well as the remaining shelf lives of the products in the distribution channel. As of
December 31, 2011, reserves for inactivated hepatitis A vaccine and combined
inactivated hepatitis A&B vaccine returns are $1.7 million (December 31, 2010 -
$2.6 million). Sales return provision on inactivated hepatitis A and combined
inactivated hepatitis A&B represents 8.3% and 16% of private pay market sales in
2011 and 2010, respectively. For H1N1 and H5N1 vaccines, customers do not have a
right of return.
Deferred revenue is generally relating to government stockpiling programs and
advances received from customers. For government stockpiling programs, the
Company generally obtains purchase authorizations from the government for a
specified amount of products at a specified price and revenue is recognized when the
government takes delivery of the products. If the products expire prior to delivery,
revenue related to these expired products is recognized once cash has been received
and the products have expired and passed government inspection.
F-15
Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(Expressed in U.S. Dollars)
2. Significant Accounting Policies (continued)
(l) Shipping and Handling
Shipping and handling fees billed to customers are included in sales. Costs related to
shipping and handling are part of selling expenses in the consolidated statements of
income (loss). In 2011, $1,197,272 (2010 - $1,051,791; 2009 - $1,387,766) related to
shipping and handling costs was included in selling expenses in the consolidated
statements of income (loss).
(m) Advertising Expenses
Advertising costs are expensed as incurred and included in selling expenses.
Advertising costs were $11,973 for the year ended December 31, 2011 (2010 -
$39,615; 2009 - $67,614).
(n) Research and Development
Research and development costs are charged to operations as incurred and are listed
as a separate line item on the Company’s consolidated statements of income (loss).
(o) Government Grants
Government grants are received from the PRC government by the operating
subsidiaries of the Company. Government grants for reimbursement of research and
development expenses are taken into income in the period in which the expenses are
incurred and the conditions imposed by the government authorities are fulfilled.
Government grants for research and development recognized are recorded as
reduction to research and development expenses and classified as operating income
in the Company’s consolidated statements of income (loss). Government grants for
building production facilities are deferred and recognized in income in the same
manner as the production facilities are amortized. Interest subsidies are recorded as
reduction to interest expenses in the Company’s consolidated statements of income
(loss) or recorded as reduction to interest capitalized if the subsidies granted are
related to a specific borrowing associated with building a qualifying asset. Other
incentives received from local government to encourage expansion of local
businesses are recognized in operating income. Government grants are recognized
when there is reasonable assurance that the amount is receivable and all the
conditions specified in the grant have been met.
F-16
Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(Expressed in U.S. Dollars)
2. Significant Accounting Policies (continued)
(p) Foreign Currency Transaction
The Company and its active subsidiaries maintain their accounting records in their
functional currencies, U.S. dollars and Renminbi Yuan (―RMB‖), respectively. The
Company translates foreign currency transactions into its functional currency in the
following manner:
At the transaction date, each asset, liability, revenue and expense is translated into the
functional currency by the use of the exchange rate in effect at that date. At the
period end, foreign currency monetary assets, and liabilities are re-evaluated into the
functional currency by using the exchange rate in effect at the balance sheet
date. The resulting foreign exchange gains and losses are included in operations.
The assets and liabilities of the foreign subsidiaries, Sinovac Beijing, Tangshan Yian,
Sinovac R&D, and Sinovac Dalian are translated into U.S. dollars at exchange rates
in effect at the balance sheet date. Revenue and expenses are translated at average
exchange rate. Gain and losses from such translations are included in stockholders’
equity as a component of other comprehensive income.
(q) Stock-based Compensation
Compensation expense for costs related to all share-based payments, including grants
of stock options, is recognized through a fair-value based method. The Company uses
the Black-Scholes option-pricing model to determine the fair value for the
awards. The value of the portion of the award that is ultimately expected to vest is
recognized on a straight-line basis as expense over the requisite service period in the
consolidated statements of income (loss).
(r) Comprehensive Income
The Company’s comprehensive income consists of net earnings and foreign currency
translation adjustments.
(s) Earnings Per Share
Earnings per share (―EPS‖) are calculated in accordance with FASB guidance
codified in ASC 260, Earnings per Share. Basic earnings per share are computed by
dividing the net income available to common stockholders by the weighted average
number of common shares outstanding during the year. Diluted earnings per share is
computed in accordance with the treasury stock method and based on the weighted
average number of common shares and dilutive common share equivalents of options.
F-17
Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(Expressed in U.S. Dollars)
2. Significant Accounting Policies (continued)
(t) Financial Instruments and Concentration of Credit Risks
Fair Value of Financial Instruments
Assets and liabilities subject to fair value measurements are required to be disclosed
within a specified fair value hierarchy. The fair value hierarchy ranks the quality and
reliability of inputs, or assumptions, used in the determination of fair value and
requires assets and liabilities carried at fair value to be classified and disclosed in one
of the following categories based on the lowest level input used that is significant to a
particular fair value measurement:
Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical
assets or liabilities in active markets.
Level 2 — Inputs other than quoted prices included in Level 1 that are observable
for the asset or liability, either directly or indirectly. Level 2 inputs include quoted
prices for similar assets or liabilities in active markets, or quoted prices for identical
or similar assets and liabilities in markets that are not active.
Level 3 — Unobservable inputs for the asset or liability.
As of December 31, 2011 and 2010, the Company did not have any Level 3 financial
assets. As of December 31, 2010, the Company’s Level 2 financial assets were short-
term investments measured at fair value. As of December 31, 2011 and 2010, the
Company did not have financial liabilities measured at fair value on a recurring basis.
The fair values of financial instruments are estimated at a specific point in time,
based on relevant information about financial markets and specific financial
instruments. As these estimates are subjective in nature, involving uncertainties and
matters of significant judgment, they cannot be determined with precision. Changes
in assumptions can significantly affect estimated fair values.
The carrying values of cash and cash equivalents, short-term investments, accounts
receivable, short-term loans payable, accounts payable and accrued liabilities, and
due from related parties approximate their fair value because of their short term
nature. The fair values of loans payable and long-term payable for acquisition of
assets are based on the estimated discounted value of future contractual cash flows
which approximate their fair value as they have variable interest rates adjusted every
12 months. The discount rate is estimated using the rates currently offered for debt
with similar remaining maturities.
Exchange Rate Risks
The Company operates in China, which may give rise to significant foreign currency
risks from fluctuations and the degree of volatility of foreign exchange rates between
US dollars and the Chinese RMB. In 2011, foreign exchange gain of $294,653 (2010
— loss of $209,958; 2009 — loss of $8,880) is included in selling, general and
administrative expenses. As at December 31, 2011, cash and cash equivalents of
$80,191,109 (RMB 510,392,021) (December 31, 2010 — $46,420,594 (RMB
306,923,681); December 31, 2009 — $64,993,822 (RMB 444,362,763)) are
denominated in RMB and are held in PRC and Hong Kong.
F-18
Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(Expressed in U.S. Dollars)
2. Significant Accounting Policies (continued)
Concentration of Credit Risks
Financial instruments that potentially subject the Company to concentration of credit
risks consist primarily of cash and cash equivalents, accounts receivable, and short-
term investments, the balances of which are stated on the consolidated balance sheets
which represents the Company’s maximum exposure. The Company places its cash
and cash equivalents in high credit quality financial institutions. Concentration of
credit risks with respect to accounts receivables is linked to the concentration of
revenue. The Company’s customers are various government agencies in China. No
single customer accounted for more than 10% of total sales for the years ended
December 31, 2011, 2010 and 2009 except for government stockpile purchases (note
22). To manage credit risk, the Company performs ongoing credit evaluations of
customers’ financial condition. The Company does not require collateral or other
security to support financial instruments subject to credit risks.
Interest Rate Risks
The Company is subject to interest rate risk. The interest-bearing loans are short-
term or at variable rate based on the respective bank’s primary lending rate (note 9).
(u) Recently Adopted Accounting Standards
Effective January 1, 2011, the Company adopted Accounting Standard Update
(―ASU‖) 2009-13, which amends ASC 605 Revenue Recognitions, Multiple-
Deliverable Revenue Arrangements. The amendments require an entity to allocate
arrangement consideration at the inception of the arrangement to all of its
deliverables based on relative selling prices. The guidance eliminates the use of the
residual method of allocation and expands the ongoing disclosure requirements. The
adoption of this guidance did not have a material effect on the Company’s
consolidated financial statements.
Effective January 1, 2011, the Company adopted ASU 2010-13, which amends ASC
718 Compensation — Stock Compensation, Effect of Denominating the Exercise
Price of a Share-Based Payment Award in the Currency of the Market in Which the
Underlying Equity Security Trades. The amendments clarify that a share-based
payment award with an exercise price denominated in the currency of a market in
which a substantial portion of the entity’s equity securities trades shall not be
considered to contain a market, performance, or service condition. Therefore, such an
award is not to be classified as a liability if it otherwise qualifies as equity
classification. The amendments are effective for fiscal year beginning on or after
December 15, 2010, with early adoption permitted. The adoption of this guidance did
not have a material effect on the Company’s consolidated financial statements.
F-19
Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(Expressed in U.S. Dollars)
2. Significant Accounting Policies (continued)
Effective January 1, 2011, the Company adopted ASU 2010-17, which amends ASC
605, Revenue Recognition, Milestone Method of Revenue Recognition. The
amendments provide guidance on defining a milestone under ASC 605 and
determining when it may be appropriate to apply the milestone method of revenue
recognition for research or development transactions. The amendments are effective
for fiscal year beginning on or after June 15, 2010, with early adoption permitted.
The adoption of this guidance did not have a material effect on the Company’s
consolidated financial statements.
Effective January 1, 2011, the Company adopted ASU 2010-29, which amends ASC
805, Business Combinations, Disclosure of Supplementary Pro Forma Information
for Business Combinations. The ASU clarifies that if comparative financial
statements are presented, the pro forma disclosures for both periods presented should
be reported as if the acquisition had occurred as of the beginning of the comparable
prior annual reporting period only and not as if it had occurred at the beginning of the
current annual reporting period. The ASU also expands the supplemental pro forma
disclosure requirements to include a description of the nature and amount of any
material non-recurring adjustments that are directly attributable to the business
combination. The guidance in the ASU is effective for business combinations for
which the acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2010, and should be applied prospectively.
The adoption of this guidance did not have a material effect on the Company’s
consolidated financial statements.
F-20
Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(Expressed in U.S. Dollars)
2. Significant Accounting Policies (continued)
(v) Recently Issued Accounting Guidance, Not Adopted as of December 31, 2011
In May 2011, the FASB issued ASU 2011-4, which amends the fair value
measurement and disclosure guidance in ASC 820, Fair Value Measurement, to
converge US GAAP and IFRS requirements for measuring amounts at fair value as
well as disclosures about these measurements. The amendments are effective for
fiscal year beginning on or after December 15, 2011. The Company is currently
evaluating the effect that the adoption of this guidance will have on its consolidated
financial statements.
In June 2011, the FASB issued ASU 2011-5, which amends the presentation
guidance in ASC 220, Comprehensive Income, and will result in more converged
guidance on how comprehensive income is presented under US GAAP and IFRS,
although some differences remain. The new US GAAP guidance gives companies
two choices of how to present items of net income, items of other comprehensive
income or separate consecutive statements. Companies will no longer be allowed to
present OCI in the statement of stockholders’ equity. Earnings per share would
continue to be based on the net income. Although existing guidance related to items
that must be presented in other comprehensive income (―OCI‖) has not changed,
companies will be required to display reclassification adjustments for each
component of OCI in both net income and OCI. Also companies will need to present
the components of other comprehensive income in their interim and annual financial
statements. The amendments are effective for fiscal year beginning on or after
December 15, 2011. In December 2011, the FASB issued ASU 2011-12, which
defers ASU 2011-05 requirement that companies present reclassification adjustments
for each component of accumulated other comprehensive income (―AOCI‖) in both
net income and OCI on the face of the financial statements. Companies are still
required to present reclassifications out of AOCI on the face of the financial
statements or disclose those amounts in the notes to the financial statements. The
ASU also defers the requirement to report reclassification adjustments in interim
periods. The Company is currently evaluating the effect that the adoption of this
guidance will have on its consolidated financial statements.
In December 2011, the FASB issued ASU 2011-11, which amends the disclosure
guidance in ASC 210, Balance Sheet. New disclosures are required to enable users of
financial statements to understand significant quantitative differences in balance
sheets prepared under US GAAP and IFRS related to the offsetting of financial
instruments. The existing US GAAP guidance allowing balance sheet offsetting,
including industry-specific guidance, remains unchanged. The amendments are
effective for annual reporting periods beginning on or after January 1, 2013, and
interim periods within those annual periods. The amendments should be applied
retrospectively for all prior periods presented.
(w) Comparative Figures
Certain comparative figures have been reclassified in order to conform with the
presentation adopted in the current year.
F-21
Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(Expressed in U.S. Dollars)
3. Short-term Investments
December 31, December 31,
2011
2010
Commercial paper with a term of 7 days, payable or
renewable on any weekday, bearing maximum
interest at 3.2% per year
Short-term investments
4. Accounts Receivable - net
— $ 1,512,447
— $ 1,512,447
Trade receivables (note 9)
Allowance for doubtful accounts
Other receivables
Total accounts receivable
December 31, December 31,
2011
2010
(3,927,914 )
$ 20,779,992 $ 26,208,393
(4,212,922 )
$ 16,852,078 $ 21,995,471
374,825
$ 17,834,407 $ 22,370,296
982,329
Accounts receivable with a carrying value of $5.5 million (RMB 35 million) were pledged as
collateral for a bank loan (note 9).
The allowance for doubtful accounts reflects the Company’s best estimate of probable losses
inherent in the accounts receivable balance. The Company determines the allowance based on
known troubled accounts, historical experience, the age of the accounts receivable balances,
credit quality of the Company’s customers, current economic conditions, and other factors that
may affect customers’ ability to pay. The Company records its allowance for doubtful
accounts based upon its assessment of various factors. As of December 31, 2011, the
Company provided 100% allowance for accounts aged more than two years, approximately 55%
allowance for accounts receivable aged between one year and two years, and approximately 6%
allowance for accounts receivable aged less than one year.
F-22
Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(Expressed in U.S. Dollars)
4. Accounts Receivable — net (continued)
The Company’s maximum exposure to credit risk at the balance sheet date relating to trade
receivables is summarized as follows:
December 31, December 31,
2011
2010
Aging within one year, net of allowance for doubtful
accounts
$ 16,025,464 $ 19,745,688
Aging greater than one year, net of allowance for doubtful
accounts
Total trade receivables
826,614
2,249,783
$ 16,852,078 $ 21,995,471
5. Inventories
Raw materials
Work in progress
Finished goods
Inventories
December 31, December 31,
2011
2010
$ 3,230,727 $ 1,176,209
632,911
12,732,434
$ 8,113,428 $ 14,541,554
446,468
4,436,233
For the year ended December 31, 2011, the Company charged $1,205,179 (2010 – $297,623;
2009 – $187,442) of excessive fixed production overhead to cost of sales.
In 2011, 2010 and 2009, cost of sales included provision of $4,034,169, $6,805,541, and
$593,451, respectively for the estimated value of inventory likely to expire before being sold.
6. Long-term Inventories
Long-term inventories represent H5N1 with remaining shelf lives over one year and H1N1
vaccines expired but government inspection has not been completed. These vaccines are for
government stockpiling purpose.
December 31, December 31,
2011
2010
Work in progress
Finished goods
Long-term inventories
F-23
$
— $ 317,857
77,659
$ 5,248,237 $ 395,516
5,248,237
Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(Expressed in U.S. Dollars)
7. Property, Plant and Equipment
Construction in progress
Plant and building
Land-use rights
Machinery and equipment
Motor vehicles
Office equipment and furniture
Leasehold improvement
Total
Construction in progress
Plant and building
Land-use rights
Machinery and equipment
Motor vehicles
Office equipment and furniture
Leasehold improvement
Total
December 31, 2011
Accumulated
Depreciation
Net book
Value
Cost
$ 22,341,627 $
23,902,926
11,639,714
26,178,326
1,842,370
2,083,117
3,658,617
— $ 22,341,627
20,529,782
10,960,210
17,438,449
736,585
1,181,803
2,439,425
$ 91,646,697 $ 16,018,816 $ 75,627,881
3,373,144
679,504
8,739,877
1,105,785
901,314
1,219,192
December 31, 2010
Accumulated
Depreciation
Net book
Value
Cost
$ 11,421,734 $
22,274,540
11,204,708
22,912,867
1,773,515
2,022,351
3,521,885
— $ 11,421,734
19,920,039
10,809,221
16,742,880
1,082,583
1,390,292
2,669,479
$ 75,131,600 $ 11,095,372 $ 64,036,228
2,354,501
395,487
6,169,987
690,932
632,059
852,406
Land and building of Changping facilities of Sinovac Beijing with a net book value of $7.38
million (RMB 46.97 million) was pledged as collateral (note 9) for a bank loan from China
Construction Bank.
Plant and building of Sinovac Beijing with a net book value of $3.4 million (RMB 21.5
million) was pledged as collateral (note 9) for a bank loan from Bank of Beijing.
Depreciation expense in 2011, 2010 and 2009 was $4,557,268, $3,685,480 and $1,841,261
respectively.
As at December 31, 2011, the accounts payable and accrued liabilities included $9,124,751
(December 31, 2010 - $3,958,740) for purchasing plant, property and equipment.
Loss on disposal and write down of equipment in 2011, 2010 and 2009 was $454,973,
$1,237,685 and $169,678, respectively.
F-24
Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(Expressed in U.S. Dollars)
8. Licenses and Permits
Inactivated hepatitis A
Combined inactivated hepatitis A&B
H5N1 licenses (note 23 (c))
Total
Inactivated hepatitis A
Combined inactivated hepatitis A&B
H5N1 licenses (note 23 (c))
Total
December 31, 2011
Accumulated
amortization
Net book
value
Cost
$ 3,319,347 $ 3,319,347 $
—
144,397
1,191,857
$ 5,241,335 $ 3,905,081 $ 1,336,254
477,313
1,444,675
332,916
252,818
Cost
December 31, 2010
Accumulated
amortization
$ 3,195,295 $ 3,073,516 $ 121,779
185,335
1,041,250
$ 4,844,770 $ 3,496,406 $ 1,348,364
459,475
1,190,000
274,140
148,750
Net book
value
(a) Amortization expense for the licenses and permits was $268,345, $546,623 and
$397,878 for the years ended December 31, 2011, 2010 and 2009, respectively.
(b) The estimated amortization expenses for the remaining useful lives are as follows:
2012
2013
2014
2015
2016
Thereafter
Total
$
120,000
120,000
120,000
72,000
72,000
832,254
$ 1,336,254
The above amortization expense forecast is an estimate. Actual amounts of
amortization expense may differ from estimated amounts due to additional intangible
asset acquisitions, changes in foreign currency exchange rates, impairment of licenses
and permits, and other events.
(c) See note 1 regarding risks and uncertainties associated with licenses and permits.
F-25
Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(Expressed in U.S. Dollars)
9. Loans Payable
Bank loan (China Merchants Bank): RMB 10 million, bearing
interest at 5.56% per year, interest is payable quarterly and the
principal is payable on December 22, 2011.The loan was
repaid on December 22, 2011.
Bank loan (China Merchants Bank): RMB 10 million, bearing
interest at 20% above the prime rate of a one-year term loan
published by the People’s Bank of China, currently at 7.872%
per year. Interest is payable quarterly and the principal is
payable on December 21, 2012. The loan agreement is under a
general credit facility agreement with the same bank with a
limit of RMB 30 million for the period from December 22,
2011 to December 21, 2012.
Bank loan (Industrial and Commercial Bank of China Limited):
RMB 50 million, bearing interest at Bank of China’s prime
rate for loans of nine months to one year plus 1.04% per year.
Interest is payable monthly and the principal is payable on
December 7, 2011. The loan was collateralized by the trade
receivables of Sinovac Beijing with a carrying value of RMB
80 million. The loan was repaid on December 7, 2011.
Bank loan (Industrial and Commercial Bank of China Limited):
RMB 20 million, bearing interest at 10% above Bank of
China’s prime rate for loans of six months to one year plus
1.456% of financing fee per year, currently at 8.672% per
year. Interest is payable monthly and the principal is payable
on December 21, 2012. The loan is guaranteed by an unrelated
third party, with a guarantee fee of $63,000 (RMB 400,000)
over the term of the loan and the trade receivables of Sinovac
Beijing with a carrying value of not lower than RMB 35
million is pledged to the guarantee company.
Bank loan (Bank of China): RMB 9 million, bearing interest at
5.31% per year, interest is payable quarterly and the principal
is repayable on April 5, 2011. The loan is exclusively for
H1N1 working capital. Subject to the terms and conditions
pursuant to the agreement, Sinovac Beijing is required to
maintain a debt to asset ratio less than 90% and daily balance
of cash and cash equivalents not less than RMB 50 million.
The loan was repaid on April 2, 2011.
Loans payable — current-term
F-26
December 31, December 31,
2011
2010
$
— $ 1,512,447
1,571,166
—
—
7,562,237
3,142,332
—
1,361,203
—
$ 4,713,498 $ 10,435,887
Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(Expressed in U.S. Dollars)
9. Loans Payable (continued)
Bank loan (China Construction Bank): RMB 76.5 million
December 31, December 31,
2011
2010
$ 12,019,420 $ 10,057,775
(December 31, 2010 — RMB 66.5 million), bearing interest at
the bank’s prime lending rate and adjusted every 12 months,
currently at 6.9% per year. The loan is exclusively for the
purchase of the Changping facility. Interest is payable
monthly. The total amount of the loan is $14.14 million (RMB
90 million) and is advanced to the Company in six installments
according to the agreement. Land and building of the
Changping facility of Sinovac Beijing with a net book value of
$7.38 million (RMB 46.97 million) was pledged as collateral.
The entire principal amount is payable on February 9, 2015.
Bank loan (Bank of Beijing): RMB 33,745,050 bearing interest at
the bank’s prime lending rate and adjusted every 12 months,
currently at 6.9% per year. Interest is payable quarterly. The
loan is for construction of the Changping facility and has a
maximum credit amount of RMB 200 million. The loan is
repayable on November 13, 2015. The Company also obtained
a credit with a maximum quota for issuing letter of credits of
RMB 80 million with the same bank. Plant and building of
Sinovac Beijing with a net book value of $3.4 million (RMB
21.5 million) was pledged as collateral.
5,301,907
—
Loans payable — long-term
$ 17,321,327 $ 10,057,775
The weighted average effective interest rate was 6.71% and 5.56% in 2011 and 2010,
respectively. In 2011, 2010, and 2009, the Company incurred $1,439,743, $1,163,551 and
$914,546 interest costs, respectively, of which $251,891 (net of $711,738 loan interest
subsidies received) (2010 - $nil and 2009 - $nil) have been capitalized in property, plant and
equipment.
F-27
Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(Expressed in U.S. Dollars)
10. Income Taxes
Sinovac Beijing, Tangshan Yian, Sinovac R&D and Sinovac Dalian are subject to income
taxes in China on their taxable income as reported in their statutory accounts at a tax rate in
accordance with the relevant income tax laws applicable to foreign investment enterprises.
On January 1, 2008, ―The Law of the People’s Republic of China on Enterprise Income Tax‖
(the ―Enterprise Income Tax Law‖) became effective. This Enterprise Income Tax Law
eliminated the previous preferential tax treatment that was available to the foreign invested
enterprises (―FIEs‖) but provided grandfathering of the preferential tax treatment currently
enjoyed by the FIEs. Under the Enterprise Income Tax Law, both domestic companies and
FIEs are subject to an unified income tax rate of 25%. Sinovac Beijing reconfirmed its ―High
and New Technology Enterprise‖ (―HNTE‖) status according to the new criteria and obtained
the certificate on September 19, 2011. Sinovac Beijing qualifies for preferential income tax
rate of 15% from 2011 to 2013. The income tax rate will need to be reviewed every three
years thereafter depending on whether or not Sinovac Beijing is in compliance with the ―High
and New Technology Enterprise‖ criteria. Tangshan Yian is subject to a 25% income tax rate
but is subject to a preferential exemption from income taxes for two years and a 50%
reduction in income taxes for the three years from 2008 to 2013. The unified income tax rate
of 25% is also applicable to Sinovac R&D and Sinovac Dalian until they obtain HNTE
certificates.
The Enterprise Income Tax Law provides that, if an enterprise incorporated outside the PRC
has its ―de facto management organization‖ located within the PRC, such enterprise may be
recognized as a PRC tax resident enterprise and thus may be subject to enterprise income tax
at the rate of 25% on its worldwide income. Under the Implementation Rules of the
Enterprises Income Tax Law, ―de facto management organization‖ means the organization
which is essentially in charge of overall management and control with respect to the operation,
personnel, books and accounts, and assets of the enterprise in question. As substantially all
members of the management continue to be located in the PRC, the Company may be deemed
a PRC tax resident enterprise and therefore be subject to an enterprise income tax rate of 25%
on its worldwide income. The dividends that the Company receives from its PRC subsidiaries
would be exempt from PRC withholding tax but be subject to income tax at 25% if the
Company is recognized as a PRC tax resident.
If Sinovac Beijing had not been subject to the beneficial tax rate described above, the income
tax expenses (net of non-controlling interest) would have been increased (decreased) by
approximately $521,155 (RMB 3,373,697), ($2,545,830) (RMB17,254,418) and $2,622,861
(RMB 17,942,992), for the years ended December 31, 2011, 2010 and 2009,
respectively. Basic earnings (losses) per common share would have been approximately
($0.03), ($0.11), $0.41, and diluted earnings (losses) per common share would have been
($0.03), ($0.11), $0.40 for the years ended December 31, 2011, 2010 and 2009, respectively.
F-28
Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(Expressed in U.S. Dollars)
10. Income Taxes (continued)
Pursuant to the double tax arrangement between Hong Kong and PRC, dividends paid by a
foreign-invested enterprise in China to its direct holding company in Hong Kong are subject
to withholding tax at a rate of 5%, or otherwise 10%. Whether the favorable rate will be
applicable to dividends received by Sinovac Hong Kong from its PRC subsidiaries is subject
to the approval of the PRC tax authorities because it is unclear whether Sinovac Hong Kong is
considered as the beneficial owner of the dividends in substance. The PRC tax authorities
have discretion to assess whether a recipient of the PRC-sourced income is only an agent or a
conduit, or lacks the requisite amount of business substance, in which case the application of
the tax arrangement may be denied. As of December 31, 2011, the deferred tax liability related
to the withholding tax on undistributed earnings of Sinovac Beijing is $nil (December 31,
2010 - $1,005,186) based on 10%. As of December 31, 2011, the withholding tax on
dividends declared to Sinovac Hong Kong is $1,730,201 (December 31, 2010 - $nil) based on
a withholding tax rate of 10% and is included in income tax payable. The withholding tax rate
and amount are subject to the approval of the PRC tax authorities.
The Company was incorporated in Antigua and Barbuda, and has historically been involved in
a number of business combinations and significant financing. As a result, the Company could
be involved in various investigations, claims and tax reviews that arise in the ordinary course
of business activities.
Income taxes are attributed to the operations in China and consist of:
2011
2010
2009
Current
Deferred
Total income tax expense (recovery)
$ 2,221,408 $ 1,004,607 $ 9,878,698
1,261,823
$ 5,066,603 $ (703,882 ) $ 11,140,521
2,845,195
(1,708,489 )
The reconciliation of income taxes at the statutory income tax rate in Antigua and Barbuda to
income tax rate based on income before income taxes stated in the consolidated statements of
income (loss) is as follows:
Income taxes resultant from capital gain
Income taxes on dividend and interest income
received from subsidiary
Loss of subsidiaries at higher rate in China
Income of the subsidiary (Sinovac Beijing) at
higher rate in China
Changes in tax benefits not recognized
Non-deductible expenses
Future tax rate difference on current timing
differences
Others
Income tax expense (recovery)
2011
— $
2010
2009
— $ 2,485,556
$
725,015
(2,055,694 )
(420,237 )
(1,897,897 )
1,397,306
(650,715 )
1,651,243
4,327,094
206,641
901,804
2,172,278
13,800
6,918,471
772,572
355,924
432,924
(220,620 )
(133,719 )
(4,874 )
$ 5,066,603 $ (703,882 ) $ 11,140,521
(1,487,233 )
13,603
F-29
Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(Expressed in U.S. Dollars)
10. Income Taxes (continued)
The tax effects of temporary differences that give rise to the Company’s deferred tax assets
are as follow:
Tax losses carried forward
Tax on accounts receivable provision
Excess of tax cost over net book value of certain
assets
Less: valuation allowance
Total deferred tax assets
Less: current portion
Total deferred tax assets-long term
2011
2010
$ 2,055,694 $ 1,897,897
631,938
630,970
3,189,131
2,898,123
(2,529,835 )
(5,165,673 )
3,189,131
419,114
(2,682,069 )
—
$ 419,114 $ 507,062
The Company determines deferred taxes for each tax-paying entity in each tax jurisdiction.
The potential tax benefits arising from the losses incurred by its subsidiaries have not been
recorded in the financial statements. The tax losses of its PRC subsidiaries in the amount of
$8,930,894 (RMB 56,842,461) can be carried forward for five consecutive years against its
profits starting from 2012 and will expire ranging from 2015 to 2017.
The Company evaluates its valuation allowance requirements at each reporting period by
reviewing all available evidence, both positive and negative, and considering whether, based
on the weight of that evidence, a valuation allowance is needed. When circumstances change
causes a change in management’s judgement about the realizability of deferred tax assets, the
impact of the change on the valuation allowance is generally reflected in income from
continuing operations. The future realization of the tax benefit of an existing deductible
temporary difference ultimately depends on the existence of sufficient taxable income of the
appropriate character within the carryforward period available under applicable tax law.
A full valuation allowance has been provided for the current deferred income tax assets
arising from Sinovac Beijing’s temporary differences.
The valuation allowance relating to losses carried forward of the PRC subsidiaries are still
required as realization of this element of the potential tax benefit is still uncertain.
F-30
Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(Expressed in U.S. Dollars)
11. Non-controlling Interests
Non-controlling interests represent the interest of non-controlling shareholders in Sinovac
Beijing and Sinovac Dalian based on their proportionate interests in the equity of that
company adjusted for its proportionate share of income or losses from operations. On
October 1, 2011, the Company increased its ownership in Sinovac Beijing by an additional
1.53% through contributing the dividends declared to Sinovac Hong Kong but unpaid in the
amount of $2,906,308 (RMB 18,605,600). An adjustment of $273,171 (RMB 1,640,336)
resulted from the difference between the adjustment to the carrying amount of the non-
controlling interest in Sinovac Beijing and the consideration was charged to additional paid-in
capital. The non-controlling interest in Sinovac Beijing was 28.44% prior to October 1, 2011
and was 26.91% after October 1, 2011. The non-controlling interest in Sinovac Dalian was 70%
for the period from the incorporation to December 27, 2010 and was 45% as of December 31,
2010 (note 15).
12. Related Party Transactions and Balances
Related party transactions and balances not disclosed elsewhere in the consolidated financial
statements are as follows:
(a) Unsecured, non-interest bearing. The loan to the non-controlling shareholder was in
lieu of dividend.
December 31, December 31,
2011
2010
Due from Sino Bioway Biotech Group Holding Ltd.,
(―Sino Bioway‖), a non-controlling shareholder of
Sinovac Beijing
$
— $ 3,397,522
(b) The Company entered into the following transactions in the normal course of
operations at the exchange amount with related parties:
Rent expenses incurred to Sino Bioway $ 804,565 $ 581,941 $ 503,136
2011
2010
2009
In 2004, the Company entered into two operating lease agreements with Sino Bioway
with respect to Sinovac Beijing’s production plant and laboratory in Beijing, China
with annual lease payments totaling $216,062 (RMB 1,398,680). The leases
commenced on August 12, 2004 and have a term of 20 years. One of the lease
agreements was amended on August 12, 2010 with the rent increased from $69,916
(RMB 452,600) to $209,747 (RMB 1,357,800) per year.
In June 2007, the Company entered into another operating lease agreement with Sino
Bioway, with respect to the expansion of Sinovac Beijing’s production plant in
Beijing, China for an annual lease payment of $315,636 (RMB 2,043,270). The lease
commenced in June 2007 and has a term of 20 years.
F-31
Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(Expressed in U.S. Dollars)
12. Related Party Transactions and Balances (continued)
In September 2010, the Company entered into another operating lease agreement with
Sino Bioway with respect to expansion of Sinovac R&D’s business on research and
development for an annual lease payment of $133,035 (RMB 861,202). The lease
commenced on September 30, 2010 and has a term of 5 years. Included in current and
long-term prepaid expenses and deposits as at December 31, 2011, is $543,965 (RMB
3,462,172) (December 31, 2010, $653,888 (RMB 4,323,374)), representing prepaid lease
payments made to this related party.
(c)
During 2011, 2010 and 2009, the Company incurred $274,812, $176,032 and $121,119
respectively, to directors of the Company, relating to management consulting services
and director fees. Included in accounts payable and accrued liabilities as at December 31,
2011 is $168,818 (December 31, 2010 - $56,250; December 31, 2009 - $32,000).
13. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities at December 31, 2011 and December 31, 2010
consisted of the following:
Trade payables
Machinery and equipment payables
Payable on acquisition of Changping assets
Accrued expenses
Value added tax payable
Other tax payable
Withholding personal income tax
Bonus and benefit payables
Other payables
Total
December 31, 2011 December 31, 2010
970,114
$
1,303,361
2,655,379
6,964,825
142,556
331,295
1,109,318
5,478,793
3,135,549
22,091,190
2,945,096 $
4,094,238
5,030,513
4,119,443
911,286
536,735
1,201,628
5,759,425
4,924,131
29,522,495 $
$
In February 2010, Sinovac Beijing purchased the facility located in Changping District,
Beijing, China for $19.42 million (RMB123.6 million). To finance the acquisition, Sinovac
Beijing entered into a loan agreement with China Construction Bank to borrow total RMB 90
million on February 10, 2010 (note 9). As of December 31, 2011, Sinovac Beijing made total
payments of $14.16 million (RMB 90.1 million). The balance of the payable will be repaid in
one payment of RMB 10 million on June 30, 2012 and one payment of RMB 23.5 million on
December 31, 2012. The payable was discounted at a rate of 5.40%. Accretion expense in the
amount of $377,410 (2010 - $117,064, 2009 - $nil) was included in interest and financing
expenses.
F-32
Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(Expressed in U.S. Dollars)
14. Commitments and Contingencies
(a) Operating Lease Commitments
The Company leases production plant and laboratory under operating leases (note 12 (b)).
Rental expense amounted to $804,565, $581,941 and $503,136 in 2011, 2010 and 2009,
respectively.
Minimum future rental payments under operating leases for the years ending December 31 are
as follows:
2012
2013
2014
2015
2016
Thereafter
Total minimum future payments
(b) Other Commitments
$
805,000
805,000
805,000
805,000
805,000
5,851,970
$ 9,876,970
In addition to commitments disclosed in note 23, commitments related to R&D expenditures
are approximately $241,472 as at December 31, 2011.
Commitments related to capital expenditures are approximately $3,407,057.
15. Incorporation of Sinovac Dalian and Acquisition of Additional 25% Interest of Sinovac
Dalian
The Company, through its subsidiary, Sinovac Hong Kong, incorporated Sinovac Dalian on
January 19, 2010. Upon incorporation, the non-controlling interest shareholder of Sinovac
Dalian contributed assets in the amount of $20,477,416 (RMB140 million) to own 70%
interest in Sinovac Dalian. Sinovac Hong Kong contributed cash in the amount of $8,776,036
(RMB 60 million) to own 30% interest in Sinovac Dalian. Upon incorporation, the non-
controlling interest was recorded at the fair value of $20,477,416 (RMB140 million). The
transaction was accounted for as an asset acquisition. The Company consolidated Sinovac
Dalian from the date of incorporation due to its control of Sinovac Dalian’s board of directors
by holding two of three board seats.
On December 27, 2010, the Company purchased an additional 25% interest in Sinovac Dalian.
An adjustment of $1,112,527 (RMB7,355,807) resulted from the difference between the
adjustment to the carrying amount of the non-controlling interest in Sinovac Dalian and the
cash consideration was charged to additional paid-in capital.
F-33
Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(Expressed in U.S. Dollars)
16. Common Stock
Share Capital
In 2009, the Company repurchased 249,734 shares of common stock through open-market
transactions on NYSE AMEX, at an average price of $1.34 per share, for a total consideration
of $335,831.
In 2009, the Company cancelled 542,767 shares of common stock which were repurchased in
the open market.
In 2009, the Company issued 234,100 shares of common stock on the exercise of employee
stock options with exercise price of $2.40 to $3.20 per share, for total proceeds of $697,320.
In 2009, the Company received further cash proceeds of $4,035 on the exercise of stock
options for which the shares were issued subsequent to December 31, 2009.
In 2010, the Company issued a total 11,500,000 shares of common stock at $5.75 per share,
including 1,500,000 shares of common stock pursuant to the full exercise of the underwriters’
over-allotment option. The Company received net proceeds of $61,845,306 after deducting
underwriters’ commissions and offering expenses of approximately $4,279,694.
In 2010, the Company issued 220,700 shares of common stock on the exercise of employee
stock options with exercise prices ranging from $1.60 to $2.69 per share, for total proceeds of
$409,955.
In 2011, the Company issued 468,000 shares of common stock on the exercise of employee
stock options with exercise price of $1.60 per share, for total proceeds of $748,000. In 2011,
the Company received further cash proceeds of $3,360 on the exercise of stock options for
which the shares were issued subsequent to December 31, 2011.
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Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(Expressed in U.S. Dollars)
17. Stock Options
(a) Stock Option Plan
The board of directors approved a stock option plan (the ―Plan‖) effective November 1, 2003,
pursuant to which directors, officers, employees and consultants of the Company are eligible
to receive grants of options for the Company’s common stock. The Plan expires on
November 1, 2023. Up to 10% of the Company’s then outstanding common stocks were
reserved for issuance under the plan. As of December 31, 2011, 80,100 shares of common
stock under the options plan remained available. Each stock option entitles its holder to
purchase one share of common stock of the Company. Options may be granted for a term not
exceeding 10 years from the date of grant. The Plan is administered by the board of directors.
In January 2009, the Company granted 1,708,500 options to directors, officers and certain
employees with an exercise price of $1.60, being the quoted market price of the Company’s
shares at the time of grant. These options vest in installments from January 10, 2010 to
April 10, 2012 and expire on January 10, 2014. The Company did not grant any stock options
in 2010. In December 2011, the Company granted 767,000 options to employees with an
exercise price of $2.37, being the quoted market price of the Company’s shares at the time of
grant. These options vest in installments from December 26, 2012 to March 26, 2015, and
expire on December 25, 2017.
(b) Valuation Assumptions
The following assumptions were used in determining stock based compensation costs under
the Black-Scholes option pricing model:
Expected volatility
Risk-free interest rate
Expected life (years)
Dividend yield
Estimated forfeiture rate
2011
86.91 %
0.36 %
3.24
Nil
10 %
2010
—
—
—
—
—
2009
75.80 %
1.38 %
2.26
Nil
7 %
The weighted average fair value of options granted in 2011 and 2009 was $1.35 and $0.70 per
option, respectively.
The expected volatility related to 2011 grants and 2009 grants is based on the Company’s
historical stock prices. Computation of expected life was estimated after considering the
contractual terms of the stock-based award, vesting schedules and expectations of future
employee behaviour. The interest rate for period within the contractual life of the award is
based on the U.S. Treasury yield curve in effect at the time of grant.
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Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(Expressed in U.S. Dollars)
17. Stock Options (continued)
(c) Stock-based Payment Award Activity
A summary of the Company’s stock options activities is presented below:
Outstanding as at December 31, 2009
Exercised
Forfeited
Outstanding as at December 31, 2010
Granted
Expired
Exercised
Forfeited
Outstanding as at December 31, 2011
Aggregate Intrinsic
Value
Number
Weighted
Average
Exercise Price
1.66
1.88
1.60
1.63
2.37
3.23
1.60
1.60
1.90 $
1,783,500
(220,700 )
(65,400 )
1,497,400
767,000
(30,000 )
(468,000 )
(37,900 )
1,728,500 $
576,900
Exercisable at December 31, 2011
801,700 $
1.60 $
481,020
Options Outstanding
Weighted
Weighted
Average
Remaining Average
Contractual Exercise
Price
Life
Options Exercisable
Weighted
Weighted
Average
Remaining Average
Contractual Exercise
Life
Price
Number
Exercisable
Range of
Exercise
Prices
Number
Outstanding
$
$
1.60
2.37
961,500
767,000
1,728,500
2.06 $
5 $
3.36 $
1.60
2.37
1.90
801,700
—
801,700
2.06 $
—
2.06 $
1.60
—
1.60
Included in selling, general and administrative expenses are $206,301, $459,901 and
$422,860 of stock-based compensation in 2011, 2010 and 2009, respectively. Stock-based
compensation expense is charged to operations over the vesting period of the options
using the straight-line amortization method.
F-36
Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(Expressed in U.S. Dollars)
17. Stock Options (continued)
Aggregate intrinsic value of the Company’s stock options is calculated as the difference
between the exercise price of the options and the quoted price of the common shares that were
in-the-money. The aggregate intrinsic value of the Company’s stock options exercised under
the Plan was $995,444, $604,222 and $1,539,669 in 2011, 2010 and 2009, respectively,
determined as of the date of exercise of option.
As at December 31, 2011, there was $1,043,765 of unrecognized compensation cost related to
non-vested stock options granted under the Plan. That cost is expected to be recognized over a
period of 39 months. The estimated fair value of stock options vested during 2011, 2010 and
2009 was $416,325, $528,675 and $22,960, respectively.
18. Distribution of Profit
Pursuant to Chinese company law applicable to foreign investment companies, the Company’s
subsidiaries, Sinovac Beijing, Tangshan Yian, Sinovac R&D and Sinovac Dalian, are required
to maintain statutory surplus reserves, which include a general reserve and an enterprise
expansion reserve. As a solely foreign invested enterprise, Tangshan Yian could only maintain
a general reserve. The statutory surplus reserves are to be appropriated from net income after
taxes, and should be at least 10% of the after tax net income determined in accordance with
accounting principles and relevant financial regulations applicable to PRC enterprises (―PRC
GAAP‖). The Company has an option of not appropriating the general reserve after the
general reserve is equal to 50% of the subsidiaries registered capital. Statutory surplus
reserves are recorded as a component of shareholders’ equity and are not distributable other
than upon liquidation.
For the year ended December 31, 2011, Sinovac Beijing appropriated 10% (2010 -10%; 2009
-10%) and nil (2010 - 5%; 2009 - 5%) of its after-tax profit, determined under the relevant
Chinese accounting regulations, to the general reserve and the enterprise expansion reserve,
respectively. For the year ended December 31, 2011, the general reserve and the enterprise
expansion reserve appropriated are $335,161 (RMB 2,133,203), (2010 - $1,073,240 (RMB
7,096,045); (2009 - $2,875,711 (RMB 19,661,240)) and nil, (2010 - $536,619 (RMB
3,548,023); (2009 - $1,437,856 (RMB 9,830,620)) respectively.
Pursuant to the same Chinese company law, the Company’s subsidiaries, Sinovac Beijing,
Tangshan Yian, Sinovac R&D and Sinovac Dalian can transfer, at the discretion of their
respective boards of directors, a certain amount of their annual net income after taxes as
determined under the relevant PRC GAAP to a staff welfare and bonus fund. For the year
ended December 31, 2011, the board of directors of Sinovac Beijing approved $167,580
(RMB 1,066,601); (2010 - $536,619 (RMB 3,548,023); (2009 - $1,437,856 (RMB 9,830,620))
for contribution to such fund which shall be utilized for collective staff benefits. The amounts
appropriated to the staff welfare and bonus fund were charged against income and the related
provisions were reflected as accrued liabilities in the consolidated balance sheets.
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Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(Expressed in U.S. Dollars)
18. Distribution of Profit (continued)
Tangshan Yian recorded a net loss for each of the three years in the period ended
December 31, 2011, so no appropriation to the statutory surplus reserves and staff welfare and
bonus fund was made.
Sinovac R&D and Sinovac Dalian have not made any profit since inception, so no
appropriation to the statutory surplus reserves and staff welfare and bonus was made.
Dividends declared by the Company’s subsidiaries are based on the distributable profits as
reported in their statutory financial statements. In 2011, Sinovac Beijing declared a dividend
of $5,862,676 (RMB 38,608,654) related to the profits of 2010 (2010 - $3,285,902 (RMB
22,463,737), 2009 - $3,849,501 (RMB 26,319,722)) to the non-controlling shareholder of
Sinovac Beijing. On January 18, 2012, Sinovac Beijing declared a dividend of $795,106
(RMB5,060,612) related to the profits of 2011. As of December 31, 2011, the Company has
$795,106 dividend payable (December 31, 2010 - $nil).
In addition to the above reserves, transferring net assets from the Chinese subsidiaries to the
Company in the form of dividend payments, loans or advances also requires the Company and
certain shareholders to comply with certain administrative rules prescribed by the relevant
Chinese government authorities.
Pursuant to the relevant PRC company laws and regulations, the Company’s PRC subsidiaries’
paid-in capital and statutory surplus reverses that are restricted from transfer or dividend
distribution amounted to $86.2 million (RMB 548.9 million) and $72.2 million (RMB 477.1
million) as of December 31, 2011 and 2010.
19. Deferred Government Grants
Deferred government grants (current) represent research and development grants received, net
of research and development expenditures incurred. In 2011, the Company received $893,149
(RMB 5,781,800) (2010 - $372,012 (RMB 2,521,760)) in government grants for research and
development expenses.
Deferred government grants (non-current) included $2,277,428 (RMB 14,495,147)
(December 31, 2010 - $2,464,565 (RMB 16,295,212)) being the unamortized portion of the
amount that the Company received in 2007 for construction of a pandemic influenza vaccine
production facility. The condition of receiving the production facility grant requires the
Company to have the entire facility available to manufacture pandemic influenza vaccines at
any given moment upon request by the Chinese government. Government grant relating to the
production facility recognized in income was $278,067, $265,547 and $197,347 in 2011, 2010
and 2009, respectively.
In 2011, the Company received $699,776 (RMB 4,530,000) (2010 - $nil) interest subsidy
related to the Changping facility construction project and recorded as a reduction to interest
capitalized (note 9).
In 2011, the Company received $331,135 (RMB 2,143,600) (2010 - $nil) general incentives
from the government and recorded it in government grants recognized as income in statement
of income.
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Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(Expressed in U.S. Dollars)
19. Deferred Government Grants (continued)
In 2011, the Company received $595,883 (RMB 3,857,450) (2010 - $147,521
(RMB1,000,000)) interest subsidy from the government and recorded it as a reduction to
interest and financing expenses in statement of income.
20. Deferred Revenue
The current deferred revenue included $97,412 (December 31, 2010 - $7,712,996) received
from the Chinese government for stockpiling of H5N1 vaccines which would expire within
one year and $332,004 (December 31, 2010 - $1,994,681) of HA vaccines products in
advances from customers.
The long-term deferred revenue included $10,369,695 (December 31, 2010 - $3,478,629)
received from the Chinese government for stockpiling of H5N1 vaccines.
21. Earnings (Loss) per Share
Earnings (loss) per share was calculated as follows:
Net income (loss) attributable to the
stockholders
Basic weighted average number of
common shares outstanding
Dilutive effect of stock options
Diluted weighted average number of
common shares outstanding
Basic earnings (loss) per share
Diluted earnings (loss) per share
2011
2010
2009
$ (844,696 ) $ (8,507,344 ) $ 19,958,388
54,608,919
—
53,064,968
—
42,580,945
394,062
54,608,919
53,064,968
(0.02 ) $
(0.02 ) $
(0.16 ) $
(0.16 ) $
42,975,007
0.47
0.46
$
$
For the years ended December 31, 2011 and 2010, the basic and diluted loss per share are the
same as including the additional potential common stock equivalents would have an anti-
dilutive effect on the loss per share calculation.
F-39
Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(Expressed in U.S. Dollars)
22. Segmented Information
The Company operates exclusively in the biotech sector. The Company’s business is
considered as operating in one segment based upon the Company’s organizational structure,
the way in which the operation is managed and evaluated, the availability of separate financial
results and materiality considerations. All revenues are generated in China. Total long-lived
assets of $76,964,135 (December 31, 2010 - $65,384,592) including property, plant and
equipment and license and permits are all located in mainland China. The Company’s total
assets by geographic location are as follows:
Assets
Mainland China
Hong Kong
Total
December 31, 2011 December 31, 2010
$ 170,662,019 $ 160,814,672
53,543,252
$ 215,908,129 $ 214,357,924
45,246,110
The Company’s revenues by product are as follows:
2011
2010
2009
Sales
Inactivated hepatitis vaccines
Influenza vaccines
Total
$ 26,939,386 $ 16,200,844 $ 39,242,901
44,954,281
$ 56,841,892 $ 33,401,426 $ 84,197,182
17,200,582
29,902,506
Sales of H1N1 and H5N1 vaccines represent 24.6% and 13.7%, respectively, of total revenue
in 2011 (2010 – 21.5% and 7.2%, respectively, 2009 – 35.3% and 0.1%, respectively). The
H1N1 and H5N1 vaccines were all sold to the Chinese government. The Company’s sales of
H1N1 and H5N1 vaccines are dependent on government purchases. Loss of such government
purchases would have a material adverse effect on the Company’s total sales.
The Company’s revenues are attributed to geographic locations as follows:
2011
2010
2009
Sales
Mainland China
Foreign countries
Total
$ 56,407,130 $ 32,981,974 $ 84,122,913
74,269
$ 56,841,892 $ 33,401,426 $ 84,197,182
419,452
434,762
F-40
Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(Expressed in U.S. Dollars)
23. Collaboration Agreements
(a)
On March 12, 2009, the Company entered into a technology transfer agreement (with an
amendment entered on December 14, 2011) with Tianjing CanSino Biotechnology Inc.
to develop a pneumococcal vaccine. The collaboration term under the technology
transfer agreement is from March 12, 2009 to eight years after the first sales of the
vaccine developed under the technology transfer agreement in Chinese market.
(b)
(c)
Under the terms of the technology transfer agreement, the Company will make
milestone payments of up to $3 million and royalty payments ranging from percentages
falling in the teens for the portion of the net sales in Chinese market less than RMB 100
million and the single digits for net sales in Chinese market in excess of RMB 100
million. Both parties will work together to develop international markets for the
products.
On December 14, 2011, an amendment agreement was signed for the payment of
$300,000 for transfer of additional 6 serotypes and related technology. As of
December 31, 2011, the Company incurred milestone payments of $1 million.
On August 18, 2009, the Company entered into a patent license agreement with the
National Institutes of Health (―PHS‖), an agency of the United States Public Health
Services within the Department of Health and Human Services. PHS has granted the
Company a non-exclusive license to make and use certain of its products. PHS has also
granted the Company the right to use certain associated information for development of
its licensed products.
The Company has agreed to pay PHS a license issue royalty of $80,000 and a non-
refundable minimum annual royalty of $7,500, and royalty payments on net sales with a
range in single digits depending on the sales territory and the customers. The Company
has also agreed to pay PHS benchmark royalties upon achieving each benchmark as
specified in the patent license agreement. In 2011, the Company recorded a license issue
royalty of $21,125 (2010 $ - 7,500; 2009 $ - 90,274) in research and development
expenses.
The Company licensed from MedImmune, LLC certain rights to use patented reverse
genetics technology pertaining to virus strain production for vaccines, including the
H5N1 influenza virus strain. The Company has agreed to pay an upfront license fee,
milestone payments of up to an aggregate of $6.5 million based upon achievement of
cumulative net sales of licensed products in China (including Hong Kong and Macau),
as well as royalty payments in single digit of net sales of the licensed products in China
(including Hong Kong and Macau). As of December 31, 2011, an upfront license fee
was included in the account payable and accrued liabilities. No milestone payments
have been paid or are payable because the cumulative net sales target has not been
achieved.
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Table of Contents
SINOVAC BIOTECH LTD.
Incorporated in Antigua and Barbuda
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
(Expressed in U.S. Dollars)
24. Subsequent Events
On March 15, 2012, Sinovac Dalian borrowed a loan of $3.14 million (RMB 20 million) from
its non-controlling shareholder, bearing interest at 7.2% per year and interest is payable
monthly. The loan is payable on March 14, 2014.
F-42