20-F 1 form20f.htm ANNUAL REPORT ON FORM 20-F 3SBio Inc.: Form 20-F - Filed by newsfilecorp.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 20-F

(Mark One)

[  ] Registration statement pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934

or

[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2012

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 001-33295

3SBio Inc.
(Exact Name of Registrant as Specified in Its Charter)

Cayman Islands
(Jurisdiction of Incorporation or Organization)

No. 3 A1, Road 10
Shenyang Economy & Technology Development Zone
Shenyang 110027
People’s Republic of China
(Address of Principal Executive Offices)

Bo Tan, Chief Financial Officer
No. 3 A1, Road 10
Shenyang Economy & Technology Development Zone
Shenyang 110027
People’s Republic of China
www.3sbio.com

Telephone (China): 8624-25811820
Email: ir@3sbio.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 Name of Each Exchange on Which Registered
American Depositary Shares The NASDAQ Stock Market LLC
(Each representing seven ordinary shares, par value US$0.0001 per share)  



Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

Indicate the number of outstanding ordinary 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.

155,635,016 ordinary shares, par value US$0.0001, as of December 31, 2012

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes [   ]                                                                   No [X]

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 [X]

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]                                                                  No [   ]

Indicate by check mark whether the registrant 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 [X] 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 [X]

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 Securities Exchange Act of 1934).

Yes[  ]                                                                     No [X]


3SBIO INC.

FORM 20-F ANNUAL REPORT

FISCAL YEAR ENDED DECEMBER 31, 2012

TABLE OF CONTENTS

   
INTRODUCTION  
PART I   1

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 1

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE 1

ITEM 3.

KEY INFORMATION 1

ITEM 4.

INFORMATION ON THE COMPANY 21

ITEM 4A.

UNRESOLVED STAFF COMMENTS 51

ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS 52

ITEM 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 65

ITEM 7.

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 72

ITEM 8.

FINANCIAL INFORMATION 76

ITEM 9.

THE OFFER AND LISTING 77

ITEM 10.

ADDITIONAL INFORMATION 79

ITEM 11.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 86

ITEM 12.

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 87
PART II   89

ITEM 13.

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 89

ITEM 14.

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 89

ITEM 15.

CONTROLS AND PROCEDURES 89

ITEM 16A.

AUDIT COMMITTEE FINANCIAL EXPERT 90

ITEM 16B.

CODE OF ETHICS 90

ITEM 16C.

PRINCIPAL ACCOUNTANT FEES AND SERVICES 90

ITEM 16D.

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 90

ITEM 16E.

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 91

ITEM 16F.

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT 91

ITEM 16G.

CORPORATE GOVERNANCE 91

ITEM 16H.

MINE SAFETY DISCLOSURE 91
PART III   92

ITEM 17.

FINANCIAL STATEMENTS 92

ITEM 18.

FINANCIAL STATEMENTS 92

ITEM 19.

EXHIBITS 92


INTRODUCTION

Conventions

In this annual report on Form 20-F, unless otherwise indicated:

  • The term “our company”, “the Company”, “we”, “us”, or “our”, or any like terms, refer to 3SBio Inc. and its subsidiaries and consolidated variable interest entity, unless the context requires otherwise;

  • “Share(s)”or “ordinary share(s)” refer to our ordinary share(s), with par value US$0.0001 per share;

  • “ADS(s)” refer to our American depositary share(s), each of which represents seven ordinary shares;

  • “ADR(s)” refer to our American depositary receipt(s) that evidence our ADSs;

  • References to “China” or “PRC” are to the People’s Republic of China, excluding for the purposes of this annual report Hong Kong, Taiwan and Macau;

  • References to “province(s)” of China are to one or more, as applicable, of the provinces and provincial-level municipalities and autonomous regions of China;

  • All references to “RMB” or “Renminbi” are to the legal currency of China;

  • All references to “U.S. dollars”, “USD” or “US$” are to the legal currency of the United States of America;

  • “U.S. GAAP” refer to the generally accepted accounting principles in the United States of America;

  • “SFDA” refers to the State Food and Drug Administration of PRC;

  • The “Commission” or “SEC” refers to the Securities and Exchange Commission of the United States;

In addition,

  • Heading, titles, or numbering, or presentation aids of similar nature, other than required captions and numbering applicable to each Item of Form 20-F, are only for convenience of reference, for the benefit of readers, and shall be with no substance;

  • Any website addresses are not intended to function as hyperlinks, and the information contained in such websites is not a part of this filing;

  • We do not incorporate into this annual report by reference, and disclaim any responsibility or liability, to any materials, statements or information that are authored or supplied by third parties, other than as specifically and expressly indicated;

  • To the extent available and not at unreasonable costs to us, if determined to facilitate better shareholder communications, at our sole discretion, we may from time to time choose to discuss certain events, developments, or issues after the end of the subject year, or choose to disclose certain information not required to disclose, in the annual report on Form 20-F, and may not do so with respect to other than such selected information or in any future periods; and

  • All descriptions of any document in this annual report on Form 20−F are subject to and qualified in the entirety by reference to the full text of such document.

Cautionary Statement concerning Forward-looking Statements:

Statutory Safe Harbor

This annual report on Form 20−F contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created by those laws.

What are Forward-looking Statements

Certain statements, other than statements of historical facts, included or incorporated by reference in this report, may address activities, events, conditions, or developments that we currently expect or anticipate may occur in the future, including, but not limited to, such things as or as related to, business growth and prospects, operation objectives, market size, as may be indicated by patient numbers or disease prevalence estimates, our business strategy, competitive strengths, future government policies and regulations and their impact, product pricing trends, regulatory review, approval, and certification progress, product development and launch, research and development progress, prospect for partnerships or collaborations and the outcome thereof, capital expense estimate, future operations and strategies. Such statements may be considered forward-looking statements. References to future successes of our company are usually forward-looking statements. Forward-looking statements include information about possible or assumed future financial condition and results of operations of the Company.

i


Forward-looking statements include, but are not limited to, those statements using words such as “believe,” “expect,” “plans,” “strategy,” “potential”, “prospects,” “forecast,” “estimate,” “project,” “anticipate,” “aim,” “will” or “would”, “may” or “might”, and words, phrases, expressions, and usages of similar meaning or substance or the negative of such words, phrases, expressions and usages.

Forward-looking statements usually are based on management’s current assumptions, beliefs, expectations, and projections, in light of the information currently available to it.

Subject to Risks, Uncertainties, and Assumptions

Numerous risks and uncertainties attend or impact on the matters addressed by forward-looking statements, any of which could negatively and materially affect our operation results, performance or financial conditions. Therefore, you should not place undue reliance on forward-looking statements.

Our actual operation results, performance or financial conditions could differ materially from those contained in forward-looking statements due to a number of factors, including: regulatory actions such as adverse drug pricing adjustments; competition from other domestic and foreign pharmaceutical companies and their products; changes in China's healthcare insurance system, particularly in various government sponsored programs, as to coverage and reimbursement limits and otherwise; changes in the government medical procurement and the competitive bidding system; the segment market growth for our products; changes in other Chinese government policies and regulations; risks and uncertainties related to collaboration, joint ventures, and partnerships, including deal consummation risks; our ability to enhance existing products and develop, obtain government approvals for, and market new indications or future generations of our existing products and new products; progress of our clinical trials; receipt and timing of regulatory approvals for new products and indications; market acceptance of our products and hospital or patient demand for our products; our ability to improve and expand our production, sales and distribution network and other aspects of our operations; our ability to diversify our product portfolio; our ability to effectively protect our intellectual property; our ability to successfully identify, acquire, develop and deploy new medical technologies, products and product candidates; other changes in the healthcare industry in China ; and fluctuations in general economic and business conditions in China.

We describe in this report some of these risks and uncertainties in greater detail under “Item 3. Key Information—Risk Factors”. Important information regarding risks and uncertainties may also appear elsewhere in this annual report, including but not limited to “Item 4. Information on the Company,” “Item 5. Operating and Financial Review and Prospects,” the Company’s consolidated financial statements referenced in “Item 18. Financial Statements,” and “Item 11. Quantitative and Qualitative Disclosures about Market Risk”.

Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of these assumptions, and therefore, also the forward-looking statements based on these assumptions, could prove to be inaccurate or incomplete.

In light of the significant risks and uncertainties inherent in the forward-looking statements that are included or incorporated by reference in this report, our inclusion or incorporation of such information is not a representation by us or any other persons that any possibility, estimation, particular course of action or prediction will come to fruition or materialize, or our objectives and plans will be achieved.

We urge you to consider and evaluate all forward-looking statements always in light of possible risks, uncertainties and limitations.

Date of Relevance; No Update

Our forward-looking statements speak only as of the date made, and, for those contained in this annual report, only as of the date of this annual report. We will not update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except in very limited circumstance where the securities laws require us to do so.

Applicable to other Disclosures

From time to time, oral or written forward-looking statements may also be included in other materials of the Company released to the public, including, but not limited to, other SEC filings, news releases, discussions at earnings calls, investor presentations and website information. All the discussions under this heading “Cautionary Statement concerning Forward-looking Statements” apply to such other oral or written forward-looking statements.

ii


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 selected consolidated financial data presented below for the years ended December 31, 2010, 2011 and 2012 are derived from our audited consolidated financial statements (“Financial Statements”) for such periods, which are included elsewhere in this annual report. The selected consolidated financial data presented below for the years ended December 31, 2008 and 2009, and the balance sheet, dated as of December 31, 2008, 2009 and 2010 are derived from our audited consolidated financial statements for such periods, but not included in this annual report.

Our consolidated financial statements are prepared in accordance with U.S. GAAP. Our historical results do not necessarily indicate results expected for any future periods. The selected financial data should be read in conjunction with, and are qualified in their entirety by reference to, our audited consolidated financial statements and related notes and “Item 5. Operating and Financial Review and Prospects” in this annual report.

    Year ended December 31,  
    2008     2009     2010     2011     2012     2012  
    RMB     RMB     RMB     RMB     RMB     US$  
    (in thousands, except per share, share, per ADS and ADS data)  
Selected Statement of Income data:                                    
Net revenue(1):   243,245     316,920     418,628     541,614     669,948     107,534  
Cost of revenue   (21,741 )   (25,236 )   (41,650 )   (58,073 )   (70,504 )   (11,317 )
Gross profit   221,504     291,684     376,978     483,541     599,444     96,217  
Total operating expenses   (173,325 )   (206,627 )   (288,880 )   (361,895 )   (470,623 )   (75,540 )
Income from operations   48,179     85,057     88,098     121,646     128,821     20,677  
Total other income, net   2,463     10,114     14,960     14,724     3,632     582  
Income before income tax expenses   50,642     95,171     103,058     136,370     132,453     21,259  
Net income attributable to 3SBio Inc.   39,542     83,435     81,286     108,573     102,354     16,428  
Basic weighted average number of ordinary shares outstanding   151,655,631     150,606,317     151,241,036     153,310,128     154,726,537     154,726,537  
Diluted weighted average number of ordinary shares outstanding   151,712,749     151,034,192     154,131,768     157,148,685     158,971,682     158,971,682  
Net income attributable to 3SBio Inc. per share, basic   0.26     0.55     0.54     0.71     0.66     0.11  
Net income attributable to 3SBio Inc. per share, diluted   0.26     0.55     0.53     0.69     0.64     0.10  
Net income attributable to 3SBio Inc. per ADS, basic   1.82     3.87     3.76     4.96     4.63     0.74  
Net income attributable to 3SBio Inc. per ADS, diluted   1.82     3.87     3.69     4.84     4.51     0.72  

1



    As of December 31,  
    2008     2009     2010     2011     2012     2012  
    RMB     RMB     RMB     RMB     RMB     US$  
    (in thousands)  
Selected Balance Sheet Data:                                    
Cash and cash equivalents   439,237     262,767     153,250     245,813     450,557     72,319  
Restricted cash   -     9,300     1,662     665     668     107  
Time deposits with financial institutions   293,809     468,451     498,405     519,201     441,294     70,832  
Total assets   952,918     1,053,461     1,186,397     1,311,110     1,470,029     235,956  
Total liabilities   32,523     41,223     50,344     65,904     91,406     14,671  
Share capital   121     121     123     124     125     20  
Total shareholder’s equity   920,395     1,012,238     1,136,053     1,245,206     1,378,623     221,285  
                                     
Selected Cash Flow Data:                                    
Net cash provided by operating activities   60,468     88,638     58,133     137,111     185,966     29,848  
Net cash provided by/(used in) investing activities   (368,889 )   (266,114 )   (165,234 )   (52,322 )   19,699     3,163  
Net cash provided by/(used in) financing activities   (14,467 )   132     6,763     15,963     486     78  

(1)

Net revenue consists of the invoiced value of goods sold, net of: value-added taxes, or VAT; discretionary sales returns; and trade discounts and allowances.

Exchange Rate Information

Our business is primarily conducted in China, and all of our revenue and operating expenses are denominated in Renminbi. However, for the convenience of readers, periodic reports made to shareholders include current period amounts translated into U.S. dollars using the current exchange rate. Unless otherwise indicated, all translations from Renminbi to U.S. dollars for financial data have been made at a rate of RMB6.2301 to US$1.00, the exchange rate as set forth in the H.10 statistical release of the Federal Reserve Bank of New York on December 31, 2012.

The following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated. For all periods prior to January 1, 2009, the exchange rate refers to the noon buying rate for U.S. dollars in The City of New York for cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York. For periods beginning on or after January 1, 2009, the exchange rate refers to the exchange rate as set forth in the H.10 statistical release of the Federal Reserve Bank. On March 29 2013, the latest practicable date, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board was RMB6.2108 to $1.00.

    Noon Buying Rate  
    Period End     Average(1)   High     Low  
    (RMB per US$1.00)  
Period                        
                         
2008   6.8225     6.9477     6.7800     7.2946  
2009   6.8259     6.8295     6.8176     6.8470  
2010   6.6000     6.7689     6.8330     6.6000  
2011   6.2939     6.4630     6.6364     6.2939  
2012                        
   October   6.2372     6.2627     6.2877     6.2372  
   November   6.2265     6.2338     6.2454     6.2221  
   December   6.2301     6.2328     6.2502     6.2251  
2013                        
   January   6.2186     6.2215     6.2303     6.2134  
   February   6.2213     6.2323     6.2438     6.2213  
   March   6.2108     6.2154     6.2246     6.2105  
   
(1)

Annual averages are calculated from month-end rates. Monthly averages are calculated from the daily rates during the month.

2


We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, the rates stated above, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade.

B. Capitalization and Indebtedness

Not applicable.

C. Reasons for the Offer and Use of Proceeds

Not applicable.

D. Risk Factors

You should consider carefully all of the information in this annual report, including the risks described below. If any risk disclosed below or elsewhere in this annual report actually occurs, our business, financial condition or results of operations could be harmed. In such an event, the trading price of our ADS could decline and you might lose all or part of your investment. Some information in this Item 3.D may be a summary of more detailed discussions contained elsewhere in this annual report.

The risks described below are not the only ones concerning us. Our business is also subject to the risks not specifically addressed below that generally affect many companies, such as employment relations, general economic conditions, geopolitical events, etc. Further, additional risks not currently known to us or that we currently believe are immaterial also may impact our business, operations, financial condition and ADS price materially and adversely.

3.D.1 Risks Related To Our Company

We are currently dependent on our two flagship product, EPIAO and TPIAO. A reduction in revenues of these two products would cause our total revenues to decline and could materially harm our business.

We are largely dependent on sales of two products: (1) our erythropoietin, or EPO, product, which we market under the name of EPIAO; (2) our recombinant human thrombopoietin, or TPO-based therapeutic, which we market under the name of TPIAO. We began marketing and selling EPIAO in 1998, and it has been our top-selling product since 2002. Our proprietary product, TPIAO, was first launched in January 2006. Revenues from sales of EPIAO accounted for 59.9%, 58.7% and 55.7% of our total revenues for the years ended December 31, 2010, 2011 and 2012, respectively. Revenues from sales of TPIAO accounted for 30.7%, 30.4% and 31.4% of our total revenues for the years ended December 31, 2010, 2011 and 2012, respectively. We have continued our efforts to promote EPO and TPO products in 2013 and expect that their sales will continue to comprise a substantial portion of our revenues in the future.

Any reduction in revenues from EPIAO and TPIAO will have a direct negative impact on our business, financial condition and results of operations. Our EPO and TPO franchises and associated revenues could be adversely affected by a variety of factors, including, but not limited to:

  • increased competition;

  • pricing pressure caused by competition, government policies, or otherwise;

  • new product introductions;

  • the inability to market effectively our products;

  • intellectual property issues;

  • problems with raw materials supply;

  • disruptions in manufacturing or distribution;

3


  • newly discovered safety, side effects or other product issues; and

  • negative perception or insufficient recognition of EPIAO and TPIAO by the medical community or other key parties such as third party payers.

Despite our efforts, we may be unable to develop or acquire new products that would enable us to diversify our business and reduce our dependence on EPIAO and TPIAO products, or to do so in such manner as competitively required.

The commercial success of our products depends upon the degree of market acceptance among the medical community. Failure to attain market acceptance among the medical community would have an adverse impact on our operations and profitability.

The commercial success of our products, including in-licensed products, depends upon the degree of market acceptance they achieve among the medical community, particularly physicians and hospitals. Physicians may not prescribe or recommend our products to patients, and procurement departments of hospitals may not purchase our products. The acceptance of any of our products among the medical community will depend upon several factors, including:

  • the safety and effectiveness of the product;

  • the effectiveness of our efforts to market our products to hospitals and physicians;

  • the product’s cost effectiveness;

  • the prevalence and severity of side effects; and

  • the product’s perceived advantages and disadvantages relative to competing products or treatments.

If our products fail to attain market acceptance among the medical community, our operations and profitability would be adversely affected.

The selling prices of our products tend to decline over time. Our success depends on our ability to successfully develop and commercialize additional pharmaceutical products. Our product development efforts may not result in commercially viable products.

As is typical in the Chinese pharmaceutical industry, the average selling prices of our products tend to decline significantly over the life of the product. These declines principally result from increased competition and changes in government policies.

We must therefore constantly identify product candidates that can be developed into cost-effective therapeutic products. We plan to continue to search for in-license and acquisition opportunities and invest in research and development; however, successful product development in our industry is highly uncertain, and relatively few research and development projects produce commercially viable products. If we cannot offset any decline in revenues and margins of our marketed products with new product introductions, our overall results of operations will be materially and adversely affected.

Our products face substantial competition, and we may not be able to compete effectively against current and future competitors.

We operate in a highly competitive environment. Our products compete with other products or treatments for diseases for which our products may be indicated.

  • EPIAO competes with both existing EPO drugs and new drug candidates. In China, EPO drugs are offered by established international companies such as Kirin Brewery Company Limited, or Kirin, and F. Hoffmann-La Roche, Ltd., or Roche, and domestic pharmaceutical companies such as Shanghai Kelong, Beijing Sihuan, Chengdu Di’ao, Shenzheng Saiboer, Shandong Ahua, Shandong Kexing, and others.

  • Competitors for Iron Sucrose Supplement include Beijing Novartis Pharmaceutical Co., Ltd., Nanjing Hencer Pharmaceutical Co., Ltd. and others.

  • While we believe TPIAO is the only TPO-based therapeutic available in the China market to date, other pharmaceutical companies may enter this market and manufacture and market their TPO products.

Certain of our competitors, including biotechnology and pharmaceutical companies, are actively engaged in research and development in areas where we have products or where we are developing product candidates or new indications for existing products. Other companies may discover, develop, acquire or commercialize products before or more successfully than we do.

In the future, we expect that our products will compete with new drugs currently in development, drugs approved for other indications that may be approved for the same indications as those of our products and drugs approved for other indications that are used off-label. Furthermore, our products may compete against products that have lower prices, superior performance, greater ease of administration or other advantages compared to our products. We do not currently have patents of any commercial significance covering EPIAO, our legacy products or several of our product candidates with which to protect these products from direct competition. Our inability to compete effectively could reduce sales or margins, which could have a material adverse effect on our results of operations.

4


As we expand our product portfolio by adding new products and indications, as well as developing second-generation versions of existing products with the same or overlapping labels, some of our products may be used as a substitute for our other products in the same end markets.

An increasing number of foreign pharmaceutical companies have introduced their products into the Chinese market. Subsequent to the reduction of import tariffs pursuant to China’s World Trade Organization (“WTO”) obligations, the selling prices in China of imported pharmaceuticals have become more competitive. Also, foreign pharmaceutical manufacturers have set up domestic production bases in China leading to increasing direct competition.

Large Chinese state-owned and privately-owned pharmaceutical companies, and foreign pharmaceutical companies, may have greater clinical, research, regulatory, manufacturing, marketing, financial and human resources than we do. In addition, some of our competitors may have technical or competitive advantages over us for the development of technologies and processes. These resources may make it difficult for us to compete with them to successfully discover, develop and market new products and for our current products to compete with new products or new product indications that these competitors may bring to market. There may also be significant consolidation in the pharmaceutical industry among our competitors, or alliances may develop among competitors and these alliances may rapidly acquire significant market share.

In order to gain market share in China, competitors may significantly increase their advertising expenditures and promotional activities, or even engage in irrational or predatory pricing behavior. In addition, our competitors may engage in improper or unfair conducts, or even illegal acts. Third parties may actively engage in activities designed to undermine our brand name or to influence customer confidence in our products.

For these and other possible reasons, we may not be able to compete effectively against current and future competitors. Increased competition may result in price reductions, reduced margins and loss of market share, any of which could have a material adverse effect on our profit margins.

Our competitors may have the ability to manufacture pharmaceutical products substantially similar to ours.

Our ability to compete against our competitors is, to a significant extent, dependent upon our ability to distinguish our products from those of our competitors by providing high quality products at reasonable prices that are perceived to be safe and effective by doctors and patients. Many of our competitors may have been in business longer than we have, may have substantially greater financial and other resources than we have and may be better established in our markets. Our competitors in any particular market may also benefit from raw material sources or production facilities that are closer to such markets, which may provide them with competitive advantages in terms of cost and proximity to consumers.

Our TPIAO product had market exclusivity under a regulatory monitoring period through May 2010, during which other pharmaceutical companies were prohibited from manufacturing or importing similar drugs. Since the monitoring period has expired, other pharmaceutical companies in China may apply for approval of the SFDA to manufacture similar drugs using similar formulae or production techniques.

With respect to TPIAO or any other current or future product of ours, if other manufacturers introduce products substantially similar to ours, we will face more competitive pressure in the market and our sales and profit margin may be adversely affected.

Our business depends on our Shenyang Sunshine, EPIAO and TPIAO brands, and if we are not able to maintain and enhance our brands to sustain our competitive advantage, our reputation, business and operating results may be harmed.

We believe that market awareness of our Shenyang Sunshine, EPIAO and TPIAO brands has contributed significantly to the success of our business. We also believe that maintaining and enhancing these brands is critical to our competitive advantage.

In order to further penetrate the markets and launch new products, we must expand our manufacturing and sales and marketing efforts. Maintaining quality and cost-effectiveness may be more difficult to achieve.

While our sales and marketing staff will continue to promote our brands to remain competitive, we may not be successful. If we are unable to further enhance our brand recognition and increase awareness of our products, or if we incur excessive marketing and promotion expenses, our business and results of operations may be materially and adversely affected.

We may pursue collaborations, in-licensing arrangements, joint ventures, acquisitions, strategic alliances, partnerships, or other strategic initiatives or arrangements, which may fail to produce anticipated benefits, or adversely affect or disrupt our business.

As part of our business strategy, we continually pursue opportunities of collaboration, in-licensing, joint ventures, acquisitions of products, assets, technologies, or businesses, strategic alliances, or partnerships that we believe would be complementary to or promote our existing business.

Proposing, negotiating and implementing collaborations, in-licensing arrangements, joint ventures, acquisitions, or other strategic arrangements may be a lengthy and complex process. Other companies, including those with substantially greater financial, marketing, sales, technology, or other business resources, may compete with us for these opportunities or arrangements. We may not identify, secure, or complete any such transactions or arrangements in a timely manner, on a cost-effective basis, on acceptable terms, or at all.

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We have limited experience with respect to these business development activities. Management of a license arrangement, collaboration, joint venture, or other strategic arrangement or integration of acquired assets or businesses may adversely affect or disrupt our current business, decrease our profitability, or cause us to incur significant expenses, or divert management resources that otherwise would be available for our existing business. We may not realize the anticipated benefits of any such transaction or arrangement.

Furthermore, partners, collaborators, or other parties to such transactions or arrangements may fail to fully perform their obligations or meet our expectations or cooperate with us satisfactorily for various reasons, including, due to risks or uncertainties related to their business and operations. There may be conflicts or other collaboration failures and inefficiencies between us and the other parties.

Such transactions or arrangements may also require or stand in need of actions, consents, approvals, waivers, participation or involvement of various degrees from third parties, such as regulators, government authorities, creditors, license grantors or grantees, related individuals, suppliers, distributors, shareholders, or other stakeholders or interested parties. We may not obtain such required or desired actions, consent, approval, waiver, participation or involvement on a timely basis, on acceptable terms, or at all.

We may be classified as a passive foreign investment company, which would result in adverse U.S. federal income tax consequences to U.S. investors in our ADSs or ordinary shares.

We may be classified as a passive foreign investment company, or a PFIC, for United States federal income tax purposes, particularly for the taxable year ended December 31, 2008 (“Year 2008”) and the taxable year ended December 31, 2009 (“Year 2009”).

PFIC status is a factual determination made for each taxable year ending December 31, after the close of such year, on the basis of the composition of our income and our “active” versus “passive” assets for such year. Under the PFIC rules, we will generally be classified as a PFIC if, in the case of any particular taxable year, 75% or more of our gross income consists of certain types of “passive income” (the “income test”) or 50% or more of the value of our assets consists of “passive assets” (the “asset test”). For this purpose, cash and other liquid assets are generally classified as passive assets and goodwill and other unbooked intangibles may generally be classified as active assets. The overall level of our passive assets will be significantly affected by the amount and time-frame within which we deploy the cash raised in our initial public offering, other liquid assets that we presently hold, and the cash flows generated from operating activities. In addition, the overall level of our active assets will depend, in great measure, on the valuation of our goodwill and other unbooked intangibles as implied by our market capitalization which may fluctuate.

We believe we were not a PFIC for U.S. federal income tax purposes for our taxable year ended December 31, 2012. For the taxable year ending December 31, 2013, the PFIC status cannot be determined until after the end of the year. Because the PFIC determination is highly fact intensive, there can be no assurance that we will not be classified as a PFIC for any particular taxable year or that the Internal Revenue Service will not challenge any determination concerning our PFIC status for any particular taxable year. With respect to prior years, the financial market disruptions from late 2008 and early 2009 may have materially depressed our market valuation for Year 2008 and Year 2009, and, to our knowledge, there is a lack of guidance from United States authorities regarding how such disruptions should be taken into account in applying the asset test. In particular, it is possible that the disruptions could lead to our being classified as a PFIC under the asset test for Year 2008 and Year 2009. If we were to be or become classified as a PFIC for any particular taxable year during which a U.S. investor holds our ADSs or ordinary shares, such U.S. investor may incur a significantly increased United States income tax liability on gain recognized on the sale or other disposition of our ADSs or ordinary shares and on the receipt of distributions on our ADSs or ordinary shares; and, we generally would continue to be treated as a PFIC for all succeeding years during which such U.S. investor holds our ADSs or ordinary shares. See “Item10.E --- Taxation - United States Federal Income Tax Considerations for U.S. Persons” for more detailed discussions on PFIC matters.

Notwithstanding our belief as discussed and any information we provide solely for the convenience of our investors, we are not providing any U.S. tax opinion or advice to U.S. investors concerning the PFIC status of our company, and U.S. investors should consult their own tax advisors concerning the implication of the PFIC rules in his, her or its particular circumstance and determine his, her, or its own tax position as to our PFIC status for a particular taxable year, including, as applicable, for Year 2008 and Year 2009.

Certain of our raw materials, medical devices and components are single-sourced from third parties; third-party supply failures could adversely affect our ability to supply our products.

Certain raw materials necessary for commercial manufacturing and formulation of our products are provided by single-source unaffiliated third-party suppliers. Also, certain medical devices and components necessary for formulation, fill and finish of our products are provided by single-source unaffiliated third-party suppliers, including the EPO Elisa Kit by R&D Systems Inc., GIBCO cell culture medium by Invitrogen Inc., Pharmacia EPO chromatography purification medium by GE Healthcare, a division of GE, and Disc, a microcarrier for cell cultures, by New Brunswick Scientific Inc. For more details, see “4.B.8 Manufacturing.” Certain of these raw materials, medical devices and components are the proprietary products of these unaffiliated third-party suppliers.

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We would be unable to obtain these raw materials, medical devices or components for an indeterminate period of time if these third-party single-source suppliers were to cease or interrupt production or otherwise fail to supply these materials or products to us for any reason, including due to regulatory requirements or action, due to adverse financial developments at or affecting the suppliers, and/or due to unexpected demand, labor shortages or disputes. We would also be unable to obtain these materials, devices and components for an indeterminate period of time if such supply was subsequently found to not be in compliance with our quality standards or resulted in quality failures or product contamination and/or recall when used to manufacture, formulate, fill or finish our products. These events could adversely affect our ability to satisfy demand for our products, which could materially and adversely affect our product sales and operating results.

For example, we have occasionally experienced shortages in certain components necessary for the formulation, fill and finish of certain of our products in our Shenyang facility without impact on our ability to supply these products. However, we may experience shortages in the future resulting in delayed shipments, supply constraints, stock-outs and/or recalls of our products, which could result in interruptions to our production.

We depend on our distributors for sales of our products.

We rely on our network of distributors to distribute our own and our in-licensed products. Our distributors do not sell our products on an exclusive basis. As a result, our products face competition from similar products sold by our distributors.

Our success will depend in part on our ability to form relationships with and manage a changing number of distributors. If our distribution network in China suffers a disruption, our financial condition and results of operations may be adversely affected.

While we have long-standing business relationships with most of our distributors, we do not have long-term contracts with any distributor except for our export sales, which in the past 5 years represents approximately 5% of our total net revenue. Moreover, a significant amount of our revenue is generated by product sales to relatively few distributors, whose mix changes from year to year. In each of the past three years, sales to our top five distributors accounted for 30% to 40% of our total net revenue.

For more information, see “4.B.5 Marketing, Sales and Distribution.”

If any large distributor was to voluntarily or involuntarily suspend or terminate product purchases from us, we would need to divert product sales to other distributors, which could cause disruptions to our revenue and profitability.

We are highly dependent on senior management and key research and development personnel.

We are highly dependent on our senior management to manage our business and operations and our key research and development personnel for the development of new products, technologies and applications and the enhancement of our existing products. In particular, we rely substantially on our Chairman and Chief Executive Officer, Dr. Jing Lou, to manage our operations. We also depend on our key research personnel such as Dr. Dongmei Su, our vice president of research and development (“R&D”) and chief technology officer. In addition, we also rely on sales personnel and other personnel with industry knowledge, to market and sell our products. We do not maintain key man life insurance on any of our senior management or key personnel. The loss of any one of them, in particular Dr. Lou, would have a material adverse effect on our business and operations. In addition, although Dr. Lou and Dr. Su have each signed a non-competition agreement with us, we cannot assure you that we will be able to successfully enforce these provisions in the event of a dispute.

Competition for senior management and research and development personnel is intense, and the pool of suitable candidates is limited. We may be unable to locate a suitable replacement for any senior management or key research and development personnel that we lose. We compete for qualified personnel with other pharmaceutical companies, universities and research institutions. Intense competition for these personnel could cause our compensation costs to increase significantly, which could have a material adverse effect on our results of operations. Our future success and ability to grow our business will depend in part on the continued service of these individuals and our ability to identify, hire and retain additional qualified personnel. If we are unable to attract and retain qualified employees, we may be unable to meet our business and financial goals.

If we are unable to protect our products through intellectual property rights, our competitors may compete directly against us.

Our success depends, in part, on our ability to protect our products from competition by establishing, maintaining and enforcing intellectual property rights. We try to protect the products and technology that we consider important to our business by filing PRC patent applications, securing pharmaceutical regulatory protection, establishing and enforcing confidentiality contractual obligations, relying on trade secrets, or employing a combination of these methods.

We do not have any patent protection of commercial significance relating to EPIAO. We have patents and patent applications relating to TPIAO and certain of our other products, product candidates and technologies. For more details, see “4.B.7—Intellectual Property.” However, the process of seeking patent protection in the PRC can be lengthy and expensive, and we cannot assure you that these patent applications, or any patent applications we may make in the future in respect of other products, will result in patents being issued, or that any patents issued in the future will be able to provide us with meaningful protection or commercial advantage. Any patent issued to us may be challenged, invalidated or circumvented.

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In addition to patents, we rely on trade secrets and proprietary know-how to protect our intellectual property. We have entered into confidentiality agreements with many of our employees, consultants, outside scientific collaborators, sponsored researchers and other advisors. 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 proprietary information and techniques substantially similar to ours or otherwise gain access to our proprietary information.

We may become involved in patent litigation against third parties to enforce our patent rights, to invalidate patents held by such third parties, or to defend against intellectual property claims. The cost to us of any patent litigation or similar proceeding could be substantial, and it may absorb significant management resources. We do not maintain insurance to cover intellectual property infringement.

Intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries, due to, among other causes, lack of procedural rules for discovery and evidence, low damage awards and lack of judicial independence. Implementation and enforcement of PRC intellectual property-related laws have historically been deficient and ineffective and may be hampered by corruption and local protectionism. 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 expenditure 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.

For more details on the process for applying for and obtaining intellectual property protection in the PRC, see “4.B.11-c Intellectual Property.”

Third party claims of intellectual property rights infringement may materially and adversely affect us.

Our commercial success depends significantly on our ability to operate without infringing the patents and other proprietary rights of third parties. Under the PRC Patent Law promulgated by the People’s Congress in March 1984, as amended, patent applications are maintained in confidence until their publication at the end of 18 months from 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 the date on which patent applications are filed. China adopts the first-to-file system under which whoever first files a patent application (instead of the one who makes first actual discoveries) will be awarded the patent. By contrast, the United States patent law endorses the first-to-invent system under which whoever makes the first actual discovery will be awarded the patent. Under the first-to-file system, even after reasonable investigation we may not know with certainty whether we have infringed a third party’s patent because such third party may have filed a patent application without our knowledge while we are still developing that product. While the validity of issued patents, patentability of pending patent applications and applicability of any of them to our programs are uncertain, if asserted against us, any related patent rights could adversely affect our ability to commercialize our products.

If a third party claims that we infringe its proprietary rights, one or more of the following may occur:

  • 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 a third party’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 acceptable terms, if at all, or which may require us to pay substantial royalties or grant cross licenses to our patents; or

  • we may have to reformulate our product so that it does not infringe patent rights of others, which may not be possible or could be very expensive and time-consuming.

Although to date we have not experienced any of the circumstances listed above, if any of these events occurs, our business will be adversely affected.

Our export sales may expose us to risks, uncertainties, and liabilities related to the destination countries and international operations. We have very limited experience in operating internationally.

We export our products outside China and plan to continually expand our exports. We had previously operated solely within China until 2003, and had very limited experience in operating internationally and in any particular destination country.

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The exports may expose us to risks, uncertainties, and liabilities in or related to the destination countries and international operations. In new markets we may fail to anticipate competitive conditions that are different from those in our existing markets. In a particular destination country, our brands may be less recognized. Our selected distributors may not be suitable for selling our products. We expect that pharmaceutical products are heavily regulated and the local laws and regulations may impose substantial costs and burdens on us. We may be unable to effectively protect or enforce our intellectual property rights; may become involved in disputes or litigations over intellectual property rights; or may encounter other issues in the area of intellectual property.

Other risks and uncertainties may include: particular local forms of products liabilities and regulations with respect to pharmaceutical products that are burdensome or unfavorable to us; obligations to comply with a wide variety of foreign laws and other regulatory requirements; political instability; economic instability and recessions; changes in tariffs; difficulties of managing foreign operations generally; increased risk of exposure to terrorist activities; issues related to the 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; and language and cultural conflicts.

There are certain operational, legal and other risks associated with our contractual arrangements with Liaoning Sunshine and its shareholders that are intended to effect our control over Liaoning Sunshine.

We rely on contractual arrangements with our affiliated variable interest entity, Liaoning Sunshine Bio-Pharmaceutical Company Limited, or Liaoning Sunshine, and its shareholder, Mr. Dan Lou, to maintain control over the business and operations of Liaoning Sunshine. Mr. Dan Lou is our former chairman and the father of Mr. Jing Lou, our Chairman and Chief Executive Officer (“CEO”). Liaoning Sunshine holds the rights to our in-licensed product, Iron Sucrose Supplement; in addition, Liaoning Sunshine Science and Technology Development Co. Limited (“LSSTD”), a wholly-owned subsidiary of Liaoning Sunshine, is the principal vehicle in our collaboration with DaVita Inc. (“DaVita”) to provide kidney care services in two Chinese provinces, as set forth under Item 4.B.1.4 and Exhibit 4.10.

These contractual control arrangements may not be as effective in providing control over Liaoning Sunshine as direct ownership. We cannot assure you that the sole shareholder of Liaoning Sunshine will always act in our best interests. If Liaoning Sunshine or its sole shareholder, Mr. Dan Lou, fails to perform any contractual obligations to us, we could be affected, and we may have to rely on legal remedies under PRC law, which may not be effective. Dr. Jing Lou is the CEO and a director of LSSTD. While Dr. Lou as our Chairman and CEO has a fiduciary duty of loyalty and care to us under Cayman Islands law, the potential exists for conflicts of interests between his duties to us and his duties towards LSSTD.

We are party to a purchase agreement, pursuant to which we may acquire 100% of the equity interests in Liaoning Sunshine from Mr. Dan Lou, if and when PRC law permits. We may not receive any required regulatory approval on a timely basis, or at all.

In addition, although we believe, as advised by our counsel, we comply with current PRC regulations, we cannot assure you that the PRC authorities would agree that our arrangements with Liaoning Sunshine comply with PRC licensing, registration, tax or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future.

Any of these risks may affect adversely our economic and voting control over Liaoning Sunshine, which could in turn adversely affect our business, results of operations, and financial condition. For more information, please see “4.C Organizational Structure” and “7.B Related Party Transactions – Transactions with Liaoning Sunshine.”

We may not achieve one or more of our projected goals, objectives, milestones or targets as to various aspects of our business and operations, in the time frames we announce and expect, or at all.

We may set forth goals, milestones or targets in public announcements, releases and disclosures, regarding timing of the accomplishment of objectives material to our success, such as the commencement and completion of clinical trials, anticipated regulatory submission and approval dates, and timing of product launches. As a public company listed in the United States, we make additional announcements in our public reports, such as this annual report, and in press releases regarding these events, from time to time. The actual timing of these events can vary dramatically due to factors beyond our control, 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. There can be no assurance that our clinical trials will be completed, that we will make regulatory submissions or receive regulatory approvals as planned or that we will be able to adhere to our current schedule for the launch of any of our products. If we fail to achieve one or more of these objectives, goals, milestones or targets as planned, the price of our share could decline.

We may experience significant period-to-period quarterly and annual fluctuations in our revenue and operating results, which may result in volatility in our stock price.

We may experience significant period-to-period fluctuations in revenues and operating results. Our revenues and operating results in some quarters may fall below the estimates of securities research analysts, which may cause the value of our ordinary shares and ADSs to decline.

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Generally, our quarterly and annual operating results are affected by a number of factors, such as:

  • seasonal spending patterns of Chinese consumers, including hospitals, dialysis centers and clinics;

  • changes in pricing policies by us, our competitors or the government;

  • the timing and market acceptance of new products and product enhancements by us or our competitors;

  • the loss of key sales personnel or distributors;

  • changes in government policies or regulations;

  • increase in our research and development expenses as we focus on bringing new products to market; and

  • fluctuations in general economic conditions in China.

Many of these factors are beyond our control, and you should not rely on our results of operations for prior quarters as an indication of our results in any future period. As our revenues vary significantly from quarter to quarter, our business could be difficult to predict and manage and our quarterly results could fall below investor expectations, which could cause our ADS price to decline.

Power shortages, natural disasters, terrorist acts or other calamities could disrupt our production and have a material adverse effect on our business, financial position and results of operations.

EPIAO, TPIAO and our legacy products are produced at our manufacturing facilities in Shenyang. A significant disruption at that facility, even on a short-term basis, could impair our ability to produce and ship products on a timely basis, which could have a material adverse effect on our business, financial position and results of operations.

Our Shenyang manufacturing operations are vulnerable to interruption and damage from natural and other types of disasters, including earthquake, fire, floods, environmental accidents, power shortage, interruptions in electricity supply, communications failures and similar events. If any disaster were to occur, our ability to operate our business at our facilities would be seriously impacted. In addition, the nature of our production and research activities could require significant delays in our programs and make it difficult for us to recover from a disaster. We do not maintain business interruption insurance. Accordingly, unexpected business interruptions resulting from disasters could disrupt our operations and thereby result in substantial costs and diversion of resources.

3.D.2 Risks Related To Our Industry

The pharmaceutical industry in China is highly regulated, and future government regulation may place additional burdens on our business.

The pharmaceutical industry in China is subject to extensive government regulation and supervision. The regulatory framework addresses all aspects of operating in the pharmaceutical industry, including approval, production, licensing and certification requirements and procedures, periodic renewal and reassessment processes, registration of new drugs and environmental protection. Violation of applicable laws and regulations may materially adversely affect our business.

In order to manufacture pharmaceutical products in China, we are required to apply for and obtain a pharmaceutical manufacturing permit from the provincial level food and drug administrative authority. In addition, in order to manufacture and market any drug in China, we are required to apply for and obtain permits and certificates from the SFDA, including the new drug certificate, drug registration certificate (which includes the issuance of a drug approval number) and GMP certificate. (Chinese GMP refers to guidelines and regulations issued from time to time pursuant to PRC laws as part of quality assurance to ensure that products subject to those guidelines and regulations are consistently produced and controlled to the quality and standards appropriate for their intended use.) We are required to renew the pharmaceutical manufacturing permits, drug registration certificates and GMP certificates periodically, generally every five years. China SFDA and other Chinese regulatory agencies operate under considerable time and resources constraints. There may be various factors and risks that impact on the process of obtaining or renewal of these certificates, permits, or similar regulatory approvals. If we are unable to obtain or renew such permits or certificates or any other regulatory approvals required for our operation on a timely basis, or at all, we may be prevented from engaging in the manufacture of our products, or suffer other possible negative consequences, and our business may be adversely affected.

Changes in compliance standards, laws, regulations and regulatory practices may prohibit or render more restrictive certain business activities, increase compliance costs or otherwise adversely impact our operations, profitability or financial position.

For more information, please refer to “4.B.11—Regulations.”

New product development in the pharmaceutical industry is both costly and labor-intensive and has a low rate of successful commercialization.

Our success will depend in part on our ability to enhance our existing products and to develop new products. The development process for pharmaceutical products is complex and uncertain, as well as time-consuming and costly. Relatively few research and development programs produce a commercial product. A product candidate that appears promising in the early phases of development may fail to reach the market for a number of reasons, such as:

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  • the failure to demonstrate safety and efficacy in preclinical and clinical trials;

  • the failure to obtain approvals for intended use from relevant regulatory bodies, such as the SFDA;

  • our inability to manufacture and commercialize sufficient quantities of the product economically; and

  • proprietary rights, such as patent rights, held by others related to our product candidate and their refusal to sell or license such rights to us on reasonable terms, or at all.

In addition, product development requires the accurate assessment of market trends. We cannot assure you that:

  • our new product research and development efforts will be successfully and timely completed;

  • the SFDA or other regulatory bodies will grant necessary regulatory clearances or approvals on a timely basis, or at all; or

  • any product we develop will be commercialized or achieve market acceptance.

Delays in any part of the development process or our inability to obtain regulatory approval of our products could adversely affect our operating results by restricting or delaying our introduction of new products. For example, our application to the SFDA to undertake a registration trial for Ferumoxytol was submitted as of January 2010 but is still pending approval.

Failure to develop, obtain necessary regulatory clearances or approvals for or successfully commercialize or market potential new products or technologies could have a material adverse effect on our financial condition and results of operations.

We will not be able to commercialize our product candidates if our preclinical studies do not produce successful results or our clinical trials do not demonstrate safety and efficacy in humans.

Before obtaining regulatory approvals for the manufacturing and sale of our product candidates, we must conduct, at our own expense, extensive preclinical tests and clinical trials to demonstrate the safety and efficacy in humans of our product candidates. Preclinical and clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful, and interim results of a clinical trial do not necessarily predict final results. A failure of one or more of our clinical trials can occur at any stage of testing. We may experience numerous unforeseen events during, or as a result of, preclinical testing and the clinical trial process that could delay or prevent our ability to receive regulatory approval or commercialize our product candidates, including:

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  • our preclinical tests or clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional preclinical testing or clinical trials, or we may abandon projects that we expect to be promising;

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  • we might have to suspend or terminate our clinical trials if the participating patients are being exposed to unacceptable health risks;

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  • regulators may require that we hold, suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or safety concerns;

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  • the time or cost of our clinical trials may be greater than we currently anticipate;

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  • any regulatory approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the product not commercially viable; and

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  • our product candidates may produce undesirable side effects or may have other unexpected characteristics.

    If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we currently contemplate, if we are unable to successfully complete our clinical trials or other testing or if the results of these trials or tests are not positive or are only modestly positive, we may:

    • be delayed in obtaining marketing approval for our product candidates;

    • not be able to obtain marketing approval; or

    • obtain approval for indications that are not as broad as intended.

    Our product development costs will also increase if we experience delays in testing or approvals. We do not know whether planned clinical trials will begin as planned, will need to be restructured or will be completed on schedule, if at all. Significant clinical trial delays also could allow our competitors to bring products to market before we do and impair our ability to commercialize our products or product candidates.

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    We may not be able to obtain regulatory approval for any of the products resulting from our development, or may do so only with sufferance of delays, limitations, increased costs or other issues.

    New pharmaceutical products must be approved by the SFDA before they can be marketed and sold in China. The SFDA requires successful completion of clinical trials and demonstrated manufacturing capability before the grant of approval. Clinical trials are expensive and their results are uncertain. It often takes multiple years before a medicine can be ultimately approved by the SFDA. In addition, the SFDA and other regulatory authorities may apply new standards for safety, manufacturing, packaging, and distribution of future product candidates. Complying with such standards may be time-consuming and expensive and could result in delays in obtaining SFDA approval for our product candidates, or possibly preclude us from obtaining SFDA approval. Furthermore, our future products may not be effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude us from obtaining regulatory approval or prevent or limit commercial use. The SFDA and other regulatory authorities operate under considerable time and resource constraints. There may be various factors and risks that impact on the process of regulatory review and approvals. The SFDA and other regulatory authorities may not approve the products that we develop, and even if we do obtain regulatory approvals, such regulatory approvals may take longer than expected or desired, or may be subject to limitations on the indicated uses for which we may market a product, which may limit the size of the market for such product.

    The pricing of all of our products is subject to government approval, controls, and other regulations. Such price-related government actions or measures may limit our profitability or cause us to stop marketing in a region or even stop manufacturing certain products.

    Pursuant to the implementing rules of the Drug Administration Law, we are required to seek pricing approval for all our products from the National Development and Reform Commission of the PRC, or the NDRC, and the price administration authorities of the relevant provinces of the PRC in which our pharmaceutical products are manufactured. We have in the past been able to successfully obtain pricing-related approvals.

    In addition, in order to access certain local or provincial-level markets, we enter into government-sponsored competitive tendering processes for EPIAO, TPIAO and our legacy products every year or every few years, or as otherwise required by the relevant government authorities, with a designated price range. The competitive bidding in effect sets price ceilings for our products, thereby limiting our profitability. In some instances, if the price range designated by any local government falls below our costs, we may stop marketing such products in that region or even stop manufacturing such products. See “4.B.11-b.3 Distribution.” The provincial tendering process recently has been evolving with additional downward pressure including practices like “adopting lowest prices in the country” and “hospital secondary bidding”.

    Pharmaceutical products included in certain government sponsored insurance programs are subject to price controls in the form of fixed retail prices or retail price ceilings. In addition, the maximum retail prices of such products are also subject to periodic downward adjustments as the PRC government authorities aim to make pharmaceuticals more affordable to the general public. In Septemeber 2012, the NDRC released an updated list of maximum retail selling prices for certain drugs sold in China which resulted in reductions in the maximum selling prices for EPIAO and TPIAO.

    Our core products EPIAO and TPIAO are currently not included in the National Essential Drugs Registry (see Item 4.B.11-b.5 "- National Essential Drugs Registry"), which inclusion would be likely to exert more downward pricing pressure, as National Essential Drugs Registry is periodically updated.

    Rapid changes in the pharmaceutical industry may render our products obsolete.

    The pharmaceutical industry is characterized by rapid changes in technology, constant enhancement of industrial knowhow and frequent emergence of new products. Future technological improvements and continual product developments in the pharmaceutical market may render our existing products obsolete or affect our viability and competitiveness. Therefore, our future success will largely depend on our ability to:

    • improve our existing products;

    • diversify our product portfolio; and

    • develop new and competitively priced products which meet the requirements of the constantly changing market.

    If we fail to respond to this environment by improving our existing products or developing new products in a timely fashion, or if our new or improved products do not achieve adequate market acceptance, our business and profitability may be materially and adversely affected.

    Anti-corruption measures taken by the government authorities to correct corruptive practices in the pharmaceutical industry, and laws and regulations aiming at combating corruption, could adversely affect us.

    The PRC government has from time to time undertaken anti-corruption measures to correct corrupt practices. In the pharmaceutical industry, such practices include, among others, acceptance of kickbacks, bribery or other illegal gains or benefits by the hospitals and medical practitioners from pharmaceutical distributors in connection with the prescription of a certain drug. Nearly all of our sales to our ultimate customers are conducted through third-party distributors. We have no control over our third-party distributors, who may engage in corrupt practices to promote our products. While we maintain strict anti-corruption policies applicable to our internal sales force and third-party distributors, these policies may not be effective. If our affiliated variable interest entity, Liaoning Sunshine, or any of our third-party distributors engage in such practices and the government takes enforcement action, our products may be seized and our own practices, and involvement in the distributors’ practices, investigated. If this occurs, our sales and reputation may be materially and adversely affected.

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    In addition, government-sponsored anti-corruption campaigns from time to time could have an adverse effect on our efforts to reach new hospital customers. Our sales representatives primarily rely on hospital visits to better educate physicians on our products and promote our brand awareness. In the past, there have been occasions on which our sales representatives were denied access to hospitals in order to avoid the perception of corruption. If this attitude becomes widespread among our potential customers, our ability to promote our products will be adversely affected.

    Furthermore, we are subject to the U.S. Foreign Corrupt Practices Act, or FCPA, which has been more vigorously enforced by the U.S. government in recent years. Even though we have adopted a Code of Ethics that applies to all our employees, which, among other requirements, prohibits improper payments and gifts in our business, and enforces compliance with applicable laws and regulations, including FCPA, we cannot assure you that our employees will comply with this Code or that the increased level of FCPA investigative and enforcement actions will not adversely affect us.

    We are subject to environmental regulations and may be exposed to liability and potential costs for environmental compliance.

    We are subject to PRC laws and regulations concerning the discharge of effluent water and solid waste during our manufacturing processes. We are required to obtain clearances and authorizations from government authorities for the treatment and disposal of such discharge. We may not at all times comply fully with environmental regulations. Any violation of these regulations may result in substantial fines, criminal sanctions, revocations of operating permits, shutdown of our facilities and obligation to take corrective measures. Our cost of complying with current and future environmental protection laws and regulations and our liabilities which may potentially arise from the discharge of effluent water and solid waste may materially and adversely affect our business, financial condition and results of operations.

    The government may take steps toward the adoption of more stringent environmental regulations. Due to the possibility of unanticipated regulatory or other developments, the amount and timing of future environmental expenditures may vary substantially from those currently anticipated. If there is any unanticipated change in the environmental regulations, we may need to incur substantial capital expenditures to install, replace, upgrade or supplement our pollution control equipment or make operational changes to limit any adverse impact or potential adverse impact on the environment in order to comply with new environmental protection laws and regulations. If such costs become prohibitively expensive, we may be forced to cease certain of our business operations.

    We may be required to defend lawsuits or pay damages for product liability claims. We do not have any liability or business disruption insurance, and, a claim against us, or an interruption in our business, could adversely affect our reputation and our financial results.

    The development and commercialization of pharmaceutical products entails an inherent risk of harm to the patient and, therefore, product liability. If a product liability claim is brought against us, it may, regardless of merit or eventual outcome, result in damage to our reputation, breach of contract with our customers, decreased demand for our products, costly litigation, product recalls, loss of revenue and the inability to commercialize some products. We currently are not aware of any existing or anticipated product liability claims with respect to our products.

    Existing PRC laws and regulations do not require us to, nor do we, maintain liability insurance to cover product liability claims. The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products. As a result, we do not have business liability, or in particular, product liability or disruption insurance coverage for our operations. Any business disruption, litigation or natural disaster might result in substantial costs and diversion of resources. Any product liability insurance for clinical trials, when obtained, may be prohibitively expensive, or may not fully cover our potential liabilities. The inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or inhibit the commercialization of products that we or our collaborators develop.

    3.D.3 Risks Related To Doing Business In China

    Adverse changes in political, economic and other policies of the Chinese government could have a material adverse effect on the overall economic growth of China, which could reduce the demand for our products; and could otherwise materially and adversely affect our business, operations or competitive position. Developments in China’s healthcare policy may adversely affect us. Changes and developments in China’s economic, political and social conditions could adversely affect our financial condition and results of operations.

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    All of our operations are located in China, and substantially all of our sales are 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, but not limited to:

    • 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

    • the level of transparency in the regulatory process.

    While the Chinese economy has experienced significant growth in the past 20 years, growth has been uneven, both geographically, among various sectors of the economy, and during different periods. The Chinese economy may not continue to grow, and if there is growth, such growth may not be steady and uniform; and if there is a slowdown, such a slowdown may have a material negative effect on us.

    The Chinese government implements various measures intended to encourage economic growth and guide the allocation of resources. These measures may include differential policies towards specific groups of pharmaceutical companies, such as promotion of traditional medicines or state-owned companies, or investments in biopharmaceutical companies competing against us, which may have an adverse effect on us. 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. Further, 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.

    The Chinese economy has been transitioning from a planned economy to a more market-oriented economy. Although the Chinese government has implemented reform measures allowing more free play of market forces, 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.

    Changes and developments in China’s economic, political and social conditions could adversely affect our financial condition and results of operations. For example, the pharmaceutical market may grow at a slower pace than expected; an outbreak of avian flu, SARS, swine influenza or other epidemics in China could adversely affect our business, financial condition or results of operations.

    Moreover, the political relationship between the United States, Europe, or other Asian nations 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 operations.

    Future changes in laws, regulations or enforcement policies in China could adversely affect our business.

    Laws, regulations or enforcement policies in China, including those regulating healthcare and the pharmaceutical industry, are evolving and subject to frequent changes. Further, regulatory agencies in China may periodically, and 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 adverse effect on us. 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, and damage to reputation. In addition, such changes may be applied retroactively and thus subject our business and operations to increased uncertainties and risks.

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    There are significant uncertainties under the Enterprise Income Tax (“EIT”) law of the PRC, with respect to our PRC enterprise income tax liabilities, and with respect to possible PRC withholding tax upon our shareholders and ADS holders.

    There are significant uncertainties under the PRC Enterprise Income Tax Law and accompanying regulations and rules, or the EIT law.

    Under the EIT law, if we are deemed a PRC resident enterprise, we could be subject to the EIT at 25%, or any preferential rate, if obtained, on our global income, except that the dividends we receive from our PRC subsidiaries may be exempt from the EIT to the extent such dividends constitute “dividends among qualified PRC resident enterprises.” It is, however, unclear what type of enterprises would be deemed a “qualified resident enterprise” for such purposes. If we are deemed a resident enterprise and determined to have earned income other than exempted dividends from our PRC subsidiaries, the EIT on our global income could significantly increase our tax burden and adversely affect our cash flow and profitability.

    Further, if we are deemed a PRC resident enterprise under the EIT law, our shareholders and ADS holders that are nonresident could be subject to the withholding income tax, or WHT, upon the dividends payable by us or upon any gains realized from the transfer of our ordinary shares or ADSs, if such income is deemed derived from China. The WHT rate is generally 10% to enterprises and 20% to individuals. It is unclear whether, if we are deemed a PRC resident enterprise, our shareholders and ADS holders might be able to claim the benefit of income tax treaties entered into between China and other countries.

    Alternatively, if we, as to the holding entities outside China, are deemed non-resident enterprise, the WHT may apply to the dividends (and interests on intercompany loans) paid by our PRC subsidiaries to the holding entities outside China. For the information regarding our holding structure, please refer to “4.C Organization Structure”.

    We have received various preferential tax treatments under the EIT law and its predecessor laws with respect to our operations and business. Shenyang Sunshine Pharmaceutical Company Limited, or Shenyang Sunshine, our wholly-owned PRC subsidiary, has been certified as a “New and High Technology Enterprise” that entitled it to a preferential EIT rate of 15% effective from January 1, 2011, to December 31, 2013. This and other past or future preferential tax treatments may expire, or be repealed, discontinued or otherwise modified, such that our tax burden could be materially increased.

    For more information, please refer to “4.B.11-d PRC Enterprise Income Tax”.

    We face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.

    Pursuant to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or Circular 698, issued by the State Administration of Taxation, which became effective retroactively as of January 1, 2008, where a non-resident enterprise investor transfers equity interests in a PRC resident enterprise indirectly by way of disposing of equity interests in an overseas holding company, or an Indirect Transfer, and such overseas holding company is located in a tax jurisdiction that: (i) has an effective tax rate less than 12.5% or (ii) does not tax foreign income of its residents, the non-resident enterprise investor should report such indirect transfer to the relevant tax authority of the PRC resident enterprise. The PRC tax authority will examine the true nature of the indirect transfer, and if the tax authority considers that the non-resident enterprise investor has adopted an abusive arrangement without a reasonable commercial purpose in order to reduce, avoid or defer PRC tax, they will disregard the existence of the overseas holding company that is used for tax planning purposes and re-characterize the indirect transfer. As a result, gains derived from such indirect transfer may be subject to PRC withholding tax at the rate of up to 10%. In addition, the PRC resident enterprise may be required to provide necessary assistance to support the enforcement of Circular 698.

    There is some uncertainty as to the application of Circular 698. For example, the term “indirect transfer” is not clearly defined, and the relevant governmental authority has not yet promulgated any formal interpretations or declarations as to the process and format for reporting an indirect transfer to the competent tax authority, or on how to calculate the effective tax rates in a foreign tax jurisdiction or whether a non-resident enterprise investor has adopted an abusive arrangement in order to reduce, avoid or defer PRC tax. Although it appears that Circular 698 was not intended to apply to share transfers of publicly traded companies, there is uncertainty as to the application of Circular 698 to other indirect transfer of our PRC resident entities. As a result, we may have the risk of being subject to the reporting obligations or PRC tax under Circular 698 and may be required to expend resources to comply with Circular 698 or to establish that we should not be taxed under Circular 698, which may have an adverse effect on our financial condition, results of operations and your investment in us.

    Restrictions on currency exchange may limit our ability to receive and use our revenue effectively.

    We receive nearly all of our revenue in Renminbi, which currently is not a freely convertible currency. A portion of our revenue may be converted into other currencies to meet our foreign currency obligations, including, among others, payment of dividends declared, if any, in respect of our ordinary shares. Under China’s existing foreign exchange regulations, we 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, the PRC government may take measures to restrict access to foreign currencies for current account transactions.

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    Our ability to obtain foreign exchange is subject to significant foreign exchange controls, which 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 Shenyang Sunshine obtains foreign currency loans from foreign lenders, it must do so within approved limits that satisfy its approval documentation and PRC debt to equity ratio requirements. Further, such loans must be registered with the SAFE. These limitations could affect the ability of Shenyang Sunshine to obtain capital through offshore debt or equity financing.

    Exchange rate volatility may adversely affect our competitive position, financial position, operations, or otherwise.

    The value of the RMB 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 and foreign exchange policies. The conversion of RMB into foreign currencies, including U.S. dollars, is based on rates set by the People’s Bank of China. The PRC government allowed the RMB to appreciate by more than 20% against the U.S. dollar between July 2005 and July 2008. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the RMB and the U.S. dollar remained within a narrow band. Since June 2010, the PRC government has allowed the RMB to appreciate slowly against the U.S. dollar again, though there have been periods when the U.S. dollar has appreciated against the Renminbi as well. It is difficult to predict how market forces or PRC or U.S. government policy and Chinese government policy may impact the exchange rate between the RMB and the U.S. dollar in the future.

    Any appreciation of the Renminbi may subject us to increased competition from imports into China and from international competitors in our export markets; and any devaluation of the Renminbi may adversely affect the value of our net assets, earnings and financial results, and declared dividends in foreign currency terms, as well as our ability to import raw materials and equipment and service our foreign currency obligations. For example, to the extent that we need to convert our U.S. dollars holdings into the 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 ordinary shares or ADSs, purchasing equipment and raw materials from overseas, or 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.

    There are limited hedging tools available to reduce our exposure to exchange rate fluctuations. While we may decide to enter into hedging transactions, the availability and effectiveness of these hedges may be limited and we may not be able to successfully hedge our exposure, if at all. In addition, any currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into U.S. Dollars.

    Our operations are subject to the uncertainties and particularities associated with the legal system in China, which could adversely affect our business, or limit the legal protection available to us or to existing or potential investors.

    We conduct our business through our operating subsidiaries in China, which are governed by PRC law. China is a civil law jurisdiction based on written codes and statutes. Unlike common law jurisdictions, prior court decisions may be cited as persuasive authority but do not have legally binding force. The PRC government has promulgated laws and regulations in relation to economic matters in general, such as foreign investment, corporate organization and governance, commerce, taxation and trade, with a view to establishing a comprehensive legal system conducive to investment activities. However, the implementation, interpretation and enforcement of these laws and regulations may involve greater uncertainty compared to those in the common law jurisdictions due to a relatively short legislative history, limited volume of court cases and their non-binding nature. Furthermore, many laws, regulations and legal requirements have only recently been adopted by the central or local government agencies, and their implementation, interpretation and enforcement may involve uncertainty due to the lack of established practice available for guidance. PRC administrative and court authorities also have significant discretion in interpreting and enforcing statutory and contractual terms. It thus may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection available than in more developed legal systems. These uncertainties may also impede our ability to enforce the contracts we have entered into with our business partners, customers and suppliers. Vis-à-vis our competitors, depending on the government agency or how an application or a case is presented to such agency or other factors, we may receive less favorable application of law. In addition, any litigation or legal proceeding in China may be protracted and result in substantial legal costs and diversion of resources and management attention. We cannot predict the effect of future legal developments in China, including promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, the preemption of local rules and regulations by national law, the overturn or modification of the lower-level authority’s decisions at the higher level, or the changes in judiciary and administrative practices. As a result, there is substantial uncertainty as to the legal protection available to us or to our investors.

    There may be difficulties in effecting services of process and seeking recognition and enforcement of foreign judgments in China.

    Substantially all of our assets are located in China, and most of our senior management members and directors reside in China. However, China has not entered into treaties or arrangements providing for the recognition and enforcement of judgments made by the courts of the United States or many other jurisdictions. As a result, it may be difficult or impossible for investors to effect service of process or enforce court judgments against our PRC subsidiaries, our assets, senior management members or directors in China.

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    Changes in PRC government policy with respect to foreign investment in China may adversely affect our business and results of operations.

    We are subject to restrictions on foreign investment imposed by PRC law from time to time. For instance, under the Foreign Investment Industrial Guidance Catalogue, the latest version ("Catalogue") of which became effective on January 30, 2012, some industries are categorized as sectors which are encouraged, restricted or prohibited for foreign investment.

    We believe our business as structured is in due compliance with the Catalogue and other currently effective Chinese law and regulations. Kidney care services currently allows foreign ownership of up to 70%; and LSSTD is the principal vehicle in our collaboration with DaVita, with LSSTD holding 30% interest, and Davita 70%, in the joint venture, whereas we only exercise significant influence over LSSTD through contractual arrangements with Liaoning Sunshine, LSSTD's parent. DaVita is a foreign company, and both LSSTD and Liaoning Sunshine are Chinese companies with no foreign ownership. As the Catalogue is updated every few years, there can be no assurance that the PRC government will not change its policies in a manner that would cause part or all of our businesses to fall within the restricted or prohibited categories. If any of our businesses becomes prohibited or if we cannot obtain approval from relevant approval authorities to engage in businesses which become restricted for foreign investors, we may be forced to sell or restructure our businesses which have become restricted or prohibited for foreign investment. If we are forced to adjust our corporate structure or business line as a result of changes in government policy on foreign investment, our business, financial condition and results of operations may be materially and adversely affected.

    Our auditor, like other independent registered public accounting firms operating in China, is not permitted to be subject to inspection by the Public Company Accounting Oversight Board, and as such, investors may be deprived of the benefits of such inspection.

    Our independent registered public accounting firm that issues the audit reports included in our annual reports filed with the SEC, Ernst & Young Hua Ming LLP, as an auditor of the companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or PCAOB, is required by the laws of the United States to undergo regular inspections by PCAOB to assess its compliance with the laws of the United States and professional standards. Because our auditor is located in China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the PRC authorities, our auditor, like other independent registered public accounting firms operating in China, is currently not inspected by the PCAOB.

    Inspection of other firms that the PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future auditor quality. The inability of the PCAOB to conduct inspections of independent registered public accounting firms operating in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedure. As a result, investors may be deprived of the benefits of the PCAOB inspections.

    We may be adversely affected by the outcome of the administrative proceedings brought by the SEC against five accounting firms in China.

    The SEC has brought administrative proceedings against five accounting firms in China recently, alleging that they refused to hand over documents to the SEC for ongoing investigations into certain other China-based companies. We were not and are not subject to any SEC investigations, nor are we involved in the proceedings brought by the SEC against the accounting firms. However, the independent registered public accounting firm that issues the audit reports included in our annual reports filed with the SEC is one of the five accounting firms named in the SEC’s proceedings and we may be adversely affected by the outcome of the proceedings, along with other U.S.-listed companies audited by these accounting firms. If the SEC prevails in the proceedings, our independent auditors and other four accounting firms in China that were named in the proceedings may be barred from practicing before the SEC and hence unable to continue to be the auditors for China-based companies like ourselves. If none of the China-based auditors are able to continue to be auditors for China-based companies listed in the U.S., we will not be able to meet the reporting requirements under the Exchange Act, which may ultimately result in our deregistration by the SEC and delisting from NASDAQ.

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    3.D.4 Risks Related To Our ADSs and Other Risks

    Currently, a going-private transaction of the Company is progressing, which may materially affect public shareholders' investment in us.

    On September 12, 2012, a going-private proposal (as reflected in more details in the transaction documents, including Exhibit 4.11 and Exhibit 4.25, “Going-private Transaction”) from Dr. Jing Lou, our Chairman and Chief Executive Officer and certain affiliates (“Rollover Shareholders”) and CPEChina Fund, L.P. (“CITIC PE”), a Chinese private equity fund, (together with Rollover Shareholders, “Buyer Group”), to acquire all of our outstanding shares not owned by the Buyer Group at $15 per ADS, was announced and submitted to the board of directors of the Company. On February 8, 2013, the board, acting upon the unanimous recommendation of an independent committee formed by the board (the “Independent Committee”), approved the proposed transaction with an increasd offer price at $15.4 per ADS, and we signed a merger agreement with the Buyer Group (Exhibit 4.11 hereto); and the board also recommends that the Company’s shareholders vote to approve and authorize this going-private transaction. On April 24, 2013, the parties entered in an amendment to the merger agreement (Exhibit 4.25 hereto) that raises offer price further to $16.7 per ADS. An extraordinary general meeting of shareholders, as adjourned on April 25, 2013, is expected to be reconvened soon to consider this going-private transaction.

    Dr. Jing Lou and substantially all of our senior management are members of the Buyer Group, which would generally be viewed as involving potential conflicts of interests. This transaction, if approved by our shareholders and successfully closed, would cause the Company to be delisted from the NASDAQ global market and to become a private company, in which event our shareholders, other than the Rollover Shareholders, would not be able to participate in the future growth of the Company; on the other hand, if the proposal would be rejected by our shareholders, or not closed, the price of our ADSs may fall to the former level prior to the announcement of the proposal, and may not reach $16.7 per ADS in future periods. The merger agreement, as amended, and related transaction documents enumerate various closing conditions and also provide for termination events. The board’s ability to adopt anti-takeover measures such as the so-called poison pill plan can inhibit alternative transactions that may be proposed and pursued by other potential bidders. The Going-private Transaction, whether or not consummated, presents a risk of diverting management focus and resources from other strategic opportunities and from operational matters.

    There are numerous additional risks and uncertainties attending this transaction as contemplated; and therefore, shareholders are urged to read carefully the documents filed with the SEC by the Company and the parties to the transaction, particularly the merger agreement as amended, the Schedule 13E-3 transaction statement first filed on March 4, 2013, as subsequently amended, and the proxy statement attached as an exhibit to Schedule 13E-3, including, the information regarding the effects of the transaction on our company, and other discussions regarding risks and uncertainties.

    The market price for our ADSs may be volatile.

    The market price for our ADSs may be highly volatile and subject to wide fluctuations in response to various factors, as discussed under this Item 3.D and elsewhere in this annual report on Form 20-F, including, but not limited to, the following:

    • actual or anticipated fluctuations in our quarterly operating results and changes or revisions of our expected results;

    • changes in financial estimates by securities research analysts;

    • economic, regulatory or political developments in China;

    • announcements of studies and reports relating to the effectiveness or safety of our products or those of our competitors;

    • announcements of technological or competitive developments;

    • any litigation, governmental investigation or enforcement proceedings brought against us by authorities and industry regulators in China or elsewhere;

    • announcements regarding patent litigation or the issuance of patents to us or our competitors;

    • addition or departure of our senior management and key research and development personnel;

    • changes in the economic performance or market valuations of other pharmaceutical or health care companies; and

    • sales of additional ordinary shares or ADSs, or increased supplies of ordinary shares or ADS, or the perception that such sales or supplies might occur.

    In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also have a material adverse effect on the market price of our ADSs.

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    In past few years, there have been a surge of lawsuits, regulatory investigations and enforcement actions, and hostile market manipulations against a number of US-listed Chinese companies, based on allegations of accounting fraud, inadequate disclosure and improper transactions between related parties, and other issues. Such developments have adversely affected US-listed Chinese companies, and may adversely affect the market price of our ADSs and may affect us in other ways.

    Dr. Jing Lou, our Chairman and Chief Executive Officer, and his father, Mr. Dan Lou, control a number of ordinary shares sufficient to influence corporate actions.

    Dr. Jing Lou, our Chairman and Chief Executive Officer, and his father, Mr. Dan Lou, together owned or controlled approximately 13.6% of our outstanding ordinary shares as of April 12, 2013. The interests of the Lou family may differ from those of our other shareholders, and they may take actions that advance their interests to the detriment of our other shareholders. Acting together, they would have voting power to influence the outcome of corporate actions submitted to the shareholders for approval and could otherwise influence our management and affairs, including the election of our board of directors. Chairman Lou is not required to stand for election at any meeting of our shareholders, and therefore serves for an undetermined period of time. In addition, this concentration of ownership may prevent or hinder attempts to remove or replace senior management.

    Anti-takeover measures that could be adopted by the board of directors may adversely affect the rights of holders of our ordinary shares and ADSs.

    Our amended and restated articles of association include provisions that could limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their share at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. These provisions could also serve to entrench our existing board of directors and management. For example, our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares and ADS. In addition, the board of directors may decide to adopt a rights plan, popularly known as “poison pill”, that are generally considered effective to hinder change-of-control transactions.

    Holders of ADSs have fewer or less rights than shareholders and must act through the depositary to exercise those rights.

    Holders of ADSs do not have the same rights as holders of our ordinary shares and ADS holders only have such rights as are specified in the deposit agreement, which generally are more restricted than the rights of holders of ordinary shares.

    For general meetings of our company, if the vote is by show of hands, the depositary will vote the deposited securities in accordance with the voting instructions received from a majority of holders of ADSs that provided timely voting instructions. If the vote is by poll, the depositary will vote the deposited securities in accordance with the voting instructions it timely receives from ADS holders. In the event of poll voting, deposited securities for which no instructions are received will not be voted.

    Under our articles of association, the minimum notice period required to convene a general meeting is ten days. When a general meeting is convened, you may not receive sufficient notice of a shareholders’ meeting to permit you to withdraw your ordinary shares to allow you to cast your vote with respect to any specific matter.

    In addition, the depositary and its agents may not be able to send voting instructions to you or carry out your voting instructions in a timely manner.

    We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your share. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote.

    As a result, you may not be able to exercise your right to vote and you may lack recourse if your ordinary shares are not voted as you requested.

    In addition, in your capacity as an ADS holder, you will not be able to call a shareholder meeting.

    You may be subject to limitations on transfers of your ADSs; your right to participate in any future rights offerings may be limited; and you may not receive cash dividends or other distributions in certain cases.

    Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deem it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

    Your right to participate in any future rights offerings may be limited, if we are not able to register in the United States the rights and the securities to which the rights relate under the Securities Act of 1933, as amended, or the Securities Act, or to establish an exemption from the registration requirements, which may cause dilution to your holdings.

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    In addition, the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution of cash dividends or other distributions available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property, in which event you would not receive such distribution.

    Since we are a Cayman Islands company, you may have less protection of your shareholder rights than you would as an investor in a U.S. company.

    Our corporate affairs are governed by our amended and restated memorandum and articles of association, the Cayman Islands Companies Law and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, the rights of minority shareholders to institute actions, and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, the latter of which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States; and, some states in the United States, such as Delaware, have more developed and judicially interpreted bodies of corporate law than the Cayman Islands.

    There is uncertainty regarding whether Cayman Islands courts would:

  •  
  • recognize or enforce against us or our directors or officers judgments of courts of the United States predicated upon certain civil liability provisions of United States securities laws; or

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  • impose liability against us, in original actions brought in the Cayman Islands, based on certain civil liability provisions of United States securities laws or laws of any state in the United States

    Cayman Islands companies may not have standing to initiate a shareholder derivative action before the federal courts of the United States.

    As a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by our management, directors or any controlling shareholder than they would as public shareholders of a United States company.

    In addition, as a foreign private issuer, we are not required to follow all the NASDAQ’s corporate governance requirements and certain other NASDAQ rules. As a result, holders of our ADSs may not have the same protection afforded to the shareholders of the companies that are subject to additional NASDAQ corporate governance requirements and rules. Please refer to “Item 16G Corporate Governance” for more information.

    Your ability to bring an action against us or against our directors and officers, or to enforce a judgment against us or them, will be limited, because, we are incorporated in the Cayman Islands, we conduct substantially all of our operations in China and most of our directors and officers reside outside of the United States.

    We are incorporated in the Cayman Islands, and we conduct substantially all of our operations in China through our PRC subsidiaries and affiliated entities. Most of our directors and officers reside, and substantially all of the assets of those persons may be located, outside the United States. As a result, it may be difficult or impossible for you to bring an action in the United States against us or against these individuals in the event that you believe that your rights have been violated under United States securities laws or otherwise, including, that, it may be difficult for you to effect service of process within the United States upon these persons. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands or China may render you unable to enforce a judgment against our assets or the assets of our directors and officers.

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    ITEM 4. INFORMATION ON THE COMPANY

    4.A. History and Development of the Company

    4.A.1 Corporate Information

    3SBio Inc. is an exempted company limited by share in the Cayman Islands, incorporated in August 2006, operating under the Cayman Islands Companies Law (2012 Revision).

    Our principal executive offices are located at No. 3 A1, Road 10, Shenyang Economy & Technology Development Zone, Shenyang 110027. Our telephone number at this address is (86-24) 2538-6000.

    We commenced business operations in 1993 through Shenyang Sunshine Pharmaceutical Company Limited, or Shenyang Sunshine, a limited liability company established in China, which is now our main PRC operating subsidiary. In anticipation of our initial public offering in February 2007, we established a holding company structure through the following series of corporate reorganization transactions:

  •  
  • We formed Collected Mind Limited, or Collected Mind, a British Virgin Islands company, in July 2006;

  •  
  • Collected Mind acquired 100% of the equity interests of Shenyang Sunshine, which was reorganized as a wholly foreign owned enterprise, or WFOE, in July 2006; and

  •  
  • We incorporated 3SBio Inc., a Cayman Islands company, in August 2006, which acquired 100% equity interest in Collected Mind in September 2006.

    In addition, please refer to “4.C Organization Structure” for information concerning our consolidated affiliated entity, Liaoning Sunshine, whose equity interests we divested as part of the corporate reorganization in November 2006. Please also see Note 1 of the Financial Statements for additional information on our corporate organization.

    4.A.2 Going-private Transaction

    On September 12, 2012, a going-private proposal from Dr. Jing Lou, our Chairman and Chief Executive Officer and other Rollover Shareholders and CPEChina Fund, L.P., to acquire all of our outstanding shares not owned by the Buyer Group at $15 per ADS, was announced and submitted to the board of directors of the Company. The Rollover Shareholders include substantially all of our senior management. CPEChina Fund, L.P. is an affiliate of China CITIC Bank. On February 8, 2013, our board of directors, acting upon the unanimous recommendation of the Independent Committee, approved the proposed transaction with an increasd offer price at $15.4 per ADS, and the Company signed a Agreement and Plan of Merger (Exhibit 4.11, “Merger Agreement”) with the Buyer Group. Pursuant to the Merger Agreement, the buyer group will acquire all of our outstanding shares not owned by the Buyer Group for $15.4 per ADS, which has been increased to $16.7 as provided in the Amendment No.1 to the Merger Agreement (Exhibit 4.25, and the Merger Agreement as amended, “Amended Merger Agreement”) signed on April 24, 2013. The Independent Committee, which is composed solely of independent directors unrelated to the Buyer Group or any of the management members of the Company, negotiated the terms of the transaction with the assistance of its legal and financial advisors. An extraordinary general meeting of shareholders as adjourned on April 25, 2013, is expected to be reconvened soon to consider this going-private transaction. The board recommends that our shareholders vote to approve and authorize this going-private transaction. Upon the completion of the transaction, the Company will become a private company and be delisted from NASDAQ.

    The transaction contemplated in the Amended Merger Agreement, which is currently expected to close during the second quarter of 2013, is subject to various closing conditions, including the approval by an affirmative vote of shareholders representing two-thirds or more of Shares present and voting in person or by proxy as a single class at the extraordinary general meeting, as well as certain other customary closing conditions.

    You may find more information in, and our shareholders are urged to read carefully, the Transaction Statement on Schedule 13E-3 filed with SEC as first filed on March 4, 2013 and subsequently amended, the exhibits thereto, including the Amended Merger Agreement and the proxy statement regarding the extraordinary general meeting, and other reports and documents furnished or filed with SEC by the Company and various parties in connection to this proposed transaction. For your information purpose, with respect to this transaction, a Schedule 13D was filed by certain Rollover Shareholders on February 19, 2013, as subsequently amended. Please also see Item 3.D.4 --- “Currently, a going-private transaction of the Company is progressing, which may materially affect public shareholders' investment in us.”

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    4.A.3 Principal Capital Expenditures and Divestures

    In each of the fiscal years 2010, 2011 and 2012, our capital expenditures, or cash outflow to purchase property, plant and equipment and intangible assets, to acquire interests in other companies, and other investment payments were RMB117.2 million, RMB56.9 million and RMB59.4 million (US$9.5 million), respectively. Historically, capital expenditures were incurred for constructing manufacturing facilities, purchases of production and office equipment, acquisition of interests in other companies, and research laboratory and facilities renovations. In May 2012, we acquired the manufacturing technology, trademark and exclusive distribution rights from Shandong Qidu Pharmaceutical Co., Ltd. and made an initial payment of RMB6 million (US$1.0 million). In 2011, we started building a manufacturing facility in Benxi city, Liaoning province to produce dialysis consumables. Capital expenditures amounting to approximately RMB19.4 million (US$3.1 million) were incurred for the construction of the manufacturing facility in Benxi in 2012. Barring any new developments, at this time our capital expenditures in 2013 are expected to be approximately US$5 million to US$10 million, a major portion of which is expected to relate to payments for procurement of manufacturing equipment for our recently completed plant and construction of facilities for dialysis related business. We plan to finance these expenditures with a combination of cash generated from our operating activities and existing funds.

    4.B Business Overview

    Overview

    We are a leading biotechnology company in China with fully integrated research and development, manufacturing, and marketing capabilities focusing on bio-pharmaceutical products. Our recombinant, or genetically engineered, protein-based products and product candidates are designed to address large markets with significant unmet medical needs in nephrology, oncology, supportive cancer care, inflammation and infectious diseases. We began operations in 1993.

    Our principal products are EPIAO and TPIAO. In addition, we have an in-licensed product, Iron Sucrose Supplement and two legacy products, Inleusin and Intefen. Substantially all of our revenues and profits are derived from these five products.

    For the years ended December 31, 2010, 2011 and 2012, EPIAO generated approximately 59.9%, 58.7% and 55.7% of our total revenue, respectively. According to data derived from IMS Health and internally, EPIAO continued to be the market leader in China both in terms of revenues and sales volume, with market shares of 41.7% and 25.1%, respectively, in the fourth quarter of 2012. In 2007, we received from the SFDA licenses to produce and sell pre-filled syringe EPIAO in 2,000 IU, 3,000 IU, 4,000 IU, and 10,000 IU strengths. We launched these EPIAO formats in June 2007. The pre-filled syringe EPIAO has been an important addition to our product portfolio because of its increased safety, ease of use and the flexibility to self-administer the medication at home. In 2011, we received from SFDA the license to produce and sell EPIAO in 36,000 IU strength, the only dosage form of this kind available in China. The 36,000 IU dosage is comparable to the standardized dose used globally for chemotherapy-induced anemia, allowing for less frequent administration than lower dosage forms, expected to provide greater convenience for both patients and caregivers.

    Our proprietary product, TPIAO, was launched in January 2006 and has continued to gain market acceptance, ending in each of the fiscal years 2010, 2011 and 2012 as our second largest revenue contributor, accounting for 30.7%, 30.4% and 31.4% of our revenues for 2010, 2011 and 2012, respectively. We will continue to promote TPIAO products to diversify our revenue sources. A new indication for our TPIAO to treat immune thrombocytopenia (ITP) was approved for manufacturing by SFDA in 2011, which further enhances TPIAO's revenue contribution.

    We in-licensed a prescription iron sucrose supplement product, which we began to market in August 2006. Liaoning Sunshine holds the license to Iron Sucrose Supplement. For the years ended December 31, 2010, 2011 and 2012, approximately 4.1%, 4.6% and 5.1%, respectively, of our total revenue was generated by sales of Iron Sucrose Supplement. In May 2012, we entered into an agreement to acquire Metadoxine, a treatment for alcoholic liver disease, which we began to market during the second quarter of 2012.

    For the years ended December 31, 2010, 2011 and 2012, approximately 1.8%, 1.5% and 1.1%, respectively, of total revenue was generated by sales of our legacy products Inleusin and Intefen (excluding export sales of Inleusin and Intefen). Beginning in 2004, we began to reduce focus on these products due to increased competition and pricing pressure.

    We are actively pursuing eight product candidates in late-, mid- and early-stage clinical and pre-clinical development. These product candidates include: (1) Feraheme® (ferumoxytol), an in-licensed intravenous iron replacement therapeutic agent used to treat iron deficiency anemia in chronic kidney disease (CKD) patients and in patients requiring hemodialysis; (2) Voclosporin, an in-licensed next generation calcineurin inhibitor being developed for use in the prevention of organ rejection following transplantation and the treatment of autoimmune diseases; (3) Pegsiticase (Uricase-PEG 20), a modified pegylated recombinant uricase derived from Candida utilis, being developed for the treatment of refractory gout and tumor lysis syndrome; (4) NuPIAO, our second-generation EPIAO; (5) a HPV vaccine for the prevention of cervical cancer; and, (6) an anti-TNF monoclonal antibody product candidate for treating rheumatoid arthritis, psoriasis, and potentially other inflammatory diseases.

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    In addition, we have a targeted cancer therapeutic development program through collaboration, focusing on programmed cell death, or apoptosis, which at this time includes (1) a pan-Bcl-2 inhibitor for treating non-small cell lung cancer (NSCLC), the most common form of lung cancer; and (2) a multi-IAP inhibitor (including XIAP, cIAP1, cIAP2, ML-IAP) with a broad range of potential indications encompassing solid tumors and leukemia.

    We sell our products primarily in China. We also export a small portion of our products to certain developing countries, where we have been approved to sell these products in compliance with local laws and regulations. While exports still constituted a small percentage of our total sales, at 6% in 2012, we plan to expand exports because of growing opportunities, particularly, in the global market for biosimilar products, which are new versions of biopharmaceutical products whose patents have expired.

    Leveraging our expertise in the nephrology market, we are developing our business in the dialysis service area. We are building a new manufacturing facility to produce dialysis consumables. Further, in 2012, we formed a joint venture with DaVita Inc., a leading U.S. dialysis services provider, to provide dialysis services in Jilin province and Liaoning province in China.

    4.B.1 Products

    4.B.1.1 Principal Marketed Products

    EPIAO

    Launched in 1998, EPIAO is an injectable recombinant human erythropoietin, or EPO, that is used to stimulate the production of red blood cells in patients with anemia and to reduce the need for blood transfusions. Anemia is a condition in which insufficient oxygen is delivered to the body’s organs and tissues. EPIAO is a protein-based therapeutic comparable in structure and function to Amgen Inc.’s Epogen and Kirin’s ESPO.

    According to IMS Health, an independent research firm, revenues from all EPO drug sales in China were estimated at approximately RMB1,126.3 million (US$142.5 million) in 2012, representing an approximately 20.3% compound annual growth rate, or CAGR, from 2003. EPIAO, as tracked by IMS Health, has been ranked as the number one EPO drug since 2002 in terms of both units sold and revenues among the foreign and domestic biopharmaceutical companies marketing EPO drugs in China, with market shares of 25.1% and 41.7%, respectively, in the fourth quarter of 2012. We have sold over 27.7 million vials of EPIAO since 1999.

    EPIAO is approved by the SFDA for three distinct indications: anemia associated with chronic renal failure; red blood cell mobilization, which is the process in which red blood cells are stimulated to proliferate, before, during, and after surgery; and anemia associated with chemotherapy in cancer patients with non-myeloid malignancies, which are cancers that do not originate in the bone marrow or involve myeloid cells, or non-lymphocyte white blood cells found in the bone marrow.

    In 2007, we received from the SFDA licenses to produce and sell pre-filled syringe EPIAO in 2,000 IU, 3,000 IU, 4,000 IU and 10,000 IU strengths. The pre-filled syringe EPIAO is an important addition to our product portfolio because of its increased safety, ease of use and the flexibility to self-administer the medication at home. We launched our pre-filled syringe EPIAO format in June 2007. We have started the Phase I clinical trial for NuPIAO, our second-generation EPIAO product candidate in the fourth quarter of 2012. NuPIAO is designed to have a longer half-life relative to our first-generation EPIAO.

    In 2011, we received from SFDA the license to produce and sell EPIAO in 36,000 IU strength, the only dosage form of this kind available in China. The 36,000 IU dosage is comparable to the standardized dose used globally for chemotherapy-induced anemia, allowing for less frequent administration than lower dosage forms, which in turn is expected to provide greater convenience for both patients and caregivers.

    TPIAO

    We launched TPIAO, our internally developed protein-based therapeutic product, in January 2006. This product is a recombinant human thrombopoietin, or TPO, for the treatment of chemotherapy-induced thrombocytopenia, a deficiency of platelets. Platelets are disc-shaped cells in the blood that assist in coagulation and the arrest of bleeding by repairing the walls of blood vessels. TPIAO represents the first protein-based therapeutic of its type approved for thrombocytopenia in China. Additionally, with respect to TPIAO for the treatment of immune thrombocytopenia, or ITP, an immune system disorder in which the body perceives platelets as foreign and destroys them, we received the manufacturing approval for this indication from SFDA as announced in January 2011. In 2012, our total revenues from TPIAO sales were RMB210.4 million (US$33.8 million), accounting for 31.4% of our overall revenues for the year. Introduction of TPIAO has reduced our dependence on EPIAO, which used to be our primary revenues contributor. We will continue to promote TPIAO products to diversify our revenue sources, and the approval of the ITP indication further enhances TPIAO's revenue contribution.

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    4.B.1.2 Legacy Products

    In addition to EPIAO and TPIAO, we market two other protein-based therapeutics that had historically been significant contributors to our overall revenues. Due to unfavorable pricing and increased competition, we refocused our sales and marketing efforts in early 2004, and our legacy products are now marketed primarily by distributors.

    Intefen. Intefen is our recombinant interferon alpha-2a product. Intefen is indicated for the treatment of carcinomas of the lymphatic or hematopoietic system, such as lymphoma and leukemia, and viral infectious diseases, such as hepatitis C. We launched Intefen in the Chinese market in 1995.

    Inleusin. Inleusin is our recombinant human interleukin-2, or IL-2, product. Inleusin is indicated for the treatment of renal cell carcinoma, the most common form of kidney cancer, metastatic melanoma, a type of skin cancer, and thoratic fluid build-up caused by cancer and tuberculosis. Inleusin is designed to stimulate the immune system in order to fight cancer and infectious diseases. We launched Inleusin in the Chinese market in 1996.

    4.B.1.3 In-Licensed Products

    Iron Sucrose Supplement. Iron Sucrose Supplement, an intravenously administered prescription drug that is designed to treat anemia associated with iron deficiency, is indicated for patients with end-stage renal disease requiring iron replacement therapy. This product was launched in China in 2005 by Shenyang Borui Pharmaceutical Company Limited, or Borui. We in-license this product from Borui.

    Metadoxine. Metadoxine is a treatment for alcoholic liver disease, approved in China in March 2006. We entered into an agreement to acquire this product from Shandong Qidu Pharmaceutical Co., Ltd. in May 2012, and are in the process of ownership transfer.

    4.B.1.4 Dialysis Business and DaVita Collaboration

    To leverage our expertise in the nephrology market, we are developing our business in the dialysis sector. We are building a new manufacturing facility to produce dialysis consumables in Benxi, Liaoning. Further, the Company may pursue acquiring, building and operating dialysis centers. In February 2012, we entered a collaboration agreement with DaVita Inc. (NYSE: DVA, "DaVita"), a leading provider of kidney care services for those diagnosed with chronic kidney disease, to provide kidney care services in Jilin and Liaoning, two provinces in northeastern China. The total planned investment is US$20 million with DaVita and us contributing 70% and 30%, respectively. In addition, we and DaVita have also agreed to enter into a supply agreement for us to provide DaVita with anemia management drugs throughout China. Pursuant to the collaboration, Davita -3SBio Healthcare Management (Liaoning) Co., Ltd. has been set up to manage a series of dialysis service centers.

    For the joint venture with DaVita, while we believe these arrangements are in compliance with current Chinese law and regulations, and the government policy is encouraging participation of foreign ownership in health service sector, there may be uncertainties, in terms of review, approval and other regulatory requirements, associated with foreign investment in owning, operating and managing dialysis clinics. Please refer to Item 3.D "Risks Factors" for discussions on relevant risks and uncertainties, such as related to collaboration and strategic arrangements, and the legal and regulatory environment in China.

    LSSTD, a wholly-owned subsidiary of Liaoning Sunshine, is the principal vehicle in this collaboration, and Liaoning Sunshine is a variable interest entity to us. Given the current regulatory environment, we may also leverage Liaoning Sunshine’s status as a PRC domestic entity to obtain licenses and permits in connection with developing our dialysis business. Please review the issues and risks such as discussed under Item 4.C.1 “Affiliated Entities”, and Item 3.D.1 — “There are certain operational, legal and other risks associated with our contractual arrangements with Liaoning Sunshine and its shareholders that are intended to effect our control over Liaoning Sunshine.” The dialysis service centers managed under the joint venture all involve variable interest entity (VIE) arrangement, which poses regulatory issues and risks.

    While we consider the opportunity in the dialysis service segment to be attractive, some of the issues and risks include that we have no experience in managing and operating dialysis centers; that the government may in future reduce the reimbursement for dialysis service to patients covered under government sponsored insurance programs; and that there are uncertainties as to how government will eventually regulate stand alone dialysis clinics.

    4.B.1.5 Three-Year Net Revenues Breakdown by Product

    The following table sets forth our net revenues by product and as a percentage of our total net revenues for the years indicated.

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        For the years ended December 31,  
        2010     2011     2012     2012 vs 2011  
        RMB'000     %     RMB'000     %     RMB'000     US$'000       %     RMB'000     %  
    Domestics sales                                                      
    EPIAO   250,854     59.9%     317,889     58.7%     372,912     59,857     55.7%     55,023     17.3%  
    TPIAO   128,717     30.7%     164,839     30.4%     210,391     33,770     31.4%     45,552     27.6%  
    Intefen   5,358     1.3%     5,229     1.0%     4,649     746     0.7%     (580 )   -11.1%  
    Inleusin   2,041     0.5%     2,788     0.5%     2,963     476     0.4%     175     6.3%  
    Iron Sucrose Supplement 17,187 4.1% 24,859 4.6% 34,268 5,500 5.1% 9,409 37.8%
    Export sales   12,211     2.9%     23,890     4.4%     40,040     6,427     6.0%     16,150     67.6%  
    Other   2,260     0.6%     2,120     0.4%     4,725     758     0.7%     2,605     122.9%  
    Total   418,628     100.0%     541,614     100%     669,948     107,534     100%     128,334     23.7%  

    4.B.1.6 Product Pipeline

    We focus our research and development efforts on both novel and validated protein-based therapeutics for the treatment of diseases in the areas of nephrology, oncology, supportive cancer care, inflammation and infectious diseases, and other selected areas. Our product pipeline, which we expect will be a key contributor to our future growth, consists of eight product candidates in various stages of development. We employ a market-driven approach to our research and development efforts, and our team utilizes the latest molecular biology and biochemical techniques and technologies to develop promising product candidates. Our diversified product pipeline includes: (1) Feraheme® (ferumoxytol), an in-licensed intravenous iron replacement therapeutic agent used to treat iron deficiency anemia in chronic kidney disease (CKD) patients and in patients requiring hemodialysis; (2) Voclosporin, an in-licensed next generation calcineurin inhibitor being developed for use in the prevention of organ rejection following transplantation and the treatment of autoimmune diseases; (3) Pegsiticase (Uricase-PEG 20), a modified pegylated recombinant uricase derived from Candida utilis, being developed for the treatment of refractory gout and tumor lysis syndrome; (4) NuPIAO, our second-generation EPIAO; (5) a human papilloma virus, or HPV, vaccine for the prevention of cervical cancer; and, (6) an anti-TNF monoclonal antibody product candidate for treating rheumatoid arthritis, psoriasis, and potentially other inflammatory diseases. In addition, we have a targeted cancer therapeutic development program through collaboration, focusing on programmed cell death, or apoptosis, which at this time includes (1) a pan-Bcl-2 inhibitor for treating non-small cell lung cancer (NSCLC), the most common form of lung cancer; and (2) a multi-IAP inhibitor (including XIAP, cIAP1, cIAP2, ML-IAP) with a broad range of potential indications encompassing solid tumors and leukemia.

    We believe that each of these product candidates, if successfully developed or licensed and approved, would address significant market opportunities. We are required to conduct extensive preclinical and clinical trials in order to generate safety and efficacy data to support a filing for approval by the SFDA.

    We are currently expanding the indications for our marketed products, developing next generation, enhanced versions of our marketed products, and bringing novel protein-based therapeutics to market.

    The table below** summarizes the respective point of development in China for our product candidates as of December 31, 2012:

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    *

    Developed by Ascentage Shanghai Pharmaceutical Co., Ltd

    **

    The development and commercialization of our product candidates are subject to numerous risks and uncertainties, as noted in Item 3.D “Risk Factors”.

    Phases I, II and III described in the table above are comparable to the similar phases of clinical trials involved in obtaining marketing approval from the U.S. Food and Drug Administration, or US FDA. Under the Administrative Measures on the Registration of Pharmaceutical Products promulgated by the SFDA, the three phases refer to: “Phase I”, evaluation of safety; “Phase II”, evaluation of safety, dosing and efficacy; “Phase III”, larger scale evaluation of safety and efficacy.

    4.B.1.7 Expanded Discussion of Products

    Our Principal Products

    EPIAO

    EPIAO, our flagship product, is an injectable recombinant human erythropoietin (EPO) that stimulates the production of red blood cells, cells that transport oxygen from the lungs to all cells of the body. EPO is a naturally occurring growth factor that is normally produced in healthy kidneys and regulates production of red blood cells. Adequate amounts of EPO are required to produce a sufficient number of red blood cells. A significant reduction in the number of circulating red blood cells results in anemia, a condition in which insufficient oxygen is delivered to the body’s organs and tissues. For example, patients with chronic renal failure suffer from anemia because they do not produce sufficient amounts of EPO. Anemia can also be a side effect of chemotherapy treatments for patients, sometimes forcing patients to discontinue chemotherapy.

    According to IMS Health, revenues from all EPO drug sales in China were estimated at approximately RMB1,126.3 million (US$180.8 million) in 2012, representing a compound annual growth rate (CAGR) of approximately 20.3% from 2003 to 2012.

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    EPIAO is utilized as a replacement protein therapy to restore EPO to normal or physiological levels, stimulate red blood cell production and relieve the symptoms of anemia, thereby improving the quality of life for patients with renal disease and cancer in addition to reducing the need for continuous blood transfusions. Our EPIAO products are available in five different strengths (2,000 IU/vial, 3,000 IU/vial, 4,000 IU/vial, 10,000 IU/vial and 36,000IU/vial) and approved for three distinct medical indications. To date, no other EPO product has been approved in China for all three indications.

  •  
  • In 1998, we received approval for the first indication, anemia associated with chronic renal failure;

  •  
  • In 2000, we received approval for the use of EPIAO to mobilize red blood cell in patients before, during and after surgery to facilitate a quicker recovery and reduce the need for blood transfusion; and

  •  
  • In 2001, we received approval for anemia associated with chemotherapy in cancer patients with non-myeloid malignancies. These patients become anemic as a side effect of chemotherapy and as a general complication associated with cancer.

    We were among the first biotechnology companies to introduce a recombinant form of EPO in China. According to IMS Health, our EPIAO was the most widely used recombinant EPO in China in each of the 44 consecutive quarters ending with the first quarter of 2013. EPIAO is on the State Basic Medical Insurance, Work Injury Insurance, and Maternity Insurance Drug Catalogue as a Category B drug, for the treatment of anemia associated with chronic renal failure, and on the provincial medicine catalog for the treatment of anemia associated with chemotherapy in non-myeloid malignancies in certain provinces and cities such as Hubei Province and Shanghai Municipality. (See “4.B.11-b.5 Consumer --- Urban personnel basic medical insurance program.”) According to data from IMS Health, our EPIAO has been the market leader in China since 2002 both in terms of revenues and sales volume, with market shares of 41.7% and 25.1% respectively in the fourth quarter of 2012.

    In 2007, we received from the SFDA licenses to produce and sell pre-filled syringe EPIAO in 2,000 IU, 3,000 IU, 4,000 IU, 10,000 IU strengths. We launched these EPIAO formats in June 2007. The pre-filled syringe EPIAO has been an important addition to our product portfolio because of its increased safety, ease of use and the flexibility to self-administer the medication at home.

    In 2011, we received from SFDA the license to produce and sell EPIAO in 36,000 IU strength, the only dosage form of this kind available in China. The 36,000 IU dosage is comparable to the standardized dose used globally for chemotherapy-induced anemia (such treatment option available since 2004 in the United States and 2006 in the United Kingdom), allowing for less frequent administration than lower dosage forms, which in turn is expected to provide greater convenience for both patients and caregivers, for the rapid restoration of hemoglobin to normal levels.

    In the fourth quarter of 2012, we have started the Phase I clinical trial for NuPIAO, our second-generation EPIAO. NuPIAO is a highly glycosylated ESA (erythropoiesis-stimulating agent) with extended half-life and increased biologic activity. We believe that it is comparable to Amgen’s Aranesp. We own one PRC-issued patent relating to NuPIAO.

    Competitive Advantages:

    We believe EPIAO’s competitive advantages include:

    Focus on quality. We have implemented our proprietary process technology and developed quality assurance and control system in compliance with the Chinese GMP standards. Since 2004, we have applied the European Pharmacopoeia (2002 version) standards, which we believe are higher production quality standards than those required for domestic pharmaceutical manufacturers.

    Broadest applications and specifications. Since 2002, our EPIAO products have been the only EPO products approved for each of the following three indications: anemia associated with chronic renal failure; red blood cell mobilization; and chemotherapy-induced anemia in cancer patients. We provide our EPIAO products in five dosage forms to meet the needs of our patients and their doctors, with the 36,000 IU strength dosage being the highest dosage formulation of an EPO drug on the Chinese market.

    Competitive pricing. Our economy of scale, favorable cost structure and experience in manufacturing afford us the opportunity to competitively price EPIAO while still maintaining attractive margins. In order to secure and maintain a large customer base, we have been pricing our EPIAO products substantially lower than the comparable products produced overseas.

    Strong brand awareness. We believe our sustained marketing efforts with medical practitioners and our focus on pre-sale and post-sale services have established EPIAO and Shenyang Sunshine as well-recognized and well-received brands. We have implemented a focused marketing strategy since launching the product in 1998. As part of this strategy, our sales representatives promote our products to doctors by visiting hospitals to better educate physicians and develop brand awareness.

    Clinical Trials:

    In 1997, we completed a multicenter, randomized clinical trial with EPIAO in 194 end-stage renal disease patients. This trial compared the efficacy of our product to that of Epogen, Amgen’s recombinant EPO. The data demonstrated that our product was biologically equivalent to Epogen, as demonstrated by comparable restoration of hematocrit and hemoglobin levels, indicators of red blood cell reemergence. Additionally we did not observe any severe adverse reactions. We obtained approval from a branch of the Ministry of Health, or the MOH, in November 1997 and launched EPIAO in China in August 1998.

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    In 2001, we completed a multicenter, randomized, double blind, placebo-controlled clinical extension trial to evaluate the efficacy of EPIAO in 121 cancer patients with anemia resulting from their chemotherapy regimens. The primary endpoint of this clinical trial was restoration of hemoglobin and hematocrit levels. Patients received either EPIAO or a placebo three times a week for 12 weeks. The results demonstrated that EPIAO was effective in restoring hemoglobin and hematocrit levels in this patient setting. We obtained SFDA approval for this indication in September 2001 and launched EPIAO for this indication in December 2002.

    In 2000, we completed a multicenter, randomized placebo controlled extension trial in 105 patients undergoing major orthopedic surgery to evaluate the efficacy of EPIAO in mobilization of red blood cells in patients undergoing surgery. Typically, these patients require allogeneic blood transfusion, where blood comes from a donor instead of the patient himself, thereby exposing the patients to the risk of contracting blood-borne diseases. The primary endpoint of this clinical trial was also restoration of hemoglobin and hematocrit levels. Compared with placebo-controlled patients, patients who received EPIAO before, during and after surgery had higher levels of hemoglobin and hematocrit. We received SFDA approval for this indication in 2000 and launched EPIAO for this indication in December 2002.

    A study sponsored by Amgen and published in September 2008 by the Journal of Pharmaceutical Sciences, “Biochemical Assessment Of Erythropoietin Products From Asia Versus US Epoetin Alfa Manufactured By Amgen”, has pointed to EPIAO as the product in Asia most similar to Epogen, the original proprietary EPO developed by Amgen.

    TPIAO

    TPIAO is our recombinant human thrombopoietin product and we were the first company in the world to research, develop and commercialize a recombinant human thrombopoietin product. TPIAO was launched in January 2006 for the treatment of chemotherapy-induced thrombocytopenia, or platelet deficiency, and represents the first such protein-based therapeutic approved and launched for this indication in China. TPO is a hemopoietic, or blood or blood cell-related, growth factor protein found in plasma. TPO naturally stimulates production of megakaryoctyes, cells with a mutilobed nucleus in the bone marrow and liver, thereby releasing mature platelets and raising the circulating platelet count without increasing the platelet function. Patients undergoing blood stem cell transplantation or cancer chemotherapy, with late-stage liver diseases, or for unknown pathological reasons may suffer from platelet deficiency. We market TPIAO in two strengths: 7,500 IU/vial and 15,000 IU/vial. We began marketing our TPIAO products at the end of 2005 on a trial basis and recorded revenues of RMB128.7 million, RMB164.8 million and RMB210.4 million (US$33.8 million) for the years ended December 31, 2010, 2011 and 2012, respectively. TPIAO is on the State Basic Medical Insurance, Work Injury Insurance, and Maternity Insurance Drug Catalogue as a Category B drug for work injury insurance, and is in the provincial catalogue of Liaoning, Shanghai, Heilongjiang, Shan'xi, and Hainan to treat chemotherapy-induced thrombocytopenia.

    We began our research and development efforts on TPIAO in 1995 as part of the national “863” scientific program. After successful discovery and pre-clinical studies, we initiated clinical trials in 1999. Phase I and Phase II clinical trials were completed in 2001 and 2002, respectively, which demonstrated TPIAO’s safety and efficacy.

    In 2003, we completed a multicenter, randomized, double-blind placebo self-controlled Phase III trial in 305 patients, 223 of whom were cancer patients receiving chemotherapy and 82 of whom were ITP patients who had failed to respond to any other form of treatment. Patients were treated with TPIAO within six to 24 hours after the first chemotherapy cycle daily for 14 days. The primary endpoints were platelet counts and reduction in the number of transfusions. In this trial, TPIAO treatment resulted in a higher platelet count in approximately 78% of the cancer patients and approximately 85% of the ITP patients. There were 18 cases of mild adverse reactions relating to TPIAO treatment, including transient flu-like symptoms, but patients spontaneously recovered without discontinuing treatment.

    Although we obtained SFDA approval for TPIAO in May 2005, the SFDA has required us to conduct a Phase IV post-marketing trial on TPIAO as a supportive cancer care product. The three-arm trial included approximately 1,000 cancer patients being treated with chemotherapy. The primary endpoint was the time to recovery of platelet count to normal levels. We initiated this trial in the fourth quarter of 2006. We completed this trial with satisfactory results and submitted the results report to the Food and Drug Administration of Liaoning Province, or Liaoning FDA, in April 2010, which fulfilled this SFDA’s requirement.

    TPIAO was approved in May 2005 for treatment of chemotherapy-induced thrombocytopenia with a monitoring period of five years, which expired in May 2010. During the monitoring period, other pharmaceutical companies generally were prohibited from manufacturing or importing a similar drug. Since the monitoring period has now expired, other manufacturers in China may apply for approval of the SFDA to conduct clinical trials and then to manufacture and market their TPO products. The SFDA review process usually spans multiple years. In addition, we expect that our technology know-how in respect to TPIAO provide us with significant competitive advantage. TPIAO is a unique molecule, the molecular structure of which is heavily glycosylated and presents a manufacturing barrier. We also believe that any new entrants into the TPO market could contribute to the overall market growth for this product.

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    We have two PRC-issued patents in relation to TPIAO.

    TPIAO for the treatment of ITP

    ITP is characterized by thrombocytopenia that results in bruising and bleeding that can be severe. In certain ITP patients, the immune system malfunctions, perceiving the body’s platelets as foreign and destroying them, potentially resulting in dangerously low platelet counts. Platelets are disc-shaped cells in blood that assist in the clotting process to stop bleeding. TPIAO is being explored as a new approach to treat ITP by stimulating the TPO receptor, directly increasing platelet production to outpace platelet destruction by the immune system.

    In the Phase III trial that we completed, which was a multicenter, randomized, placebo-controlled study in 120 ITP patients, all patients were administered Danazol, a synthetic steroid hormone drug routinely used to treat ITP. The treatment group was administered an additional 1.0 µg (or microgram)/kg TPIAO once daily for 14 days. The primary endpoint of this trial was the measurement of platelet counts during the 14 day treatment.

    We have received SFDA approval for manufacturing as announced in January 2011.

    Legacy Products

    In addition to EPIAO and TPIAO, we market two protein-based therapeutics, Intefen and Inleusin, which used to be significant contributors to our overall revenue. Due to unfavorable pricing and increased competition, we refocused our sales and marketing efforts since early 2004 and no longer heavily market these products with our own sales force.

    Intefen

    Intefen is our recombinant human interferon alpha-2a product for the treatment of malignancies of the lymphatic or hematopoietic system, and viral infectious diseases, including adult chronic hepatitis B, acute and chronic hepatitis C, and genital warts. Interferon is a protein that occurs naturally in the body in very small amounts and comes in three main types: alpha, beta and gamma. When exposed to viruses, certain cells produce interferon, which is released into the bloodstream or intercellular fluid to induce healthy cells to produce enzymes and proteins that counter and combat the infection. The anti-cellular or immuno-regulatory functions of IFN can enable interferon products to play a central role against certain tumor and auto-immune diseases. Interferon alpha has been manufactured by pharmaceutical companies for therapeutic use against hairy-cell leukemia, hepatitis C and hepatitis B, as well as for treatment of genital warts and some rare cancers of blood and bone marrow.

    We obtained SFDA approval to market Intefen in April 1995 and launched the product in December 1995. Our Intefen is available in lyophilized powder and injectable solution. Both the powder and solution come in three strengths: 1 MIU (million international unit)/vial, 3 MIU/vial and 5 MIU/vial. Revenues from our Intefen products were RMB4.6 million (US$0.7 million) in 2012, representing a decrease of 11.1% over 2011.

    In 1994, we completed a multicenter, randomized Phase III clinical trial with Intefen in 127 patients with hepatitis C virus, or HCV. The primary endpoints of the trial were the change in Alanine Amino Transferase recovery rates, or ALT, a measurement of liver function and HCV RNA clearance rates, a measure of the number of viruses present in the patient. The data indicated that Intefen was comparable to Schering Plough’s Intron A when measured with these two tests. The observed side effects were flu-like symptoms that were relatively minor and reversed upon discontinuation of the therapy.

    Inleusin

    Inleusin is our recombinant human interleukin-2, or IL-2, product that is structurally and functionally the same to naturally occurring IL-2, a body immune regulator. Inleusin is indicated for treatment of renal cell carcinoma, melanoma, thoratic fluid build-up caused by cancer, and tuberculosis. IL-2 is a natural part of the body’s immune response to microbial infection. IL-2 promotes the proliferation and maturation of, among others, T-cells and natural killer cells, both of which are capable of destroying cancer cells directly. IL-2 plays a role in the development of white blood cells or lymphocytes, and anti-inflammatory reactions which are part of the regulation of the immune response.

    We obtained SFDA approval to market Inleusin in the Chinese market in June 1995 and launched the product in March 1996. It was the first interleukin product introduced into the Chinese market. Our Inleusin products come in four strengths: 0.1 MIU/vial, 0.2 MIU/vial, 0.5 MIU/vial and 1 MIU/vial. Revenues from our Inleusin products were RMB3.0 million (US$0.5 million) in 2012, representing an increase of 6.3% over 2011.

    In 2002, we completed a multicenter, randomized, placebo-controlled extension study in 209 patients with tuberculosis. The primary endpoint was the reduction of severity of infection as measured by thoracic X-Ray imaging the reduction in the number of tuberculosis bacilli, an infectious organism, in a sputum smear. The data demonstrated that Inleusin effectively reduced the severity of tuberculosis in these patients.

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    In-Licensed Products

    Iron Sucrose Supplement. Iron Sucrose Supplement is a complex of polynuclear iron (III)-hydroxide, a bioavailable form of iron, in a sucrose solution for intravenous use. It is indicated for the treatment of iron deficiency anemia in patients with end-stage renal disease and generally considered to have a superior safety profile compared to other forms of iron supplements. Iron sucrose supplement is on the State Basic Medical Insurance, Work Injury Insurance, and Maternity Insurance Drug Catalogue as a Category B drug.

    This Iron Sucrose Supplement was launched in China in 2005 by Shenyang Borui Pharmaceutical Company Limited (“Borui”). Through Liaoning Sunshine, we in-licensed a five-year exclusive PRC distribution right for this product from Borui in May 2006. We began to generate revenues from the sale of Iron Sucrose Supplement in the beginning of 2007. We believe this product is complementary to our EPIAO product lines as we have a strong brand reputation in the nephrology market in China, and Iron Sucrose Supplement is designed to treat anemia associated with iron deficiency for patients with renal disease.

    In 2008, through Liaoning Sunshine, we entered into various agreements with Borui and Chengdu Tiantaishan Pharmaceutical Co. Ltd., or Tiantaishan, the manufacturer for this product, to acquire additional rights to the Iron Sucrose Supplement. Pursuant to these agreements and a supplement agreement with Tiantaishan, we hold the exclusive national distribution rights to this product until 2018.

    Metadoxine. Metadoxine is a treatment for alcoholic liver disease, approved in China in March 2006. In May 2012, we entered into an agreement to acquire the manufacturing technology, trademark and exclusive distribution rights from Shandong Qidu Pharmaceutical Co., Ltd for a total consideration of RMB12 million (with RMB 6 million paid as of December 31, 2012, and RMB 6 million payable at certain project milestone); and the seller will assist us fully in completing the ownership transfer registration, which we expect will occur within the next 12-18 months. Metadoxine is sold through the same distribution channels as our legacy products, Intefen and Inleusin.

    Our Product Candidates

    Ferumoxytol (Feraheme® )

    As announced in May 2008, we entered into a development and commercialization agreement with AMAG Pharmaceuticals, Inc. (“AMAG”) (NASDAQ:AMAG), a US biopharmaceutical company, for ferumoxytol, an intravenous iron replacement therapeutic agent being developed to treat iron deficiency anemia in CKD patients and in patients requiring hemodialysis.

    Under the terms of the agreement, AMAG grants us exclusive rights to develop and commercialize ferumoxytol in the PRC, initially for CKD, and with an option to expand into additional indications. We are responsible for the clinical development, registration, and commercialization in the PRC, and we and AMAG have formed a joint steering committee that oversees and guides the development and commercialization of ferumoxytol in PRC. The agreement has an initial duration of 13 years and will be automatically renewed for a set term if minimum sales thresholds are achieved. AMAG retains all manufacturing rights for ferumoxytol and will provide, under a separate agreement, commercial supply to us at a predetermined supply price.

    Ferumoxytol was approved in June 2009 by the U.S. Food and Drug Administration to treat iron deficiency anemia in CKD patients and launched commercially in the U.S. by AMAG in July 2009. We have submitted the application for a registrational clinical trial for Ferumoxytol to SFDA as of January 2010. Once approved by the SFDA, we will commence a multi-center randomized efficacy and safety study in China with approximately 200 CKD patients, measuring the mean change in hemoglobin from baseline at Day 35 after first dose.

    Voclosporin

    We entered into a license, development and commercialization agreement with Isotechnika Pharma Inc. (“Isotechnika”) (TSX: ISA), a Canada-based biopharmaceutical company focused on the discovery and development of immune modulating therapeutics, for voclosporin, a next generation calcineurin inhibitor being developed for use in the prevention of organ rejection following transplantation and the treatment of autoimmune diseases, as announced in August 2010.

    Under the terms of the agreement, Isotechnika grants us exclusive rights to all transplant and autoimmune indications of voclosporin in China, including Hong Kong and Taiwan, excluding ophthalmic indications and medical devices which were previously licensed to Lux Biosciences, Inc. and Atrium Medical Corporation, respectively. We are responsible for the clinical development, registration and commercialization of voclosporin in China. Isotechnika will provide, under a separate agreement, commercial supply to us on a cost-plus basis. We have made an upfront non-refundable licensing payment of US$1.5 million to Isotechnika in December 2010. We may also pay milestone payments when certain criteria are met, as well as ongoing royalties based on our sales of voclosporin. In addition, we invested US$4.5 million in Isotechnika through a three-year convertible debenture with interest rate of 7% per annum, which were fully converted into common equity of Isotechnika at a conversion price of Canadian Dollar $0.155 per share as of November 2010. As of December 31, 2012, we held approximately 16.1% of the outstanding shares of Isotechnika, and Isotechnika’s Board of Directors includes one representative from us.

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    In April 2010, voclosporin completed a phase IIb North American trial for the prevention of kidney rejection following transplantation. In the U.S., New Onset Diabetes after Transplant (“NODAT”) is common and has become a major concern in transplantation of all organs, and, in kidney transplantation, it is shown to be associated with inferior long term graft and patient survival while increasing the cost of patient management. Voclosporin appears to have not only demonstrated efficacy with improvements in safety, but to be easy to use for clinicians. It is estimated China has approximately 100,000 transplant recipients, a population which is growing by about 10,000 new patients per year.

    On March 29, 2011 we submitted an application to the SFDA to conduct the China arm of the global multi-center phase III trial of voclosporin. The SFDA has approved this application in June 2012. According to the approved protocol, this will be a phase III, randomized, multi-center, concentration-controlled comparison study on renal transplant patients. The trial design only accepts kidney transplants from living relatives, as approved by an ethics committee. Isotechnika is the sponsor of the global multi-center phase III trial.

    To our knowledge, Isotechnika has not started its phase III transplant trial for voclosporin. If Isotechnika does not proceed with its phase III transplant trial, 3SBio will need to transfer technology from Isotechnika before restarting the clinical trialprocess in China from the pre-clinical stage, which would require additional investment and delay the introduction of voclosporin into the China transplant market.

    Apoptosis Collaboration Program

    In March 2010, we entered into a strategic alliance with Ascentage Pharma Group Corporation, Ltd. (“APGC”), a Hong Kong based therapeutic research company, to research, develop and commercialize best-in-class targeted cancer therapeutics focusing on programmed cell death, or apoptosis. Apoptosis-targeted small molecules have the potential to play a key role in the next generation of highly effective targeted cancer drugs.

    Under the terms of the agreements between us and APGC, and between us and APGC’s PRC affiliated entity, Ascentage Shanghai Pharmaceutical Co., Ltd (“Ascentage SH”), we paid a total consideration of approximately US$3 million, to fund APGC’s apoptosis related R&D programs (“APGC programs”), and for acquiring 40% equity interests in both APGC and Ascentage SH, and the exclusive right to develop and commercialize in mainland China the cancer therapeutics that are developed through APGC programs.

    The alliance leverages APGC's expertise in structure-based small molecule design, leads optimization and preclinical development with our proven drug development and commercialization capabilities in China. This investment allows us to gain access to one of the best external science and small molecule drug discovery platforms in China.

    Ascentage SH is a spin-off of Ascenta (Shanghai) R&D Center, a wholly owned subsidiary of Ascenta Therapeutics, Inc. (“Ascenta”). Ascentage SH has an established track record in late stage discovery, preclinical and IND enabling work, working with both China's SFDA and the US FDA. Ascentage SH focuses on research and development in oncology new chemical entity (NCE) drug using cutting edge apoptosis technology, building on molecules and compounds licensed from the University of Michigan. It aims to develop best-in-class targeted therapeutics for the unmet medical needs of both China and global markets.

    APGC has acquired certain rights to Ascenta’s clinical stage, apoptosis-triggering small molecules, including the exclusive rights to an IAP inhibitor in mainland China, Hong Kong, Taiwan and Macau, as well as exclusive rights to a Bcl-2 inhibitor in all regions worldwide outside USA, Canada and Europe. The Bcl-2 inhibitor is a pan-Bcl-2 inhibitor in Phase II development for treating non-small cell lung cancer (NSCLC), the most common form of lung cancer. The IAP inhibitor, currently in pre-clinical development, is a multi-IAP inhibitor (including XIAP, cIAP1, cIAP2, ML-IAP) with a broad range of potential indications encompassing solid tumors and leukemia. Pursuant to our agreements as outlined above, we have the exclusive right to develop and commercialize in mainland China the Bcl-2 inhibitor and the IAP inhibitor through the APGC programs.

    Pegsiticase

    We have acquired worldwide rights, exclusive of Taiwan, of pegsiticase for all indications from EnzymeRx LLC (“EnzymeRX”), a U.S. based biotechnology company, for a total consideration of US$6.25 million, as announced in November 2010.

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    Pegsiticase (Uricase-PEG 20) is a pegylated recombinant uricase derived from Candida utilis, modified by the attachment of multiple 20 kilodalton molecules of polyethylene glycol (PEG), and is being developed for the treatment of refractory gout and tumor lysis syndrome. It has been shown to profoundly lower uric acid when administered by intravenous infusion and intramuscular injection, and was safe and well-tolerated in a pair of phase I clinical studies sponsored by EnzymeRx. Pegsiticase has received Orphan Drug designation from U.S. FDA for refractory gout, tumor lysis syndrome and Lesch-Nyhan syndrome.

    We intend to develop Pegsiticase in China and will seek partnerships for its development outside of China. Gout is a common rheumatic disease in China, with prevalence of gout and hyperuricemia estimated to be 0.22% –0.43% and 12.1% –25.2% respectively, according to Rheumatol Int ((2009) 29:481–490). The number of patients in China suffering from gout and hyperuricemia is expected to continue to grow rapidly due to changes in diet and lifestyle. While currently focusing on gout and hyperuricemia, we may choose to explore and develop the other indications in the future.

    NuPIAO

    In the fourth quarter of 2012, we have started the Phase I clinical trial for NuPIAO, our second-generation EPIAO that is designed to have a longer half life and is expected to be comparable in structure to Amgen’s Aranesp. Aranesp (darbepoietin alpha) is a novel erythropoiesis-stimulating protein with a longer circulating half-life than EPO. By using molecular biology and recombinant DNA techniques, we synthesized a series of novel erythropoiesis-stimulating proteins and identified NuPIAO through an activity screening assay. Preliminary testing of NuPIAO has demonstrated an enhanced half-life comparable to the half-life of darbepoietin alpha.

    The effect of extended half-life and increased biologic activity as compared with EPIAO would allow for less frequent administration, which is more convenient for both the patient and the caregiver. We own one PRC-issued patent relating to NuPIAO.

    NuPIAO will be investigated to treat anemia associated with both chronic kidney disease and cancer.

    SSS08 (HPV Vaccine)

    HPV is a common virus that is often passed on through genital contact, typically during sexual contact. At least 50% of sexually active people will get HPV at some time in their lives. About 40 types of HPV can infect the genital areas of men and women. While most strains of HPV cause no symptoms and resolve without treatment, some strains of HPV can cause cervical cancer in women.

    Worldwide, cervical cancer is one of the most common cancers in women, and causes significant numbers of deaths in both developed and developing countries. In 1995, scientists from Merck & Co., Inc. and MedImmune Inc. separately demonstrated that expression of the papilloma virus major capsid gene L1 alone, or together with the minor capsid protein L2, is sufficient for the generation of virus-like particles, or VLPs. VLPs mimic in some aspects the infection with virions and induce virus-neutralizing antibodies, making them an attractive candidate for developing a prophylactic vaccine against HPV infections. In June 2006, Merck received approval from the US FDA for its vaccine targeting four strains of HPV that cause approximately 70% of cervical cancers and approximately 90% of genital warts. Our HPV vaccine candidate also targets VLPs of HPV-16 and HPV-18.

    SSS07 (Rheumatoid arthritis and other autoimmune diseases)

    SSS07 is our anti-TNF monoclonal antibody product candidate that we are developing in collaboration with Epitomics, Inc., a United States-based biotechnology company that is recognized for its proprietary high-affinity rabbit monoclonal antibody technology. Tumor necrosis factor α (TNF) is one of the key chemical messengers that help regulate the inflammatory process and plays an important role in the underlying mechanisms of conditions such as rheumatoid arthritis, psoriasis, and many other inflammatory disorders. When the body produces too much TNF, it overwhelms the immune system’s ability to control inflammation of the joints or of psoriasis-affected skin areas. The TNF inhibitors are molecules that disrupt the TNF function by blocking the binding of TNF to the TNF receptors. Blockage of these receptors can result in a significant reduction in inflammatory activity and reduce symptoms, inhibit the progression of structural damage, and improve physical function in patients with moderate to severe rheumatoid arthritis. SSS07 is a genetically engineered anti-TNF humanized monoclonal antibody designed to bind and deactivate certain TNF molecules. By binding to the native TNF molecule, SSS07 is designed to prevent activation of the inflammation signalling cascade. Several TNF inhibitors developed by other companies have been approved by the US FDA, including Enbrel (entanercept), Remicade (infliximab) and Humira (adalimumab). Rheumatoid arthritis, a chronic disease, afflicts an estimated 1% of the world’s population.

    In March 2006, we entered into a collaboration agreement with Epitomics Inc., under which we are granted an exclusive, royalty bearing, non-transferable and perpetual license in the field of therapeutic usage in order to develop and conduct clinical trials to obtain SFDA approval for the humanized rabbit anti-TNF alpha monoclonal antibody compounds. Under the agreement, we are also granted the right to manufacture, sell, market and distribute (including distributions by engaging third parties) in China anti-TNF alpha monoclonal antibody therapeutics covered under the intellectual property rights owned by Epitomics. We are required to pay a royalty payment equivalent to a certain percentage of the net sales of therapeutic products should they reach market. Under the agreement, we grants Epitomics the right to use all intellectual property generated during the development of the therapeutic product. However, if Epitomics uses this intellectual property for the development of the same therapeutic product outside of China, Epitomics shall pay us a royalty equivalent to a certain percentage of the financial benefit from licenses and product sales. If any new developments or agents are created as a result of the collaboration agreement, we will grant to Epitomics a “right of first refusal” with regard to the commercialization of such agents. The details of a development program to commercialize the therapeutic products and the mechanism for calculating the royalties will be determined between Epitomics and us at a later date.

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    In August 2010, Epitomics, Inc. announces that an antibody therapeutics spin-off company, Apexigen, Inc., will focus on the development and commercialization of humanized monoclonal antibodies for treatment of cancer and immuno-disorders.

    An investigational new drug application (“IND”) was submitted to the SFDA for SSS07 in the second quarter of 2012. All non-clinical studies of SSS07 have been completed. Pre-clinical results showed a promising pharmacokinetic profile which could improve treatment options for rheumatoid arthritis patients. Phase 1 trials are expected to begin in 2015, subject to regulatory approval.

    4.B.2 Competition and Principal Markets

    In China, our EPIAO competes primarily with Kirin’s ESPO, Roche’s Recormon and the EPO products offered by domestic companies including Shanghai Kelong, Beijing Sihuan, Chengdu Di’ao, Shenzheng Saiboer, Shandong Ahua, Shandong Kexing, and others. According to IMS Health data, since 2002, EPIAO has been the China market leader, with, in terms of value, 41.7% of market share in the fourth quarter of 2012, and our closest competitor's market share was 15.5% . According to our market data, we are also the only EPO vendor with 36,000 IU strength in China. However, competition in the high dose (10,000 IU or above) EPO area has been intensifying with several other companies introducing their own versions of high dosage EPO products.

    Competitors for the Iron Sucrose Supplement in China include Beijing Novartis Pharmaceutical Co., Ltd. and Nanjing Hencer Pharmaceutical Co., Ltd., and others.

    While we believe TPIAO, our proprietary, internally developed protein-based therapeutic product, is the only recombinant human thrombopoietin, or TPO-based therapeutic, available in the Chinese market to date, the monitoring period for our TPIAO product expired as of May 2010, and other companies may, subject to the review and approval of the SFDA, conduct clinical trials and manufacture and market their TPO products. The SFDA review process usually spans multiple years. In addition, we expect that our technology know-how in respect to TPIAO provide us with significant competitive advantage. TPIAO is a unique molecule, the molecular structure of which is heavily glycosylated and presents a manufacturing barrier. We also believe that any new entrants into the TPO market could contribute to the overall market growth for this product.

    We believe that our leadership position in our industry is based on managerial and technological advantages, and the ability to identify and exploit commercially viable products. Other factors affecting our competitive position include pricing, reimbursement, convenience, time to market, patent position, product efficacy, safety, reliability, and availability. We believe we are well positioned to compete in the fast-developing Chinese pharmaceutical market with our strong Shenyang Sunshine brand, diverse product portfolio, proven research and development capabilities, established sales and marketing network and favorable cost structure.

    Please also see Item 3.D.1 -- "Our products face substantial competition, and we may not be able to compete effectively against current and future competitors" and -- "Our competitors may have the ability to manufacture pharmaceutical products substantially similar to ours".

    4.B.2.1 Export Sales

    In addition to our domestic sales, we currently export a part of our products to certain other countries, where we have been approved to sell these products in compliance with local laws and regulations. We initiated our export business in 2003 to a country in the Middle East through an export company in China. Increasingly, in subsequent years, we have worked with local agents in countries in the Middle East, South America and Southeast Asia. Our export growth is driven by our compelling value proposition of world-class biological medicines at competitive prices.

    Export sales accounted for 2.9%, 4.4% and 6.0% of our total revenues for the years ended December 31, 2010, 2011 and 2012, respectively.

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        For the Years ended December 31,  
        2010     2011     2012  
       

    (in thousands, RMB)

     
    Revenues by geography                  
    Egypt   1,611     10,145     9,713  
    South Korea   1,542     1,242     1,453  
    Brazil   568     1,153     12,431  
    Pakistan   1,699     2,084     4,369  
    Thailand   3,842     5,573     6,823  
    Bangladesh   1,403     1,192     937  
    Rest of World   1,546     2,501     4,314  
    Total revenues   12,211     23,890     40,040  

    EPIAO is registered in 17 countries and applications are in progress in 8 other countries TPIAO has been registered in 3 countries. Intefen has been registered in 9 countries.

    We believe market opportunities exist in Europe and other selected regulated markets for new versions of biopharmaceutical products whose patents have expired (known as biosimilar products). A “biosimilar” product is a follow-on version of another biological product for which marketing approval is sought or has been obtained based on a demonstration that it is “biosimilar” to the original reference product. This demonstration will typically consist of comparative analytical, preclinical and clinical data from the biosimilar product to show that it has similar safety and efficacy as the reference product. We are preparing for the process of seeking requisite international certification and regulatory approvals.

    4.B.3 Seasonality of Business

    Not applicable.

    4.B.4 Supply of Raw Materials

    Our top five suppliers and the single largest supplier as a percentage of our total inventories purchased were 37.2% and 10%, respectively, for the year ended December 31, 2012. We primarily source our raw materials from a variety of international suppliers through their local distributors. We do not anticipate any significant fluctuations in price or any significant disruptions in the supply of our raw materials in the near future. It is our current belief that our switching cost for our suppliers is not high because alternative suppliers are readily available.

    4.B.5 Marketing, Sales and Distribution

    Our sales force in China benefits from over ten years of experience in marketing protein-based therapeutics. As a result of our history as a provider of therapeutics to the Chinese market, we believe our Shenyang Sunshine brand is widely recognized throughout the PRC medical community for quality and reliability.

    We maintain a sales and marketing force in 31 provinces and major cities in China, including the municipalities of Beijing and Shanghai and the city of Guangzhou. As of December 31, 2012, our principal products EPIAO and TPIAO were marketed by our 548 sales and marketing professionals and sold by our network of approximately 120 distributors to healthcare providers including, based on our internal estimates, approximately 3,685 hospitals, clinics and dialysis centers.

    Our internal sales and marketing staff details our products to physicians and hospital administrators, and as required by PRC laws, our distributors are engaged to contract with our customers for the sale of our products to physicians and hospitals. In addition, our legacy products Intefen and Inleusin are marketed and sold by distributors.

    Our network of approximately 120 distributors distributes our own products as well as our in-licensed products. We select our distributors based on their reputation, market coverage and sales experience. We conduct credit assessments of each of our distributor customers before we enter into a sales agreement. We do not have an exclusive distribution arrangement with any of our distributors, and some of our distributors market competing brands. For every calendar year, we enter into a distribution agreement with each distributor which provides general terms for the distribution arrangement, such as the designated sales area, place and method for delivery, targets for annual sales volume and receivable collection. Under our standard distribution agreement, a distributor cannot sell our products outside the designated geographical area without first obtaining our written consent. The term of a distributor contract is typically for one year, reflecting the prevailing pricing arrangement under the local competitive bidding process. The price under the agreement may be adjusted by a number of factors, such as the outcome of the competitive bidding process, or regulatory changes during the calendar year.

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    Hospitals in China typically purchase medical products on credit and sometimes do not make payment until more than a year after the purchase. By contrast, the average credit terms that we give to our distributors range from 30 days to 90 days, with the majority averaging around 80 days from the date of our delivery, regardless of whether payments from the hospital to the distributors are received. We believe by selling our products to distributors, we achieve an improved collection rate on our accounts receivable and reduce bad debt expense.

    We have a sales department located in Beijing. We also have a marketing department located in Shanghai.

    We have established relationships with many hospital administrators at prominent hospitals and other leading medical institutions, many of whom we believe are advocates for our products. We believe our relationships with these major hospitals and medical institutions raise our profile, enhance awareness of our products in the medical community, medical equipment and supplies industry and among patients, provide us with valuable clinical data to improve our products and keep us abreast of industry trends and developments, all of which in turn helps us market and sell our products.

    In export sales, we market our products through distribution agreements with local agents.

    A significant amount of our revenue is generated by product sales to relatively few distributors, whose mix changes from year to year. In each of the past three years, sales to our top five distributors accounted for approximately 30% to 40% of our revenue. Sales to our top ten distributors accounted for approximately 54%, 51% and 49% of our total revenues for the years ended December 31, 2010, 2011 and 2012, respectively.

    4.B.6 Research and Development

    As of December 31, 2012 our research and development team consisted of 35 research personnel and medical professionals, including four PhDs, one MD, and thirteen holders of master’s degrees, many of whom have experience in the healthcare and biotechnology research fields, including experience working in research institutions and hospitals and in proceeding through the SFDA drug approval process.

    We conduct research and development activities at our Shenyang facilities. To date, our primary sources of new clinical products have been our internal research and development activities and the licensing of compounds from third parties. We believe by complementing our internal research and development efforts with a disciplined strategy of entering into collaborative relationships, we can build a pipeline of diversified pharmaceuticals to drive sustainable revenue growth. For a detailed description of our product pipeline, see “4.B.1.5 Product Pipeline” and “4.B.1.6 Expanded Discussion of Products --- Our Product Candidates” above.

    Our research and development expenses for the years ended December 31, 2010, 2011 and 2012 were RMB39.4 million, RMB41.8 million and RMB71.2 million (US$11.4 million), respectively.

    4.B.7 Intellectual Property

    We expect that we may, in the future, rely more on patents to protect our proprietary technology. While we have previously sought patent protection only in China, we have acquired intellectual property outside China and may opportunistically seek patents to protect our innovations in jurisdictions outside China in the future.

    In China, patents relating to pharmaceutical inventions are effective for 20 years from the date the patent application is filed.

    We currently own eight PRC-issued patents relating to:

    • the composition of matter of TPIAO, expiring in 2015;

    • a method of manufacturing TPIAO, expiring in 2020;

    • a method and application thereof relating to our manufacturing processes, expiring in 2021;

    • the composition of matter of pegylated-uricase expiring in 2022;

    • a formulation of EPIAO, expiring in 2023;

    • a patent related to certain protein, expiring in 2015;

    • a method of manufacturing interleukin analogue, expiring in 2026; and

    • a novel erythropoiesis stimulating protein analogue, expiring in 2027.

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    We have filed one pending PRC patent application related to the formulation and application of human papillomavirus vaccine. In addition, we have acquired a United State patent related to the composition of matter of pegylated-uricase expiring in 2021, and licensed PRC, Hong Kong and Taiwan patents related to voclosporin expiring in 2022.

    We are aware of intellectual property rights held by third parties that relate to products or technologies we are developing. For example, we are aware of certain patents held by some third parties that may relate to pegylated uricase. We believe, as to any such third party claim, that we either do not infringe the claim of the patent or that the claim is invalid. While the validity of issued patents, patentability of pending patent applications and applicability of any of them to our programs are uncertain, if asserted against us, any related patent rights could adversely affect our ability to commercialize our products.

    We own 11 registered trademarks relating to EPIAO, TPIAO, Intefen and Inleusin.

    We also rely on trade secrets, proprietary know-how and continuing technological innovation to develop and maintain a competitive position in our product areas. We generally require our employees, consultants and advisors to enter into confidentiality agreements. 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 under 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. The development of our technology and many of our processes are dependent upon the knowledge, experience and skills of key scientific and technical personnel. Further, as a matter of company policy, all scientific and technical employees have entered into agreements that generally require disclosure and assignment to us of ideas, developments, discoveries and inventions made by them. However, these agreements may not effectively prevent disclosure of our confidential information or provide meaningful protection for our confidential information if there is unauthorized use or disclosure.

    The research, development and commercialization of a biopharmaceutical often involve alternative development and optimization routes, which are presented at various stages in the development process. The preferred routes cannot be predicted at the outset of a research and development program because they will depend upon subsequent discoveries and test results. There are numerous third-party patents in our field, and it is possible that to pursue the preferred development route of one or more of our products we will need to obtain a license to a patent, which would decrease the ultimate profitability of the applicable product. If we cannot negotiate a license, we might have to pursue a less desirable development route or terminate the program altogether. PRC patent and trademark laws are discussed in greater detail in 4.B.11-c.1 “PRC patent law” and 4.B.11-c.2 “Trademarks”.

    We cannot assure you that any of our intellectual properties will be able to provide us with meaningful protection or commercial advantages. 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, manufacturing processes or our proprietary technology or to otherwise obtain and use information that we regard as proprietary. The protection of intellectual property rights and proprietary information in China may not be as effective as in the United States or other countries. For example, implementation and enforcement of PRC intellectual property-related laws have historically been deficient and ineffective and may be hampered by corruption and local protectionism. 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 expenditure of cash and management efforts and could harm our business, financial condition and results of operations.

    To date, we have not been involved in any significant intellectual property disputes or encountered major difficulties in enforcing our intellectual property rights in China.

    See “4.B.11-c Intellectual Property” for general discussions on the intellectual property regulations in the Chinese pharmaceutical industry.

    Our license agreement with Panacor Bioscience Limited (“Panacor”), a Taiwanese biopharmaceutical company, grants us a license to the patent rights and know-how of ferric compounds or Nephoxil®, as announced in early 2010; in connection, we agreed to make an upfront equity investment in Panacor, which, however, did not receive the approval from relevant regulatory authorities in Taiwan.

    4.B.8 Manufacturing

    Our Shenyang-based manufacturing operations consist of bulk manufacturing and formulation, fill and finish activities for the production of EPIAO, TPIAO, Intefen and Inleusin for both clinical and commercial purposes. We also manufacture our product candidates for clinical trials at this facility. All fill, finish and packaging activities in relation to our domestic sales are conducted at our Shenyang facility. A portion of our exported products are packaged in our Shenyang facility, and the rest is shipped overseas in bulk format as concentrated solutions of recombinant human erythropoietin, interferon alpha-2a or interleukin-2 and finished and packaged locally. Our Shenyang facilities are certified in accordance with Chinese GMP. We specialize in manufacturing proteins with mammalian expression systems, although we are capable of manufacturing with bacterial expression systems.

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    We generally produce our products based on quarterly order forecasts and anticipated additional orders that we are reasonably confident will be obtained. Lead times for raw materials and components vary and depend on the specific supplier and the availability and demand for the raw materials. Raw materials and supplies are generally available from various suppliers in quantities adequate to meet our needs. However, we have single-source suppliers for some components and value-added steps, including EPO Elisa Kit by R&D systems Inc, GIBCO cell culture medium by Invitrogen Inc., Pharmacia chromatography purification medium by GE Healthcare, a division of GE, and Disc, a microcarrier for cell cultures, by New Brunswick Scientific Inc.

    We have not experienced any disruptions in the supply of these raw materials in the past. Unlike in the United States, we do not need SFDA approval to change suppliers. In the event that any one of these supply arrangements or agreements is terminated or the ability of any one of these suppliers to perform under our agreements were to be materially adversely affected, we believe that we will be able to locate, qualify and enter into an agreement with a new supplier on a timely basis. We maintain long-term relationships with most of our suppliers and place orders from these suppliers from time to time on an as-needed basis.

    We expect that our existing manufacturing facilities and outside sources will allow us to meet manufacturing needs for our commercial products and product candidates that are in clinical trials.

    As part of our overall strategy to increase our manufacturing capacity, we have completed construction of additional manufacturing facilities in early 2010. The additional facilities supports the sustained growth of EPIAO and TPIAO in China, and serves as a key step towards exploring global biosimilar opportunities.

    4.B.8.1 Quality Control and Assurance

    We have our own independent quality control system and devote significant attention to quality control for the designing, manufacturing and testing of our products. We have established a quality control system in accordance with SFDA regulations. Our laboratories fully comply with the Chinese GMP guidelines and are staffed with highly educated and skilled technicians to ensure quality of all batches of product release.

    We implemented European Pharmacopoeia 2002 version on quality control in 2004. European Pharmacopeia of the Council of Europe is a wide range of active substances and excipients used to prepare pharmaceutical products in Europe. In September 2011, the SFDA approved our voluntary upgrade of manufacturing specifications to align EPIAO product quality with European Pharmacopoeia standards. Thus, we believe we are the only Chinese manufacturer with an approved product quality that meets both Chinese Pharmacopoeia and European Pharmacopoeia standards.

    Our quality assurance team is also responsible for ensuring that we are in compliance with all applicable regulations, standards and internal policies. Our senior management team is actively involved in setting quality policies and managing internal and external quality performance.

    4.B.9 Facilities

    Our state-of-art manufacturing facilities are located in the Shenyang Economy & Technology Development Zone, where, after commissioning the additional facilities in 2010, we own four buildings with an aggregate of approximately 28,692 square meters of office, research and development, and manufacturing space. Our facilities in Shenyang consist of three separate divisions capable of producing bulk products, including bacterial expressed proteins and mammalian expressed proteins, and formulating final products. Our manufacturing facilities are equipped with state-of-art and top-line branded equipment, such as bioreactors, centrifuges, chromatography systems and lyophilizers. We own all of our manufacturing facilities in Shenyang. Please refer to “4.B.8 Manufacturing” for productive capacity, products, and other information. Our manufacturing facilities are compliant with Chinese environmental regulations.

    In early 2010, we completed building additional manufacturing facilities in Shenyang. We commenced construction in November 2007, and have expended, including contracted amounts that are not yet paid, approximately RMB163 million as of December 31, 2012 for this construction project, inclusive of related machinery and equipment. The additional facilities are estimated to increase our manufacturing capacity, subject to actual operating conditions and parameters, by approximately four times. We have funded such capital expenditures with a combination of cash generated from operating activities and the proceeds from our initial public offering in February 2007.

    As we are developing our dialysis business, in October 2011, we commenced building a new manufacturing facility in Benxi, Liaoning, to produce dialysis consumables. The total expenditure for this new facility is estimated to be RMB50.4 million, including RMB26.4 million that has been incurred as of December 31, 2012. We plan to finance this construction with a combination of our existing funds and cash generated from operating activities. The new facility is expected to commence operations in 2015-2016.

    We have leased office space used for local sales and services in various cities of China.

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    The following table contains information concerning our significant real properties, all owned by us:

    Location General Character, Size and Use of Property
    Shenyang, Liaoning Province, China approximately 28,692 square meters, used for office, manufacturing, and research and development.
    Shenyang, Liaoning Province, China 400 square meters, used for general corporate purposes.
    Beijing, China 1,000 square meters, used for sales and marketing and corporate purposes

    In addition, we are in the process of completing the administrative procedures and acquiring the land use right to the following properties:

    Location General Character, Size and Use of Property
    Benxi, Liaoning Province, China approximately 25,200 square meters, used for dialysis consumables manufacturing facilities.
    Taizhou, Jiangsu approximately 32,214 square meters, planned use being for pharmaceutical manufacturing facilities, with no significant development or construction started yet.

    We believe that our facilities and equipment are in good working condition.

    4.B.10 Employees

    We had 718, 810 and 891 employees as of December 31, 2010, 2011 and 2012, respectively. The following table sets forth the number of our employees categorized by function as of December 31, 2012:

        As of December 31, 2012  
    Manufacturing and services   219  
    Research and development   35  
    General and administration   89  
    Marketing and sales   548  
    Total   891  

    From time to time, we may also employ independent contractors to support our marketing and sales and clinical support and research. We may hire additional employees for marketing and sales, customer service, manufacturing and assembly as we grow our business. We have a labor union in accordance with Chinese law and practice, and we consider our relationship with our employees to be good.

    In accordance with applicable regulations in the PRC, we participate in a pension contribution plan, a medical insurance plan, an unemployment insurance plan and a personal injury insurance plan for our employees. We have made adequate provisions in accordance with applicable regulations, amounting to RMB5.2 million, RMB8.2 million and RMB10.1 million (US$1.6 million) for the years ended December 31, 2010, 2011 and 2012, respectively.

    Also, in accordance with PRC regulations, we make annual contributions towards a housing fund, a supplemental medical insurance fund and a maternity fund.

    4.B.11 Regulations

    The pharmaceutical industry is heavily regulated in the PRC. This section summarizes the principal PRC regulations related to our business.

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    4.B.11-a Regulatory Authorities

    In the PRC, the SFDA, is the authority that monitors and supervises the administration of pharmaceutical products, medical appliances and equipment as well as food, health food and cosmetics. The SFDA’s predecessor, the State Drug Administration, or the SDA, was established in 1998 as an organization under the State Council to assume the responsibilities previously handled by the MOH, the State Pharmaceutical Administration Bureau of the PRC and the State Administration of Traditional Chinese Medicine of the PRC. The SFDA was founded in March 2003 to replace the SDA and reported to the State Council until the MOH was reorganized and assumed administrative responsibility for the SFDA in March 2008.

    The primary responsibilities of the SFDA include:

     
  •  
  • monitoring and supervising the administration of pharmaceutical products, medical appliances and equipment as well as food, health food and cosmetics in the PRC;
     
  •  
  • formulating administrative rules and policies concerning the supervision and administration of food, health food, cosmetics and the pharmaceutical industry;
     
  •  
  • evaluating, registering and approving of new drugs, generic drugs, imported drugs and traditional Chinese medicine;
     
  •  
  • approving and issuing permits for the manufacture and export/import of pharmaceutical products, medical appliances and equipment and approving the establishment of enterprises to engage in the manufacture and distribution of pharmaceutical products; and
     
  •  
  • examining and evaluating the safety of food, health food and cosmetics and handling significant accidents involving these products.

    The MOH is a ministerial-level authority under the State Council and is primarily responsible for national public health. Following the establishment of the SFDA in 2003, the MOH was put in charge of the overall administration of the national health system in the PRC excluding the pharmaceutical industry. In March 2008, the MOH was reorganized and assumed administrative responsibility for the SFDA. The MOH performs a variety of tasks in relation to the health industry such as establishing social medical institutes, promulgating national regulations, and producing professional codes of ethics for public medical personnel. The MOH is also responsible for international issues, such as those pertinent to foreign companies and governments, and NGOs.

    In 2013, ministry-level government structure changes are taking place involving SFDA and MOH, which may result in uncertainties in policies and regulation.

    Other than SFDA and MOH, certain aspects of our operations may also come under the jurisdiction of other government authorities at various levels such as NDRC.

    4.B.11-b.1 Drug Administration General

    Drug administration laws and regulations

    The PRC Drug Administration Law (amendment effective December 1, 2001) applies to entities and individuals engaged in the development, production, trade, application, supervision and administration of pharmaceutical products. It regulates and prescribes a framework for the administration of pharmaceutical manufacturers, pharmaceutical trading companies, medicinal preparations of medical institutions and the research, development, manufacturing, packaging, distribution, pricing and advertisements of pharmaceutical products.

    The PRC Drug Administration Implementation Regulations promulgated by the State Council, effective on September 15, 2002, provides detailed implementation regulations for the revised PRC Drug Administration Law.

    4.B.11-b.2 Medicine Approval and Manufacturing

    Examination and approval of new medicines

    The SFDA promulgated the Administrative Measures on the Registration of Pharmaceutical Products on October 1, 2007, superseding prior regulations. Under the current regulations, the approval of new medicines requires the following steps:

  •  
  • Upon completion of the pre-clinical research of the new medicine, application for registration of the new medicine shall be submitted to the drug regulatory authorities at the provincial level for review. After completion of their review, such drug regulatory authorities shall submit their opinion and report to the SFDA for review;

  •  
  • If all the requirements are complied with, the provincial FDA will issue a notice of acceptance of application and proceed with its assessment on whether or not to grant the approval for conducting the clinical research on the new medicine;
  •  
  • After obtaining the SFDA’s approval for conducting the clinical research, the applicant may proceed with the relevant clinical research (which is generally conducted in three phases for a new medicine, with Phase IV post-marketing study applicable in certain instances) at institutions with appropriate qualification:

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  •  
  • Phase I refers to the preliminary clinical trial for clinical pharmacology and body safety. It is conducted to observe the human body tolerance for new medicine and pharmacokinetics, so as to provide a basis for determining the prescription plan;

  •  
  • Phase II refers to the stage of preliminary evaluation of clinical effectiveness. The purpose is to preliminarily evaluate the clinical effectiveness and safety of the medicine used on patients with targeted indication, as well as to provide a basis for determining the Phase III clinical trial research plan and the dosage under the prescription plan; and

  •  
  • Phase III is a clinical trial stage to verify the clinical effectiveness. The purpose is to test and determine the clinical effectiveness and safety of the medicine used on patients with targeted indication, to evaluate the benefits and risks thereof, and, eventually, to provide sufficient basis for review of the medicine registration application.

  •  
  • Phase IV is the clinical study after the new medicine is approved and enters into the market, targeting to investigate the efficacy and any adverse reactions of the drug under the conditions of mass use, and to evaluate the benefits and risks of its use among common and special patient groups and to improve drug dosage.

  •  
  • After completion of the relevant clinical research, the applicant shall submit its clinical research report together with the relevant supporting documents to the drug regulatory authorities at the provincial level and shall provide raw materials of the standard products to the PRC National Institutes for Food and Drug Control;

  •  
  • The drug regulatory authorities at the provincial level shall then review the relevant documents, conduct site inspections and sample examinations and thereafter submit their opinion, inspection report and other application materials to the SFDA for review;

  •  
  • The PRC National Institutes for Food and Drug Control will arrange for the examination of the sample new drug supplied by the relevant medicine examination institutes and will then issue the examination result report to the SFDA; and

  •  
  • If all the regulatory requirements are satisfied, the SFDA will grant a new drug certificate and a pharmaceutical approval number (assuming the applicant has a valid pharmaceutical manufacturing permit and satisfies the requisite production conditions for the new medicine).

    Permits and licenses for manufacturing and registration of drugs

    Production License. To manufacture pharmaceutical products in the PRC, a pharmaceutical manufacturing enterprise must first obtain a pharmaceutical manufacturing permit issued by the relevant pharmaceutical administrative authorities at the provincial level where the enterprise is located.

    Each pharmaceutical manufacturing permit issued to a pharmaceutical manufacturing enterprise is effective for a period of five years. Any enterprise holding a pharmaceutical manufacturing permit is subject to review by the relevant regulatory authorities on an annual basis. The enterprise is required to apply for renewal of such permit within six months prior to its expiry and will be subject to reassessment by the issuing authorities in accordance with the then prevailing legal and regulatory requirements for the purposes of such renewal.

    Business Licenses. In addition to a pharmaceutical manufacturing permit, the manufacturing enterprise must also obtain a business license from the administrative bureau of industry and commerce at the local level after it has obtained the requisite pharmaceutical manufacturing permit.

    Registration of Pharmaceutical Products. All pharmaceutical products that are produced in the PRC must bear a registered number issued by the SFDA, with the exception of Chinese herbs and Chinese herbal medicines in soluble form. The pharmaceutical manufacturing enterprises must obtain the medicine registration number before manufacturing any medicine.

    GMP Certificates. The World Health Organization encourages the adoption of GMP standards in pharmaceutical production in order to minimize the risks involved in any pharmaceutical production that cannot be eliminated through testing the final products.

    China’s Guidelines on Good Manufacturing Practices for Pharmaceuticals, as amended in 2010, or the Guidelines, took effect on March 1, 2011 and set the basic standards for the manufacture of pharmaceuticals. The Guidelines cover issues such as production facilities, qualification of staff at the management level, production plant and facilities, documentation, material packaging and labeling, inspection, production management, sales and return of products and customers’ complaints. On August 2, 2011, the SFDA issued the Administrative Measures on the Certification and Regulation of Good Manufacturing Practice for Pharmaceuticals, which stipulates the procedures of GMP accreditation, including documents and materials to be submitted to the SFDA or to the relevant drug regulatory authorities at the provincial level and on-site and follow-up examinations to be conducted by the relevant SFDA agencies. The application for GMP certificate renewal must be submitted six months prior to its expiration date.

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    4.B.11-b.3 Distribution

    Distribution of pharmaceutical products

    According to the PRC Drug Administration Law and its implementing regulations and the Measures for Supervision and Administration of Distribution of Pharmaceutical Products, a manufacturer of pharmaceutical products in the PRC can only engage in the trading of the pharmaceutical products that the manufacturer has produced itself, if it does not obtain the license for the pharmaceutical trading. In addition, such manufacturer can only sell its products to:

    • wholesalers and retailers holding pharmaceutical trading permits;

    • other holders of pharmaceutical manufacturing permits; or

    • medical practitioners holding medical institution practice permits.

    A pharmaceutical manufacturer in the PRC is prohibited, if it does not obtain the license for the pharmaceutical trading, from selling its products to end-users, or any individuals or entities other than holders of pharmaceutical trading permits, pharmaceutical manufacturing permits or medical institution practice permits.

    The granting of a pharmaceutical trading permit to wholesalers shall be subject to approval of the relevant drug regulatory authorities at the provincial level, while the granting of pharmaceutical trading permit to retailers shall be subject to the approval of the relevant drug regulatory authorities above the county level. Unless otherwise expressly approved, no pharmaceutical wholesaler may engage in the retail of pharmaceutical products, and neither may pharmaceutical retailers engage in wholesale distribution.

    A pharmaceutical distributor (including wholesalers and retailers) shall satisfy the following requirements:

    • retain qualified personnel with pharmaceutical expertise as required by the law;

    • operate in business sites, facilities, warehouses with sanitary environments compatible to the distributed pharmaceutical products;

    • engage quality management system and personnel compatible to the distributed pharmaceutical products; and

    • comply with relevant rules and regulations to ensure the quality of the distributed pharmaceutical products.

    Operations of pharmaceutical distributors shall be conducted in accordance with the Pharmaceutical Operation Quality Management Rules and shall be granted a certificate under such rules by the SFDA.

    Pharmaceutical distributors must keep true and complete records of any pharmaceutical products purchased, distributed or sold with the generic name of such products, specification, approval code, term, manufacturer, purchasing or selling party, price and date of purchase or sale. A pharmaceutical distributor must keep such record until one year after the expiry date of such products and in any case, such record must be kept for no less than three years. Penalties may be imposed for any violation of record-keeping.

    Pharmaceutical distributors can only distribute pharmaceutical products obtained from those with a pharmaceutical manufacturing permit or a pharmaceutical trading permit.

    Restrictions on foreign ownership in pharmaceutical wholesale and retail businesses

    Under Foreign Investment Industrial Guidance Catalogue, as amended, foreign investment in wholesale and retail sales and distribution of pharmaceutical products is not restricted.

    The Administration Rules on Foreign Investment in Sales and Distribution and related administrative pronouncements permit foreign companies to establish or invest in wholly-foreign-owned enterprises or joint ventures that engage in wholesale or retail sales of pharmaceutical products in China, subject to approvals from the SFDA and MOFCOM or the respective provincial level delegate agencies and certain review and filing requirements.

    Price control

    The administration of price control of pharmaceutical products is vested in the national and provincial price administration authorities. Depending on the categories of pharmaceutical products in question, the prices of pharmaceutical products listed in the State Basic Medical Insurance, Work Injury Insurance, and Maternity Insurance Drug Catalogue, as amended, or Catalogue, drugs with patents and other drugs whose production or trading may constitute monopolies are subject to the control of the National Development and Reform Commission of the PRC and the relevant provincial or local price administration authorities. In respect of pharmaceutical products manufactured in the PRC, the national price administration authority from time to time publishes price control lists setting out the names of pharmaceutical products and their respective price ceilings. The provincial price administration authorities also publish price control lists in respect of the pharmaceutical products which are manufactured within their respective areas. The main purpose of the price control policy is to set an upper limit to the prices of pharmaceutical products to prevent excessive increases in the prices of such products. Pursuant to the Measures for Medicine Pricing by the Government, the price ceiling is determined mainly by reference to the quality of the product, whether it is a newly developed product, and the GMP compliance status.

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    The prices of pharmaceutical products included in the price control lists are subject to adjustment upon approval by the price administration authorities from time to time. Pharmaceutical enterprises in the PRC are required to submit cost related information such as raw material prices regularly to the relevant price administration authorities, so that the authorities could take into account the market conditions when setting the prices. The price administration authorities may approve adjustments to the prices upon request if material changes in production costs or significant changes in demand for these pharmaceutical products are recognized.

    Competitive bidding

    In each province where we market our products, we participate in a government-sponsored competitive bidding process every year or every few years for procurement by state-owned hospitals of medicines included in the provincial medicine catalogs. A government-appointed committee reviews bids submitted and selects one or more medicines for treatment of a particular medical condition. The selection is based on a number of factors, including bid price, quality of the product and manufacturer’s reputation and service. The bid price of the selected medicine will become the purchase price of that medicine to be paid by all state-owned hospitals in the province or local district in question. This bidding mechanism was first instituted in 2004 and has been adopted across China, with provincial variations. During recent provincial tenders, the tender prices generally fall within a range. Individual provinces in some cases are requiring the lowest tender price obtained through other provincial tenders, which is resulting in increasing pricing pressure.

    Sales to military hospitals account for approximately 10-12% of our total sales. In 2012, regional military tenders were consolidated into one national tender which used the lowest local (non-military) tender price as a reference; and the military tender prices for EPIAO decreased by approximately 10-20% across different dosages.

    4.B.11-b.4 Key Certificates and Permits

    Shenyang Sunshine’s current pharmaceutical manufacturing permit was issued by Liaoning FDA on January 1, 2011 and is valid until December 31, 2015. Shenyang Sunshine’s current GMP certificate in relation to TPIAO was issued by the SFDA on July 12, 2010. Shenyang Sunshine’s current GMP certificate in relation to EPIAO and our legacy products was issued by the SFDA on February 10, 2010. All our GMP certificates, as issued, set the expiry at the fifth anniversary of the issuance date; however, in connection with the implementation of China’s 2010 GMP standards, at this time, all pharmaceutical manufacturers are required to be re-certified; and we are in the process of recertification and expect that we will be duly recertified.

    Liaoning Sunshine’s current pharmaceutical trading permit was issued by Liaoning FDA on December 30, 2009 and is valid until December 29, 2014. Liaoning Sunshine’s current certificate for good operation management practice, or GSP certificate, in relation to pharmaceutical wholesales was issued by Liaoning FDA on December 8, 2008 and is valid until until December 7, 2013.

    4.B.11-b.5 Consumer and Government Insurance Reimbursement

    Product liability

    In addition to the strict new drug approval process, certain PRC laws have been promulgated to protect the rights of consumers and to strengthen the control of medical products in the PRC.

    Under current PRC law, manufacturers and vendors of defective products in the PRC may incur liability for loss and injury caused by such products. Pursuant to the General Principles of the Civil Law of the PRC, or the PRC Civil Law, promulgated on April 12, 1986, as amended in 2009, a defective product which causes property damage or physical injury to any person may subject the manufacturer or vendor of such product to civil liability for such damage or injury.

    On February 22, 1993, the Product Quality Law of the PRC, or the Product Quality Law, was promulgated to supplement the PRC Civil Law aiming to protect the legitimate rights and interests of the end-users and consumers and to strengthen the supervision and control of the quality of products. The Product Quality Law was revised by the Ninth National People’s Congress on July 8, 2000. Pursuant to the Product Quality Law, manufacturers who produce defective products may be subject to civil or criminal liability and have their business licenses revoked.

    On October 31, 1993, the PRC Law on the Protection of the Rights and Interests of Consumers, or the Consumers Protection Law, was promulgated, which provides further protection to the legal rights and interests of consumers in connection with the purchase or use of goods and services. Under this law, in addition to other damages and compensations, any company engaged in fraudulent conduct in connection with services and goods supplied, at the request of the aggrieved consumer, may be liable for an incremental damage equal to the amount paid for such service or goods. At present, all business operations must observe and comply with the Consumers Protection Law when they provide their goods and/or consumer services.

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    On December 26, 2009, the PRC Tort Liability Law, or the Tort Liability Law, was promulgated, and took effect on July 1, 2010. The Tort Liability Law provides basis for a variety of tort claims resulted from defective products, motor accidents, medical malpractice, environmental pollution, and highly dangerous activities and animals. In particular, according to the Tort Liability Law, where any producer or seller knowingly produces or sells defective products that cause death or serious injury to the health of others, the injured party may claim appropriate punitive damages.

    Government Medical Insurance Coverage

    China has a complex government-sponsored medical insurance system that is currently undergoing reform. Generally, once those individuals covered by medical insurance have paid for medical services, they may seek available reimbursement according to applicable medical insurance programs in which they participate. For public servants and others covered by the

    1989 Administrative Measure on State Provision of Healthcare, the PRC government currently either fully or partially reimburses medical expenses for certain approved treatment services. Urban residents in China that are not covered by the 1989 Administrative Measure on State Provision of Healthcare are generally covered by one of two nationwide public medical insurance schemes, which are the Urban personnel basic medical insurance program launched in 1998 and the Urban Residents Basic Medical Insurance Program launched in 2007. Rural residents in China are generally covered under a New Rural Cooperative Medical Program launched in 2003.

    The Urban personnel basic medical insurance program which mainly covers employed urban residents, fully or partially reimburses urban workers for certain approved treatments services. The Urban personnel basic medical insurance program is funded by the mandatory medical insurance contribution by employees and their employers and the contribution rates vary based on the economic development status and individual income level of different regions. All of the employee’s contribution and a small portion of the employer’s contribution are allocated to the individual’s reimbursement account, and the remaining portion of the employer’s contribution is aggregated into a social medical expense pool. Participants of the Urban personnel basic medical insurance program may seek reimbursement from both the individual account and the social medical expense pool up to the stipulated reimbursement caps.

    Urban residents who are not covered by the Urban personnel basic medical insurance program such as students, children and other non-employees, may voluntarily participate in the Urban Residents Basic Medical Insurance Program on a per family’s basis. The Urban Residents Basic Medical Insurance Program is mainly funded by the monthly contributions of each participating family and a fixed amount of annual government subsidies for each individual participant, all of which can be aggregated into a social medical expense pool. There is no specific requirement or guidance from the central government. Local governments separately determine the respective reimbursement policy. Individual participants of the Urban Residents Basic Medical Insurance Program may seek reimbursement from the social medical expense pool up to the stipulated reimbursement cap.

    Rural residents can voluntarily participate in the New Rural Cooperative Medical Program on a per family basis. The New Rural Cooperative Medical Program is mainly funded by the monthly contribution of each participating family and a fixed amount of government subsidies for each individual participant, all of which can be aggregated into a social medical expense pool. The individual participants of the New Rural Cooperative Medical Program may seek reimbursement from the social medical expense pool up to the stipulated reimbursement cap.

    In general, the reimbursement levels for covered medical expenses for urban non-employees and rural residents, which vary widely from region to region and treatment to treatment, are generally lower than those for urban employees in the same region. These government insurance programs usually maintain reimbursement lists of covered drugs. As part of the healthcare reform, the Chinese government has expanded the coverage of medical insurance programs, including extending coverage to 95% of the national population, increasing the government subsidies for the Urban Residents Basic Medical Insurance Program and the New Rural Cooperative Medical Program, and increasing the reimbursement caps for the social medical expense pools of the three medical insurance programs.

    Urban personnel basic medical insurance program

    According to the State Council Decision on the Establishment of the Basic Medical Insurance System of Personnel in Cities and Townships promulgated by the State Council in December 1998, the Ministry of Labor and Social Security assumed the responsibilities for the reform of the medical insurance system. As part of the reform of the state basic medical insurance system for employees in the urban areas, the Ministry of Labor and Social Security, the MOH, the SDFA and various other governmental departments jointly issued the State Basic Medical Insurance, Work Injury Insurance, and Maternity Insurance Drug Catalogue, or the Catalogue, with a view to enhancing the management of the use of drugs under the medical insurance system. The drugs listed in the Catalogue are covered by the Urban Personnel Basic Medical Insurance Program, or Program.

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    --- Reimbursement under the urban personnel basic medical insurance program

    The Ministry of Labor and Social Security, together with other government authorities, determines which medicines are to be included in or removed from the Catalogue for the Program, and under which category a medicine should fall, both of which affect the amounts reimbursable to program participants for their purchases of those medicines. These determinations are based on a number of factors, including whether the medicine is consumed in large quantities and commonly prescribed for clinical use, and whether the medicine is considered to be important in meeting the basic healthcare needs of the general public. A program participant can be reimbursed for the full cost of a Category A medicine and part of the cost of a Category B medicine. Although it is designated as a national program, the implementation of the Program is delegated to various provincial governments, each of which has established its own medicine catalog. A provincial government must include all Category A medicines listed in the Catalogue in its provincial medicine catalogue, but may use its discretion based on its own selection criteria to add other medicines to, or exclude Category B medicines listed in the Catalogue from, its provincial medicine catalogue, so long as the combined numbers of the medicines added and excluded do not exceed 243 of the Category B medicines listed in the Catalogue. In addition, provincial governments may not downgrade a nationally classified Category A medicine to Category B.

    According to the national guideline as issued by the State Council, the total amount of reimbursement for the cost of prescription and over-the-counter medicines, in addition to other medical expenses, for an individual program participant in a calendar year is generally capped at four times the local average annual salary level; all the costs below the reimbursement threshold and a percentage above the threshold need to be paid from the individual account, with the other portions paid from the social medical expense pool. The amount in a participant’s account varies, depending upon the amount of contributions made by the participant and his or her employer. Generally, program participants who are from relatively wealthier eastern parts of China or metropolitan areas have greater amounts in their accounts than those from less developed areas.

    While inclusion of a medicine in the Catalogue or the provincial medical catalogues may improve the sales volume of the medicine, a selected medicine generally is subject to various price controls, including fixed retail price or retail price ceiling, and periodical government-imposed price adjustments.

    National Essential Drugs Registry

    As part of the healthcare reform, the PRC Ministry of Health has established the National Essential Drugs Registry, or Registry, which includes medicines selected with a view towards meeting the basic requirements of medical care in China. None of our products is included in the Registry as of the time of the recent 2012 update, released on March 15, 2013. The Administration Measures for National Essential Drugs Registry (Tentative Implementation) was promulgated to accompany the Registry. Eligible participants in the government-sponsored medical insurance programs are entitled to reimbursement for varying percentages of the cost of the medicines that are included in the Registry. All the medicines in the Registry are subject to the government price control.

    Prescription regulations

    As announced by Ministry of Health, the Prescription Administrative Measures, took effect on May 1, 2007, which stipulates that doctors may only use the generic names of drugs in their prescriptions instead of brand names and that medical institutions may offer patients the same type of drug from no more than two separate pharmaceutical companies. The purpose of this regulation is to combat the practice of doctors receiving kickbacks from pharmaceutical companies for prescribing higher priced, or even unneeded, drugs to patients.

    4.B.11-c Intellectual Property

    4.B.11-c.1 PRC patent law

    The PRC government first allowed patents for the protection of proprietary rights, as set forth in the 1985 China Patent Law (revised on December 27, 2008, effective as of October 1, 2009). Pharmaceutical inventions were not patentable under the China Patent Law until 1994. Patents relating to pharmaceutical inventions are effective for 20 years from the date the patent application is filed.

    Patent prosecution

    The Chinese patent prosecution system is different from the United States system in a number of ways. The Chinese patent system, like most countries other than the United States, adopts the principle of “first to file.” This means that, where more than one person files a patent application for the same invention, a patent will be granted to the person who first filed the application. The United States uses a principle of first to discover to determine the granting of patents. In addition, the PRC requires absolute novelty in order for an invention to be patentable. Pursuant to this requirement, any prior written or oral publication, demonstration or use before filing the patent application prevents an invention from being patented in the PRC. Conversely, inventors in the United States have a one year grace period after publication of the invention in which they may file a patent.

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    Patents issued in the PRC are not enforceable in Hong Kong, Taiwan or Macau, each of which has independent patent systems. Patents are filed at the State Intellectual Property Office, or SIPO, in Beijing.

    Patent enforcement

    A patent holder who believes the patent is being infringed may either file a civil legal suit or file an administrative complaint with a provincial or municipal office of SIPO. A PRC court may issue a preliminary injunction upon the patent holder’s or an interested party’s request before instituting any legal proceedings or during the proceedings. Damages for infringement are calculated as: (1) the loss actually suffered by the patent holder arising from the infringement; (2) if such actual loss cannot be ascertained, the benefit gained by the infringing party from the infringement; (3) if such actual loss or benefit cannot be ascertained, a reasonable amount by reference to certain times of the patent’s license fees; or (4) if damages cannot be established by method (1) through (3), court-ordered statutory damages in the range from RMB10,000 to RMB1,000,000. The reasonable costs expended by the patent holder to cause infringement to cease are required to be added to the amount calculated under (1) through (3) above.

    Generally, as in other jurisdictions, the patent holder in the PRC has the burden of proving that the patent is being infringed. However, if the holder of a manufacturing process patent alleges infringement of such patent, the alleged infringing party has the burden of proving that there has been no infringement.

    Compulsory license

    Pursuant to the PRC Patent Law, as amended, the SIPO may, on the basis of the application of any entity or individual that is qualified to exploit an invention patent or utility model patent, grant a compulsory license to any such entity or individual if: (1) where, within three years of the date on which the patent right is granted and within four years of the date of patent application, the patent owner has not exploited the patent, or not done so adequately, without any reasonable justification; or (2) where, the patent owner's act of exploitation of the patent is held in accordance with law to be monopolistic and it is necessary to grant the compulsory license to remove or reduce any anti-competitive and adverse effect.

    Additionally, under the PRC Patent Law as amended, for public health purposes, the SIPO may grant a compulsory license for manufacturing patented medicines and exporting them to countries or regions which comply with the provisions of relevant international treaties acceded to by the PRC.

    A compulsory license can also be granted where a national emergency or any extraordinary state of affairs occurs or where the public interest so requires. We believe no compulsory license has yet been granted by the SIPO.

    International patent treaties

    The PRC is also a signatory to all major intellectual property conventions, including Paris Convention for the Protection of Industrial Property, Madrid Agreement on the International Registration of Marks and Madrid Protocol, Patent Cooperation Treaty, Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the Purposes of Patent Procedure and the Agreement on Trade-Related Aspects of Intellectual Property Rights, or TRIPs.

    Although patent rights are national rights, there is also a large degree of international cooperation under the Patent Cooperation Treaty, or the PCT, to which China is a signatory. Under the PCT, applicants in one country can seek patent protection for an invention simultaneously in a number of other member countries by filing a single international patent application. The fact that a patent application is pending is no guarantee that a patent will be granted, and even if granted, the scope of a patent may not be as broad as the subject of the initial application.

    4.B.11-c.2 Trademarks

    The PRC Trademark Law was promulgated in 1982, followed by the PRC Trademark Implementing Regulations in 1988, and was amended on October 27, 2001. As noted above, the PRC is signatory to the Madrid Agreement and the Madrid Protocol. These agreements provide a mechanism whereby an international registration produces the same effects as an application for registration of the mark made in each of the countries designated by the applicant.

    The PRC Trademark Office is responsible for the registration and administration of trademarks throughout the country. Like patents, the PRC has adopted a “first-to-file” principle with respect to trademarks.

    PRC law provides that the following acts constitute infringement of the exclusive right to use a registered trademark:

     
  •  
  • use of a trademark that is identical with or similar to a registered trademark in respect of the same or similar commodities without the authorization of the trademark registrant;
     
  •  
  • sale of commodities infringing upon the exclusive right to use the trademark;
     
  •  
  • counterfeiting or making, without authorization, representations of a registered trademark of another person, or sale of such representations of a registered trademark as were counterfeited, or made without authorization;

     
  •  
  • altering a registered trademark and putting commodities on which the altered registered trademark is used into the market without the consent of the trademark registrant; and
     
  •  
  • otherwise infringing upon the exclusive right of another person to use a registered trademark.
     

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    In the PRC, a trademark owner who believes the trademark is being infringed has three options:

     
  •  
  • The trademark owner can provide his trademark registration certificate and other relevant evidence to the State or local administrative bureau of industry and commerce (“AIC”) which can, at its discretion, launch an investigation. The AIC may take such actions as order the infringer to immediately cease the infringing behavior, seize and destroy the representations of the trademark in question and impose a fine. If the trademark owner is dissatisfied with the AIC’s decision, he may apply to have the decision reconsidered.

     
  •  
  • The trademark owner may institute civil proceedings directly with a court. Civil redress for trademark infringement includes:

     
  •  
  • injunctions;

     
  •  
  • requiring the infringer to take steps to mitigate the damage (i.e., print notices in newspapers); and

     
  •  
  • damages (i.e; compensation for the economic loss and injury to reputation as a result of trademark infringement suffered by the trademark holder).

     
  •  
  • The amount of compensation is calculated according to either the gains earned by the infringer from the infringement or the loss suffered by the trademark owner, including expenses incurred by the trademark holder to deter such infringement. If it is difficult to determine the gains earned by the infringer from the infringement, or the loss suffered by the trademark owner, the court may elect to award compensation of up to RMB500,000.

     
  •  
  • If the case is so serious as to constitute a crime, the trademark owner may lodge a complaint with the relevant public security organ.

    4.B.11-c.3 Administrative protection and monitoring periods for new drugs

    According to the Administrative Measures on the Registration of Pharmaceutical Products (promulgated first in 2002, revised in 2005 and 2007), with a view to protecting public health, the SFDA may provide for administrative monitoring periods of up to five years for new drugs approved to be manufactured, to continually monitor the safety of those new drugs. The key element in determining the availability and duration of the monitoring period is the safety of the new drug. The SFDA will consider, among other things, whether the new drug has been previously launched domestically or overseas, what type of new drug it is and what process and technology are involved in the production of the new drug.

    During the monitoring period of a new drug, the SFDA will not approve any other enterprise’s application to manufacture or import a similar new drug. After a new drug enters the monitoring period, for an application whose clinical trial has already been approved by SFDA, the application shall continue in the regular review process, and SFDA may approve the production or import of an application in compliance with the requirements, as well as monitor the new drug produced by the pharmaceutical manufacturer within the territory of China.

    Any applicant objecting to the SFDA’s decision can appeal within 60 days after its receipt of the SFDA’s decision. If the applicant is dissatisfied with the result of the appeal, it may apply for an administrative review with a special committee consisting of senior officials of the SFDA or file an administrative lawsuit with a court in China.

    EPIAO for anemia associated with chemotherapy in cancer patients with non-myeloid malignancies held a 6-year administrative protection period till September 2007. TPIAO for the treatment of chemotherapy-induced thrombocytopenia held a 5-year administrative protection period till May 2010.

    4.B.11-d PRC Enterprise Income Tax

    On March 16, 2007, the PRC Enterprise Income Tax Law, or the EIT Law, was enacted. Under the EIT Law, effective January 1, 2008, China adopted a uniform tax rate of 25% for all enterprises (including foreign-invested enterprises) and revoked the then current tax exemption, reduction and preferential treatments applicable to foreign-invested enterprises.

    There is a transition period for enterprises, whether foreign-invested or domestic, that were receiving preferential tax treatments granted by relevant tax authorities at the time the EIT Law became effective. Enterprises that are subject to an enterprise income tax, or EIT, rate lower than 25% may continue to enjoy the lower rate and gradually transition to the new tax rate within five years after the effective date of the EIT Law. Enterprises that are currently entitled to exemptions or reductions from the standard income tax rate for a fixed term may continue to enjoy such treatment until the fixed term expires.

    Preferential tax treatments will continue to be granted to industries and projects that are strongly supported and encouraged by the state, and enterprises otherwise classified as such “encouraged” high-tech enterprises will be entitled to a preferential 15% EIT rate. On April 14, 2008, the Measures for the Recognition and Administration of New and High-tech

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    Enterprises, or the Measures, were promulgated jointly by the Ministry of Science and Technology, the Ministry of Finance and the State Administration of Taxation and became retroactively effective from January 1, 2008. Under the Measures, the term "new- and high-tech enterprise" is defined as a resident enterprise that has been registered in the PRC (excluding Hong Kong, Macao or Taiwan) for more than one year, conducts business in the new and high-tech fields encouraged by government as listed in an appendix to the Measures, continuously undertakes research and development and technology conversion, and relies on proprietary intellectual property rights as the basis of its business operation. Such new and high-tech enterprises may apply for tax benefits.

    On February 15, 2012, Shenyang Sunshine received the “New and High Technology Enterprise” renewal certification that entitles it to a reduced 15% EIT rate, effective retroactively from January 1, 2011 to December 31, 2013. Shenyang Sunshine also held that certification with the 15% EIT rate for the period from 2008 to 2010.

    Under the EIT law and the implementation rules issued by the State Council, PRC income tax is applicable to all dividends payable to: subject to any applicable tax treaty, (1) investors that are “non-resident enterprises”, which do not have an establishment or place of business in the PRC, or which have such establishment or place of business but the relevant income is not effectively connected with the establishment or place of business, generally at the rate of 10%, and (2) non-resident individual investors, at the individual rate of 20%, to the extent such dividends have their sources within the PRC. Similarly, any gain realized on the transfer of ADSs or ordinary shares by such investors is also subject to PRC income tax at the same rate as such gain is treated as income derived from sources within the PRC. Such taxes are subject to WHT.

    Under the EIT Law and related regulations, an enterprise established outside of the PRC with “de facto management bodies” within the PRC is deemed a PRC resident enterprise and is subject to the EIT at the 25% statutory rate or any rate applicable to such resident enterprise on its worldwide income. The related regulations define the term “de facto management bodies” as “establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise.” In April 2009, the PRC State Administration of Taxation, or the SAT, issued Circular No. 82 “Issues concerning the Determination of Companies that are Organized outside China but controlled by Chinese-Nationals as Resident Enterprise pursuant to the Standard of De Facto Management Bodies.” This Circular limits the applicability of the tax residency determination employing the de facto management bodies standard to such enterprises incorporated outside China whose principal control investors are enterprises or enterprise groups within China. In July 2011, the SAT issued "Administrative Measures on Income Tax of Chinese-controlled Resident Enterprises Incorporated Overseas (Trial)", or Circular 45, to supplement Circular 82 and other tax laws and regulations. Circular 45 clarifies certain issues relating to resident status determination. While substantially all of our management functions are currently based in China, and will likely remain in China for the foreseeable future, we do not have any enterprise or enterprise group within China as our principal control investors. Please see Item 7.A “Major Shareholders”. We cannot assure you, however, that the SAT will not in future apply or enforce the tax residence tests set forth in Circular 82 and Circular 45 beyond those controlled by enterprise or enterprise group within China, to including those controlled by PRC individuals or foreign persons like us.

    We have not been taxed as a resident enterprise at any time since the promulgation of the EIT Law. It remains, however, unclear whether PRC tax authorities would require or permit us to be treated as a PRC resident enterprise.

    Starting from December 2010, Shenyang Sunshine has begun to be subject to municipal construction tax and education surcharges, at 12% of VAT payable and business tax payable, as a result of the change in the China tax regulation effective from such time. Previously Shenyang Sunshine as a wholly foreign-owned enterprise was not subject to those taxes.

    Risk and uncertainties as to tax residency

    Notwithstanding the discussions above, there are substantial uncertainties regarding the interpretation, application and enforcement of PRC laws and regulations, including, that PRC National Tax Administration and local and other authorities may change their views on the tax residency issue in future. See “3.D.3 — Our operations are subject to the uncertainty and particularities associated with the legal system in China, which could adversely affect our business, or limit the legal protection available to us or to existing or potential investors.

    If we were deemed a PRC resident enterprise, we could be subject to the EIT at 25%, or any preferential rate, if obtained, on our global income, except that the dividends we receive from our PRC subsidiaries may be exempt from the EIT to the extent such dividends constitute “dividends among qualified PRC resident enterprises.” It is, however, unclear what type of enterprises would be deemed a “qualified PRC resident enterprise” for such purposes. If we were considered a resident enterprise and determined to have earned income other than exempted dividends from our PRC subsidiaries, the EIT on our global income could significantly increase our tax burden and materially and adversely affect our cash flow and profitability.

    Further, If we were deemed a PRC resident enterprise under the EIT Law, our shareholders and ADS holders who are deemed non-resident enterprises could be subject to the WHT upon the dividends payable by us or upon any gains realized from the transfer of our ordinary shares or ADSs, if such income is deemed derived from China, provided that (i) such non-resident enterprise investor has no establishment or premises in China, or (ii) it has establishment or premises in China but its income derived from China has no real connection with such establishment or premises; and our non-resident individual shareholders and ADS holders could be subject to the WHT upon the dividends payable by us or upon any gains realized from the transfer of our ordinary shares or ADSs, if such income is deemed derived from China. It is unclear whether, if we were deemed a PRC resident enterprise, our shareholders and ADS holders might be able to claim the benefit of income tax treaties entered into between China and other countries. If we were required under the EIT Law to withhold PRC income tax on our dividends payable to our non-resident shareholders and ADS holders, or if any gains realized from the transfer of our ordinary shares or ADSs by our non-resident shareholders and ADS holders were subject to the WHT, your investment in our ordinary shares or ADSs could be materially and adversely affected.

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    Alternatively, if our holding entities outside China, as applicable, are deemed non-resident enterprises, the WHT may apply to the dividends (and interests on intra-company loans) paid by our PRC subsidiaries to such holding entities outside China. For the information regarding our holding structure, please refer to “4.C Organization Structure”.

    4.B.11-e Regulation of foreign currency exchange, dividend distribution, and overseas listing

    Foreign currency exchange

    Foreign currency exchange regulation in China is primarily governed by the following rules:

    • the Foreign Currency Administration Rules (1996), as amended, or the Exchange Rules; and

    • the Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules.

    Under the Exchange Rules, 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.

    Under the Administration Rules, foreign-invested enterprises in China, such as Shenyang Sunshine, may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business after providing valid commercial documents and, in the case of capital account item transactions, obtaining approval from the SAFE. Capital investments by foreign-invested enterprises outside of China are also subject to limitations, which include but not limited to registration with approvals by the SAFE, MOFCOM and other relevant government authorities.

    Dividend distribution

    The principal regulations governing distribution of dividends paid by wholly foreign owned enterprises include:

    • the Wholly Foreign Owned Enterprise Law (1986), as amended; and

    • the Wholly Foreign Owned Enterprise Law Implementation Rules (1990), as amended.

    Under these regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, foreign-invested enterprises in China are required to set aside certain amounts out of their accumulated profits each year, if any, to fund certain reserve funds, bonus and welfare funds. These funds are not distributable as cash dividends.

    Regulation of foreign exchange in certain onshore and offshore transactions

    On October 21, 2005, the SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Reverse Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or Notice No. 75, which became effective as of November 1, 2005.

    Pursuant to Notice No.75, prior to establishing or assuming control of an offshore company for the purpose of financing that offshore company with assets or equity interests in an onshore enterprise in the PRC, each PRC resident who is an ultimate control person, whether a natural or legal person, must complete the overseas investment foreign exchange registration procedures with the applicable local SAFE branch. An amendment to the registration with the local SAFE branch is required to be filed by any PRC resident that directly or indirectly holds interests in that offshore company upon either the injection of equity interests or assets of an onshore enterprise to the offshore company, or the completion of any overseas fundraising by such offshore company. An amendment to the registration with the local SAFE branch is also required to be filed by such PRC resident when there is any material change involving a change in the capital of the offshore company, such as (a) an increase or decrease in its capital, (b) a transfer or swap of shares, (c) a merger or division, (d) a long-term equity or debt investment or (e) the provision of a guarantee to third parties.

    Under Notice No. 75, failure to comply with the registration procedures set forth in Notice 75 may result in restrictions being imposed on the foreign exchange activities of the relevant onshore company, including the payment of dividends and other distributions to its offshore parent or affiliate and the capital inflow from the offshore entity, and may also subject the relevant PRC residents to penalties under PRC foreign exchange administration regulations.

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    4.B.11-f Other national and provincial level laws and regulations

    We are subject to changing regulations under many other laws and regulations administered by governmental authorities at the national, provincial and municipal levels, some of which are or may become applicable to our business. Our hospital customers are also subject to a wide variety of laws and regulations that could affect the nature and scope of their relationships with us.

    For example, regulations control the confidentiality of patients’ medical information and the circumstances under which patient medical information may be released for inclusion in our databases, or released by us to third parties. These laws and regulations governing both the disclosure and the use of confidential patient medical information may become more restrictive in the future.

    We also comply with numerous additional state and local laws relating to matters such as safe working conditions, environmental protection and fire hazard control. We believe that we are currently in compliance with these laws and regulations; however, we may be required to incur significant costs to comply with these laws and regulations in the future. Unanticipated changes in existing regulatory requirements or adoption of new requirements could therefore have a material adverse effect on our business, results of operations and financial condition.

    4.C Organizational Structure

    The following is a list of our subsidiaries and consolidated affiliated entities as of February 28, 2013, the latest practicable date:

    Name Time of Formation Place of Formation Relationship

    Collected Mind Limited

    July 2006 British Virgin Islands

    Wholly-owned subsidiary of 3SBio Inc.

    --- China Sansheng Medical Limited*

    November 2009 Hong Kong

    Wholly-owned subsidiary of Collected Mind

    --- Shenyang Sunshine Pharmaceutical Co., Limited

    January 1993 PRC

    Wholly-owned subsidiary of Collected Mind

    --- Jiangsu Sunshine Pharmaceutical Technology Company Limited

    December 2010 PRC

    95% owned by Shenyang Sunshine and 5% owned by Liaoning Sunshine

    --- Taizhou Huan Sheng Investment Management Company Limited

    December 2010 PRC

    Wholly-owned subsidiary of Shenyang Sunshine

    ---80% Limited Partner interest in Taizhou Huan Sheng Healthcare Industry Investment Center, LLP ("3SBio Ventures")

    May 2011 PRC

    80% Limited Partner interest owned by Shenyang Sunshine

    3SBio, LLC*

    November 2010 USA

    Wholly-owned subsidiary of 3SBio Inc.

    Liaoning Sunshine Bio-Pharmaceutical Company Limited (“Liaoning Sunshine”)

    February 2000 PRC

    Consolidated affiliated entity

    --- Liaoning Sunshine Science and Technology Development Co. Limited

    December 2009 PRC

    Wholly-owned subsidiary of Liaoning Sunshine, consolidated affiliated entity

    *As of December 31, 2012, not involved in any business activities.

    4.C.1 Affiliated Entities

    Historically, we conducted our manufacturing and marketing activities through our wholly owned subsidiary, Shenyang Sunshine, and certain distribution and logistics activities through Beijing Sunshine (now dissolved) and Liaoning Sunshine.

    We had held equity interests in Liaoning Sunshine and Beijing Sunshine, and divested these interests as part of our corporate reorganization in 2006.

    Liaoning Sunshine is primarily engaged in the distribution of our in-licensed products, currently comprising Iron Sucrose Supplement, as Shenyang Sunshine, our principal subsidiary, may only engage in the trading of the pharmaceutical products that it has produced itself. Furthermore, Liaoning Sunshine, primarily through LSSTD, is a key party to our collaboration with DaVita Inc. as reflected in the Master Agreement (Exhibit 4.10) . Under Chinese regulations, kidney care services currently allow foreign ownership of up to 70%. LSSTD holds 30% interest, and DaVita 70%, in the joint venture, with us only exercising control over LSSTD through contractual arrangements with Liaoning Sunshine, LSSTD's parent. Both LSSTD and Liaoning Sunshine are Chinese companies with no foreign ownership. DaVita is a foreign company.

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    As of December 31, 2012, Liaoning Sunshine had total assets (exclusive of LSSTD) of RMB31.6 million (US$5.1 million). For the three years ended December 31, 2010, 2011 and 2012, Liaoning Sunshine’s revenue (exclusive of LSSTD) represented approximately 5.4%, 5.3% and 5.9% of our total net revenue, respectively. As of December 31, 2012, LSSTD had total assets of RMB78.0 million (US$12.5 million). For the three years ended December 31, 2010, 2011 and 2012, LSSTD’s revenue represented approximately 0.1%, 0.5% and 0.5% of our total net revenue, respectively.

    --- 4.C.1.1 Economic and Control Arrangements

    Shenyang Sunshine entered into a series of contractual arrangements with Liaoning Sunshine and its 100% shareholder, Mr. Dan Lou, to enable us to maintain control over it, including: (1) a business cooperation agreement; (2) a purchase agreement for the acquisition of equity interest in Liaoning Sunshine; (3) a voting rights agreement; and (4) an equity pledge agreement. Please see “7.B Related Party Transactions - Transactions with Liaoning Sunshine” for more details about these contractual arrangements. Liaoning Sunshine, together with its wholly owned subsidiary LSSTD, has been included in our consolidated financial statements as a variable interest entity (“VIE”). VIEs are those entities of which a company, through contractual and/or other arrangements, bears the risks of and enjoys the rewards normally associated with ownership, and of which therefore the company is the primary beneficiary.

    --- 4.C.1.2 PRC Legal Risks and Uncertainties

    As advised by our legal counsel, we are of the view that:

  •  
  • our current ownership structure does not violate, breach, contravene or conflict with any applicable PRC Laws;

  •  
  • the agreements among our subsidiaries, affiliated entities, VIE and its subsidiary and their respective shareholders constitutes a legal, valid and binding obligation of the parties thereto, enforceable against such parties in accordance with its terms and does not violate any requirements of the PRC Laws.

    There are, however, substantial uncertainties regarding the interpretation, application and enforcement of PRC laws and regulations, including but not limited to the laws and regulations governing our business or the enforcement and performance of our contractual arrangements in the event of the imposition of statutory liens, death, bankruptcy and criminal proceedings. Accordingly, we cannot assure you that PRC authorities will not take a view contrary to ours. See, “3.D.3 — Our operations are subject to the uncertainty and particularities associated with the legal system in China, which could adversely affect our business, or limit the legal protection available to existing or potential investors;” “3.D.3 — Changes in PRC government policy with respect to foreign investment in China may adversely affect our business and results of operations;” and “3.D.1 — There are certain operational, legal and other risks associated with our contractual arrangements with Liaoning Sunshine and its shareholders that are intended to effect our control over Liaoning Sunshine.”

    4.C.2 3SBio Ventures

    As announced in August 2011, we formed an investment partnership with Taizhou Oriental CMC Limited ("Taizhou Oriental"), the investment arm of Taizhou China Medicine City Company (“CMC”). CMC, located in Jiangsu province, is a national level high-tech industrial park dedicated particularly to biopharmaceutical innovation, and is supported directly by the Ministry of Health, Ministry of Science and Technology and the SFDA. The investment partnership is managed by Taizhou Huan Sheng Investment Management Company Limited, a wholly-owned subsidiary of ours. We and Taizhou Oriental have committed RMB200 million and RMB50 million respectively to 3SBio Ventures. The initial contribution is 20% of the total commitment with the balance to be drawn down as required. 3SBio Ventures will seek investments that support our strategic interests and has an investment horizon of 8 years with an option to extend. The setup of this platform is consistent with, and will advance, our standing strategy of pursuing collaborations and in-licenses, and will play a key role in our future pipeline development. As of December 31, 2012, no investments have been made.

    4.D. Property, Plant and Equipment

    Please refer to “4.B.9 Facilities” for a discussion of our property, plant and equipment.

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    ITEM 4A. UNRESOLVED STAFF COMMENTS

    Not applicable.

     

     

    51



    ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

    You should read the following in conjunction with our audited consolidated financial statements for the periods covered by this report, together with the accompanying notes, all included elsewhere in this annual report. This discussion contains forward-looking statements and other information and statements that are subject to risks, uncertainties, assumptions and limitations. Our actual results could differ materially from such information and statements. In evaluating our business, you should carefully consider the information provided under the caption “Item 3. Key Information—D. Risk Factors” and other information about risks, uncertainties, assumption in this report and our other disclosures. Please also read the information under the heading “Cautionary Statement concerning Forward-looking Statement” at beginning of this annual report.

    5.A Operating Results

    5.A.1 Significant Trends, Factors and Developments

    Certain significant trends, factors, and developments, as discussed below, have historically affected or have had a material effect on our results of operations, or, are reasonably likely to affect or have a material effect on our results of operations in future periods.

    Significant Market Potential and Government Policies

    With its growing economy, healthcare expenditures in China are rising rapidly. The economic growth enhances the ability to pay. Urbanization and aging population in China are expected to continue to contribute to the growth of healthcare spending.

    China's healthcare reform started from 2009 aims at healthcare accessibility and affordability, with significant commitments of government funding for healthcare expenditures. The coverage expansion now takes over 95% of China's population, or 1.3 billion people, under different health insurance schemes (See Item 4.B.11-b.5 “Consumer and Government Insurance Reimbursement”), bringing about significant growth in the number of patients receiving care, with increased reimbursement limits. The hospital system reforms are expected to remove bottlenecks in the system. The improvement in basic health services, a priority of the reform, particularly in urban community healthcare centers and clinics, of those in lower-tier cities, as well as in rural clinics, may result in more patients being properly diagnosed with conditions that can be treated using our products.

    Our year-on-year revenues increase for 2010, 2011 and 2012, in RMB terms, are 32.1%, 29.4% and 23.7%, respectively. We are serving a market sector that is greatly under-penetrated. For example, in the US, approximately 80% of patients with end-stage renal diseases are on dialysis, while this figure is estimated to be at 10-15% or less in China. The majority of patients on dialysis receive EPO treatment, our EPIAO being the leading product in China's EPO market since 2002 and accounting for 41.7% of total EPO sale revenues in China in the fourth quarter of 2012. The central government identifies dialysis services as a key healthcare objective1. Additional impetus comes from the government encouraging private and foreign companies entering into healthcare services2. We believe the number of dialysis clinics and services could see considerable growth. Over 70% of our EPIAO sales come from the dialysis segment. We are also continually developing our marketing and sales.

    There are, however, also uncertainties and challenges in various respects of our operating environment, such as the ongoing hospital reform and the bidding system as evolved in provincial and local variations.

    Continuing Pricing Pressure

    The selling prices of some of our products have declined over time due to increased pricing pressure from industry peers and various government price control measures and the bidding mechanism in China. Please see under Item 4.B.11-b.3 “Distribution” “--- Price control” and “--- Competitive bidding.” On the other hand, price decreases may to a certain extent be compensated by improved sales volumes.

    The average selling prices of our legacy products and lower dosage EPIAO products have declined over time. We were able to maintain relatively stable overall average selling prices for our TPIAO and higher dosage EPIAO products over the past few years. We remain focused on our strategy of growing sales for our high-dosage products and increasing sales volumes in order to maintain healthy margins for our EPIAO products. In addition, the stable average prices of our TPIAO products, combined with their market acceptance since launch, have contributed to our revenue growth and favorable overall margins. However, the approval and commercial launch of the competitors’ high-dosage EPO products have and will put additional pricing pressure on our ability to maintain our overall average pricing.

    __________________________

    1

    2012 Government Report: “III. 2012 Priority Objectives – (6) Provision, Protection and Improvement for the Life of People: ... promote the support and security on a comprehensive basis for CKD and other 7 catastrophic diseases; ...”

    2

    See 2012 Government Report, delivered by Premier Jiabao Wen to the 2012 (5th ) Session, 11th National People's Congress on March 5th , 2012: “ III. 2012 Priority Objectives – (6) Provision, Protection and Improvement for the Life of People: ... encourage and direct social capital to invest in and operate hospitals, and speed up the forming of a medical service industry set-up with participation of multiple actors that opens up internationally ...”

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    We believe our ability to continue to grow our revenue and remain profitable in the face of downward pricing pressure is primarily dependent on the following factors:

    Enhancing Product Mix. We are continually enhancing our product mix through the introduction of new products, such as the 36,000 IU dosage EPIAO, our proprietary drug, TPIAO, with the new indication for ITP, our pre-filled syringe EPIAO and our Iron Sucrose supplement. We believe the product candidates in our pipeline will further contribute to an enhanced product mix. The new introductions generally can maintain higher pricing due to potential status as innovative drugs or first-to-market generics, which (1) would often be accompanied by patents or the administratively enforced exclusivity in the form of monitoring periods; (2) may come with inherent technology barriers to competitors; (3) if not included in any government medical insurance programs, may allow more freedom in setting the price with less regulatory intervention; or (4) may be eligible for premium pricing in any regulatory reviews such as conducted by the NDRC.

    Realigning Sales and Marketing Resources. As pricing pressures drive down the average selling price of a product, we may focus our internal sales force on other more profitable products, thereby improving our overall product mix and sales force efficiency. For example, since 2004 we have devoted a decreasing amount of resources to the marketing of our two legacy products, Intefen and Inleusin, as we strategically realigned our internal focus on EPIAO, and, in particular, its higher dosage forms, and TPIAO. At the same time, we began outsourcing the sales efforts for the two legacy products to distributors who manage their own sales forces.

    Export Sales. While export sales accounted for a small percentage of our total revenues in past periods, as we are seeking to expand internationally and pursue global biosimilar opportunities, future growth in export sales may assist us in offsetting pricing pressures in our domestic market. See “4.B.2.1 Export Sales.

    The NDRC has instituted a new round of price cuts in September 2012 targeting oncology and hematology categories, which affect the prices of our existing products. For example, the retail price ceiling for the EPO products in 10,000 IU dosage form decreased by 27.3% from RMB 168 to RMB 132 and the retail price ceiling for TPO products in 15,000 IU dosage form decreased by 24.7% from RMB 1,490 to RMB 1,195. We expect that the NDRC price cuts will result in lower prices in future provincial biddings. Furthermore, recent policy discussions seem to indicate that the government contemplates to give hospitals the ability to renegotiate off the provincial bidding results, a practice known as “hospital secondary bidding”, which may create additional downward pricing pressure on drug producers like us.

    Government Insurance Reimbursement and Competitive Bidding

    Eligible participants in the government-sponsored medical insurance programs in China are entitled to reimbursement for varying percentages of the cost for any medicines that are included in the Registry and applicable reimbursement lists. See the relevant sections under 4.B.11-b.5. Factors that affect the inclusion of medicines in the Registry and any applicable reimbursement list may include whether the medicine is consumed in large volumes and commonly prescribed for clinical use in China and whether it is considered to be important in meeting the basic healthcare needs of the general public. The inclusion of a medicine in the Registry and any applicable reimbursement list can substantially improve the sales volume of the medicine due to the availability of third-party reimbursements; while, on the other hand, subjects it to price controls in the form of fixed retail prices or retail price ceilings, as well as periodical price adjustments by the regulatory authorities. All of our products are included in the Catalogue.

    In each province where we market our products, we participate in a government-sponsored competitive bidding process every year or every few years for procurement by state-owned hospitals of medicines included in the provincial medicine catalogs. A government-appointed committee reviews bids submitted and selects one or more medicines for treatment of a particular medical condition. The selection is based on a number of factors, including bid price, quality of the product and manufacturer’s reputation and service. The bid price of the selected medicine will become the purchase price of that medicine to be paid by all state-owned hospitals in the applicable region. The competitive bidding in effect sets price ceilings for our products, thereby limiting our profitability; and, if we are not selected in these competitive biddings, we may lose market share to our competitors, and our business may be adversely affected. Furthermore, the bidding system is evolving and the provincial and local variations may produce uncertainties that can impact drug makers like us. We expect that the recent NDRC price cuts will result in lower prices in future provincial biddings.

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    International Expansion

    We plan to expand exports because of growing opportunities in the global market. Particularly, we believe market opportunities exist in Europe and other selected regulated markets for biosimilar products. We are searching for international partners to assist us for this expansion.

    In 2010, we completed construction of additional manufacturing facilities in Shenyang, PRC, which have been certified with the Chinese GMP. The new facilities are also designed to be compliant with the regulations of European Medicines Agency, or EMEA, and other major international regulatory guidelines. Similar to the US FDA, the EMEA is a European agency for the evaluation of medicinal products.

    In September 2011, the SFDA approved our voluntary upgrade of manufacturing specifications to align EPIAO product quality with European Pharmacopoeia standards. Thus, we believe we are the only Chinese manufacturer with an approved product quality that meets both Chinese Pharmacopoeia and European Pharmacopoeia standards.

    We are preparing for the process of seeking requisite international certification and regulatory approvals. We plan to first seek international recognition through the Pharmaceutical Inspection Convention and Pharmaceutical Inspection Co-operation Scheme (jointly referred to as PIC/S). PIC/S are two international instruments between countries and pharmaceutical inspection authorities, which provide together an active and constructive co-operation in the field of GMP. There are now 39 participating authorities of 33 countries, including the regulatory agencies of many European countries, Australia, Canada, and others. Approval by a participant country will facilitate the review process by other participants. After PIC/S recognition, we plan then to initiate EMEA application. The process and the timing of events, however, may be impacted by many factors that are not within our control.

    Substantial capital and management resources will be required in order to secure regional partnerships, seek regulatory certifications and approvals and promote our brand. We may be unable to successfully execute the expansion plan due to inability to obtain suitable partners to assist us, changing competitive dynamics of international markets or inability to obtain required certification and other approvals for selling our products in those regions.

    5.A.2 Significant Components of Revenue and Expenses

    Net revenues

    Net revenues consist of the invoiced value of goods sold, net of VAT, trade discounts and allowances, and, in very rare circumstances, discretionary sales returns. In the PRC, VAT on the invoice amount is collected on behalf of tax authorities in respect of the sales of goods. Revenue is stated net of VAT. VAT collected from customers is offset by VAT paid for purchases, with the net amount recorded as a liability in the consolidated balance sheets until it is paid to the authorities.

    We sell our products primarily to distributors, who resell them to healthcare providers, including hospitals and dialysis centers. With respect to our principal products, EPIAO and TPIAO, we rely on our own sales force to promote them to the hospitals and other customers. Because of PRC regulations governing the distribution of pharmaceuticals by manufacturers, we direct our customers to purchase our products from designated distributors. We generally sell our products to these distributors at a discount of approximately 8% off the wholesale prices to healthcare providers such as hospitals and dialysis centers. With respect to legacy products, Intefen and Inleusin, we primarily rely on distributors to market, as well as sell, our products with their own sales force. We reimburse the related costs of these distributors’ sales efforts in the form of a negotiated discount.

    We generally recognize revenue at the time our products are delivered and the customers take ownership and assume risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. We are a party to binding sales agreements with our distributors each time we make a sale of our products. Under these sales agreements, our distributors agree to pay a fixed amount of money per unit of our products over a period of time. Our distributors take ownership of our products when they accept our products.

    Allowance for doubtful accounts

    We maintain allowances for doubtful accounts for estimated losses resulting from the failure of our customers to make required payments. We review the accounts receivable on a periodic basis and make general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of our customers’ balances, we consider many factors, including the aging of the receivables, the customers’ past payment history and current credit-worthiness. We are subject to stringent requirements mandated by scrutiny of the local Chinese tax authorities on write-offs of bad debts. For example, bad debts must be aged over three years and sufficient evidence must be provided to prove customers’ inability to make payments. As a result, this creates a substantial time lag between the time when our bad debt provision is made and the removal of such doubtful debt from our books. We made an allowance for doubtful accounts of RMB2,208,000 (US$355,000) as of December 31, 2012. As of December 31, 2012, there were no material amounts of receivables outstanding for more than one year that was not fully reserved.

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    VAT

    Our revenues are recorded net of VAT. VAT is charged based on the selling price of our products at a general rate of 17%. In China, pharmaceutical companies are accustomed to having the market sales data referenced to revenue inclusive of the VAT, which is referred to as “gross revenue”. Gross revenue is mainly presented for non-financial purpose. For example, the data quoted by IMS Health throughout this annual report are quoted on gross revenue.

    Cost of revenue

    Our cost of revenue includes costs of raw materials, packaging, labor costs and manufacturing overhead. Our manufacturing overhead is primarily comprised of factory staff costs, allocated utilities and depreciation of our production facilities. We believe the relatively low cost of labor in the PRC provides us with a significant competitive advantage compared to international competitors that are not producing products in the PRC.

    Operating expenses

    Our operating expenses include research and development costs, or R&D costs, sales, marketing and distribution expenses and general and administrative expenses. The key components of our operating expenses are described below.

    Research and development costs. Our research and development costs are related to activities such as preclinical studies and clinical trials and consist primarily of:

    • Direct and allocated salaries and related expenses for research and development personnel;

    • Fees paid to consultants and clinical research organizations in conjunction with their monitoring our clinical trials and acquiring and evaluating data in conjunction with our clinical trials;

    • Direct cost of materials used in research and development;

    • Direct cost of equipment that lacks an alternative future use;

    • Fees paid to independent research organizations in conjunction with preclinical animal studies;

    • Allocated depreciation of research equipment and laboratory facilities;

    • Manufacturing costs of our clinical trial supply quantities for our product candidates;

    • Non-refundable upfront payments paid and/or milestone payments related to our in-licensing agreements;

    • Costs associated with other clinical development such as seminar hosting and process optimization; and

    • Costs for seeking regulatory approval so that we may enter international markets for our products.

    We expense both internal and external research and development costs as incurred, other than laboratory equipment with alternative future uses, which we capitalize.

    The following table shows the research and development costs that have been incurred for our two principal products, EPIAO and TPIAO, and others during each of the years indicated.

        Year ended December 31,  
        2010     2011     2012     2012  
        RMB     RMB     RMB     US$  
        (in thousands)  
    Research and development costs by product                        
       EPIAO   6,004     7,615     20,932     3,360  
       TPIAO   1,700     5,635     17,639     2,831  
       Others   31,705     28,555     32,657     5,242  
        39,409     41,805     71,228     11,433  

    The table above contains research and development costs attributable to the ongoing clinical trials for expanded indications of our marketed products, as well as preclinical and clinical trials for our product candidates.

    Sales, marketing and distribution expenses. Our sales, marketing and distribution expenses primarily consist of salaries, employee benefits, bonuses and related expenses, including share-based compensation for our sales and marketing staff. They also include the direct costs attributable to our sales and marketing activities, such as conferences and seminar hosting and attendance, travel, entertainment and advertising expenses. We expect our sales, marketing and distribution expenses to increase in absolute dollar amounts in the future as we continue to expand the portfolio of our products.

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    General and administrative expenses. Our general and administrative expenses primarily consist of salaries and employee benefits, including share-based compensation for our administrative staff, as well as depreciation charges of office premises and equipment. We expect our general and administrative expenses to increase in absolute monetary amounts in line with our continued growth.

    5.A.3 Critical Accounting Policies and Estimates

    The discussion and analysis of our operating results and financial position are primarily based on our audited financial statements, which have been prepared in accordance with U.S. GAAP. The reporting of our operating results and consolidated financial position are sensitive to accounting methods, assumptions and estimates that underlie the preparation of our financial statements. We base our assumptions and estimates on historical experience and on various other assumptions that we believe to be reasonable and which form the basis for making judgments about matters that are not readily apparent from other sources. Our management evaluates these estimates on an ongoing basis. Actual results may differ from these estimates as facts, circumstances and conditions change or as a result of different assumptions.

    The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies, and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered when reviewing our financial statements. Our principal accounting policies are set forth in detail in Note 2 to our consolidated financial statements included elsewhere in this annual report. We believe the following critical accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.

    Consolidation

    The consolidated financial statements include the financial statements of the Company and its subsidiaries, including the VIE of which the Company is the primary beneficiary. All significant intercompany balances and transactions between the Company, its subsidiaries and consolidated VIE have been eliminated upon consolidation.

    Revenue recognition

    Sales of pharmaceutical products represent the invoiced value of goods, net of VAT, sales returns, trade discounts and allowances. We recognize revenue when products are delivered and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. Shipping and handling costs that we pay on shipment and recover from our customers are included in revenue and sales, marketing and distribution expenses.

    In the PRC, VAT at a general rate of 17% on invoice amount is collected on behalf of tax authorities in respect of the sales of goods. Revenue is stated net of VAT. VAT collected from customers is offset with VAT paid by us for purchases, with the net amount recorded as a liability in the consolidated balance sheets until it is paid to the tax authorities.

    Determination of other-than-temporary impairment of investment securities

    A decline in the market value of any investment security, including those that are available-for-sale that is deemed to be other-than-temporary, results in an impairment to reduce the carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. To determine whether an impairment is other-than-temporary, we consider whether we have the ability and intent to hold the investment until a market price recovery and consider whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to year-end, forecasted performance of the investee, and the general market condition in the geographic area or industry the investee operates in. An other-than-temporary impairment charge of US$3,279,000 (RMB20,427,000) was recognized in 2012.

    Research and development costs

    We critically identify any research and development activities that could be objectively measured and recognized and are aimed at the discovery of new products, indications, or betterment of processes. We capitalize the costs of tangible and intangible assets used for research and development purpose and having alternative future uses. We amortize these assets over their useful lives. Research and development costs are expensed as incurred. Research and development costs consist primarily of the remuneration of research and development staff, depreciation, material, clinical trial costs as well as amortization of acquired technology and know-how used in research and development with alternative future uses. Research and development expenses also include costs associated with collaborative research and development and in-licensing arrangements, including upfront fees paid to collaboration partners in connection with technologies which have not reached technological feasibility and did not have an alternative future use. Reimbursement of research and development costs for arrangements with our collaboration partners is recognized when the obligations are incurred. Expenses relating to new products are charged to the statement of income until such time that we obtain the new medicine certificate. The costs of research and development services such as pre-clinical tests outsourced or contract consulting services for upgrading our facilities are also included in research and development costs. Upfront and milestone payments made to third parties in connection with particular research and development collaborations with no alternative future uses are expensed as incurred. The determination of alternative use requires judgment about the application of developed processes and know-how as well as market acceptance of related products. Different judgments regarding alternative uses could result in a change in the timing and amount of costs capitalized as materials and equipment.

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    Estimated useful lives and impairment of long-lived assets

    We make estimates of the useful lives of property, plant and equipment with finite useful lives, in order to determine the amount of depreciation expense to be recorded during any reporting period. Our total depreciation expense for the years ended December 31, 2010, 2011 and 2012 was RMB13.9 million, RMB20.0 million and RMB24.0 million (US$3.9 million), respectively. The useful lives are estimated at the time the assets are acquired and are based on historical experience with similar assets as well as anticipated technological or other changes. If technological changes were to occur more rapidly than anticipated or in a different form than anticipated, the useful lives assigned to these assets may need to be shortened, resulting in the recognition of increased depreciation expense in future periods. We make estimates of useful lives of the intangible assets based on the estimation of the period that the intangible assets can generate expected future cash flows for us. Amortization expense for the years ended December 31, 2010, 2011 and 2012 of RMB1.1 million, RMB2.8 million and RMB3.8 million (US$0.6 million) respectively, was included in cost of revenue. In process research and development (“IPR&D”) assets with an indefinite useful life are not amortized.

    Long-lived assets, including property, plant and equipment and intangible assets with finite useful lives, are reviewed for impairment whenever events or changes in circumstances indicate, in management’s judgment, that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Fair value is measured by the asset’s discounted cash flows or market value, if readily determinable.

    If intangible assets with indefinite use lives are subsequently determined to have finite useful lives, amortization will be provided prospectively over their estimated remaining useful lives and will be accounted for in the same manner as other intangible assets that are subject to amortization. Intangible assets with indefinite useful lives are tested for impairment annually or more frequently if events or changes in circumstances indicate that they might be impaired. There have been no impairment charges on the Company's intangible assets with indefinite useful lives.

    Allowance for doubtful accounts

    We evaluate the recoverability of our account receivables based on a combination of factors. We regularly analyze our significant customer accounts, and, when we become aware of a specific customer’s inability to meet its financial obligations to us, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position, we record a specific reserve for bad debt to reduce the related receivable to the amount we reasonably believe is collectible. We also record reserves for bad debt for all other customers based on a variety of factors, including the length of time the receivables are past due, the financial health of the customer and historical experience. If circumstances related to specific customers change, our estimates of the recoverability of receivables could be further adjusted. In the event that our account receivables become uncollectible, we record additional adjustments to receivables to reflect the amounts at net realizable value. The accounting effect of this entry would be a charge to income. We believe that the current charges to income are sufficient to reflect the recoverability of our accounts receivable.

    Inventories

    We state all inventories at the lower of cost or market value. Cost is determined using the weighted average cost method. Write-down on inventories is made when conditions indicate that the selling price could be less than cost due to physical deterioration, usage, obsolescence and reductions in estimated future demand. We balance the need to maintain strategic inventory levels with the risk of obsolescence due to varying customer demand levels and changing technology, although this rarely happens. Unfavorable changes in market conditions may result in additional inventory reserves that could adversely impact our gross margins. Conversely, favorable changes in demand could result in higher gross margins when we sell products.

    Share-based compensation

    We record share-based compensation costs based on the grant date fair value of the awards over the requisite service period, which is presumed to be the vesting period. For awards with graded vesting, we recognize compensation costs on a straight-line basis over the requisite service period. We estimate the fair value of each stock option grant using an option-pricing model, which requires us to make certain assumptions related to volatility, expected life, dividend yield and interest-free interest rate.

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    Deferred tax assets and valuation allowance

    We account for income taxes using the liability method and deferred tax assets and liabilities are recognized for temporary differences. In assessing the realization of deferred tax assets, we have considered whether it is more likely than not based on all sources of positive and negative evidence that some or all of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based on the level of projected future taxable income over the periods in which the deferred tax assets are deductible, we have provided a valuation allowance to reduce the amount of deferred tax assets when it is more likely than not that we will not be able to realize the benefits of certain deductible differences.

    Uncertain tax positions

    We evaluate our income tax positions and recognize in the financial statements the effects of tax positions when it is more likely than not these positions will be sustained upon examination. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. We accrue interest, and penalties if necessary, related to our balance of unrecognized tax benefits.

    5.A.4 Results of Operations

    The table below sets forth selected results of operations data expressed as a percentage of total revenues, for the years indicated. Our historical results of operations are not necessarily indicative of the results for any future period.

        Year ended December 31,  
        2010     2011     2012  
        %     %     %  
    Selected Statement of Income Data:                  
    Net revenue:                  
       EPIAO   59.9     58.7     55.7  
       TPIAO   30.7     30.4     31.4  
       Intefen   1.3     1.0     0.7  
       Inleusin   0.5     0.5     0.4  
       Iron Sucrose Supplement   4.1     4.6     5.1  
       Export   2.9     4.4     6.0  
       Others   0.6     0.4     0.7  
    Total net revenue   100     100     100  
    Cost of revenue   (10.0 )   (10.7 )   (10.5 )
    Gross margin   90.0     89.3     89.5  
    Operating expenses:                  
       Research and development   (9.4 )   (7.7 )   (10.6 )
       Sales, marketing and distribution   (46.6 )   (47.0 )   (47.5 )
       General and administrative   (13.3 )   (12.4 )   (12.3 )
       Grant income   0.3     0.3     0.1  
    Income from operations   21.0     22.5     19.2  
    Other income/(expense),net Interest income   3.0     3.4     3.8  
                       
       Impairment loss on available-for-sale securities   -     (0.2 )   (3.0 )
       Others   0.6     (0.5 )   (0.2 )
    Total other income, net   3.6     2.7     0.6  
       Income before income tax expense   24.6     25.2     19.8  
    Income tax expense   (5.2 )   (5.1 )   (4.5 )
    Net income   19.4     20.1     15.3  
    Net loss attributable to non-controlling interest   -     0.1     0.0  
    Net income attributable to 3SBio Inc.   19.4     20.2     15.3  

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    Year ended December 31, 2012 compared with year ended December 31, 2011

    Net revenue. Our net revenue increased by 23.7%, from RMB541.6 million in 2011 to RMB669.9 million (US$107.5 million) in 2012. This increase was primarily attributable to the continued strong sales of EPIAO and TPIAO, which grew 17.3% and 27.6%, respectively, over the same period in 2011. Revenue from our leading EPIAO products increased from RMB317.9 million in 2011 to RMB372.9 million (US$59.9 million) in 2012. TPIAO remained our second largest revenue contributor in 2012, accounting for 31.4% of total net revenues. The EPIAO and TPIAO growth was primarily due to the continued strong demand in the oncology and nephrology markets.

    Cost of revenue. Our cost of revenue was RMB58.1 million and RMB70.5 million (US$11.3 million) for the years ended December 31, 2011 and 2012, respectively. The increase of 21.4% was primarily due to the increase in sales volume. Cost of revenue as a percentage of net revenue remained relatively stable at around 10% for both 2011 and 2012 due to the enhanced capacity utilization and improved production efficiency of the new plant.

    Operating expenses. Our total operating expenses increased by 30.0% from RMB361.9 million in 2011 to RMB470.6 million (US$75.5 million) in 2012.

    • Research and development costs. R&D costs increased by 70.4% to RMB71.2 million (US$11.4 million) in 2012 from RMB41.8 million in 2011. The increase in R&D expenses was primarily attributable to NuPIAO, a second generation version of EPIAO and an anti-TNF compound that targets rheumatoid arthritis, psoriasis and other inflammatory disorders;

    • Sales, marketing and distribution (SMD) expenses. Our SMD expenses increased by 24.9% to RMB318.2 million (US$51.1 million) in 2012 from RMB254.8 million in 2011. The increase in SMD is broadly in line with overall sales growth. SMD expenses as a percentage of net revenue increased slightly from 47.0% in 2011 to 47.5% in 2012. The increase was primarily attributable to the intensified market competition and the uncertainties related to the tendering process;

    • General and administrative expenses. Our general and administrative expenses increased by 22.7% from RMB66.9 million in 2011 to RMB82.1 million (US$13.2 million) in 2012. The increase was primarily attributable to legal and consulting expenses.

    Other income, net. We had other income of RMB3.6 million (US$0.6 million) in 2012, compared to other income of RMB14.7 million in 2011. The decrease was mainly attributable to a writedown of RMB20.4 million (US$3.3 million) in available-for-sale securities, following a decline deemed to be other-than-temporary in the market value of 3SBio’s US$4.5 million investment in the common shares of Isotechnika (TSX:ISA).

    Income before income tax expense. As a result of the foregoing, our income before income tax expense decreased by 2.9% from RMB136.4 million in 2011 to RMB132.5 million (US$21.3 million) in 2012.

    Income tax expense. Our income tax expense increased by 5.9% from RMB28.2 million in 2011 to RMB29.9 million (US$4.8 million) in 2012. The increase in income tax expense was in line with the improved income before income tax expense.

    Net income attributable to 3SBio Inc. As a result of the foregoing, our net income decreased by 5.7% from RMB108.6 million in 2011 to RMB102.4 million (US$16.4 million) in 2012.

    Year ended December 31, 2011 compared with year ended December 31, 2010

    Net revenue. Our net revenue increased by 29.4%, from RMB418.6 million in 2010 to RMB541.6 million (US$86.1 million) in 2011. This increase was primarily attributable to the continued strong sales of EPIAO and TPIAO, which grew 26.7% and 28.1%, respectively, over the same period in 2010. Revenue from our leading EPIAO products increased from RMB250.9 million in 2010 to RMB317.9 million (US$50.5 million) in 2011.TPIAO remained our second largest revenue contributor in 2011, accounting for 30.4% of total net revenues. The EPIAO and TPIAO growth was primarily due to the continued strong demand in the oncology and nephrology markets.

    Cost of revenue. Our cost of revenue was RMB41.7 million and RMB58.1 million (US$9.2 million) for the years ended December 31, 2010 and 2011, respectively. The increase of 39.4% was primarily due to the increase in sales volume, and the RMB12.1 million in depreciation charges related to the new plant as compared to RMB6.8 million of depreciation charges in 2010. Cost of revenue as a percentage of net revenue remained relatively stable at around 10% for both 2010 and 2011 due to the enhanced capacity utilization and improved production efficiency of the new plant.

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    Operating expenses. Our total operating expenses increased by 25.3% from RMB288.9 million in 2010 to RMB361.9 million (US$57.5 million) in 2011.

    • Research and development costs. R&D costs increased by 6.1% to RMB41.8 million (US$6.6 million) in 2011 from RMB39.4 million in 2010, which was in line with the R&D progress of current pipeline products;

    • Sales, marketing and distribution (SMD) expenses. Our SMD expenses increased by 30.7% to RMB254.8 million (US$40.5 million) in 2011 from RMB194.9 million in 2010. The increase in SMD is broadly in line with overall sales growth. SMD expenses as a percentage of net revenue increased slightly from 46.6% in 2010 to 47.0% in 2011. The increase was primarily attributable to the expanded sales and marketing activities, including new product launch initiatives for TPIAO for ITP as well as the municipal construction tax and education surcharges levied as a result of the change in the China tax regulation effective from December 2010.

    • General and administrative expenses. Our general and administrative expenses increased by 19.8% from RMB55.9 million in 2010 to RMB66.9 million (US$10.6 million) in 2011. The increase was primarily attributable to employee compensation.

    Other income, net. We had other income of RMB14.7 million (US$2.3 million) in 2011, compared to other income of RMB15.0 million in 2010.

    Income before income tax expense. As a result of the foregoing, our income before income tax expense increased by 32.3% from RMB103.1 million in 2010 to RMB136.4 million (US$21.7 million) in 2011.

    Income tax expense. Our income tax expense increased by 29.6% from RMB21.8 million in 2010 to RMB28.2 million (US$4.5 million) in 2011. The increase in income tax expense was in line with the improved income before income tax expense.

    Net income attributable to 3SBio Inc. As a result of the foregoing, our net income increased by 33.6% from RMB81.3 million in 2010 to RMB108.6 million (US$17.2 million) in 2011.

    5.B Liquidity and Capital Resources

    Overview

    As of December 31, 2012, we had cash, cash equivalents, restricted cash and time deposits of RMB892.5 million (US$143.3 million) and working capital of RMB1,044.5 million (US$167.7 million). For the year ended December 31, 2012, our primary sources of funding for both our working capital and our long-term funding needs have been the net proceeds from our initial public offering in 2007 and cash flows from operating activities. Our primary uses of funds in 2012 have been for upgrading of existing facilities, procurement of new manufacturing equipment, construction of the manufacturing facility in Benxi city, prepayment for acquisition of manufacturing technology, trademark and exclusive distribution rights of Metadoxine. As of December 31, 2012, our cash and time deposits position denominated in RMB totaled RMB752.3 million (US$120.7 million) and our cash and time deposits position denominated in foreign currencies (mainly US$) totaled US$22.5 million. As of December 31, 2012, we had cash and cash equivalents of RMB450.6 million (US$72.3 million), restricted cash of RMB0.7 million (US$0.1 million) and time deposits of RMB441.3 million (US$70.8 million). As of December 31, 2012, we had RMB21.8 million (US$3.5 million) invested in equity securities and investment-grade bond securities.

    The following table summarizes the sources and uses of our cash flows for the years indicated:

        Year ended December 31,  
        2010     2011     2012     2012  
        RMB     RMB     RMB     US$  
        (in thousands)  
    Net cash provided by operating activities   58,133     137,111     185,966     29,848  
    Net cash provided/(used in) investing activities   (165,234 )   (52,322 )   19,699     3,163  
    Net cash provided by financing activities   6,763     15,963     486     78  

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    Net cash provided by operating activities

    Our net cash provided by operating activities was RMB186.0 million (US$29.8 million) in 2012 compared to RMB137.1 million in 2011. The increase of RMB48.9 million in cash provided by operating activities in 2012 from 2011 reflects increase in cash provided by net income of RMB25.4 million and increase in cash provided by net operating assets and liabilities of RMB23.5 million, including accounts and notes receivables, inventories, prepaid expenses and other receivables, accounts payable, grant income, income tax payables, accrued expenses and prepayment to related parties.

    Our net cash provided by operating activities was RMB137.1 million in 2011 compared to RMB58.1 million in 2010. The increase of RMB78.9 million in cash provided by operating activities in 2011 from 2010 reflects increase in cash provided by net income of RMB34.1 million and in cash provided by net operating assets and liabilities of RMB44.8 million, including accounts and notes receivables, inventories, prepaid expenses and other receivables, income tax payables, accrued expenses and prepayment to related parties.

    Net cash provided/used in investing activities

    Our net cash provided in investing activities was RMB20.0 million (US$3.2 million) in 2012, compared to net cash used in investing activities of RMB52.3 million in 2011. The cash outlay in investing activities in 2012 consisted primarily of RMB26.7million for renovation of existing facilities and procurement of new manufacturing equipment; RMB6 million for prepayment for acquisition of the manufacturing technology, trademark and exclusive distribution rights of Metadoxine; RMB19.4 million for the construction of the manufacturing facility in Benxi and RMB4.9 million for investment in JV ManageCo. The cash provided in investing activities consisted primarily of RMB77.9 million net proceeds from purchase and maturity of time deposits.

    Our net cash used in investing activities was RMB52.3 million in 2011, compared to net cash used in investing activities of RMB165.2 million in 2010. The cash outlay in investing activities in 2011 consisted primarily of RMB31.5 million for renovation of existing facilities and procurement of new manufacturing equipment; RMB8.1 million for acquiring a patent; RMB9.8 million for acquiring a land use right; RMB20.8 million for net purchasing of time deposits with financial institutions; and RMB7.5 million for investment in our dialysis business; partially offset by RMB24.4 million for repayment of a loan receivable and RMB1.0 million from the release of restricted cash.

    Net cash provided by financing activities

    Net cash provided by financing activities in 2012 was RMB0.5 million (US$0.1 million), compared to net cash provided by financing activities of RMB16.0 million in 2011. Net cash provided by financing activities in 2012 consisted of the gross proceeds of RMB0.5 million from issuance of shares upon grantee exercise of share options under our share-based compensation arrangements.

    Net cash provided by financing activities in 2011 was RMB16.0 million, compared to net cash provided by financing activities of RMB6.8 million in 2010. The increase was attributable to the RMB11.3 million investment into 3SBio Ventures by CMC, and the gross proceeds of RMB4.7 million in 2011 from issuance of shares upon grantee exercise of share options under our share-based compensation arrangements.

    We believe that our current cash and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs, including planned capital expenditures for upgrading existing facilities and building new manufacturing facilities in Benxi, other working capital needs for investing in research and development and increasing sales and marketing efforts, at least for the next two years.

    Our indebtedness as of December 31, 2011 and 2012 was nil.

    We do not expect to pay dividends in the near future as we plan to use our resources for our growth. However, should we decide to pay dividends, our wholly-owned subsidiary’s ability to pay dividends to us is subject to various restrictions, including legal restriction in the PRC, which permits payment of dividends only out of net income determined in accordance with PRC accounting standards and regulations. In addition, under PRC law, our China-based subsidiaries and consolidated VIE is required to set aside 10% of its net income as reserve funds, until such reserves have reached at least 50% of its respective registered capital. These reserves are not distributable as cash dividends to us for use by us to satisfy our obligations, such as debt incurred at the holding company level. Such dividends may be subject to EIT, as discussed under Paragraph 4.B.11-d “PRC Enterprise Income Tax”. Furthermore, PRC law also imposes restrictions on our China-based consolidated entities with respect to transferring certain of their net assets to us in the form of loans and advances. Amounts so restricted as described in all of the foregoing include paid-up capital and statutory reserves funds of our PRC-based subsidiaries, and the net assets of the consolidated VIE, in which we have no legal ownership, totaling RMB258,057,000 (US$41,421,000) as of December 31, 2012. These restrictions have not had, and we do not currently expect these restrictions to, in foreseeable future, have any material impact on our ability to meet our cash obligations.

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    Capital Expenditures

    Historically, most of our capital expenditures were incurred for the construction of our new manufacturing facility, purchases of production and office equipment, upgrade of our research laboratory, and upgrades for our plant and office renovation.

    In the year ended December 31, 2012, our capital expenditures of RMB59.4 million (US$9.5 million) related primarily to renovation of existing facilities, prepayment for acquisition of manufacturing technology, trademark and exclusive distribution rights of Metadoxine and construction of manufacturing facilities in Benxi.

    In the year ended December 31, 2011, our capital expenditures of RMB56.9 million related primarily to renovation of existing facilities, procurement of new manufacturing equipment, procurement of land use right, acquisition of a patent and investment in dialysis business.

    In the year ended December 31, 2010, our capital expenditures of RMB85.2 million related primarily to renovation of existing facilities, procurement of new manufacturing equipment, and acquisition of Pegsiticase related tangible and intangible assets.

    Our future capital requirements may include, but are not limited to: upgrading our existing facilities for our development and production, potential investments in our dialysis business and other projects, and building new facilities. We are not obligated to meet any absolute minimum dollar spending requirements, and our future capital requirements will depend on many factors. The major components of our capital expenditures for 2013 may include the upgrading of existing manufacturing facilities, procurement of new manufacturing equipment and construction of new facilities.

    We expect to fund our capital expenditure needs with a combination of cash generated from operating activities and our existing cash, cash equivalents and time deposits. We do not anticipate that we will require debt financing to fund our capital expenditures in the near term, although this may change in future periods.

    5.A-B.1 Recently Issued Accounting Pronouncements

    ASU 2012-02

    In July 2012, the Financial Accounting Standards Board (FASB) issued ASU 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”). ASU 2012-02 allows entities to use a qualitative approach to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount and recognize an impairment loss, if any, to the extent the carrying value exceeds its fair value. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. We do not expect that the adoption of ASU2012-02 will have a material impact on our consolidated financial statements.

    ASU 2013-02

    In February 2013, the FASB issued ASU 2013-02, Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”). ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in financial statements. However, it requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. ASU 2013-02 is effective prospectively for reporting periods beginning after December 15, 2012 for public entities. Early adoption is permitted. We do not expect that the adoption of ASU 2013-02 will have a material impact on our consolidated financial statements.

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    5.A-B.2 Inflation

    According to the National Bureau of Statistics of China, the change of consumer price index in China was 3.3%, 5.4%, and 2.6% in 2010, 2011 and 2012, respectively. We can be affected by high rates of inflation in China. For example, certain operating costs and expenses, such as employee compensation and office operating expenses may increase as a result of higher inflation. Additionally, because a substantial portion of our assets consists of cash and cash equivalents and short-term investments, high inflation could significantly reduce the value and purchasing power of these assets. We are not able to hedge our exposure to higher inflation in China.

    5.C Research and Development

    See “4.B.6 Research and Development”

    5.D Trend Information

    Other than as disclosed elsewhere in this annual report on Form 20-F, as of the date of this annual report, we are not aware of any significant recent trends in production, sales and inventory, the state of the order book and costs and selling prices since fiscal year 2012.

    For fiscal year 2013, other than as disclosed elsewhere in this annual report on Form 20-F, as of the date of this report, we are not aware of any known trends, uncertainties, demands, commitments, or events that are reasonably likely to have a material effect on our net revenue, income from continuing operations, profitability, liquidity or capital resources, or that would cause reported financial information not necessarily to be indicative of future operating results or financial condition.

    5.E Off-Balance Sheet Arrangements

    We do not have any outstanding derivative financial instruments, interest rate swap transactions, foreign currency forward contracts, or other off-balance sheet arrangements.

    5.F Tabular Disclosure of Contractual Obligations

    The following table sets forth our contractual obligations and commercial commitments as of December 31, 2012.

        Payment due by period  
    Total less than
    1 year
    1-3 years 3-5 years after
    5 years
        (RMB in thousands)  
    Operating lease obligations   756     712     44          
    Capital commitments   38,537     38,537              
    Total obligations and commitments   39,293     39,249     44          

    Milestone, Royalty and Other Payments (not included in the table above)

    Under our licensing, development and commercialization agreement with Isotechnika, we made an upfront non-refundable licensing payment of US$1,500,000 and may be required to pay milestone payments when certain criteria are met, as well as ongoing royalties based on sales of voclosporin.

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    Under our development and commercialization agreement with AMAG for ferumoxytol, AMAG received an upfront payment of US$1 million from us and is eligible to receive additional milestone payments upon regulatory approval of ferumoxytol in China for CKD and other specified indications developed in China. AMAG is also entitled to receive tiered, double-digit (up to 25%) royalties based on sales of ferumoxytol by us.

    Under the terms of the agreements between us and APGC and Ascentage SH, we paid a total consideration of approximately US$3 million to acquire 40% equity interests in both APGC and Ascentage SH, and to fund APGC research and development programs, and acquired the exclusive right to develop and commercialize in mainland China the cancer therapeutics that are developed through APGC research and development programs. We may also make future milestone payments when certain criteria are met, and may make royalty payments from our future product sales in China.

    Under our collaboration agreement with Epitomics Inc., we will be required to pay a royalty payment equivalent to a certain percentage of the net sales of therapeutic products developed through the collaboration, should such products reach market. The details of a development program to commercialize the therapeutic products and the mechanism for calculating the royalties will be determined between Epitomics and us at a later date.

    Cautionary Statement:

    Not to affect the general applicability of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 to this or other parts of this annual report, as more fully discussed in “Cautionary Statement concerning Forward-looking Statements” at the beginning of this annual report, the information contained in above table and descriptions regarding future milestone, royalty and other payments constitutes, as provided under Form 20-F Item 5.G, “forward-looking statements” within the meaning of those laws, and are subject to various risks and uncertainties, such as changes in the circumstances surrounding the subject contracts or commitments.

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    ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

    6.A Executive Officers and Directors

    The following table sets forth our executive officers and directors, their ages as of December 31, 2012 and the positions held by them. The business address for each of our executive officers and directors is Shenyang Sunshine Pharmaceutical Co. Ltd., No. 3 A1, Road 10, Economic & Technology Development Zone, Shenyang 110027, the People’s Republic of China.

    Name   Age                                                                              Position
    Dr. Jing Lou(2)   50   Chairman of the board of directors and Chief Executive Officer, Director
    Peiguo Cong   58   Independent Director
    Bin Huang   52   Vice President of Human Resources and Director
    Bo Tan   40   Chief Financial Officer (principal financial and accounting officer)
    Tianruo Pu(1)(3)   45   Independent Director
    Mingde Yu(1) (2)(3)   67   Independent Director
    Moujia Qi(1) (2)(3)   80   Independent Director
    Dr. Dongmei Su   43   Director, Vice President, R&D, and Chief Technology Officer
    Ke Li   45   Vice President and Corporate Secretary
    ___________________________________________
    (1)

    Member of the audit committee

    (2)

    Member of the nominating committee

    (3)

    Member of the compensation committee

    Dr. Jing Lou is our co-founder, Chairman of the board of directors (since 2012, with his directorship from 2006) and Chief Executive Officer (since 2006). He has served as the chief executive officer of Shenyang Sunshine since 2000. He joined Shenyang Sunshine as director of research and development in 1995, leading the manufacturing process development for EPIAO and TPIAO in the United States. Dr. Lou completed his post-doctoral study at the United States National Institute of Health in 1995. He received his Ph.D. in molecular and cell Biology in 1993 from Fordham University, where he researched interferon gene regulation, and received his medical doctor degree in 1985 from Shanghai Second Military Medical University. Dr. Lou also received an EMBA degree in 2007 from China Europe International Business School, a business school ranked in the Financial Times’ world top-25 business school list.

    Bin Huang is our vice president of human resources and a director (since 2006). Mr. Huang has served as vice president in charge of human resources and legal matters since joining Shenyang Sunshine in 1993. Before that, he acted as office manager for the Shenyang Army Medical Research Center from 1976 to 1993. He received his master’s degree in Business Administration from Qinghua University in 2002 and a bachelor’s degree in engineering from Northeast University in 1987.

    Peiguo Cong has served as a member of our board of directors since March 2010. He has been the managing partner of Beijing Jun You Law Firm since 1994. Mr. Cong also currently serves as a member on the Finance and Securities Committee of the China National Lawyers Association, a member of the All China Federation of Industry and Commerce, a director of the Chinese Society of Mergers and Acquisitions, and an independent committee member of the Credit Committee of the National Development Bank. He teaches as a part-time professor at Peking University. In addition, Mr. Cong served as an independent director of China Southern Fund Management Company (2009-2013) and Tianjin Lishen Battery Joint-Stock Co., Ltd and Haining China Leather city stock Co., Ltd (2009-2011). Mr. Cong obtained his bachelor's degree in law and master's degree in economics law from Peking University in 1982 and 1984, respectively. He was an associate professor at Peking University, a visiting professor at UCLA, and a visiting scholar at University of Michigan and other U.S. universities.

    Bo Tan has served as our CFO since February 2009. Since June 2012, he serves as an independent director and the chairman of the audit, compensation and nominating committees with Tianyin Pharmaceutical Co., Inc. (NYSE MKT: TPI). He has extensive experience within the financial and pharmaceutical industries, having worked across private equity, equity research and commercial practice. Previously, he served as the Executive Director and a member of Investment Committee for Bohai Industrial Fund Management Company, a private equity fund in China. Earlier in his career, he spent six years in the pharmaceutical industry with Eli Lilly & Company and EMD Pharmaceuticals, Inc. in North America and went on to serve as a China healthcare and consumer analyst at Lehman Brothers Asia and Macquarie Securities in Hong Kong. He received his MBA degree from Thunderbird School of International Management, an MA degree in economics from the University of Connecticut and a BA degree in economics from Renmin University of China. Mr. Tan is also a Chartered Financial Analyst.

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    Tianruo Pu has served as a director of our Company since September 2012. In addition, Mr. Pu currently serves as chief financial officer and a director of UTStarcom Holdings Corp (NASDAQ: UTSI). From September 2008 to June 2012, Mr. Pu was the chief financial officer of China Nuokang Bio-Pharmaceutical Inc. (NASDAQ: NKBP) ("Nuokang"). Prior to joining Nuokang, Mr. Pu was the chief financial officer of Global Data Solutions, a Chinese information technology services outsourcing company, which he joined in June 2006. From September 2000 to May 2006, he worked as a management consultant with Accenture, CSC Consulting Group and Mitchell Madison Consulting Group. Mr. Pu received an MBA degree from Northwestern University Kellogg School of Management in 2000, a Master of Science degree in accounting from the University of Illinois in 1995, and a Bachelor of Arts degree in English from China Foreign Affairs College in 1992.

    Mingde Yu has served as a director since February 2008. He has extensive experience in manufacturing and distribution management in the pharmaceutical industry in China. He has held a number of senior positions both in the government and the private sectors, including as the Chief Technology Officer and the Head of Manufacturing at both Liaoning Fuxi Pharmaceutical Co. and Fuxi Traditional Chinese Medicine Co. (from 1978 to 1983), Bureau Chief of the Fuxi City Food & Drug Administration from 1983 to 1991, Bureau Chief of the Liaoning Provincial Food & Drug Administration from 1991 to 1997, Drug Department Chief of the Economic Operations Bureau of the State Economic and Trade Committee from 1997 to 1998 and Vice-Director of Economic Operations Department of NDRC from 1998 to 2003. Mr. Yu is currently the honorary Chairman and Director of the Beijing Pharmaceutical Group and is the Chair for the China Pharmaceutical Enterprises Administrative Association since 2004 and China Medical Entrepreneur Association. Mr. Yu also holds senior consultancy roles with the China Chemical Drug Association and the National Pharmaceutical Industry & Commerce Association. In addition, Mr. Yu serves or served on the board of directors for the following companies: China Nuokang Bio-Pharmaceutical Inc. (2008-2013); North China Pharmaceuticals (2009-2012); Wohua Biologicals Co. (2009-2013); Qingtao Huaren Pharmaceuticals (2009-2011), the last three listed on Chinese stock exchanges, Huahai Pharmaceuticals, and Sichuan Kelun Pharmaceuticals. Mr. Yu graduated from the Macromolecule Materials and Engineering Department, Chemical Technology School at Dalian University of Technology.

    Moujia Qi has served as a director of ours since August 2006. He currently serves as an independent member on the board of directors of China Pharmaceutical Group Limited (Hong Kong Stock Exchange: 1093), and as an independent member on the supervisory board of Wuhan Humanwell Hi-Tech Industry Co., LTD (Shanghai Stock Exchange: 600079). He has also served as the Chairman of the China Starch Industry Association for the past five years. He was the deputy director and chief engineer of Huabei Pharmaceutical Factory and has held several management positions in various state-owned companies in the pharmaceutical industry. He has also served as the deputy director and chief director of the State Medicine Administration of the PRC before he retired in 1994.

    Dr. Dongmei Su is our vice president and chief technology officer responsible for research and development and manufacturing process engineering, and has served as a director since April 2012. She is the named co-inventor for four of our patents. Ms. Su joined Shenyang Sunshine in 1993. She served as director of research and development and manufacturing since 1997. She received her bachelor’s degree in biochemical engineering from Jilin University in 1992, and her master’s and doctor’s degree in microbiology and pharmacology from Shenyang Pharmaceutical University in 2001 and 2010, respectively.

    Ke Li, our vice president and corporate secretary, is responsible for all corporate and government regulatory matters. Mr. Li has served as the corporate secretary of Shenyang Sunshine since 1996. He joined us in 1993 and held various administrative positions at Shenyang Sunshine before he was appointed corporate secretary. Mr. Li received his master’s degree in Business Administration from Liaoning University in 2001 and his bachelor’s degree in engineering from Jilin University in 1988.

    6.B Compensation

    Our executive officers receive compensation in the form of annual salaries and bonuses. The compensation committee of our board of directors determines management compensation.

    While we do not have a specific bonus plan setting the calculation of our annual bonuses, each executive officer is entitled to receive an annual discretionary bonus based upon his or her performance. Our non-executive directors receive annual cash compensation and share-based awards for their board services.

    In 2012, the aggregate cash compensation we paid to our directors and executive officers was approximately RMB11.9 million (US$1.9 million); and we also granted restricted stock to our directors and executive officers, as set forth in “6.E -- Equity Grant to Directors and Senior Officers”.

    Other than described in the foregoing, our executive officers may participate in compensatory or benefits plans or arrangements that is available by its terms to employees, officers or directors generally, the operation of which uses the same method to allocate benefits to management and non-management participants.

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    6.C Board Practices

    Our board of directors currently consists of seven members, among whom, as determined by our board of directors, Mr. Tianruo Pu, Mr. Mingde Yu, Mr. Moujia Qi, and Mr. Peiguo Cong are independent directors within the meaning of Rule 5605(a)(2) of the NASDAQ Marketplace Rules as amended from time to time.

    6.C.1 Audit Committee

    Our audit committee of the board of directors, currently consisting of Mr. Tianruo Pu (Chair), Mr. Mingde Yu, and Mr. Moujia Qi, was established in October 2006. Since there are no specific requirements under Cayman Islands law on the composition of our audit committee, our practice was established by our board of directors by reference to similarly situated issuers. Our practice is in line with Rule 5605(c) of the NASDAQ Marketplace Rules that requires the audit committees of United States companies to have a minimum of three independent directors. All members of our audit committee satisfy the “independence” requirements of each of the NASDAQ Marketplace Rules and Section 10A(m)(3)(B)(i) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. In addition, our board of directors has determined that Mr. Tianruo Pu qualifies as an audit committee financial expert as defined in Item 16A of Form 20-F. The audit committee is responsible for overseeing the accounting and financial reporting processes of our company and audits of our financial statements, including the appointment, compensation and oversight of the work of our independent auditors.

    6.C.2 Compensation Committee

    Our compensation committee of the board of directors, currently consisting of Mr. Mingde Yu (Chair), Mr. Tianruo Pu and Mr. Moujia Qi, was established in January 2009. All members of our compensation committee satisfy the “independence” requirements of the NASDAQ Marketplace Rules. The compensation committee is responsible for assisting the board of directors to oversee our compensation and benefits programs and determining the compensation of all company personnel.

    6.C.3 Nominating Committee

    Our nominating committee of the board of directors, currently consisting of Mr. Jing Lou (Chair), Mr. Mingde Yu, and Mr. Moujia Qi, was established in February 2010. Mr. Yu and Mr. Qi satisfy the “independence” requirements of the NASDAQ Marketplace Rules. The nominating committee is responsible for assisting the board of directors in selecting nominees for election to the board of directors and monitoring the composition of the Board and other governance matters.

    6.C.4 Investment Committee

    Our investment committee is appointed by the board of directors to assist the board in fulfilling its responsibility to oversee our investment policy. The investment committee currently consists of the four independent directors, our chief executive officer and chief financial officer. In carrying out its responsibilities, the investment committee evaluates our investment policy periodically, approves any exceptions to the existing investment policy, and, recommends appropriate material policy changes to our board of directors.

    6.C.5 Terms of Directors and Executive Officers

    Our articles of association provide for a staggered board of directors. At each annual general meeting of our shareholders, one third of our directors (or, if their number is not a multiple of three, the number nearest to but not greater than one-third) are required to stand for reelection. The Chairman shall not be required to stand for reelection at any annual meeting, and will serve for an indefinite term. In addition, the Chairman will not be taken into account in determining the number of directors who must stand for reelection in each year.

    The particular directors that must stand for reelection at each annual general meeting are determined according to a rotation. Should a director choose not to offer himself or herself for reelection at an annual meeting, the number of directors who must stand for reelection at that meeting is reduced accordingly. Directors who have been longest in office since their last re-election or appointment shall stand for reelection at the annual meeting, provided that, in the case of directors who were last elected on the same day, which director must stand for reelection shall (unless they otherwise agree among themselves) be determined by lot.

    Any director appointed to fill a vacancy shall serve only until the next annual meeting, and shall not be taken into account in determining which particular directors or the number of directors who will stand for reelection at such annual meeting.

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    Our executive officers are appointed by and serve at the discretion of our board of directors.

    6.C.6 Employment and Management Agreements

    We have entered into employment agreements with all of our executive officers. Under these agreements, each of our executive officers is employed for a specified time period. We may terminate his or her employment for cause at any time, without notice or remuneration, for certain acts of the employee, including but not limited to a conviction or plea of guilty to a felony or to an act of fraud, misappropriation or embezzlement, negligence or dishonest act to the detriment of the company, or misconduct of the employee and failure to perform his or her agreed-to duties after a reasonable opportunity to cure the failure. Furthermore, we may terminate the employment without cause at any time, in which case we will pay the employee severance amount equal to one month of his or her salary for each year of his or her service for our company. An executive officer may terminate the employment at any time upon one-month advance written notice.

    Each executive officer has agreed to hold, both during and subsequent to the term of the employment agreement, our confidential information in strict confidence and not to disclose such information to anyone except our other employees who have a need to know such information in connection with our business. The executive officers have also agreed to assign to us all rights, titles and interests to or in any inventions that they may conceive or develop during the period of employment, including any copyrights, patents, mark work rights, trade secrets or other intellectual property rights pertaining to such inventions. Specifically, each executive officer has agreed not to, while employed by us and for a period of three years following the termination or expiration of the employment agreement, (i) approach our clients, customers or contacts or other persons or entities introduced to the executive officer for the purposes of doing business with such persons or entities, and will not interfere with the business relationship between us and such persons and/or entities; (ii) assume employment with or provide services as a director or otherwise for any of our competitors, or engage, whether as principal, partner, licensor or otherwise, in any business which is in direct or indirect competition with our business; or (iii) seek directly or indirectly, to solicit the services of any of our employees employed by us at or after the date of the executive officer’s termination, or in the year preceding such termination.

    Such employment agreement is the only agreement between us and our employee directors with respect to their services to us.

    Each of our independent directors has received an appointment letter from us, which contains customary terms and conditions, including, service compensation, confidentiality obligations, directorship termination, and indemnification. The appointment letters do not provide for any benefit upon termination of appointment.

    In connection with the retirement of our directors and officers, we may enter into retirement agreements with any of them, with benefits in due recognition of the retiree’s contributions to the Company, our compensation practice, the pre-retirement level of compensation, and any post-retirement obligations and services to us.

    6.D Employees

    See “4.B.10 Employees.”

    6.E Share Ownership

    Directors and Senior Officers Share Ownership

    Please refer to the applicable part under Item 7.A “Major Shareholders”.

    Employee Participation in the Company Capital: 2006 Stock Plan

    The following is a summary description of our 2006 stock plan, as amended, which is subject to and qualified in its entirety by reference to the full text thereof as contained in Exhibits 4.1 and 4.2 to this annual report.

    We adopted our 2006 stock plan in September 2006, as amended in April 2010, and it provides for the grant of stock, stock options, restricted stock and restricted stock units, each of which we refer to as “awards.” The purpose of the plan is to provide additional incentive to those officers, employees, directors, consultants and other service providers whose contributions are essential to the growth and success of our business, in order to strengthen the commitment of such persons to us and motivate such persons to faithfully and diligently perform their responsibilities and attract and retain competent and dedicated persons whose efforts will result in our long-term growth and profitability.

    68


    Not more than 10,000,000 ordinary shares plus a number of ordinary shares equal to 10% of any additional ordinary shares of the Company issued following the date of the adoption of the 2006 stock plan by the board of directors may be issued under this plan. The 2006 stock plan provides for the grant to our employees, directors, and consultants or any other participants that the board of directors shall decide in good faith. The board of directors has complete discretion to select the grantees and to establish the terms and conditions of the grants, subject to the provisions of the 2006 stock plan.

    Plan Administration. Our 2006 stock plan is administered by the board of directors or the compensation committee of the board of directors. With respect to the grant of the awards to employees or consultants who are neither directors nor officers, the board of directors may authorize one or more officers to grant such awards.

    Award Agreement. Awards to be granted under our 2006 stock plan are evidenced by an award agreement that sets forth the terms and conditions for each award grant, which may include, among other things, the vesting schedule, exercise price, type of option and expiration date of each award grant.

    Eligibility. We may grant awards to an officer, director, employee, consultant, advisor or a service provider of our company or any of our parent or subsidiaries, provided that directors of our company or any of our parent or subsidiary who are not also employees of our company or any of our parent or subsidiaries, and consultants or advisors to our company or any of our parent or subsidiaries may not be granted incentive stock options.

    Option Term. The term of each option to be granted under the 2006 stock plan may not exceed five years from the date of grant.

    Exercise Price. In the case of non-qualified stock options, the per share exercise price of shares purchasable under an option shall be determined by the plan administrator in the administrator’s sole discretion at the time of grant. In the case of incentive stock options, the per share exercise price of shares purchasable under an option shall not be less than 100% of the fair market value per share at the time of grant. However, if we grant an incentive stock option to an employee, who at the time of that grant owns shares representing more than 10% of the voting power of all classes of our share capital, the exercise price cannot be less than 110% of the fair market value of our ordinary shares on the date of that grant.

    Amendment and Termination. Subject to certain exceptions, our board of directors may amend, suspend or terminate the 2006 stock plan at any time and for any reason. No such termination or amendment shall affect any shares previously issued or any option previously granted. Subject to extension by amendment, the 2006 stock plan will terminate automatically 10 years after the later of (i) its adoption by the board of directors or (ii) the most recent increase in the number of shares reserved that was approved by our shareholders.

    Employee Participation in the Company Capital: 2010 Equity Incentive Plan

    The following is a summary description of our 2010 equity incentive plan, which is subject to and qualified in its entirety by reference to the full text thereof as contained in Exhibit 4.3 to this annual report.

    We adopted our 2010 equity incentive plan in March 2010, and it provides for the grant of share options, stock appreciation rights, dividend equivalent rights, shares, restricted shares, and restricted share units, each of which we refer to as “awards”. The purpose of the plan is to attract and retain the best available personnel, to provide additional incentives to employees, directors and consultants and to promote the success of the company’s business. Subject to annual adjustments equal to 15% of new issuances of shares, the maximum aggregate number of shares that may be issued pursuant to awards is 22,500,000 ordinary shares. The 2010 equity incentive plan provides for the grant of awards to our employees, directors, and consultants.

    Plan Administration. The 2010 equity incentive plan is administered by the board of directors or the compensation committee of the board of directors. With respect to the grant of awards to employees or consultants who are neither directors nor officers, the board of directors may authorize one or more officers to grant such awards.

    Award Agreement. Awards granted under our 2010 equity incentive plan are evidenced by an award agreement that sets forth the terms and conditions for each award grant, which may include, among other things, types of awards; vesting schedule; exercisability; exercise price; repurchase; right of first refusal; forfeiture; transferability of awards; form of payment; payment contingencies; satisfaction of any performance criteria upon termination of employment; and term of award.

    Eligibility. We may grant awards to employees, directors, and consultants of us, any parent corporation or subsidiary corporation of ours, or any variable interest entities of them, except that special rules apply to the grant of incentive stock options.

    69


    Exercise or Purchase Price. The exercise or purchase price of an award is generally established in reference to the fair market value per share on the date of grant.

    Amendment and Termination. Our board of directors may at any time terminate, suspend, or amend the 2010 equity incentive plan in any respect, provided that no termination, suspension or amendment may adversely affect any award previously granted. The 2010 equity incentive plan shall continue in effect for a term of ten (10) years unless sooner terminated.

    Equity Grants to Directors and Senior Officers

    The following table summarizes, as of April 12, 2013, the latest practicable date, outstanding options, restricted stock and restricted share units (or RSUs) that we granted to several of our directors and executive officers under our stock plans:

     

    70


                             
        Number of ADSs                    
        to be issued upon                    
        exercise of options (or     Per ordinary              
        upon settlement or     share              
        vesting of restricted     exercise              
        shares and RSUs)     price (US$)     Grant date     Date of Expiration  
        33,350     0.779     March 20, 2009     April 1, 2014  
    Dr. Jing Lou   75,000**     n/a     November 9, 2009     n/a  
        252,500***     n/a     April 8, 2010     n/a  
        230,000***     n/a     March 11, 2011     n/a  
        235,042***     n/a     December 21, 2011     n/a  
        130,000****     n/a     May 10, 2012     n/a  
        12,000     0.779     March 20, 2009     April 1, 2014  
    Bin Huang   2,500**     n/a     November 9, 2009     n/a  
        10,000***     n/a     April 8, 2010     n/a  
        10,000***     n/a     March 11, 2011     n/a  
        10,000***     n/a     December 21, 2011     n/a  
    Bo Tan   15,364     0.779     March 20, 2009     April 1, 2014  
        50,000**     n/a     November 9, 2009     n/a  
        22,500***     n/a     April 8, 2010     n/a  
        20,000***     n/a     March 11, 2011     n/a  
        24,000***     n/a     December 21, 2011     n/a  
        130,000****     n/a     May 10, 2012     n/a  
    Tianruo Pu   *     n/a           n/a  
    Mingde Yu   *     n/a     January 8, 2009     n/a  
        *     n/a     April 8, 2010     n/a  
        *     n/a     June 9, 2010     n/a  
    Moujia Qi   *     n/a     January 8, 2009     n/a  
        *     n/a     April 8, 2010     n/a  
        *     n/a     June 9, 2010     n/a  
    Dongmei Su   *     n/a     November 9, 2009     n/a  
        *     n/a     April 8, 2010     n/a  
        *     n/a     March 11, 2011     n/a  
    Ke Li   *     n/a     November 9, 2009     n/a  
        *     n/a     April 8, 2010     n/a  
        *     n/a     March 11, 2011     n/a  

    ____________________________________________________________

    *

    Upon exercise, vesting or settlement of all equity grants exercisable or vesting within 60 days of April 12, 2013, such person would beneficially own less than 1% of our outstanding ordinary shares.

    **

    RSU grant: RSUs granted in 2009 have a four-year graded vesting period. The RSUs cannot be settled in cash and one RSU will be settled with one ADS upon vesting. There is no other transferability restriction to the RSUs except for the graded vesting schedule.

    ***

    Restricted stock grant: All restricted stock granted in 2010 and 2011 vest at the end of a four-year vesting period.  

    **** Restricted stock grant: All restricted stock granted in 2012 vest at the end of a seven-year vesting period.

    71



    ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

    A. Major Shareholders

    The following table sets forth information with respect to the beneficial ownership of our ordinary shares, as of April 12, 2013, by:

    • each of our directors and executive officers;
    • our directors and executive officers as a group; and
    • each person known to us to beneficially own more than 5% or more of the total outstanding ordinary shares.
    Directors and Executive Officers:   Number of ordinary shares beneficially owned     Percentage of total ordinary shares outstanding(1)(2)
    Dr. Jing Lou   12,332,383(3)     7.5%  
    Tianruo (Robert) Pu   *     *  
    Mingde Yu   *     *  
    Moujia Qi   *     *  
    Bo Tan   2,068,248(4)     1.3%  
    Bin Huang   1,650,745(5)     1.0%  
    Dr. Dongmei Su   1,302,221(6)     0.8%  
    Ke Li   811,219(7)     0.5%  
    Peiguo Cong   *     *  
                 
    All directors and executive officers as a group 30,374,412 18.4%
                 
    Principal Shareholders:            
                 
    FMR LLC   17,614,919(8)     10.7%  
    Lan’s Holdings Limited   8,232,219(9)     5.0%  
    Samuel D. Isaly   14,695,100(10)     8.9%  
    Dan Lou   10,121,101(11)     6.1%  

    Notes:
    *The person beneficially owns less than 0.1% of our total outstanding ordinary shares.

    (1) Beneficial ownership is determined in accordance with Rule 13d-3 of the General Rules and Regulations under the Exchange Act, and includes voting or investment power with respect to the ordinary shares.
    (2) There were 165,064,975 ordinary shares issued and outstanding as of April 12, 2013. In calculating the percentage of beneficial ownership for each listed person, (i) the options awarded by the Company (“Company Options”) and exercisable by such person, and (ii) the RSUs awarded to such person that are vested, or will vest, in each case of (i) to (ii) within 60 days of April 12, 2013, are treated as exercised, vested, or settled in ordinary shares, as the case may be.
    (3) Includes 12,332,383 ordinary shares, including ordinary shares as represented by the American Depository Shares, held indirectly by Jing Lou through an entity wholly owned by him, Achieve Well International Limited, as of April 12, 2013.
    (4) Includes (i) 2,068,248 ordinary shares, including ordinary shares represented by the American Depository Shares, held indirectly by Bo Tan through an entity wholly owned by him, Triple Talent Enterprises Ltd, as of April 12, 2013.
    (5) Includes (i) 1,566,745 ordinary shares, including ordinary shares represented by the American Depository Shares, held indirectly by Bin Huang through a wholly owned entity, Known Virtue International Limited, as of April 12, 2013 and (ii) 84,000 ordinary shares subject to certain vested options exercisable by Bin Huang within 60 days of April 12, 2013.
    (6) Includes (i) 1,265,121 ordinary shares, including ordinary shares represented by the American Depository Shares, held indirectly by Dongmei Su through an entity wholly owned by her, Joint Palace Group Limited, as of April 12, 2013 and (ii) 37,100 ordinary shares subject to certain options exercisable by Dongmei Su within 60 days of April 12, 2013.
    (7) Includes (i) 753,119 ordinary shares, including ordinary shares represented by the American Depository Shares, held indirectly by Ke Li through a wholly owned entity, Yorkwin Finance Limited, as of April 12, 2013 and (ii) 58,100 ordinary shares subject to certain vested options exercisable by Ke Li within 60 days of April 12, 2013

    72



    (8) FMR LLC is a Delaware limited liability company. Its business address is at 82 Devonshire Street, Boston, Massachusetts 02109, U.S.A. All the information relating to this shareholder is based on a report on Schedule 13G filed with the SEC on February 14, 2013. The calculation assumes there is no change in the number of shares this shareholder holds between December 31, 2012, which, to our knowledge, is the latest date for which such information is publicly reported by the shareholder, and April 12, 2013.
    (9) Lan’s Holdings Limited is a British Virgin Islands international business company owned by Mr. Xiaobing Liu (49%) and Ms. Ying Luan (51%), each of whom has both voting and investment power over the ordinary shares reported for this shareholder. Its business address is at Room 22B, No.969 Beijing Road West, Jianan District, Shanghai, PRC. All the information relating to this shareholder is based on a report on Schedule 13G filed with the SEC on February 12, 2010. The calculation assumes there is no change in the number of shares this shareholder holds between December 31, 2009, which, to our knowledge, is the latest date for which such information is publicly reported by the shareholder, and April 12, 2013.
    (10) Samuel D. Isaly, a U.S. citizen, is the control person with respect to OrbiMed Advisors LLC and OrbiMed Capital LLC, both investment advisors, which together hold a total of 14,618,100 ordinary shares on behalf of certain persons. His business address is at 601 Lexington Avenue, 54th Floor, New York, New York 10022, U.S.A. All the information relating to this shareholder is based on a report on Schedule 13D filed with the SEC on April 5, 2013, as subsequently amended.
    (11) Includes 10,121,101 ordinary shares, including ordinary shares represented by the American Depository Shares, held indirectly by Dan Lou through an entity wholly owned by him, Hero Grand Management Limited, as of April 12, 2013. Mr. Dan Lou is our former chairman of the board of directors of the Company and has been serving as an advisor to the Company since 2012. His business address is at our corporate address.

    The persons listed above do not have different voting rights. We do not have information as to the portion of our securities held in the U.S. According to our ADR depositary, there are 10 registered holders of our ADS in the U.S. Other than the Going-private Transaction as described in Item 4.A.2, we are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.

    Changes in the Ownership of Major Shareholders:

    Except as set forth below, we are not aware of any significant change in the percentage ownership of our outstanding ordinary shares held by any major shareholders during the past three years:

        Percentage Ownership (as of the date of the column)  
    Major Shareholders  

    12/31/2010

     

     

    12/31/2011

     

     

    4/12/2013

     
    FMR LLC  

    11.9%

     

     

    11.0%

     

     

    10.7%**

     
    Samuel D. Isaly  

    5.1%*

     

     

    9.9%

     

     

    8.9%**

     
    Dan Lou  

    6.8%

     

     

    6.4%

     

     

    6.1%

     
    Happyview Finance Ltd.  

    5.5%

     

     

    4.5%

     

     

    Not reported

     
    Sectoral Asset Management Inc.  

    Not reported

     

     

    6.4%

     

     

    0.6%**

     
       
    * As of 3/31/2011.
    ** The calculation assumes there is no change in the number of shares this shareholder holds between the last publicly reported information and April 12, 2013. The information relating to Sectoral Asset Management Inc. is based on a report on Schedule 13G filed with the SEC on February 14, 2013.

    Information in the above table is derived from certain reports on Schedule 13G filed with the Securities and Exchange Commission. More information regarding any major shareholder may be found under this Item in our annual report on Form 20-F for any particular year at the end of which such shareholder's percentage ownership was 5% or more and in such reports on Schedule 13G as filed.

    B. Related Party Transactions

    Pursuant to the Article 121 of our Articles of Association, the audit committee of our board of directors conducts a review of all related party transactions on an ongoing basis and review and approve transactions with potential conflicts of interest. Set forth below is the description of certain related party transactions for the period from the beginning of 2012 up to February 28, 2013, the latest practicable date.

    Our subsidiaries, consolidated affiliated entities, and the subsidiaries of the consolidated affiliated entities have engaged, during the ordinary course of business, in a number of customary transactions with each other. All of these inter-company balances have been eliminated in consolidation.

    73


    Going-private Transaction

    The Buyer Group in the Going-private Transaction, as described in Item 4.A.2, include the Rollover Shareholders, which consists of Dr. Jing Lou, our Chairman and CEO, Mr. Dan Lou, Dr. Lou’s father and our former chairman, Dr. Dongmei Su, a director and vice president of R&D of ours, Mr. Bin Huang, a director and vice president of ours, Mr. Bo Tan, our CFO, Mr. Ke Li, one of our vice presidents, and certain other management members. In this transaction, an independent committee of the board of directors, consisting of three independent directors unrelated to the Buyer Group or any of the management members of the Company, represented the Company and negotiated the terms of the transaction, and the committee was advised by its own financial and legal advisors. For more information, please see the Transaction Statement on Schedule 13E-3 filed with SEC, as amended, and other reports and documents furnished or filed with SEC in connection to this proposed transaction. For your information purpose, with respect to this transaction, a Schedule 13D was filed by certain Rollover Shareholders on February 19, 2013, as subsequently amended.

    Transactions with Liaoning Sunshine

    To enable us to maintain economic and voting control over Liaoning Sunshine, Shenyang Sunshine has entered into a series of contractual arrangements with Liaoning Sunshine and its 100% shareholder, Mr. Dan Lou, both of whom are related parties to us, as Mr. Dan Lou is the father of Dr. Jing Lou, our Chairman and CEO. As a result, Liaoning Sunshine has been included in our consolidated financial statements as a variable interest entity. These contractual arrangements include:

    (1)

    Business cooperation agreement (Exhibit 4.12; Exhibit 16)

    Pursuant to the business cooperation agreement among Shenyang Sunshine, Liaoning Sunshine and us, Shenyang Sunshine provides technology support services and market development and consulting services to Liaoning Sunshine, and, as consideration, receives 70% of Liaoning Sunshine’s net profit before tax as service fees. Shenyang Sunshine may adjust the percentage of the service fee unilaterally. In addition, Liaoning Sunshine has agreed that, without the prior written consent of a majority of our independent directors, it will not increase or decrease its registered capital, declare dividends or make similar payments, make any investment, incur any indebtedness, mortgage or dispose of its material assets, or consolidate or merge with any other entity. This agreement has an initial term of 10 years, and, thereafter, renewable at Shenyang Sunshine’s option. Shenyang Sunshine may unilaterally revoke or terminate the agreement with prior notice to but not consent of Liaoning Sunshine and Liaoning Sunshine may not revoke or terminate the agreement.

    (2)

    Equity interest acquisition agreement (Exhibit 4.13; Exhibits 17, 18 and 19)

    Pursuant to the purchase agreement between Shenyang Sunshine and Mr. Dan Lou, as amended, Mr. Dan Lou granted Shenyang Sunshine an exclusive right to purchase, to the extent permissible under PRC law, his 100% equity interest in Liaoning Sunshine for a purchase price of RMB13.5 million, immediately after Shenyang Sunshine obtains the requisite PRC government approval for it to acquire Liaoning Sunshine. The full purchase price pursuant to the purchase agreement was prepaid by Shenyang Sunshine to Mr. Lou shortly after the signing of this agreement in December 2006. In addition, under this agreement, Shenyang Sunshine may appoint the president, chief financial officer and other senior management of Liaoning Sunshine; and may unilaterally change the service fee charged under the Business Cooperation agreement; and Shenyang Sunshine shall provide financial support to Liaoning Sunshine, including absorbing its operating losses, which financial support Shenyang Sunshine may not require Liaoning Sunshine to repay. This agreement remains in effect until all of the equity interest in Liaoning Sunshine is acquired by Shenyang Sunshine. Shenyang Sunshine may unilaterally revoke or terminate the agreement with prior notice to but not consent of Mr. Dan Lou and Mr. Dan Lou may not revoke or terminate the agreement. Liaoning Sunshine must receive Shenyang Sunshine’s approval for contracts over RMB100,000 except in the ordinary course of business.

    (3)

    Voting rights agreement (Exhibit 4.14; Exhibit 20)

    Pursuant to the voting rights agreement between Shenyang Sunshine and Mr. Dan Lou, Mr. Dan Lou irrevocably grants to Shenyang Sunshine a power of attorney and constitute Shenyang Sunshine as his legal representative with full authority: (1) to vote on all matters concerning Liaoning Sunshine; and (2) to exercise all shareholder rights, with respect to all the equity interests of Liaoning Sunshine owned by Mr. Dan Lou, with such grant to be in effect thenceforth for all the periods where Mr. Dan Lou is a shareholder of Liaoning Sunshine. Shenyang Sunshine may unilaterally revoke or terminate the agreement with prior notice to but not consent of Mr. Dan Lou and Mr. Dan Lou may not revoke or terminate the agreement.

    74


       
    (4)

    Equity pledge agreement (Exhibit 4.15; Exhibit 21)

    Pursuant to the equity pledge agreement between Shenyang Sunshine and Mr. Dan Lou, Mr. Dan Lou pledged all of his equity interests in Liaoning Sunshine to Shenyang Sunshine to guarantee his obligations under the purchase agreement and the voting rights agreement. Shenyang Sunshine is entitled to collect all dividends and other distributions if and when declared and paid by Liaoning Sunshine, during the term of this agreement. The equity pledge agreement remains in effect until Mr. Dan Lou fulfills all of his respective obligations under the equity interest acquisition agreement and the voting rights agreement. Shenyang Sunshine may unilaterally revoke or terminate the agreement with prior notice to but not consent of Mr. Dan Lou and Mr. Dan Lou may not revoke or terminate the agreement.

    Sales from Shenyang Sunshine to Liaoning Sunshine were RMB0.4 million, RMB0.4 million and RMB0.5 million ($0.08 million) for the years ended December 31, 2010, 2011 and 2012, respectively. Furthermore, Shenyang Sunshine lent Liaoning Sunshine RMB30,000,000 in 2009 to support its operations at an interest rate of 5.4%, with the full amount of the loan remaining outstanding as of February 28, 2013.

    Transactions with Liaoning Sunshine Science and Technology Development Co. Limited

    Liaoning Sunshine Science and Technology Development Co. Limited is a related party to us, as it is a wholly-owned subsidiary of Liaoning Sunshine. Further, Dr. Jing Lou, our Chairman and CEO, is the CEO and a director of LSSTD.

    LSSTD is the principal vehicle in our collaboration with DaVita to provide kidney care services in two Chinese provinces, and Shenyang Sunshine may supply DaVita with anemia management drugs throughout China under a supply agreement, all as set forth in the Master Agreement (see Exhibit 4.10 attached hereto), to which both we and LSSTD are parties. Pursuant to the Master Agreement, in June 2012, LSSTD and DaVita entered into a Equity Joint Venture Contract to set up Davita-3SBio Healthcare Management (Liaoning) Co., Ltd., with LSSTD holding 30% of its equity, and DaVita 70%.

    In connection with our dialysis service business and the construction of the dialysis consumables facilities in Benxi city, Liaoning province, China, Shenyang Sunshine lent a total of approximately RMB80 million to LSSTD (respectively, RMB20 million in April 2011, RMB20 million in February 2012, and RMB40 million in October 2012; with all at the then effective six-month loan rate as promulgated by People’s Bank of China). As of February 28, 2013, none of these loans have been repaid.

    Transactions with Davita-3SBio Healthcare Management (Liaoning) Co., Ltd.

    Davita-3SBio Healthcare Management (Liaoning) Co., Ltd. (“JV ManageCo”) is a related party to us, as LSSTD holds 30% equity of JV ManageCo. To support the working capital of JV ManageCo, pursuant to a loan agreement signed in August 2012, JV ManageCo had borrowed RMB1.23million from Shenyang Sunshine, all of which remained outstanding as of February 28, 2013. The loan bears an interest rate of 5.6% .

    Transactions with APGC and Ascentage SH

    APGC and Ascentage SH are related parties to us as we acquired and own a 40% equity interest in each of them pursuant to the agreements with them. Pursuant to the same agreements, we paid RMB17 million to fund the apoptosis related R&D program in 2010. Before entering into the agreements, APGC and Ascentage SH were not related to us.

    Management and Compensatory Contracts

    See Item 6.C.6 “Employment and Management Agreements” for a description of the employment and management agreements we enter into with our directors and officers.

    Equity Grants to Directors and Officers

    See Item 6E --- “Equity Grant to Directors and Senior Officers” for a description of share-based compensation awards we have granted to our directors and senior officers.

    C. Interests of Experts and Counsel

    Not Applicable.

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    ITEM 8. FINANCIAL INFORMATION

    A. Consolidated Statements and Other Financial Information

    Consolidated Financial Statements

    See “Item18. Financial Statements”.

    Legal Proceedings

    We are not aware of any legal or arbitration proceedings, or any governmental proceedings pending or known to be contemplated, including those relating to bankruptcy, receivership or similar proceedings and those involving any third party, which may have, or have had in the recent past, significant effects on the company’s financial position or profitability. Neither are we aware of any material proceeding in which any of our directors, any member of our senior management, or any of our affiliates is either a party adverse to us or any of our subsidiaries or has a material interest adverse to us or any of our subsidiaries.

    From time to time, we may be subject to various claims and legal actions arising in the ordinary course of business.

    Our intellectual property may be subject to theft and other unauthorized use, and our ability to protect our intellectual property is limited. In addition, we may in the future be subject to claims that we have infringed the intellectual property rights of others.

    Please refer to discussions under “Item 3.D Risk Factors” with respect to significant regulatory and legal risks.

    Dividend Policy

    Since the incorporation of our company in 2006, we have never declared or paid any cash dividends on our ordinary shares. However, if we declare dividends in the future, we may be subject to currency exchange and other restriction. See “3.D.3 — Restrictions on currency exchange may limit our ability to receive and use our revenues effectively.”

    The timing, amount and form of future dividends, if any, will depend, among other things, on our future results of operations and cash flow, our future prospects, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries and our consolidated affiliated entities, and other factors deemed relevant by our board of directors. Any future dividends on our ordinary shares would be declared by and subject to the discretion of our board of directors.

    Holders of ADSs will be entitled to receive dividends, if any, subject to the terms of the deposit agreement, to the same extent as holders of ordinary shares, less the fees and expenses payable under the deposit agreement, and after deduction of any applicable taxes.

    B. Significant Changes

    Except as disclosed elsewhere in this annual report, we are not aware of any significant changes since the date of the financial statements included in this annual report.

    76



    ITEM 9. THE OFFER AND LISTING

    A. Offer and Listing Details

    Our ADSs have been listed on the NASDAQ Global Market of the NASDAQ Stock Market LLC under the symbol “SSRX” since February 7, 2007. The outstanding ADSs are identified by the CUSIP number 88575Y105. Each of our ADSs represents seven ordinary shares.

    The following table provides the highest and lowest closing prices for our ADSs on the NASDAQ Global Market for: (1) the full financial years ended December 31, 2008, 2009, 2010, 2011, and 2012; (2) each full fiscal quarter of the financial years ended December 31, 2011 and 2012, and the first quarter of 2013; and (3) each of the most recent six months.

      Closing Price
      Per ADS
    Highest Lowest
    US$ US$

    Annual

     

     

    2008

    14.63

    4.97

    2009

    14.20

    4.51

    2010

    16.25

    10.01

    2011

    19.99

    9.60

    2012

    15.03

    9.47

    Quarterly

     

     

    First Quarter of 2011

    17.29

    14.78

    Second Quarter of 2011

    19.99

    15.14

    Third Quarter of 2011

    18.69

    11.93

    Fourth Quarter of 2011

    13.24

    9.60

    First Quarter of 2012

    15.03

    9.47

    Second Quarter of 2012

    14.56

    11.89

    Third Quarter of 2012

    13.63

    10.95

    Fourth Quarter of 2012

    14.02

    12.91

    First Quarter of 2013

    15.24

    12.94

    Most recent six months

     

     

    October 2012

    14.02

    13.16

    November 2012

    13.43

    12.91

    December 2012

    13.88

    13.26

    January 2013

    13.7

    12.94

    February 2013

    14.9

    13.66

    March 2013

    15.24

    14.75

    _________________________________
    Source: Bloomberg

    77


    B. Plan of Distribution

    Not applicable.

    C. Markets

    Our ADSs, each representing seven ordinary shares, have been listed on the NASDAQ since February 7, 2007 under the symbol “SSRX.”

    D. Selling Shareholder

    Not applicable.

    E. Dilution

    Not applicable.

    F. Expenses of The Issue

    Not applicable.

     

     

     

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    ITEM 10. ADDITIONAL INFORMATION

    A. Share Capital

    Not applicable.

    B. Memorandum and Articles of Association

    We incorporate by reference into this annual report such information, as required by Item 10.B of Form 20-F, of the description of our amended and restated memorandum and articles of association contained in our F-1 registration statement (File No. 333-140099), as amended, initially filed with the Commission on January 19, 2007, except, that the entirety of the section under the heading “Differences in Corporate Law - Mergers and Similar Arrangements description” shall be replaced by the contents below. Our shareholders adopted our amended and restated memorandum and articles of association by unanimous resolutions on September 5, 2006. See also Item 19 - Exhibit 1.2.

    Cayman Islands Law - Mergers and Similar Arrangements

    Set forth below is a summary of the provisions of the Companies Law of the Cayman Islands regarding mergers and similar arrangements, as applicable to us, that may be deemed significantly different from the laws applicable to companies incorporated in the United States and their shareholders, and the effects of such Cayman Islands law:

    (1) Merger and Consolidation

    A merger of two or more constituent companies under Cayman Islands law requires a plan of merger or consolidation (“Plan”) to be approved by the directors of each constituent company and authorization by (a) a special resolution of the members of each constituent company and (b) such other authorization as may be specified in such constituent company’s articles of association.

    Shareholders’ approval is not required in a merger between a Cayman Islands parent company and a Cayman Islands subsidiary with at least 90% of its issued shares entitled to vote owned by the parent company.

    The consent of each holder of a fixed or floating security interest over a constituent company is required unless this requirement is waived by a court in the Cayman Islands.

    The Plan must be filed with the Registrar of Companies together with supporting documents including certain declarations.

    A dissenting shareholder of a Cayman Islands constituent company is, following the specified procedures, entitled to payment of the fair value of his shares, as mutually agreed upon or determined by the Cayman Islands court, upon dissenting to a merger or consolidation, except, generally, where such person's shares are listed on a recognized stock exchange or such qualified trading market or the transaction consideration consists of securities of such nature. The exercise of appraisal rights will preclude the exercise of any other rights save for the right to seek relief on the grounds that the merger or consolidation is void or unlawful.

    Court approval is not required for a merger or consolidation effected in compliance with these statutory procedures.

    (2) Reconstruction and Amalgamation and Takeover Offer

    In addition, there are statutory provisions that facilitate the reconstruction and amalgamation of companies, provided that the arrangement is approved by a majority in 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 must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder has the right to express to the court the 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 required vote have been met;
    • the shareholders have been fairly represented at the meeting in question and the statutory majority are acting bona fide without coercion of the minority to promote interests adverse to those of the class;
    • the arrangement is such that may be reasonably approved by an intelligent and honest man of that class acting in respect of his interest; and
    • the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law.

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    When a take-over offer is made and accepted by holders of 90.0% of the shares within four months, the offeror may, within a two month period commencing on the expiration of such four 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 Grand Court of the Cayman Islands but this is unlikely to succeed in the case of an offer which has been so approved unless there is evidence of fraud, bad faith or breach of the Companies Law.

    If an arrangement and reconstruction or take-over offer is approved or accepted, the dissenting shareholder(s) are unlikely to have any 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.

    C. Material Contracts

    We have not entered into any material contracts to which we or any of our subsidiaries or affiliated entities is a party for the two years immediately preceding publication of this annual report, other than in the ordinary course of business, or other than those listed in the Exhibits hereto or discussed elsewhere in this annual report.

    D. Exchange Controls

    There are no exchange control regulations or currency restrictions in the Cayman Islands.

    For exchange control in China, please refer to “4.B.11-e Regulation of foreign currency exchange, dividend distribution, and overseas listing”.

    E. Taxation

    The following summary of certain material Cayman Islands, PRC, and U.S. federal income tax matters with respect to an investment in our ADSs or ordinary shares is based upon laws and relevant interpretations thereof in effect as of the date of this annual report, all of which are subject to change, possibly with retroactive effect. This summary does not deal with all possible tax consequences relating to an investment in our ADSs or ordinary shares, such as the tax consequences under laws of any jurisdictions other than the jurisdictions addressed herein, as well as any provincial, state and local tax laws.

    We urge any prospective purchaser or current holder of our ADSs or ordinary shares to consult your own tax advisor regarding your particular circumstances and the U.S. federal income and estate tax consequences to you of acquiring, owning and disposing of ADSs or ordinary shares, as well as any tax consequences arising under the laws of PRC, any state, local or foreign or other tax jurisdiction and the possible effects of changes in U.S. federal or other tax laws.

    Cayman Islands Taxation

    The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the Government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after execution brought within the jurisdiction of the Cayman Islands.

    The Cayman Islands is not party to any double tax treaties that are applicable to any payments made to or by our company.

    PRC Taxation

    If the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, a withholding tax of 10% for certain U.S. shareholder and ADS holders that are enterprises, and, an individual income tax of 20% for individual U.S. shareholders and ADS holders, may be imposed on dividends they receive from us and on gains realized on their sale or other disposition of shares or ADSs that are deemed income derived from sources within the PRC. You may be able to obtain a reduced rate of PRC withholding taxes under the income tax treaty between the United States and the PRC if certain requirements are met.

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    For more information, please see “4.B.11-d PRC Enterprise Income Tax”.

    United States Federal Income Tax Considerations for U.S. Persons

    The following is a summary of the material United States federal income tax considerations relating to the acquisition, ownership, and disposition of ADSs or ordinary shares by U.S. Holders (as defined below) that will hold their ADSs or ordinary shares as “capital assets” (generally, property held for investment) under the United States Internal Revenue Code (the “Code”). This summary is based upon existing United States federal income tax law, which is subject to differing interpretations or change, possibly with retroactive effect. You should note that no rulings have been or are expected to be sought from the U.S. Internal Revenue Service (the “IRS”), nor have we sought an opinion of counsel, with respect to any U.S. federal income tax matters described below, and we cannot assure you that the IRS or a court will not take contrary positions, which may result in material adverse tax consequences to U.S. Holders.

    This summary does not discuss all aspects of United States federal income taxation that may be important to particular investors in light of their individual circumstances, and does not deal with the tax consequences to investors who may be subject to special tax rules (for example, financial institutions, insurance companies, broker-dealers, regulated investment companies, real estate investment trusts, certain U.S. expatriates, and tax-exempt organizations (including private foundations), traders that elect to mark to market, persons liable for alternative minimum tax, governments or agencies or instrumentalities thereof, holders who are not U.S. Holders as defined below, holders who own (directly, indirectly, or constructively) 10% or more of our voting stock, investors that will hold ADSs or ordinary shares as part of a straddle, hedge, conversion, constructive sale, or other integrated transaction for United States federal income tax purposes, retirement plans, individual retirement accounts, or other tax-deferred accounts, or U.S. Holders that have a functional currency other than the United States dollar).

    Please note this description does not address (i) alternative minimum tax consequences or (ii) any other U.S. federal tax (such as estate or gift tax) consequences.

    This discussion is not a comprehensive description of all of the U.S. federal tax consequences that may be relevant with respect to the acquisition, ownership and disposition of ADSs or ordinary shares.

    The discussion below assumes that the representations contained in the deposit agreement are true and that the obligations in the deposit agreement and any related agreement have been and will be complied with in accordance with the terms. If you hold ADSs, you should be treated as the holder of the underlying ordinary shares represented by those ADSs for U.S. federal income tax purposes.

    We urge you to consult your own tax advisor regarding your particular circumstances and the U.S. federal income and estate tax consequences to you of owning and disposing of ADSs or ordinary shares, as well as any tax consequences arising under the laws of any state, local or foreign or other tax jurisdiction and the possible effects of changes in U.S. federal or other tax laws.

    U.S. Holder

    For purposes of this summary, a “U.S. Holder” is a beneficial owner of ADSs or ordinary shares that is, for United States federal income tax purposes, (i) an individual who is a citizen or resident of the United States; (ii) a corporation or other entity taxable as a corporation for United States federal income tax purposes, created in, or organized under the law of, the United States or any state thereof or the District of Columbia; (iii) an estate, the income of which is includible in gross income for United States federal income tax purposes regardless of its source; or (iv) a trust (A) the administration of which is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust or (B) that has otherwise validly elected to be treated as a United States person under the Code.

    If a partnership or other entity or arrangement classified as a partnership for United States federal income tax purposes is a beneficial owner of our ADSs or ordinary shares, the United States federal income tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. This summary does not address the tax consequences of any such partner. If you are a partner of a partnership holding shares or ADSs, you should consult your tax advisors.

    For United States federal income tax purposes, U.S. Holders of ADSs will be treated as the beneficial owners of the underlying shares represented by the ADSs. Accordingly, deposits or withdrawal of shares for ADSs will not be subject to United States federal income tax.

    The U.S. Treasury has expressed concerns that parties to whom American depositary shares are pre-released before share are delivered to the depositary, or intermediaries in the chain of ownership between holders of American depositary shares and the issuer of the security underlying the American depositary shares, may be taking actions that are inconsistent with the claiming of foreign tax credits by holders of American depositary shares. These actions would also be inconsistent with the claiming of the reduced rate of tax, described below, applicable to dividends received by certain non-corporate holders. Accordingly, the creditability of any PRC taxes, and the availability of the reduced tax rate for dividends received by certain non-corporate U.S. Holders, each described below, could be affected by actions taken by such parties or intermediaries.

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    Threshold PFIC Classification Matters

    A non-United States corporation, such as the company, will be treated as a “passive foreign investment company” (a “PFIC”), for United States federal income tax purposes, if 75% or more of its gross income consists of certain types of “passive” income (the “income test”) or 50% or more of its assets (based on an average of the quarterly values during a taxable year) are classified as assets that either produce passive income or are held for the production of passive income (the “asset test”). “Passive income” includes, for example, dividends, interest, certain rents and royalties, certain gains from the sale of stock and securities, and certain gains from commodities transactions.

    Certain “look through” rules apply for purposes of the income and asset tests described above. If we own, directly or indirectly, 25% or more of the total value of the outstanding share of another foreign corporation, we will be treated as if we held directly a proportionate share of the other corporation’s assets and received directly a proportionate share of the other corporation’s income. In applying this rule, however, it is not clear whether the contractual arrangements between us and our affiliated VIE entities will be treated as ownership of stock.

    The determination of whether we are, or will become, classified as a PFIC is a fact intensive determination that is made annually based on the composition and amounts of income that we earn and the composition and valuation of our assets, all of which are subject to change. For this purpose, cash is categorized as a passive asset and the company’s unbooked intangibles are taken into account.

    We believe we were not a PFIC for U.S. federal income tax purposes for our taxable year ended December 31, 2012. Based on our current income and assets, it is uncertain whether we will be classified as a PFIC for United States federal income tax purposes for our current taxable year ending December 31, 2013, a determination that can only be made after the close of the taxable year, or for any of our future taxable years. The overall level of our passive assets will be significantly affected by the amount and time-frame within which we deploy the cash raised in our initial public offering, other liquid assets that we presently hold, and the operation cash inflow.

    Because the PFIC determination is highly fact intensive, there can be no assurance that we will not be classified as a PFIC for any particular taxable year or that the Internal Revenue Service will not challenge any determination concerning our PFIC status for any particular taxable year. With respect to prior years, the financial market disruptions from late 2008 and early 2009 may have materially depressed our market valuation for the 2008 and 2009 taxable years, and, to our knowledge, there is a lack of guidance from United States authorities regarding how such disruptions should be taken into account in applying the asset test. In particular, it is possible that the disruptions could lead to our being classified as a PFIC under the asset test for the 2008 and 2009 taxable years.

    If we are classified as a PFIC for any year during which a U.S. Holder holds our ADSs or ordinary shares, we generally will continue to be treated as a PFIC for all succeeding years during which such U.S. Holder holds our ADSs or ordinary shares.

    Furthermore, because PFIC status is a fact intensive determination made on an annual basis, no assurance can be given that we are not or will not become classified as a PFIC and the determination will depend upon, in great measure, the timing of our capital expenditures and the value of our unbooked intangibles.

    Notwithstanding our belief as discussed here and these information we provide solely for the convenience of our investors, we are not providing any U.S. tax opinion or advice to U.S. investors concerning the PFIC status of our company, and U.S. investors should consult their own tax advisors concerning the implication of the PFIC rules in his, her or its particular circumstance and determine his, her, or its own tax position as to our PFIC status for a particular taxable year, including, as applicable, for the 2008 and 2009 taxable years.

    The discussion below under “Distributions on ADSs or Ordinary shares” and “Disposition of ADSs or Ordinary shares” is written on the basis that we will not be classified as a PFIC for United States federal income tax purposes. The discussion further below under “Passive Foreign Investment Company” summarizes the PFIC rules that would be applicable to an investment in our ADSs or ordinary shares if we were to be or become classified as a PFIC.

    Distributions on ADSs or Ordinary shares

    We do not currently intend to pay dividends in the foreseeable future. Subject to the PFIC rules discussed below, the gross amount of all our distributions to you with respect to the ADSs or ordinary shares will be included in your gross income as dividend income on the date of receipt by the depositary, in the case of ADSs, or by you, in the case of ordinary shares, but only to the extent that the distribution is paid out of our current or accumulated earnings and profits (computed under U.S. federal income tax principles). The dividends will not be eligible for the dividends-received deduction allowed to corporations in respect of dividends received from U.S. corporations.

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    With respect to non-corporate U.S. Holders (including individual U.S. Holders), dividends may be taxed at the lower applicable capital gains rate provided that (i) the ADSs or ordinary shares are readily tradable on an established securities market in the United States or we are eligible for the benefit of any applicable income tax treaty with the United States, (ii) we are not a passive foreign investment company (as discussed below) for either our taxable year in which the dividend was paid or the preceding taxable year, (iii) certain holding period requirements are met, and (iv) such non-corporate U.S. Holders are not under an obligation to make related payments with respect to positions in substantially similar or related property. For this purpose, ADSs listed with the Nasdaq Stock Market LLC will generally be considered to be readily tradable on an established securities market in the United States. You should consult your tax advisor regarding the availability of the lower rate for dividends paid with respect to our ADSs or ordinary shares.

    Dividends will constitute foreign source income for foreign tax credit limitation purposes. If PRC withholding taxes apply to dividends paid to you with respect to the ADSs or ordinary shares, you may be able to obtain a reduced rate of PRC withholding taxes under the income tax treaty between the United States and the PRC if certain requirements are met. In addition, subject to certain conditions and limitations, PRC withholding taxes on dividends may be treated as foreign taxes eligible for credit against your U.S. federal income tax liability. U.S. Holders should consult their own tax advisors regarding the creditability of any PRC tax. 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 ADSs or ordinary shares will generally constitute “passive category income” but could, in the case of certain U.S. Holders, constitute “general category income.”

    To the extent that the amount of the distribution exceeds our current and accumulated earnings and profits, it will be treated first as a tax-free return of your tax basis in your ADSs or ordinary shares, and to the extent the amount of the distribution exceeds your tax basis, the excess will be taxed as capital gain. We do not intend to calculate our earnings and profits for U.S. federal income tax purposes. Therefore, a U.S. Holder should expect that a distribution will be reported as a dividend.

    Dispositions of ADSs or Ordinary shares

    Subject to the PFIC rules discussed below, upon the sale, exchange or other taxable disposition of ADSs or ordinary shares, a U.S. Holder generally will recognize capital gain or loss equal to the difference between the amount realized upon the sale, exchange or other disposition and the adjusted tax basis of the U.S. Holder in the ADSs or ordinary shares. A U.S. Holder’s tax basis in an ADS or a ordinary share will be, in general, the price it paid for that ADS or ordinary share. The capital gain or loss generally will be long-term capital gain or loss if, at the time of sale, exchange or other disposition, the U.S. Holder has held the ADS or ordinary share for more than one year. Net long-term capital gains of non-corporate U.S. Holders, including individuals, are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations. Any gain or loss that a U.S. Holder recognizes generally will be treated as gain or loss from sources within the United States for U.S. foreign tax credit limitation purposes. However, in the event that we are deemed to be a PRC “resident enterprise” under the PRC tax law, we may be eligible for the benefits of the income tax treaty between the United States and the PRC. If any PRC tax was to be imposed on any gain from the sale, exchange or other disposition of the ADSs or ordinary shares, a U.S. Holder eligible for the benefits of the income tax treaty between the United States and the PRC may be able to elect to treat such gain as PRC-source income. U.S. Holders are urged to consult their own tax advisors regarding the tax consequences if a foreign withholding tax is imposed on a disposition of ADSs or ordinary shares, including the availability of the foreign tax credit under their particular circumstances.

    Passive Foreign Investment Company

    If we are or were to become classified as a PFIC for any taxable year during which you hold our ADSs or ordinary shares, unless you make a “mark-to-market” election (as described below), you would be subject to special rules with respect to (i) any gain realized on the sale or other disposition of ADSs or ordinary shares, and (ii) any “excess distribution” made by us on ADSs or ordinary shares (generally, any distributions paid to you in respect of ADSs or ordinary shares during a single taxable year that are greater than 125% of the average annual distributions received by you during the three preceding taxable years or, if shorter, your holding period for such ADSs or ordinary shares).

    Under the PFIC rules:

    • the gain or excess distribution would be allocated ratably over your holding period for ADSs or ordinary shares;

    • the amount allocated to the taxable year in which the gain or excess distribution was realized, and any taxable year prior to the first taxable year that you held ADSs or ordinary shares in which we are classified as a PFIC (a “pre-PFIC year”), would be taxable as ordinary income; and

    • the amount allocated to each prior year, other than the current year and any pre-PFIC year, would be subject to tax at the highest tax rate in effect for that year, and an interest charge generally applicable to underpayments of tax would be imposed on the resulting tax for each such year for the period it had been deferred.

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    In addition, notwithstanding any election you may make, dividends that you receive from us will not be eligible for the lower applicable capital gains rate (as discussed above in “Distributions on ADSs or Ordinary shares”).

    As an alternative to the foregoing rules, a holder of “marketable stock” in a PFIC may make a mark-to-market election, provided that the share are “regularly traded” on a “qualified exchange,” such as the NASDAQ Stock Market LLC. Stock is “regularly traded” for any calendar year if such stock is traded in other than de minimis quantities on at least 15 days during each calendar quarter. While the company anticipates that the ADSs will qualify as being “regularly traded” on the NASDAQ Stock Market LLC, no assurances may be given that the ADSs will qualify as being regularly traded on such exchange. If you make a valid mark-to-market election, you will generally (i) include as ordinary income for each taxable year the excess, if any, of the fair market value of your ADSs as determined at the end of the taxable year over the adjusted tax basis of such ADSs and (ii) deduct as an ordinary loss the excess, if any, of the adjusted tax basis of your ADSs over the fair market value of such ADSs as determined at the end of the taxable year, but only to the extent of any net mark-to-market gains on the ADSs or ordinary shares included in your income for prior taxable years. Your adjusted tax basis in your ADSs would be adjusted to reflect any income or loss resulting from the mark-to-market election.

    Alternatively, if you make an election to treat the company as a “qualified electing fund” (“QEF Election”) you generally will not be subject to the special rules discussed above. However, you can make a QEF Election only if we agree to furnish you annually with certain tax information and we currently do not intend to prepare or provide such information.

    If you hold ADSs or ordinary shares in any year in which we are a PFIC, you will be required to file an annual information report containing such information as the U.S. Treasury may require. You are urged to consult your own tax advisor regarding any reporting requirements related to PFIC status that may apply.

    You are urged to consult your tax advisor concerning the United States federal income tax consequences of acquiring, holding, and disposing of ADSs or ordinary shares if we are or become classified as a PFIC, including the possibility of making a mark-to-market election.

    Additional Tax on Investment Income

    For taxable years beginning after December 31, 2012, if you are an individual, estate or trust whose income exceeds certain thresholds, you will be subject to a 3.8% Medicare contribution tax on unearned income, including, among other things, dividends on, and capital gains from, the sale or other taxable disposition of, your ordinary shares or ADSs, subject to certain limitations and exceptions.

    Information Reporting and Backup Withholding

    Dividend payments with respect to ADSs or ordinary shares and proceeds from the sale, exchange or redemption of ADSs or ordinary shares may be subject to information reporting to the IRS and possible U.S. backup withholding. Backup withholding will not apply, however, to a U.S. Holder that furnishes a correct taxpayer identification number and makes any other required certification 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 IRS 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 can 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 timely filing the appropriate claim for refund with the IRS and furnishing any required information in a timely manner.

    Pursuant to the Hiring Incentives to Restore Employment Act of 2010 and final regulations thereunder, individual U.S. Holders and certain entities may be required to submit to the IRS certain information with respect to his or her beneficial ownership of the ADSs or ordinary shares, if such ADSs or ordinary shares are not held on his or her behalf by a financial institution. This law also imposes penalties if an individual U.S. Holder is required to submit such information to the IRS and fails to do so.

    F. Dividends and Paying Agents

    Not applicable.

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    G. Statement by Experts

    Not applicable.

    H. Documents on Display

    We have previously filed with the Commission our registration statement on Form F-1, as amended.

    We are subject to the periodic reporting and other informational requirements of the Exchange Act. Under the Exchange Act, we are required to file reports and other information with the Securities and Exchange Commission. Specifically, we are required to file annually a report on Form 20-F no later than four months after the close of our fiscal year, which is December 31. 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 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information regarding the Public Reference Room by calling the Commission at 1-800-SEC-0330 or (202) 551-8090. The Securities and Exchange Commission also maintains a web site at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants like us that make electronic filings with the Securities and Exchange Commission 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 our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.

    As permitted under NASDAQ Stock Market Rule 5250(d)(1)(C), we post our annual reports filed with the SEC on our web site at http://www.3sbio.com. We will not furnish hard copies of our annual reports to holders of our ordinary shares and ADSs unless we receive a request in writing by a holder. Upon receipt of such a request in writing, we will provide hard copies of our annual reports to the requesting holder free of charge.

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    ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    Cautionary Statement:

    Not to affect the general applicability of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 to this or other parts of this annual report, as more fully discussed in “Cautionary Statement concerning Forward-looking Statements” at the beginning of this annual report, all the information contained under this Item, as provided under Form 20-F Item 11(d), constitutes “forward looking statement” within the meaning of those laws and are subject to various risks and uncertainties, except for information regarding how our primary market risk exposures are managed and certain historical facts.

    Interest Rate Risk

    Interest-earning instruments carry a degree of interest rate risk. Our exposure to interest rate risk primarily relates to the interest income generated by cash invested in demand and time deposits from our initial public offering proceeds and cash inflow from our operations. We have not used any derivative financial instruments to manage our interest risk exposure. If market interest rates for such deposits decrease in the near future, such decrease may cause the amount of our interest income to fall. A hypothetical 10% decrease in the annual average applicable interest rate in fiscal year 2013 would result in a decrease of approximately RMB2.6 million in interest income on our balance of such demand and time deposits as of December 31, 2012. In comparison, a hypothetical 10% decrease in the annual average applicable interest rate in fiscal year 2012 would have resulted in a decrease of approximately RMB1.9 million in interest income on our balance of such demand and time deposits as of December 31, 2011.

    Foreign Currency Risk

    On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the current policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in substantial appreciation of the RMB against the U.S. dollar since then. While the international reaction to the RMB revaluation has generally been positive, 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 RMB against the U.S. dollar.

    Substantially all of our revenue and costs are denominated in RMB, while a significant portion of our financial assets are denominated in U.S. dollars, to which our exposure to foreign exchange risk principally relates. We have not hedged exposures denominated in foreign currencies.

    To the extent that we need to convert the balance of U.S. dollars we hold into Renminbi for our operations, fluctuation in the exchange rate between the Renminbi and U.S. dollar would impact on the Renminbi amount we receive from the conversion. Our cash, cash equivalents, restricted cash and time deposits with original maturities over three months denominated in U.S. dollars was US$21.1 million as of December 31, 2012, compared to US$24.5 million as of December 31, 2011. If we had converted such balance from US dollar to RMB at December 31, 2012, the converted amount would have been RMB131.5 million. If RMB were to appreciate by 5% against U.S. dollar over the December 31, 2012 exchange rate, the converted amount would be RMB124.9 million. Please also see “3.D.3 - Exchange rate volatility may adversely affect our competitive position, financial position, operations, or otherwise”.

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    ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

    Fees and Charges Payable by ADS Holders

    The table below summarizes the fees and charges that a holder of our ADSs may have to pay, directly or indirectly, to our ADS depositary, JPMorgan Chase Bank, or JPMorgan, pursuant to the Deposit Agreement, which was filed as Exhibit 99.A to our Registration Statement on Form F-6 filed with the SEC on January 22, 2007, and the types of services and the amount of the fees or charges paid therefor. The contents under this heading “Fees and Charges Payable by ADS Holders” are subject to and qualified in its entirety by reference to the full text of the Deposit Agreement.

    Category Depositary actions Associated Fee

    Depositing or substituting underlying share


    Issuances against or in respect to or pursuant to:
    —Deposits of share
    —Share distributions, rights and other distributions
    —Stock dividend or split declared by us
    —Merger, exchange of securities or any other transaction or event or other distribution affecting the ADSs or the deposited share
     


    $5.00 for each 100 ADSs (or portion thereof) issued or delivered
    (The Depositary may sell, by public or private sale, sufficient securities and property received in respect of share distributions, rights and other distributions prior to such deposit to pay such charge.)


    Withdrawing underlying share


    —ADSs surrendered for withdrawal of deposited share or ADS cancelled or reduced for any other reason
     


    $5.00 for each 100 ADSs (or portion thereof) reduced, cancelled or surrendered


    Transferring, splitting or grouping receipts


    —Transfers


    $1.50 per ADR
     


    General depositary services


    — Services performed by the Depositary in administering the ADRs
    — Such fees and expenses as are incurred by the Depositary (including without limitation expenses incurred on behalf of ADR holders in connection with compliance with foreign exchange control regulations or any law or regulation relating to foreign investment) in delivery of deposited securities (*which may include assets associated with such securities) or otherwise in connection with the Depositary's or its Custodian's compliance with applicable law, rule or regulation)

    —Conversion of foreign currency into U.S. dollars
    —Any other charge payable by any of the Depositary, any of the Depositary’s agents, including, without limitation, the Custodian, or the agents of the Depositary’s agents in connection with the servicing of the share or other deposited securities.


    — Up to $0.03 per ADS (or portion thereof) in each calendar year for services performed by the Depositary in administering the ADRs (which fee shall be assessed against ADR holders as of the record date or dates set by the Depositary not more than once each calendar year and shall be payable at the sole discretion of the Depositary by billing such ADR holders or by deducting such charge from one or more cash dividends or other cash distributions).
    — Other fees and expenses as incurred

    —Expenses of the Depositary in connection with the conversion of foreign currency into U.S. dollars are paid out of such foreign currency,
    —any other charge payable by any of the Depositary, any of the Depositary’s agents, including, without limitation, the Custodian, or the agents of the Depositary’s agents in connection with the servicing of the share or other deposited securities, which charge shall be assessed against ADR holders as of the record date or dates set by the Depositary and shall be payable at the sole discretion of the Depositary by billing such ADR holders or by deducting such charge from one or more cash dividends or other cash distributions.
     


    Receiving or distributing dividends

    —Distribution of cash, share, rights, and other properties.

    —$0.02 or less per ADS for distribution of cash or net proceeds of sale.
    —Distribution of share and securities (treated as share), the fee being in an amount equal to the fee for the execution and delivery of ADSs which would have been charged as a result of the deposit of share, $5.00 for each 100 ADSs (or portion thereof).
     

    In addition, an ADS holder may also be liable for: (i) stock transfer or other taxes and other governmental charges; (ii) cable, telex and facsimile transmission and delivery charges incurred at the request of persons depositing, or ADR holders delivering Shares, ADRs or deposited securities; (iii) transfer or registration fees for the registration or transfer of deposited securities on any applicable register in connection with the deposit or withdrawal of deposited securities.

    87


    Fees Payable by the Depositary to the Issuer

    JPMorgan, as our depositary, has agreed to reimburse us for certain expenses related to our ADS program which we incur each year. For 2012, we received US$0.1 million in reimbursements from JPMorgan, primarily related to accountant fees and investor relations expenses.

     

     

     

     

    88


    PART II

    ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

    Not Applicable.

    ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

    None.

    ITEM 15. CONTROLS AND PROCEDURES

    Evaluation of disclosure controls and procedures

    Our management, with the participation of our chief executive officer and chief financial officer, has performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report, as required by Rule 13a-15(b) under the Exchange Act.

    Based upon that evaluation, our management has concluded that, as of December 31, 2012, our disclosure controls and procedures were effective in ensuring that the information required to be disclosed by us in the reports that we file and furnish under the Exchange Act was recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.

    Report of Management on Internal Control over Financial Reporting

    Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, for our company. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Included in our internal control over financial reporting are policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations from our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.

    As required by Section 404 of the Sarbanes-Oxley Act of 2002 and related rules as promulgated by the Securities and Exchange Commission, our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2012 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, our management has concluded that our internal control over financial reporting was effective as of December 31, 2012.

    Because of its inherent limitations, a system of internal control over financial reporting may not prevent or detect all misstatements. In addition, projections of any evaluation of effectiveness of our internal control over financial reporting 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.

    Our independent registered public accounting firm, Ernst & Young Hua Ming LLP, has audited the effectiveness of our internal control over financial reporting as of December 31, 2012 as stated in its report, which appears on page F-2 of this annual report on Form 20-F.

    Changes in Internal Controls

    There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 in the Exchange Act that occurred during the period covered by this annual report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

    89


       
    ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

    Our board of directors has determined that Mr. Tianruo Pu qualifies as an audit committee financial expert as defined in Item 16A of Form 20-F. Each of the members of our Audit Committee is an “independent director” as defined under Rule 10A-3 of the Securities Exchange Act of 1934 and Rule 5605 of the NASDAQ Stock Market Rules.

    ITEM 16B. CODE OF ETHICS

    Our board of directors has adopted a Code of Ethics (See Exhibit 11.1), which is applicable to all of our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.

    We have filed our code of ethics as an exhibit to our annual report on Form 20-F for the year ended December 31, 2006 and have posted the code on our website www.3sbio.com. We hereby undertake to provide to any person, without charge, a copy of our code of 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 our principal external auditors, for each of the last two fiscal years. We did not pay any other fees to our principal external auditors during such periods.

        Year ended December 31,  
        2011     2012     2012  
        RMB     RMB     US$  
        (in thousands)  
    Audit Fees(1)   4,764     4,871     781  
                       
    Tax Fees(2)   260     -     -  

    (1) “Audit fees” means the aggregate fees billed in each of the fiscal years listed for professional services rendered by our principal external auditors for the integrated audit, including the financial audit and the audit pursuant to Section 404 of the Sarbanes-Oxley Act of 2002;
    (2) “Tax fees” means the aggregate fees billed in each of the fiscal years listed for professional services rendered by our principal external auditors for tax compliance, tax advice, and tax planning.

    The pre-approval policy and procedures for accounting fees, as described in paragraph (c)(7)(i) of Rule 2-01 of Regulation S-X, are contained in the charter of the audit committee of our board of directors, and summarized below:

    • Prior to formally appointing or re-appointing the principal external auditor, our audit committee reviews and assesses the independence of the principal external auditor, including but not limited to any relationships with us, or any other entity that may impair the principal external auditor’s judgment or independence in respect to us.

    • Our audit committee discusses with the principal external auditor the overall scope of the external audit, including identified risk areas and any additional agreed-upon procedures.

    • Our audit committee reviews the principal external auditor’s compensation to ensure that an effective, comprehensive and complete audit can be conducted for the agreed compensation level.

    All non-audit services were pre-approved by our audit committee.

    ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

    None.

    90



    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

    As permitted by NASDAQ, in lieu of the NASDAQ corporate governance rules, but subject to certain exceptions, we may follow home country practice.

    Composition of the Nominating Committee

    The nominating committee of our board of directors currently has one member that is not an independent director within the meaning of Rule 5605(a)(2) of the NASDAQ Marketplace Rules, as amended from time to time. This practice of ours differs from Rule 5605(e) of the NASDAQ Marketplace Rules. There is no specific requirement under Cayman Islands law on a nominating committee of the board of directors comprised solely of independent directors.

    Shareholder Approval of Equity Compensation Arrangements

    We are not required to obtain shareholder approval when a stock option or purchase plan is to be established or materially amended or other equity compensation arrangement made or materially amended, pursuant to which stock may be acquired by officers, directors, employees, or consultants. This practice of ours differs from Rule 5635(c) of the NASDAQ Marketplace Rules. There is no specific requirement under Cayman Islands law on shareholder approval with respect to equity compensation arrangements. The amendment to our 2006 stock plan and the establishment of our 2010 equity incentive plan were adopted by our board of directors without shareholder approval.

    ITEM 16H. MINE SAFETY DISCLOSURE

    Not applicable.

    91


    PART III

    ITEM 17. FINANCIAL STATEMENTS

    The registrant has elected to provide the consolidated financial statements and related information specified in Item 18 in lieu of Item 17.

    ITEM 18. FINANCIAL STATEMENTS

    The audited consolidated financial statements and the reports of our principal external auditors are included in this annual report beginning on page F-1.

    ITEM 19. EXHIBITS

    Exhibit Number Description of Exhibits
    1.1

    Amended and Restated Memorandum of Association of 3SBio Inc. (incorporated by reference to Exhibit 3.1 from our F- 1 registration statement (File No. 333-140099), as amended, initially filed with the Commission on January 19, 2007)

    1.2

    Amended and Restated Articles of Association of 3SBio Inc. (incorporated by reference to Exhibit 3.2 from our F-1 registration statement (File No. 333-140099), as amended, initially filed with the Commission on January 19, 2007, except that Article 61(2) shall now read:“At any general meeting of the Company, two or more Members entitled to vote and present in person or by proxy or, in the case of a Member being a corporation, by its duly authorised representative representing not less than one-third in nominal value of the total issued voting share in the Company throughout the meeting shall form a quorum for all purposes.” The amendment to Article 61(2) was approved at the 2010 Annual General Meeting by a special resolution on October 29, 2010.)

    2.1

    Form of Share Certificate of 3SBio Inc. (incorporated by reference to Exhibit 4.1 from our F-1 registration statement (File No. 333-140099), as amended, initially filed with the Commission on January 19, 2007)

    2.2

    Form of Deposit Agreement, including Form of ADR, of 3SBio Inc. (incorporated by reference to Exhibit 4.2 from our F-1 registration statement (File No. 333-140099), as amended, initially filed with the Commission on January 19, 2007)

    4.1

    2006 Stock Plan adopted by 3SBio Inc., dated as of September 5, 2006 (incorporated by reference to Exhibit 10.1 from our F-1 registration statement (File No. 333-140099), as amended, initially filed with the Commission on January 19, 2007)

    4.2

    First Amendment to 2006 Stock Plan, effective April 8, 2010 (incorporated by reference to Exhibit 4.2 from our annual report on Form 20-F for the year ended December 31, 2009, filed with the Commission on June 25, 2010)

    4.3

    2010 Equity Incentive Plan, effective April 8, 2010 (incorporated by reference to Exhibit 4.3 from our annual report on Form 20-F for the year ended December 31, 2009, filed with the Commission on June 25, 2010)

    4.4

    Form Purchase Contract for FCS between Shenyang Sunshine Pharmaceutical Company Limited and Shanghai Weike Biochemical Reagent Co., Ltd. (incorporated by reference to Exhibit 4.2 from our annual report on Form 20-F for the year ended December 31, 2008, filed with the Commission on April 21, 2009)

    4.5

    Form Purchase Agreement for BPT-6 culture medium between Shenyang Sunshine Pharmaceutical Company Limited and Invitrogen Trading (Shanghai) Company Limited (incorporated by reference to Exhibit 4.5 from our annual report on Form 20-F for the year ended December 31, 2009, filed with the Commission on June 25, 2010)

    4.6

    Form of Distribution Agreement (incorporated by reference to Exhibit 10.15 from our F-1 registration statement (File No. 333-140099), as amended, initially filed with the Commission on January 19, 2007)

    4.7

    Sanitary Piping System Contract between Shenyang Sunshine Pharmaceutical Company Limited and Shanghai Macroprocess Technology Co. Ltd., dated March30, 2009 (incorporated by reference to Exhibit 4.7 from Amendment No. 1 to our annual report on Form 20-F for the year ended December 31, 2009, filed with the Commission on November 3, 2011)

    4.8

    Installation Contract for the Core Cleanroom Area of the New Plant between Shenyang Sunshine Pharmaceutical Company Limited, and Suntec Cleanroom & HVAC Engineering Co. Ltd. and Suntec (Suzhou) Cleanroom System Co. Ltd., dated July 3, 2009 (incorporated by reference to Exhibit 4.8 from Amendments No. 2 and No. 3 to our annual report on Form 20-F for the year ended December 31, 2009, filed with the Commission on November 3, 2011 )

    4.9

    Partnership Agreement among Shenyang Sunshine Pharmaceutical Co., Limited, Taizhou Huan Sheng Investment Management Company Limited, and Taizhou Oriental CMC Limited, dated April 25, 2011 (incorporated by reference to Exhibit 4.9 from our annual report on Form 20-F for the year ended December 31, 2011, filed with the Commission on April 30, 2012)

    92



    4.10

    Master Agreement among DaVita Care PTE. LTD., DaVita China PTE. LTD., 3SBio, Inc., and Liaoning Sunshine Science and Technology Development Co. Limited, made as of February 21, 2012 (incorporated by reference to Exhibit 4.10 from our annual report on Form 20-F for the year ended December 31, 2011, filed with the Commission on April 30, 2012)

    4.11

    Agreement and Plan of Merger, dated as of February 8, 2013, among 3SBio Inc., Decade Sunshine Limited and Decade Sunshine Merger Sub (incorporated by reference to Exhibit 99.2 from a report on Form 6-K of the Company , filed with the Commission on February 8, 2013)

    4.12

    Business Cooperation Agreement among 3SBio Inc., Shenyang Sunshine Pharmaceutical Company Limited and Liaoning Sunshine Pharmaceutical Company Limited (incorporated by reference to Exhibit 10.21 from our F-1 registration statement (File No. 333-140099), as amended, initially filed with the Commission on January 19, 2007)

    4.13

    Purchase Agreement for the Acquisition of Equity Interest in Liaoning Sunshine Pharmaceutical Company Limited between Shenyang Sunshine Pharmaceutical Company Limited and Dan Lou (incorporated by reference to Exhibit 10.18 from our F-1 registration statement (File No. 333-140099), as amended, initially filed with the Commission on January 19, 2007)

    4.14

    Voting Rights Agreement between Shenyang Sunshine Pharmaceutical Company Limited and Dan Lou (incorporated by reference to Exhibit 10.20 from our F-1 registration statement (File No. 333-140099), as amended, initially filed with the Commission on January 19, 2007)

    4.15

    Pledge Agreement of Equity Interest in Liaoning Sunshine Pharmaceutical Company Limited between Shenyang Sunshine Pharmaceutical Company Limited and Dan Lou (incorporated by reference to Exhibit 10.19 from our F-1 registration statement (File No. 333-140099), as amended, initially filed with the Commission on January 19, 2007)

    4.16*

    Amendment to Business Cooperation Agreement among Shenyang Sunshine Pharmaceutical Company Limited, Liaoning Sunshine Bio-Pharmaceutical Company Limited,, and 3SBio Inc., dated as of December 31, 2012.

    4.17*

    Supplement No. 1 to Purchase Agreement for the Acquisition of Equity Interest in Liaoning Sunshine Pharmaceutical Company Limited between Shenyang Sunshine Pharmaceutical Company Limited and Dan Lou, effective as of January 1, 2009

    4.18*

    Supplement No. 2 to Purchase Agreement for the Acquisition of Equity Interest in Liaoning Sunshine Pharmaceutical Company Limited between Shenyang Sunshine Pharmaceutical Company Limited and Dan Lou, effective as of January 1, 2009

    4.19*

    Amendment to Purchase Agreement for the Acquisition of Equity Interest in Liaoning Sunshine Pharmaceutical Company Limited between Shenyang Sunshine Pharmaceutical Company Limited and Dan Lou, dated as of December 31, 2012

    4.20*

    Amendment to Voting Rights Agreement between Shenyang Sunshine Pharmaceutical Company Limited and Dan Lou, dated as of December 31, 2012

    4.21*

    Amendment to Equity Pledge Agreement between Shenyang Sunshine Pharmaceutical Company Limited and Dan Lou, dated as of December 31, 2012

    4.22

    Voting Agreement, dated as of February 8, 2013, by and among the Company, Decade Sunshine Limited and the Rollover Shareholders, incorporated herein by reference to Exhibit 7.06 to Schedule 13D filed by certain Rollover Shareholders with the SEC on February 19, 2013.

    4.23

    Limited Guaranty, dated as of February 8, 2013, by Dr. Jing Lou in favor of the Company, incorporated herein by reference to Exhibit 7.07 to Schedule 13D filed by certain Rollover Shareholders with the SEC on February 19, 2013.

    4.24

    Limited Guaranty, dated as of February 8, 2013, by CPEChina Fund, L.P. in favor of the Company, incorporated herein by reference to Exhibit 7.08 to Schedule 13D filed by certain Rollover Shareholders with the SEC on February 19, 2013.

    4.25

    Amendment No. 1 to the Agreement and Plan of Merger, dated as of April 24, 2013, by and between the Company, Decade Sunshine Limited and Decade Sunshine Merger Sub, incorporated herein by reference to Exhibit (d)-(7) to the Schedule 13E3 Amendment No. 8 filed with the SEC on February 19, 2013

    8.1*

    List of Subsidiaries of 3SBio Inc.

    93



    11.1

    Code of Ethics (incorporated by reference to Exhibit 11.1 from our annual report on Form 20-F for the year ended December 31, 2006, filed with the Commission on June 29, 2007)

    12.1*

    CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

    12.2*

    CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

    13.1*

    CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

    13.2*

    CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

    15.1*

    Consent of Ernst & Young Hua Ming LLP

    * Filed herewith.

    94


    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.

    3SBio Inc.

    By: /s/ Dr. Jing Lou                                             
    Name:  Dr. Jing Lou
    Title: Chief Executive Officer
       
    Date: April 30, 2013


    INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

    Consolidated Financial Statements of 3SBio Inc. Page
    Reports of Independent Registered Public Accounting Firm F-1
    Consolidated Balance Sheets as of December 31, 2011 and 2012 F-3
    Consolidated Statements of Income for the years ended December 31, 2010, 2011 and 2012 F-4
    Consolidated Statements of Comprehensive Income for the years ended December 31, 2010, 2011 and 2012 F-5
    Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2010, 2011 and 2012 F-6
    Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2011 and 2012 F-7
    Notes to Consolidated Financial Statements F-8



    Report of Independent Registered Public Accounting Firm

    The Board of Directors and Shareholders of 3SBio Inc.

    We have audited the accompanying consolidated balance sheets of 3SBio Inc. as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2012. 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of 3SBio Inc. at December 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2012, 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), 3SBio Inc.’s internal control over financial reporting as of December 31, 2012, 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 30, 2013 expressed an unqualified opinion thereon.

    /s/ Ernst & Young Hua Ming LLP
    Beijing, People’s Republic of China
    April 30, 2013

    F-1


    Report of Independent Registered Public Accounting Firm

    The Board of Directors and Shareholders of 3SBio Inc.

    We have audited 3SBio Inc.’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). 3SBio Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

    We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, 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, 3SBio Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, 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 3SBio Inc. as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2012 of 3SBio Inc. and our report dated April 30, 2013 expressed an unqualified opinion thereon.

    /s/ Ernst & Young Hua Ming LLP
    Beijing, People’s Republic of China

    April 30, 2013

    F-2



    3SBio Inc.
    Consolidated Balance Sheets
    At December 31, 2011 and 2012  
    (RMB and US$ expressed in thousands, except share data)


     

            December 31,  

     

                           

     

      Note     2011     2012     2012  

     

            RMB     RMB     US$  

    ASSETS

                         

    Current assets

                         

    Cash and cash equivalents

          245,813     450,557     72,319  

    Restricted cash

          665     668     107  

    Time deposits with financial institutions

            499,201     411,294     66,017  

    Accounts receivable, less allowance for doubtful accounts: December 31, 2011: RMB2,542; December 31,2012: RMB2,208 (US$355)

      3     113,949     115,563     18,549  

    Notes receivable

          47,243     59,017     9,473  

    Inventories

      4     27,604     35,430     5,687  

    Prepaid expenses and other receivables

      5     26,672     35,643     5,721  

    Available-for-sale securities

      6     22,830     10,576     1,698  

    Due from related parties

      21     6,000     1,263     203  

    Deferred tax assets

      17(a)     2,750     3,276     526  

    Total current assets

          992,727     1,123,287     180,300  

     

                           

    Time deposits with financial institutions

          20,000     30,000     4,815  

    Available-for-sale securities

      6     10,848     11,232     1,803  

    Investment in non-consolidated affiliates

      7     2,245     8,294     1,331  

    Property, plant and equipment, net

      8     198,053     224,245     35,994  

    Prepaid land lease payment

      9     17,448     16,898     2,712  

    Prepayment and non-current deposits

      10     16,801     7,469     1,199  

    Intangible assets, net

      11     49,615     45,914     7,370  

    Long-term receivables

      19     3,111     2,355     378  

    Deferred tax assets

      17(a)   262     335     54  

     

                           

    Total assets

            1,311,110     1,470,029     235,956  

     

                           

    LIABILITIES AND SHAREHOLDERS’ EQUITY

                           

     

                           

    Current liabilities (including current liabilities of the consolidated VIE without recourse to 3SBio Inc. of RMB2,457 and RMB5,800 (US$931) as of December 31, 2011 and 2012, respectively. Note 1):

     

     

                           

    Accounts payable

          6,218     3,765     604  

    Deferred income

      12     374     1,981     318  

    Accrued expenses and other payables

      13     48,389     69,331     11,128  

    Income tax payable

            8,894     3,725     598  

     

                           

    Total current liabilities

            63,875     78,802     12,648  

     

                           

    Deferred income

      12     2,029     12,604     2,023  

     

                           

    Total liabilities

          65,904     91,406     14,671  

    Commitments and contingencies

      22                    

     

                           

    Shareholders’ equity

                           

    Share capital – ordinary shares US$0.0001 par value, 500,000,000 shares authorized, 154,473,159 and 155,635,016 issued and outstanding as of December 31, 2011 and 2012 respectively

      14     124     125     20  

    Additional paid-in capital

            973,218     997,088     160,044  

    Accumulated other comprehensive loss

      23     (126,290 )   (119,319 )   (19,152 )

    Retained earnings

            387,317     489,671     78,598  

    Total shareholders’ equity attributable to 3SBio Inc.

          1,234,369     1,367,565     219,510  

     

                           

    Non-controlling interest

            10,837     11,058     1,775  

    Total shareholders’ equity

            1,245,206     1,378,623     221,285  

     

                           

    Total liabilities and shareholders’ equity

          1,311,110     1,470,029     235,956  

    The accompanying notes are an integral part of these consolidated financial statements.

    F-3



    3SBio Inc.
    Consolidated Statements of Income
    For the years ended December 31, 2010, 2011 and 2012
    (RMB and US$ expressed in thousands, except share data)


            Year ended December 31,  

      Note     2010     2011     2012     2012  

            RMB     RMB     RMB     US$  

                                 

    Net revenue

      15     418,628     541,614     669,948     107,534  

    Cost of revenue

            (41,650 )   (58,073 )   (70,504 )   (11,317 )

    Gross profit

            376,978     483,541     599,444     96,217  

     

                                 

    Operating expenses

                                 

     

                                 

    Research and development costs

            (39,409 )   (41,805 )   (71,228 )   (11,433 )

    Sales, marketing and distribution expenses

            (194,877 )   (254,767 )   (318,223 )   (51,078 )

    General and administrative expenses

            (55,850 )   (66,908 )   (82,070 )   (13,173 )

    Grant income

      12     1,256     1,585     898     144  

    Income from operations

            88,098     121,646     128,821     20,677  

     

                                 

    Interest income

            12,950     18,499     25,708     4,126  

    Impairment loss on available-for-sale securities

      6(a)     -     (1,334 )   (20,427 )   (3,279 )

    Share of gain/(loss) in non-consolidated affiliates

      7     704     (1,590 )   (655 )   (105 )

    Other income/(loss), net

      20     1,306     (851 )   (994 )   (160 )

    Total other income, net

          14,960     14,724     3,632     582  

                                 

    Income before income tax expense

            103,058     136,370     132,453     21,259  

    Income tax expense

      17(a)     (21,772 )   (28,210 )   (29,878 )   (4,796 )

                                 

    Net income

            81,286     108,160     102,575     16,463  

                                 

    Less: net profit/(loss) attributable to non- controlling interest, net of tax

          -     (413 )   221     35  

     

                               

    Net income attributable to 3SBio Inc.

          81,286     108,573     102,354     16,428  

     

                                 

    Net income attributable to 3SBio Inc. per share:

                       

         - Basic

            0.54     0.71     0.66     0.11  

         - Diluted

            0.53     0.69     0.64     0.10  

     

                                 

    Weighted average shares:

                                 

         - Basic

            151,241,036     153,310,128     154,726,537     154,726,537  

         - Diluted

            154,131,768     157,148,685     158,971,682     158,971,682  

    The accompanying notes are an integral part of these consolidated financial statements.

    F-4



    3SBio Inc.
    Consolidated Statements of Comprehensive Income
    For the years ended December 31, 2010, 2011 and 2012
    (RMB and US$ expressed in thousands, except share data)


     

            Year ended December 31,  

     

                                 

     

      Note     2010     2011     2012     2012  

     

            RMB     RMB     RMB     US$  

     

                                 

    Net income

            81,286     108,160     102,575     16,463  

    Other comprehensive income/(loss), net of tax:

                       

    Net unrealized gain/(loss) in available-for- sale securities, net of nil tax

      23     21,335     (26,545 )   8,945     1,436  

    Foreign currency translation adjustments, net of nil tax

      23     (10,258 )   (10,214 )   (1,974 )   (317 )

     

            11,077     (36,759 )   6,971     1,119  

    Comprehensive income

            92,363     71,401     109,546     17,582  

     

                                 

    Less: comprehensive profit/(loss) attributable to non-controlling interest

          -     (413 )   221     35  

    Comprehensive income attributable to 3SBio Inc.

        92,363     71,814     109,325     17,547  

    The accompanying notes are an integral part of these consolidated financial statements.

    F-5



    3SBio Inc.
    Consolidated Statements of Shareholders’ Equity
    For the years ended December 31, 2010, 2011 and 2012
    (RMB and US$ expressed in thousands, except share data)


     

                              Accumulated                

     

            Share capital     Additional     other     Retained     Non-     Total share-  

     

                        paid-in capital     comprehensive     earnings     controlling     holders’  

     

      Note     No. of shares     Amount           loss           interest     equity  

     

                  RMB     RMB     RMB     RMB     RMB     RMB  

     

                                                   

    Balance as of January 1, 2010

            150,641,461     121     915,267     (100,608 )   197,458     -     1,012,238  

    Share-based compensation, net of nil tax

                                                   

       -Shares issued upon vesting of shares/RSUs granted to independent directors and executives

      18(a)     1,103,499     1     22,538     -     -     -     22,539  

       -Share options granted to executives and employees

      18(b)   -     -     2,149     -     -     -     2,149  

       -Shares issued pursuant to exercise of vested options

      18(b)   909,188     1     6,763     -     -     -     6,764  

    Net income

            -     -     -     -     81,286     -     81,286  

    Net unrealized gain on available-for-sale securities, net of nil tax

      6(a)   -     -     -     21,335     -     -     21,335  

    Foreign currency translation adjustments, net of nil tax

            -     -     -     (10,258 )   -     -     (10,258 )

    Balance as of December 31, 2010

            152,654,148     123     946,717     (89,531 )   278,744     -     1,136,053  

    Share-based compensation, net of nil tax

                                                   

       -Shares issued upon vesting of shares/RSUs granted to independent directors and executives

      18(a)   1,062,220     1     21,128     -     -     -     21,129  

       -Share options granted to executives and employees

      18(b)   -     -     660     -     -     -     660  

       -Shares issued pursuant to exercise of vested options

      18(b)   756,791     -     4,713     -     -     -     4,713  

    Capital injection from non-controlling interest shareholder

            -     -     -     -     -     11,250     11,250  

    Net income attributable to 3SBio Inc.

            -     -     -     -     108,573     -     108,573  

    Net income attributable to non-controlling interest

            -     -     -     -     -     (413 )   (413 )

    Net unrealized loss on available-for-sale securities, net of nil tax

      6(a)   -     -     -     (26,545 )   -     -     (26,545 )

    Foreign currency translation adjustments, net of nil tax

            -     -     -     (10,214 )   -     -     (10,214 )

    Balance as of December 31, 2011

            154,473,159     124     973,218     (126,290 )   387,317     10,837     1,245,206  

    Share-based compensation, net of nil tax

                                                   

       -Shares issued upon vesting of shares/RSUs granted to independent directors and executives

      18(a)   1,062,849     1     23,231     -     -     -     23,232  

       -Share options granted to executives and employees

            -     -     153     -     -     -     153  

       -Shares issued pursuant to exercise of vested options

      18(b)   99,008     -     486     -     -     -     486  

    Net income attributable to 3SBio Inc.

            -     -     -     -     102,354     -     102,354  

    Net income attributable to non-controlling interest

            -     -     -     -     -     221     221  

    Net unrealized gain on available-for-sale securities, net of nil tax

      6(a)   -     -     -     8,945     -     -     8,945  

    Foreign currency translation adjustments, net of nil tax

            -     -     -     (1,974 )   -     -     (1,974 )

    Balance as of December 31, 2012

            155,635,016     125     997,088     (119,319 )   489,671     11,058     1,378,623  

    Balance as of December 31, 2012 (US$)

                  20     160,044     (19,152 )   78,598     1,775     221,285  

    The accompanying notes are an integral part of these consolidated financial statements.

    F-6


    3SBio Inc.
    Consolidated Statements of Cash Flows
    For the years ended December 31, 2010, 2011 and 2012
    (RMB and US$ expressed in thousands)


     

            Year ended December 31,  

     

      Note     2010     2011     2012     2012  

     

            RMB     RMB     RMB     US$  

    Cash flow from operating activities

                                 

    Net income

            81,286     108,573     102,354     16,428  

    Adjustments to reconcile net income to net cash provided by operating activities:

                       

       Loss/(gain) on disposal of property, plant and equipment

      20     (371 )   2,226     268     43  

       Loss on deconsolidation of subsidiaries

      20     -     -     7,645     1,228  

       Allowance for doubtful accounts

            624     71     103     17  

       Depreciation of property, plant and equipment

      8     13,906     20,002     24,026     3,856  

       Amortization of prepaid land lease payment

      9     353     369     550     88  

       Amortization of intangible assets

      11     1,103     2,781     3,791     608  

       Amortization of deferred income

      12     (374 )   (1,374 )   (1,312 )   (211 )

       Amortization of deferred expenses

            -     16     350     56  

       Share-based compensation expenses

      18(c)   24,498     21,193     22,844     3,667  

       Non-controlling interest

            -     (413 )   221     35  

       Impairment of available-for-sale securities

      6(a)   -     1,334     20,427     3,279  

       Foreign currency exchange (gain)/loss, net

            249     (176 )   (179 )   (29 )

       Deferred income tax expense/(benefit)

      17(a)   1,075     (441 )   (599 )   (96 )

       Share of (gain)/loss in non-consolidated affiliates

      7     (704 )   1,590     655     105  

    Changes in operating assets and liabilities:

                                 

       Accounts receivable

            (23,605 )   (35,560 )   (1,280 )   (205 )

       Notes receivable

            (24,381 )   8,403     (11,774 )   (1,890 )

       Inventories

            (6,312 )   (5,609 )   (7,701 )   (1,236 )

       Prepaid expenses and other receivables

            (17,265 )   (5,529 )   (1,231 )   (197 )

       Accounts payable

            2,294     1,188     (2,453 )   (394 )

       Accrued expenses and other payables

            4,026     12,072     20,180     3,239  

       Income tax payable

            72     6,908     (5,169 )   (830 )

       Long-term receivables

            659     (513 )   756     121  

       Deferred income

            1,000     -     13,494     2,166  

       Net cash provided by operating activities

            58,133     137,111     185,966     29,848  

    Cash flow from investing activities

                                 

       Purchase of property, plant and equipment

            (40,821 )   (34,883 )   (46,102 )   (7,400 )

       Proceeds from disposal of property, plant and equipment

          -     14     425     69  

       Purchase of available-for-sale securities

            (31,951 )   -     -     -  

       Issuance of short-term loan

            (26,400 )   (2,000 )   (1,263 )   (203 )

       Repayment of short-term loan

            -     26,400     2,000     321  

       Purchase of intangible assets

            (41,277 )   (8,097 )   (8,357 )   (1,341 )

       Prepaid land lease payment

      9     -     (9,826 )   -     -  

       Purchase of time deposits

            (463,405 )   (399,201 )   (421,294 )   (67,622 )

       Proceeds from maturity of time deposits

            433,451     378,405     499,201     80,127  

       Restricted cash for investment in a subsidiary

            (1,000 )   -     -     -  

       Release of restricted cash for investment in subsidiary

          9,300     1,000     -     -  

       Investment in non-consolidated affiliates

            (3,131 )   -     (4,911 )   (788 )

       Prepayment for investment

            -     (4,134 )   -     -  

       Net cash (used in) provided by investing activities

          (165,234 )   (52,322 )   19,699     3,163  

    Cash flow from financing activities

                                 

       Gross proceeds from exercise of stock options

            6,763     4,713     486     78  

       Proceeds from investment by non-controlling interest

        -     11,250     -     -  

       Net cash provided by financing activities

            6, 763     15,963     486     78  

       Effect of foreign currency exchange rate change on cash

          (9,179 )   (8,189 )   (1,407 )   (226 )

    Net (decrease)/ increase in cash and cash equivalents

          (109,517 )   92,563     204,744     32,863  

    Cash and cash equivalents, at beginning of year

            262,767     153,250     245,813     39,456  

    Cash and cash equivalents, at end of year

            153,250     245,813     450,557     72,319  

    Supplemental disclosures of cash flow information:

                       

    Cash paid during the year for:

                                 

       Income taxes paid

            (20,279 )   (21,264 )   (35,645 )   (5,721 )

       Non-cash transactions:

                                 

       Acquisition of property, plant and equipment included in accrued expenses and other payables

          (6,923 )   (3,680 )   (4,442 )   (713 )

    The accompanying notes are an integral part of these consolidated financial statements

    F-7


    3SBio Inc.
    Notes to Consolidated Financial Statements
    For the years ended December 31, 2010, 2011 and 2012

    1. Principal activities, organization and basis of presentation

    Principal activities

    3SBio Inc. (the “Company”) and subsidiaries (collectively the “Group”) are principally engaged in the research, development, manufacture and distribution of pharmaceutical products in the People’s Republic of China (the “PRC”). The Group currently manufactures and/or distributes five types of biopharmaceutical products, which include the following:

    • EPIAO, an injectable recombinant human erythropoietin that is used to stimulate the production of red blood cells in patients with anemia and to reduce the need for blood transfusions;
    • TPIAO, a recombinant human thrombopoietin indicated for the treatment of chemotherapy-induced thrombocytopenia;
    • Two legacy products, including Intefen, a recombinant interferon alpha-2a product indicated for the treatment of carcinoma of the lymphatic or hematopoietic system and viral infectious diseases; and Inleusin, a recombinant human IL-2 product indicated for the treatment of renal cell carcinoma, metastatic melanoma, thoratic fluid build-up caused by cancer and tuberculosis; and
    • Iron Sucrose Supplement (“Iron”), an intravenously administered prescription drug that is designed to treat anemia associated with iron deficiency, is indicated for patients with end-stage renal disease requiring iron replacement therapy.

    Organization

    The Company was incorporated in the Cayman Islands in August 2006 under the Cayman Islands Companies Law as an exempted company with limited liability.

    On February 7, 2007, the Company’s shares were listed on the Nasdaq Global Market following the completion of its initial public offering (“IPO”). The Company does not conduct any substantive operations of its own but conducts its primary business operations through its subsidiaries and variable interest entity (“VIE”).

    The Company was incorporated as part of the reorganization of Shenyang Sunshine Pharmaceutical Company Limited (“Shenyang Sunshine”) and its consolidated entities (the “Reorganization”) in preparation of the Company’s IPO. In connection with the Reorganization, and pursuant to a shareholders’ agreement amongst the existing beneficial shareholders of Shenyang Sunshine, an ultimate beneficial shareholder of Shenyang Sunshine established Collected Mind Limited (“Collected Mind”) in July 2006 in the British Virgin Islands and held the interest in Collected Mind on behalf of all the ultimate beneficial shareholders of Shenyang Sunshine or their nominees, in proportion to their respective effective share ownership in Shenyang Sunshine. Collected Mind acquired all of the equity interest in Shenyang Sunshine in August 2006. Shortly after this acquisition, the Company was established as the ultimate holding company. In September 2006, in consideration of the Company’s issuance of shares to the ultimate beneficial shareholders of Collected Mind or their nominees in proportion to each of their beneficial interest in Collected Mind, the entire equity interest in Collected Mind was acquired by the Company. Upon completion of the Reorganization, Collected Mind and the Company became Shenyang Sunshine’s immediate and ultimate holding companies, respectively. The proportionate ownership of the Company immediately after the Reorganization is substantially the same.

    F-8


    3SBio Inc.
    Notes to Consolidated Financial Statements
    For the years ended December 31, 2010, 2011 and 2012

    Shenyang Sunshine was established in the PRC in January 1993 as a Sino-foreign joint stock limited company. In connection with the Reorganization, Shenyang Sunshine became a wholly foreign-owned enterprise in the PRC.

    Prior to the Reorganization, Shenyang Sunshine consolidated Liaoning Bio-Pharmaceutical Company Limited (“Liaoning Sunshine”) as it held a 90% controlling interest in Liaoning Sunshine. Liaoning Sunshine is primarily engaged in the distribution of the Group’s in-licensed products, currently comprising Iron.

    In connection with the Reorganization and for purposes of compliance with certain PRC rules and regulations related to the distribution of pharmaceutical products, Shenyang Sunshine transferred its 90% equity interest in Liaoning Sunshine to Mr. Dan Lou, a director of the Company, in November 2006. In January 2007, Shenyang Sunshine entered into a series of contractual arrangements (“Contractual Agreements”) with Liaoning Sunshine and its shareholder including a business cooperation agreement, equity interest acquisition agreement, voting rights agreement and equity pledge agreement. The principal terms of the Contractual Agreements entered into between Shenyang Sunshine, Liaoning Sunshine (the “VIE”) and its shareholder are further described below:

    Business cooperation agreement

    Under the business cooperation agreement between Shenyang Sunshine and Liaoning Sunshine, as amended in December 2012, Shenyang Sunshine, as an exclusive service provider, provides technology support services and market development and consulting services to Liaoning Sunshine, and, as consideration, receives 70% of Liaoning Sunshine’s net profit before tax as service fees. Shenyang Sunshine may adjust the percentage of the service fee at its sole discretion unilaterally. In addition, Liaoning Sunshine has agreed that, without the prior written consent of a majority of the Company’s independent directors, it will not increase or decrease its registered capital, declare dividends or make similar payments, make any investment, incur any indebtedness, mortgage or dispose of its material assets, or consolidate or merge with any other entity. This agreement has an initial term of 10 years, and, thereafter, renewable at Shenyang Sunshine’s option. Shenyang Sunshine may unilaterally revoke or terminate the agreement with prior notice to but not consent of Liaoning Sunshine and Liaoning Sunshine may not revoke or terminate the agreement.

    Equity interest acquisition agreement

    Shenyang Sunshine and Mr. Dan Lou entered into a purchase agreement for the acquisition of equity interest in Liaoning Sunshine in December 2006, as supplemented in January 2009 and amended in December 2012 respectively. Pursuant to this agreement, Mr. Dan Lou granted Shenyang Sunshine an irrevocable and exclusive right to purchase, to the extent permissible under PRC law, the equity interest in Liaoning Sunshine for a purchase price of RMB13.5 million, immediately after Shenyang Sunshine obtains the requisite PRC government approval(s). The purchase price of RMB13.5 million was prepaid by Shenyang Sunshine to Mr. Dan Lou shortly after the signing of this agreement in December 2006. In addition, under this agreement, Shenyang Sunshine may appoint the president, chief financial officer and other senior management of Liaoning Sunshine; and may unilaterally adjust the service fees charged under the business cooperation agreement. Shenyang Sunshine commits to provide financial support to Liaoning Sunshine including but not limit to absorbing its operating losses, which financial support Shenyang Sunshine may not require Liaoning Sunshine to repay. This agreement remains in effect until all of the equity interest in Liaoning Sunshine is acquired by Shenyang Sunshine. Shenyang Sunshine may unilaterally revoke or terminate the agreement with prior notice to but not consent of Mr. Dan Lou and Mr. Dan Lou may not revoke or terminate the agreement. Liaoning Sunshine must obtain Shenyang Sunshine’s approval prior to executing any contracts over RMB100,000 except in the ordinary course of business.

    F-9


    3SBio Inc.
    Notes to Consolidated Financial Statements
    For the years ended December 31, 2010, 2011 and 2012

    Voting rights agreement

    Shenyang Sunshine and Mr. Dan Lou entered into a voting rights agreement in December 2006, which was amended in December 2012. Pursuant to this agreement, Mr. Dan Lou grants to Shenyang Sunshine a power of attorney that appoints Shenyang Sunshine as his legal representative with full authority to vote on all matters concerning Liaoning Sunshine; and to exercise all shareholder rights, with respect to all the equity interests of Liaoning Sunshine owned by him, with such grant to be in effect henceforth for all the periods where Mr. Dan Lou is a shareholder of Liaoning Sunshine. Shenyang Sunshine may unilaterally revoke or terminate the agreement with prior notice to but not consent of Mr. Dan Lou and Mr. Dan Lou may not revoke or terminate the agreement.

    Equity pledge agreement

    Shenyang Sunshine and Mr. Dan Lou entered into an equity pledge agreement in January 2007, which was amended in December 2012. Pursuant to the equity pledge agreement between Shenyang Sunshine and Mr. Dan Lou, Mr. Dan Lou pledged all of his equity interest in Liaoning Sunshine to Shenyang Sunshine to guarantee his obligations under the equity interest acquisition agreement and the voting rights agreement. Shenyang Sunshine is entitled to collect all dividends and other distributions if and when declared and paid by Liaoning Sunshine, during the term of this agreement. The equity pledge agreement remains in effect until Mr. Dan Lou fulfills all of his respective obligations under the equity interest acquisition agreement and the voting rights agreement. Shenyang Sunshine may unilaterally revoke or terminate the agreement with prior notice to but not consent of Mr. Dan Lou and Mr. Dan Lou may not revoke or terminate the agreement.

    As a result of these Contractual Agreements, the Company consolidates Liaoning Sunshine in accordance with Securities and Exchange Commission (“SEC”) Rule SX-3A-02 and Accounting Standards Codification (“ASC”) subtopic 810-10 Consolidation: Overall, because Shenyang Sunshine (the “Primary Beneficiary”) has the power to direct the activities that most significantly impact the economic performance of Liaoning Sunshine and is obligated to absorb substantially all of the expected losses of the VIE.

    However, uncertainties in the PRC legal system could cause the Group’s current ownership structure to be found in violation of future PRC laws or regulations and could limit the Company’s ability, through Shenyang Sunshine, the Primary Beneficiary, to enforce its rights under these Contractual Agreements. Furthermore, the shareholder of the VIE may have interests that are different than those of the Company, which could potentially increase the risk that they would seek to act contrary to the terms of the Contractual Agreements. In such case, the Company may not be able to operate or control the VIE, or do so to the extent the business requires, which may result in deconsolidation of the VIE and its subsidiary.

    The following table sets forth the assets and liabilities of the VIE and its subsidiary included in the Company’s consolidated balance sheets:

    F-10


    3SBio Inc.
    Notes to Consolidated Financial Statements
    For the years ended December 31, 2010, 2011 and 2012

     

       December 31,   

     

      2011     2012     2012  

     

      RMB’000     RMB’000     US$’000  

    Current assets

      21,465     56,551     9,077  

    Non-current assets

      25,364     42,799     6,870  

    Total assets

      46,829     99,350     15,947  

     

                     

    Current liabilities

      2,457     5,800     931  

    Total liabilities

      2,457     5,800     931  

    The financial performance and cash flows of the VIE and its subsidiary is as follows:

     

      Year ended December 31,  

     

      2010     2011     2012     2012  

     

      RMB’000     RMB’000     RMB’000     US$’000  

     

                           

    Net revenues

      23,169     31,374     42,714     6,856  

     

                           

    Net income /(loss)

      (1,864 )   2,344     (6,608 )   (1,061 )

    Net cash used in operating activities

      (5,409 )   (3,540 )   (6,181 )   (992 )

    Net cash provided by/(used in) investing activities

      5,424     (16,424 )   (53,811 )   (8,637 )

    Net cash provided by financing activities

      -     -     -     -  

    As of December 31, 2012, there was no pledge or collateralization of the VIE’s assets and the Primary Beneficiary has not provided any financial support that it was not previously contractually required to. Creditors of the VIE and its subsidiary have no recourse to the general credit of Shenyang Sunshine or the Company. The amount of the net assets of the VIE, which are restricted under PRC laws and regulations, was RMB93,550,000 (US$15,020,000) as of December 31, 2012.

    China Sansheng Medical Limited (“HK Sunshine”) was established in Hong Kong in November 2009. HK Sunshine was established as a wholly-owned subsidiary of Collected Mind and engages in merger and acquisition efforts, as well as import and export transactions. As of December 31, 2012, HK Sunshine has not had any significant business activities.

    Liaoning Sunshine Technology & Development Co., Ltd. (“Sunshine Tech”) was established as a wholly-owned subsidiary of Liaoning Sunshine in December 2009 and engages in medical technology development, transfer of technology and technical consulting activities.

    Pursuant to the strategic alliance entered between the Group and Ascentage Pharma Group Corporation, Ltd. (“APGC”) in February 2010, the Group acquired a 40% equity interest in both APGC and Ascentage Shanghai Pharmaceutical Co., Ltd. (“Ascentage SH”, a PRC domestic company under common control with APGC), in December 2010 and June 2010, respectively. APGC and Ascentage SH engage in research and development (“R&D”) activities and hold and maintain certain pharmaceutical products intellectual property (“IP”) rights. Refer to Note 7 and Note 16(b) for details of this arrangement.

    On November 4, 2010, the Group entered into an assets acquisition agreement with EnzymeRX LLC (“EnzymeRX”) to purchase certain R&D related assets. Related to the assets acquisition arrangement, the Group formed 3SBio, LLC, a limited liability company in Delaware, USA, on November 30, 2010. Two LLC series under 3SBio, LLC, 3SBio IP Assets Series (“IP Series”) and 3SBio US Assets Series (“Assets Series”), were established to hold the assets acquired from EnzymeRX. Each assets series is a segregated assets series with liabilities insulation between the distinct series, as provided under the Delaware Limited Liability Company Act. The members of IP Series and Assets Series are Shenyang Sunshine and the Company, respectively. IP Series was dissolved in July 2012. As of December 31, 2012, Assets Series has not been involved in any business activities.

    F-11


    3SBio Inc.
    Notes to Consolidated Financial Statements
    For the years ended December 31, 2010, 2011 and 2012

    In December 2010, Jiangsu Sunshine Pharmaceutical Technology Company Limited (“Jiangsu Sunshine”) was established as a wholly-owned subsidiary of the Company in the PRC, with paid-in capital of RMB30,000,000. Jiangsu Sunshine is engaged in seeking medical technology development and other R&D opportunities in the southern part of the PRC. As of December 31, 2012, Jiangsu Sunshine has not had any significant business activities.

    In December 2010, Taizhou Huan Sheng Investment Management Company Limited (“Taizhou Huan Sheng”) was established as a wholly-owned subsidiary of the Company in the PRC, with paid-in capital of RMB1,000,000. Taizhou Huan Sheng was established to cooperate with other investors to invest in local R&D projects.

    In May 2011, Taizhou Huan Sheng Healthcare Industry Investment Center, LLP (“3SBio Ventures”) was established in the PRC with a total investment amount of RMB250,000,000. Shenyang Sunshine and Taizhou China Medicine City Company (“CMC”) own 80% and 20% limited partner interest in 3SBio Ventures, respectively. As of December 31, 2012, an investment of RMB56,300,000 (US$9,037,000) has been made by the two parties, of which RMB45,040,000 (US$7,229,600) was made by Shenyang Sunshine. The investment partnership is managed by Taizhou Huan Sheng, the general partner of 3SBio Ventures. 3SBio Ventures is engaged in seeking investments in the life sciences sector that support the Group’s strategic development. 3SBio Ventures will have an investment horizon of eight years with an option to extend. As of December 31, 2012, 3SBio Ventures has not had any significant business activities.

    In February 2012, the Company entered into a collaboration agreement with DaVita Inc. (NYSE: DVA, "DaVita"), a leading provider of kidney care services for those diagnosed with chronic kidney disease, to provide kidney care services in Jilin and Liaoning, two provinces in north eastern China. The total committed investment to be made is US$20,000,000 with DaVita and the Company contributing 70% and 30%, respectively. In June 2012, Sunshine Tech formed a joint venture, Davita-3SBio Healthcare Management (Liaoning) Co., Ltd. (“JV ManageCo”) in Benxi with DaVita China PTE. LTD (“DaVita China”), a corporation organized under the laws of the Republic of Singapore, a wholly-owned subsidiary of DaVita, to provide dialysis services in Jilin and Liaoning province. DaVita China and Sunshine Tech hold 70% and 30% equity interest in the joint venture, respectively. As of December 31, 2012, an investment of RMB11.2 million (US$1.8 million) has been made by the two parties, of which RMB3.4 million (US$0.5 million) was made by Sunshine Tech. Pursuant to the collaboration agreement, in August 2012, the Group transferred the control of the clinical centers, each a separate PRC legal entity, owned by Sunshine Tech (collectively “Clinical Centers”), to JV ManageCo and as a result, the Group deconsolidated the assets and liabilities of the Clinical Centers. Refer to note 16(d).

    Basis of presentation

    F-12


    3SBio Inc.
    Notes to Consolidated Financial Statements
    For the years ended December 31, 2010, 2011 and 2012

    The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”).

    2. Summary of significant accounting policies and practices

    Principles of consolidation

    The consolidated financial statements include the financial statements of the Company and its subsidiaries, the VIE and its subsidiary. All significant intercompany balances and transactions between the Company, its subsidiaries and consolidated VIE have been eliminated upon consolidation.

    Currency translation for financial statement presentation

    Solely for the convenience of the readers, certain 2012 RMB amounts included in the accompanying consolidated financial statements have been translated into U.S. dollars at the rate of US$1.00 = RMB6.2301, being the noon buying rate for U.S. dollars in effect on December 31, 2012 for cable transfers in RMB per U.S. dollar as certified for custom purposes by the Federal Reserve Bank of New York. No representation is made that the RMB amounts could have been, or could be, converted into U.S. dollars at that rate or at any other rate on December 31, 2012, or on any other date.

    Foreign currency transactions

    The reporting currency of the Group is Renminbi (“RMB”).The functional currency of the Company’s PRC-based subsidiaries and consolidated VIE is RMB, whereas the functional currency of the Company and its non-PRC-based subsidiaries is the U.S. dollar (“US$”).

    Transactions of the PRC-based subsidiaries and VIE denominated in currencies other than RMB are re-measured into RMB at the exchange rates quoted by the People’s Bank of China (the “PBOC”) prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are re-measured into RMB using the applicable exchange rates quoted by the PBOC at the balance sheet dates. The resulting exchange differences are recorded in “other income, net” in the consolidated statements of income.

    Assets and liabilities of the Company and non-PRC-based subsidiaries are translated into RMB using the exchange rate on the balance sheet dates. Income and expenses are translated at average exchange rates prevailing during the year. The gains and losses resulting from translation of financial statements of the Company and the Company’s non-PRC-based subsidiaries are recorded as foreign currency translation adjustments, a separate component of accumulated other comprehensive loss within shareholders’ equity.

    Comparative figures

    Certain items in prior years’ consolidated financial statements have been reclassified to conform to the current year’s presentation.

    Use of estimates

    The preparation of the consolidated financial statements in accordance with U.S. GAAP requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities on the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual financial results could differ significantly from those estimates. On an ongoing basis, management reviews its estimates and assumptions including, but not limited to, those related to the recoverability of the carrying amount and estimated useful lives of long-lived assets; valuation and other-than-temporary impairment of investments; realizability of inventories; allowance for doubtful accounts receivables; provision for sales rebates; valuation allowance for deferred tax assets; and share-based compensation. Changes in facts and circumstances may result in revised estimates.

    F-13


    3SBio Inc.
    Notes to Consolidated Financial Statements
    For the years ended December 31, 2010, 2011 and 2012

    Concentrations of risks

    Concentration of credit risk

    Cash and cash equivalents, restricted cash, time deposits, accounts receivable and notes receivable are potentially subject to concentration of credit risk. Cash and cash equivalents, restricted cash and time deposits are placed with financial institutions that management believes are of high credit quality. Accounts receivable are derived from revenue earned from customers located primarily in the PRC. The Company maintains an allowance for doubtful accounts based upon historical experience and the age of receivables, as well as taking into consideration economic and regulatory conditions. Determining appropriate allowances for these losses is an inherently uncertain process, and ultimate losses may vary from the current estimates, resulting in a material impact to future statements of income or cash flows. Due to the relatively small dollar amount of individual accounts receivable, the Company generally does not require collateral on these balances. The allowance for doubtful accounts was RMB2,542,000 and RMB2,208,000 (US$355,000) as of December 31, 2011 and 2012, respectively.

    As of December 31, 2012 and 2011, no single customer accounted for more than 10% of outstanding net accounts receivable.

    Currency convertibility risk

    RMB is not a fully convertible currency. The PRC State Administration for Foreign Exchange, under the authority of the People’s Bank of China (“PBOC”), controls the conversion of RMB into foreign currencies. The value of the RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the PRC foreign exchange trading system market. All foreign exchange transactions involving RMB must take place either through the PBOC or other institutions authorized to buy and sell foreign exchange. Commencing from July 21, 2005, the PRC government moved the RMB into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. The exchange rate has continued to fluctuate since that time.

    Business and economic risks

    The Company participates in a fast-growing and highly competitive industry. The Company believes that changes in any of the following areas could have a material adverse effect on the Company’s future financial position, results of operations or cash flows: government regulations and policies; product pricing pressures; government sponsored insurance programs and government medical procurement; competition; demand for our major products; marketing and distribution network; product development; operation enhancement; and outside collaboration. There are other risks and uncertainties that could materiality affect the Company.

    Sales to the Company’s top five distributors accounted for 30% to 40% of total net revenue for the years ended December 31, 2010, 2011 and 2012. The following is sales to a customer that individually comprised 10% or more of net revenues:

    F-14


    3SBio Inc.
    Notes to Consolidated Financial Statements
    For the years ended December 31, 2010, 2011 and 2012

     

      Year ended December 31,  

     

      2010     2011     2012     2012  

     

      RMB’000     %     RMB’000     %     RMB’000     %     US$’000  

    Beijing Tianxingpuxin Bio-Medical Co., Ltd.

      46,762     11%     57,382     11%     67,886     10%     10,896  

    Purchases from the Company’s top five suppliers accounted for 30% to 40% of total inventories purchased for the years ended December 31, 2010, 2011 and 2012. The following are inventory purchases from suppliers that individually comprised 10% or more of total inventories purchased in any of the years ended December 31, 2010, 2011 and 2012:

     

      Year ended December 31,  

     

      2010     2011     2012     2012  

     

      RMB’000     %     RMB’000     %     RMB’000     %     US$’000     %  

    Chengdu Tiantaishan Pharmaceutial Co., Ltd.

      1,622     7%     3,553     11%     3,984     10%     639     10%  

    Nanjing Lifenergy R&D Co., Ltd.

      2,426     10%     2,156     6%     1,686     4%     271     4%  

    The Company’s operations could be adversely affected by significant political, economic and social uncertainties in the PRC.

    Foreign currency exchange rate risk

    The Company’s exposure to foreign currency exchange rate risk primarily relates to cash and cash equivalents, time deposits and accounts receivable denominated in US$, Australian Dollar (AUD) and Hong Kong Dollar (HKD). The functional currency of the Company is US$, and the reporting currency is RMB. Since July 21, 2005, the RMB has been permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. The depreciation of the US$ against RMB was approximately 1.0% in 2012. Any significant revaluation of RMB may materially and adversely affect the cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, the American Depository Shares ("ADSs") in U.S. dollars. As a result, an appreciation of RMB against the U.S. dollar would result in foreign currency translation losses when translating the net assets of the Company from the U.S. dollar into RMB.

    Fair value measurements of financial instruments

    The carrying amounts of the Group’s cash and cash equivalents, restricted cash, time deposits, accounts receivable, notes receivable and accounts payable approximate their fair value as of the balance sheet dates because of their short maturity. Fair values for investment securities that are classified as available-for-sale securities are determined by using quoted market prices and valuation methodologies, primarily discounted cash flow analysis.

    Cash and cash equivalents, time deposits and restricted cash

    Cash and cash equivalents consist of cash on hand, interest-bearing deposits placed with banks and short-term, highly liquid investments with original maturities of three months or less. Interest-bearing time deposits with financial institutions with original maturities in excess of three months are excluded from cash and cash equivalents and classified as time deposits. Time deposits with remaining maturities longer than one year are classified as non-current assets. The interest rates of the time deposits ranged from 0.77% to 5.1% per annum with a weighted-average original maturity of 1.2 years.

    F-15


    3SBio Inc.
    Notes to Consolidated Financial Statements
    For the years ended December 31, 2010, 2011 and 2012

    Restricted cash as of December 31, 2012 comprises RMB668,000 (US$107,000) housing maintenance enhancement fund. The maintenance enhancement fund can only be used upon employees’ application and the related government authority’s approval.

    As of December 31, 2011 and 2012, the amount of cash and cash equivalents, restricted cash and time deposits with original maturities over three months held in financial institutions by geographic location is as follows:

        December 31,  
        2011     2012     2012  
        RMB’000     RMB’000     US$’000  
                       
    - the PRC   675,083     833,265     133,748  
    - Hong Kong   90,596     59,254     9,510  
                       
        765,679     892,519     143,258  

    As of December 31, 2011 and 2012, the Group’s cash and cash equivalents, restricted cash and time deposits with original maturities over three months denominated in U.S. dollars, Renminbi and other foreign currencies are as follows:

        December 31,  
        2011     2012  
        ’000     ’000  
    U.S. dollars   24,516     21,127  
    Renminbi   598,810     752,277  
    HKD   7,752     2,416  
    AUD   974     1,027  

    The group holds its cash, cash equivalents, restricted cash and time deposits in major financial institutions that management believes are of high credit quality.

    Accounts receivable and notes receivable

    Accounts receivable are stated at the invoiced amount after deduction of trade discounts and allowances, if any, and is non-interest bearing. The allowance for doubtful accounts is the Group’s best estimate of the amount of credit losses in the Group’s existing accounts receivable. The Group determines the allowance based on historical write-off experience, customer specific facts and economic conditions.

    Outstanding account balances are reviewed individually for collectability. Account balances are written off after all means of collection have been exhausted and the potential for recovery is considered remote. Shenyang Sunshine and its consolidated entities are required to comply with local tax requirements on the write-offs of doubtful accounts, which allow for such write-offs only when sufficient evidence is available to prove the debtor’s inability to make payments. The Group does not have any off-balance-sheet credit exposure related to its customers.

    F-16


    3SBio Inc.
    Notes to Consolidated Financial Statements
    For the years ended December 31, 2010, 2011 and 2012

    No notes receivable provision is considered necessary as the notes are issued by reputable commercial banks in the PRC, where risk of non-payment by customers rests with the banks.

    Inventories

    Inventories are stated at the lower of cost or market. Cost is determined using the weighted average cost method. Cost of work-in-progress and finished goods comprise of direct materials, direct production cost and an allocated proportion of production overheads based on normal operating capacity. Adjustments are made to write down excess or obsolete inventories to their estimated realizable values.

    Available-for-sale securities

    Available-for-sale securities consist of debt and equity marketable securities and a convertible promissory note. Available-for-sale securities considered available for use in current operations are classified as current assets.

    Available-for-sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, if any, are reported as a separate component of accumulated other comprehensive loss until realized. Realized gains and losses from the sale or disposal of available-for-sale securities are determined on a specific-identification basis.

    A decline in the market value of any available-for-sale security that is deemed to be other-than-temporary results in an impairment to the carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. To determine whether impairment is other-than-temporary, the Group considers whether it has the ability and intent to hold the investment until a market price recovery and considers whether eviden