Description
China Biologic Products, Incorporated. 10% Owner Private Equity Warburg Pincus bought 67521 shares on 5-19-2011 at $ 14.4
BUSINESS OVERVIEW
Overview of Our Business
We are a biopharmaceutical company and through our indirect PRC subsidiaries, Shandong Taibang and Guizhou Taibang, and our minority-owned PRC investee, Huitian, we are principally engaged in the research, development, manufacturing and sales of plasma-based pharmaceutical products in China. Shandong Taibang operates from our manufacturing facility located in Tai’an, Shandong Province, and Guizhou Taibang operates from our manufacturing facility located in Guiyang City, Guizhou Province. Our minority owned investee, Huitian, operates from its facility in Shaanxi Province. The plasma-based biopharmaceutical manufacturing industry in China is highly regulated by both the provincial and central governments. Accordingly, the manufacturing process of our products is strictly monitored from the initial collection of plasma from human donors to finished products. Our principal products include our approved human albumin and immunoglobulin products.
We are approved to sell human albumin 20%/10ml, 20%/25ml and 20%/50ml, 10%/10ml, 10%/25ml, 10%/50ml and 25%/50ml. Human albumin is our top-selling product. Sales of these human albumin products represented approximately 48.0%, 49.7% and 57.8% of our total revenues, respectively, for the each of the years ended December 31, 2010, 2009 and 2008. Human albumin is principally used to increase blood volume while immunoglobulin, one of our other major products, is used for certain disease preventions and cures. The Company’s approved human albumin and immunoglobulin products use human plasma as raw material. Albumin has been used for almost 50 years to treat critically ill patients by replacing lost fluid and maintaining adequate blood volume and pressure. All of our products are prescription medicines administered in the form of injections.
We sell our products to customers in the PRC, mainly hospitals and inoculation centers. Our sales have historically been made on the basis of short-term arrangements and our largest customers have changed over the years. For the years ended December 31, 2010, 2009 and 2008, our top 5 customers accounted for approximately 12.3%, 10.7% and 16.2%, respectively, of our total revenue. For the years ended December 31, 2010, 2009 and 2008, our largest customer accounted for approximately 2.8%, 4.0% and 6.4%, of our revenue, respectively. As we continue to diversify our geographic presence, customer base and product mix, we expect that our largest customers will continue to change from year to year. We have product liability insurance covering all of our products. However, since our establishment in 2002, there has not been any product liability claims nor has any legal action been filed against the Company brought by patients related to the use of our products.
Our principal executive offices are located at No. 14 East Hushan Road, Tai’an City, Shandong, the People’s Republic of China 271000. Our corporate telephone number is (86) 538-620-2306 and our fax number is (86)538-620-3895. We maintain a website at http://www.chinabiologic.com that contains information about our operating company, but that information is not part of this report.
Our History and Background
China Biologic Products, Inc. was originally incorporated on December 20, 1989 under the laws of the State of Texas, as Shepherd Food Equipment, Inc. On November 20, 2000, Shepherd Food Equipment, Inc. changed its corporate name to Shepherd Food Equipment, Inc. Acquisition Corp., which is the survivor of a May 28, 2003 merger with GRC Holdings, Inc. or GRC. In the merger, the Company adopted the Articles of Incorporation and By-Laws of GRC and changed its corporate name to GRC Holdings, Inc. On January 10, 2007, a Plan of Conversion became effective pursuant to which GRC was converted into a Delaware corporation and changed its name to China Biologic Products, Inc.
Acquisition of Logic Express
On July 19, 2006, we completed a reverse acquisition with Logic Express, whereby we issued to the shareholders of Logic Express 18,484,715 shares of our common stock in exchange for 100% of the issued and outstanding shares of capital stock of Logic Express and its majority-owned Chinese operating subsidiary, Shandong Taibang. As a result of the reverse acquisition, Logic Express became our 100% owned subsidiary, the former shareholders of Logic Express became our controlling stockholders with 96.1% of our common stock, and Shandong Taibang became our 82.76% majority-owned indirect subsidiary. Shandong Taibang is a sino-foreign joint venture company established on October 23, 2002 with a registered capital of RMB 80 million (then approximately $10.3 million).
Acquisition of Plasma Stations
In December 2006, our subsidiary, Shandong Taibang, acquired all the assets of five plasma stations in Shandong Province. We obtained the permit to operate the stations in January 2007. In April 2007, Shandong Taibang acquired certain assets of two plasma stations in Guangxi Province. The two plasma stations obtained their operating permits in February and April 2007, respectively.
We acquired the assets of these plasma stations through separate Shandong Taibang subsidiaries, specially formed for this purpose. The subsidiaries holding six of our new plasma stations are the Xia Jin Plasma Company, the Qi He Plasma Company, the He Ze Plasma Company, the Huan Jiang Plasma Company, the Liao Cheng Plasma Company, and the Zhang Qiu Plasma Company. The seventh plasma station is held by the Fang Cheng Plasma Company, which at the time was 80% owned by Shandong Taibang and 20% owned by Feng Lin, an unrelated third party. On January 13, 2010, Shandong Taibang acquired the 20% non-controlling interest in the Fang Cheng Plasma Company, and it is now wholly-owned by Shandong Taibang. In January 2007, Shandong Taibang also signed a letter of intent to acquire certain assets of a plasma station in Guangxi Province, however, we have not consummated this acquisition as the permit for this station is in dispute, as described in Item 3, “Legal Proceedings.”
In June 2008, we received approval from the Guangxi Province Bureau of Health to set up a new plasma collection station in Pu Bei County, Guangxi Province. The new plasma collection station will be located in the Centralized Industry Zone of Pu Bei County and when it becomes operational, it will replace our existing Fang Cheng Plasma Collection Station. We decided to relocate the Fang Cheng Plasma Collection Station to a more strategic location, also in Guangxi, to increase collection volumes.
On January 22, 2010, Shandong Taibang entered into an equity transfer agreement with Yuncheng Ziguang Biotechnology Co., Ltd. (“Yuncheng Ziguang”), located in Yuncheng, Shandong Province. Under the terms of the equity transfer agreement, Shandong Taibang agreed to purchase 100% of Yuncheng Ziguang’s equity interest at a purchase price of RMB 10,066,672 (approximately $1,476,781), which was paid on February 24, 2010. The purpose of this acquisition is for relocation of Shandong Taibang’s He Ze Plasma Company into the nearby Yuncheng Ziguang facility. In February 2011, the He Ze Plasma Company moved into the Yuncheng Ziguang facility and began collecting plasma. Currently Yuncheng Ziguang has no other operations.
On July 7, 2010, Shandong Taibang invested RMB 6,000,000 (approximately $910,200) to establish a wholly-owned subsidiary, Ning Yang Plasma Company, in Shandong Province. The Ning Yang Plasma Company was still under construction as of December 31, 2010.
On July 20, 2010, Shandong Taibang invested another RMB 6,000,000 (approximately $910,200) to establish a wholly-owned subsidiary, Yishui Plasma Company, in Shandong Province. The Yi Shui Plasma Company obtained its operating permits from relevant PRC authorities on December 6, 2010, and had commenced operation as of December 31, 2010.
Establishment of Taibang Medical
In September 2006, Shandong Taibang established a wholly owned subsidiary, Taibang Medical (known then as Shandong Missile Medical Co., Ltd.), with registered capital of $384,600, fully paid on March 1, 2007. On February 7, 2007, Taibang Medical obtained a distribution license for biological products, except for vaccine, from the Shandong Food and Drug Administration, for a license period of five years from the date of obtaining the license. The registration of Taibang Medical was ultimately approved by Shandong Provincial Department of Foreign Trade and Economic Cooperation on July 4, 2007 and Taibang Medical was registered on July 19, 2007. The scope of business is wholesale of biological products, except vaccines, with a license period of 25 years from the date of registration.
On August 14, 2009, we changed Taibang Medical’s name from Shandong Missile Medical Co., Ltd. to Shandong Taibang Medical Company. In addition, the registered capital of Taibang Medical was increased by RMB 2,000,000 (approximately $293,400) to $733,500.
On July 8, 2010, Logic China, our PRC operating subsidiary, entered into an equity transfer agreement to purchase 100% of the equity interest in Taibang Medical from Shandong Taibang with a cash purchase price of RMB 6,440,000 (approximately $947,327). The equity transfer was registered with the local Administration for Industry and Commerce, or the AIC, on September 10, 2010 and the purchase price was fully paid on September 23, 2010. With this equity transfer, Taibang Medical is now the Company’s indirect wholly-owned subsidiary and the Company will be able to consolidate its resources in the sale and marketing of Shandong Taibang and Guizhou Taibang’s products.
Formation of Hong Kong Subsidiary
On December 12, 2008, we established Logic Holdings, our wholly-owned Hong Kong subsidiary, for the purpose of being a holding company for our majority equity interest in Dalin.
Dalin Acquisition and Entrustment Agreement
We completed the acquisition of 90% interest in Dalin in April 2009 upon payment of 90% of the purchase price. We substantially paid the remaining 10% of the purchase price, RMB 19,440,000 (approximately $2,844,350), on April 9, 2010, the one-year anniversary of the approval of the equity transfer by the local Administration for Industry and Commerce, or AIC.
On January 4, 2011, we entered into an equity transfer agreement with Shaowen Fan to acquire the remaining 10% minority interest in Dalin for a purchase price of RMB 50,000,000 (approximately $7,585,000). The equity transfer was registered with the local AIC on January 26, 2011 and the purchase price was fully paid as of February 22, 2011 in accordance with the equity transfer agreement. With this equity transfer, Guiyang Dalin is now the Company’s indirect wholly-owned subsidiary.
On April 6, 2009, Logic Express entered into an agreement with Shandong Institute, the noncontrolling interest holders in Shandong Taibang, pursuant to which, Shandong Institute would provide an advance to assist Logic Express’s purchase of 90% Dalin's equity interests. Under the terms of the agreement, Shandong Institute agreed to provide advance of $3,792,500 (RMB25,000,000), representing 12.86% of the Company’s purchase consideration in Dalin to the Company for one year, bearing interest equal to the higher of a proportionate share of the net income of Dalin during the year ended December 31, 2009 or 6% per annum. On April 12, 2010, the Company fully paid the advance from Shandong Institute and the interest of approximately $1.3 million, which was less than the Company’s previous estimate by approximately $0.9 million. The Company recorded the difference between the previous estimate and actual payment in other income of the consolidated statement of income for the year ended December 31, 2010.
As part of our due diligence investigation into Dalin and Guizhou Taibang, we discovered that our indirect interest in Guizhou Taibang acquired under the equity transfer agreement may be diluted to as low as 41.3%. The local AIC records show Dalin as a 54% shareholder of Guizhou Taibang; however, the AIC records do not reflect a potential issuance of Guizhou Taibang’s equity interests to certain investors in May 2007, pursuant to a capital increase agreement. Guizhou Taibang has received the consideration for the potential issuance of equity interests, but the increase in registered capital and the related issuance of the equity interest has not yet been registered with the local AIC, pending the outcome of a minority shareholder suit against Guizhou Taibang and its then shareholders, alleging violation of the shareholder’s right of first refusal in connection with the May 2007 equity issuance. For details regarding the Guizhou Taibang shareholder suit and our position with respect to the May 2007 equity issuance of Guizhou Taibang’s equity interests, see our disclosure under Item 3, “Legal Proceedings” herein.
Guizhou Taibang is one of the largest plasma-based biopharmaceutical companies in China and is the only manufacturer currently operating in Guizhou Province. With a population of 39 million, Guizhou Province has historically produced the highest volumes of plasma collection in China, because a higher proportion of its population has been willing to engage in the collection process. Guizhou Province has a total of 19 plasma collection stations in operation, collecting approximately 1,200 tons of plasma supply every year. Guizhou Taibang owns seven of these plasma collection stations, of which five are currently in operation and collecting approximately 300 tons of plasma supply per year, with an annual capacity of 400 tons. We intend to employ more advanced collection techniques at these stations to improve yields and generate additional plasma supply. Guizhou Taibang is in compliance with Good Manufacturing Practices, or GMP, standards, and has been approved by the PRC’s State Food and Drug Administration, or SFDA, to produce six types of plasma-based products including Human Albumin, Human Immunoglobulin, Human Intravenous Immunoglobulin, Human Hepatitis B Immunoglobulin, Human Tetanus Immunoglobulin and Human Rabies Immune Globulin.
On December 30, 2010, the Guiyang AIC approved Guizhou Taibang’s application to change its name to Guizhou Taibang Biological Products Co., Ltd. We expect that the name change will facilitate the Company’s promotion of the “Taibang” brand name and further the Company’s integration of its marketing efforts.
On November 11, 2010, the Company established Guiyang Qianfeng Biological Technology Co., Ltd., a wholly-owned subsidiary of Guizhou Taibang, in Guiyang, Guizhou, for the purpose of research and development of placenta based products.
Huitian Acquisition
We purchased a 35% equity interest in Huitian at a purchase price of RMB 44,000,000 (approximately $6,454,800) in October 2008. Huitian is a manufacturer of plasma-based biopharmaceutical products in Shaanxi Province and is one of only 32 such manufacturers in China which are government approved. Shaanxi Province, which has a population of 37 million, has had a historically high collection volume with approximately ten plasma collection stations in operation, collecting approximately 300 tons of plasma supply each year. Only four of the collection stations in Shaanxi Province are government approved and three of these are owned by Huitian. Huitian produces about 80 tons of plasma-based products per year and has 200 tons of annual production capacity. We believe Huitian provides a strong long-term growth potential. Huitian is in compliance with GMP standards and it is also approved by the SFDA for the production of Human Albumin, Human Immunoglobulin, Human Immunoglobulin for Intravenous Injection, and Human Hepatitis B Immunoglobulin products.
Plasma Collection in China
The collection of human plasma in China is generally influenced by a number of factors such as government regulations, geographical locations of collection stations, sanitary conditions of collection stations, living standards of the donors, and cultural and religious beliefs. Until 2006, only licensed Plasmapheresis stations owned and operated by the government could collect human plasma. Furthermore, each collection station was only allowed to supply plasma to the one manufacturer that had signed the “Quality Responsibility” statement with them. However, in March 2006, the Ministry of Health promulgated certain “Measures on Reforming Plasma Collection Stations,” or the Blood Collection Measures, whereby the ownership and management of PRC plasma stations are required to be transferred to plasma-based biopharmaceutical companies and the local government is charged with regulatory supervision and administrative control in accordance with the policies of the central government. Plasma stations that did not complete their reform by December 31, 2006 risked revocation of their license to collect plasma.
The supply of plasma for plasma-based products in the PRC has been on the decline since 2003 from the historical high of annual supply of approximately 7,000 tons to approximately 4,000 tons. We believe that this decline is a direct result of the government’s industry reforms of the country’s collection practices which led to the closure of many stations that did not meet the new industry standards. Based on reports promulgated by the PRC Ministry of Health, we estimate that the current annual supply of plasma in China amounts to approximately 4,000 tons, as compared to 30,000 tons in the global market, with the six largest manufacturers of plasma products accounting for approximately 50% of the annual plasma collection. In spite of the shortage of plasma supply, revenues from the sale of plasma products in China amounted to approximately $1.1 billion in 2009 per management’s estimate, and revenues from the sale of human albumin products accounted for about 70%. We expect that the plasma derivatives market to grow at a 15% rate per year through 2011.
We believe that these regulatory changes, including measures which limit illegal selling of blood, have improved the quality of blood and plasma by increasing cleanliness standards at blood collection stations. As the operation of the plasma stations become more regulated and the donor population expands, we believe that the overall quality of raw materials, such as human albumin will continue to improve, leading to a safer, more reliable finished product.
Plasma-Based Products Industry in China
We produce approved human albumin and immunoglobulin products, with human plasma as the main ingredient. In addition to the low usage ratio of such products in China as compared to other more developed countries, there is a significant difference in the make up and range of the plasma-based pharmaceutical products. Based on our analysis, in most developed countries like the United States, clotting factor products accounts for the majority of the plasma-based biopharmaceutical products, while in China, human albumin products accounts for the vast majority of such products. Specifically, total clotting factor products and human albumin products, account for approximately 40% and 25%, respectively, of United States’ total annual plasma-derived products, and account for approximately 3% and 59%, respectively, of China’s.
Our Growth Strategy
Our mission is to become a first-class biopharmaceutical enterprise in China. To achieve this objective, we have implemented the following strategies:
* Securing the supply of plasma . Due to the shortage of plasma and the reform of the ownership of plasma stations, our immediate strategy is to negotiate and acquire plasma stations in order to secure our plasma supply. In December 2006, we acquired five of the plasma stations in Shandong Province. Furthermore, in January 2007, we acquired two additional plasma stations in Guangxi Province. In June 2008, we received approval from the Guangxi Province Bureau of Health to set up a new plasma collection station in Pu Bei County, Guangxi Province, which, when operational, will replace our existing Fang Cheng Plasma Collection Station. We decided to relocate the Fang Cheng Plasma Collection Station to a more strategic location to increase collection volumes. During the construction period, the station will still continue with its normal operations. With the approval of the Centralized Industry Zone of Pu Bei County, once the Fang Cheng Plasma Collection Station becomes operational, we hope to expand its coverage area to secure higher collection volumes in the future. In January, 2010, Shandong Taibang purchased 100% of Yuncheng Ziguang Biotechnology Co., Ltd., or Yuncheng Ziguang, located in Yuncheng, Shandong Province, for the purpose of relocation of Shandong Taibang’s He Ze Plasma Company, or He Ze, into the nearby Yuncheng Ziguang facility. In February 2011, the He Ze Plasma Company moved into Yuncheng Ziguang and began collecting plasma. We hope to expand He Ze to secure higher collection volumes in the future. In 2010, we additionally established two new plasma companies in Shandong Province, one of which began operation in December 2010 and the other of which is still under construction. We also expect that our acquisition of Dalin and its PRC operating subsidiary, Guizhou Taibang, and our acquisition of a minority equity interest in Huitian, will help secure our plasma supply as well as expand production capacity and market coverage.
CEO BACKGROUND
Siu Ling Chan
co-founder of the Company and Chairwoman of the Company’s subsidiaries, Logic Express and Shandong Taibang, since its 2006
served as a statistician and administrator at Fujian Academy of Social Sciences
Ms. Chan’s long-term knowledge of the history and operations of the Company and background in administration has provided strategic guidance to the board and management over the years.
Sean Shao
as a U.S. certified accountant, with over 10 years experience as an auditor at Deloitte Touche Tohmatsu and Deloitte Touche Toronto, Mr. Shao led many independent audits of PRC-based companies
served as CFO and assisted in the initial public offering and initial listing of companies on the NYSE and NASDAQ and led the implementation of related corporate governance requirements
serves as an independent director of several NASDAQ-listed companies and one NYSE-listed company
holds a master’s degree in health care administration from the University of California, Los Angeles
Mr. Shao’s experience with U.S. public companies and his knowledge of the U.S. capital markets and of U.S. financial reporting requirements and U.S. GAAP is invaluable to the Company
Dr. Xiangmin Cui
holds a Doctorate in Cancer Biology from Stanford University School of Medicine
Principal of Bay City Capital, a healthcare venture capital fund, managing $1.6 billion in capital invested in over 85 companies
led or actively participated in several investments, including GenturaDx, Ion Torrent Systems, Epizyme, Sunesis Pharmaceuticals, and Presidio Pharmaceuticals
serves as a Director of Strategic Investment Planning at Southern Research Institute, a premier institution known for the discovery and development of six anti-cancer drugs; and as a director of Progentech and a board observer of Ion Torrent Systems
co-founder and former executive of Hucon Biopharmaceuticals, Pan Pacific Pharmaceuticals, and CNetwork, a non-profit organization of over 5000 Chinese professionals in Silicon Valley
Dr. Cui’s knowledge of the U.S. capital markets and of the healthcare industry in which the Company operates provides invaluable guidance and perspective to the board
Dr. Tong Jun Lin
served as a Professor in the Dalhousie University’s Departments of Microbiology and Immunology, and Pediatrics since July 2000
engaged in significant research and collaborative research with biotech companies in the field of immunology and the recipient of multiple grants as a principal investigator from competitive national funding agencies and currently focuses his research in the fields of innate and adaptive immunity, immune response to pathogens and allergens, vaccine and drug development
serves as editor or reviewer for many academic journals, such as the Journal of Immunology, and national granting agencies, such as the Canadian Institutes of Health Research, and has published many high-impact research papers in the field of immunology and cell and molecular biology
is a recipient of many academic accolades including an Award of Excellence in Medical Research from Dalhousie University and the recipient of the Canadian Society of Immunology’s prestigious annual Investigator Award for excellence in early stage of research career
Dr. Lin’s academic excellence and his cutting edge industry research provides invaluable guidance and perspective to the board, especially in relation to the Company’s research and development efforts
Chong Yang Li
has been a certified appraiser since 2006
has over 15 years of experience in providing asset valuation services, in connection with IPOs and reorganizations, primarily to PRC listed companies across varied industries
Mr. Li’s rich experiences in the valuation of listed companies, and his background and knowledge in accounting is beneficial to the Company
Dr. Bing Li
serves as an advisor of Warburg Pincus Asia LLC on potential investment evaluation and portfolio management in healthcare space since June 2010
served as General Manager of Enterprise Business and Business Development and Commercial Development Director of GlaxoSmithKline China/Hong Kong between 2006 to 2010
served in various positions with Eli Lilly and Company in the United States, including Manager of China/India strategy, Manager of Global New Product Planning for Drug Delivery System, and Consultant to Biotechnology Strategy Group
holds a Master of Business Administration and Master of Engineering Management from the Kellogg Graduate School of Management, a Ph.D. in Cell and Molecular Biology from the University of Rochester, and a Bachelor of Science in Biophysics from Fudan University
Prof. Wenfang Liu
served as the Chief Consultant for Sichuan Yuanda Shuyang Pharmaceuticals, a plasma-based manufacture in China, from February 2007 to February 2011
served in various managerial positions including as Chief Engineer and Director of Hualan Biological Engineering, a major player in PRC’s plasma-based manufacturer between 2000 to 2007
served as Director of Blood Separating at Chengdu Jiaying Medical Product Co., Ltd. from 2005 to 2006
served as Chief Engineer of Guiyang Qianfeng Biological Products Co., Ltd. between 1998 to 1999
served as Vice Chairman of Institute of Blood Transfusion of Chinese Academy of Medical Sciences
serves as a member of the Sichuan CPPC Standing Committee and previously served as a member of the Chinese Society of Blood Transfusion and the China Medical Biotech Association
holds a Bachelors degree in Bio-Chemistry from the Chinese Academy of Sciences, Forest and Soil College and has been a Ph.D. advisor from 1007 to 1998
MANAGEMENT DISCUSSION FROM LATEST 10K
Overview
We are a biopharmaceutical company and through our indirect majority-owned PRC subsidiaries, Shandong Taibang and Guizhou Taibang, and our minority-owned PRC investee, Huitian, we are principally engaged in the research, development, manufacturing and sales of plasma-based pharmaceutical products in China. Shandong Taibang operates from our manufacturing facility located in Tai’an, Shandong Province and Guizhou Taibang operates from our manufacturing facility located in Guiyang City, Guizhou Province. Our minority owned investee, Huitian, operates from its facility in Shaanxi Province. The plasma-based biopharmaceutical manufacturing industry in China is highly regulated by both the provincial and central governments. Accordingly, the manufacturing process of our products is strictly monitored from the initial collection of plasma from human donors to finished products. Our principal products include our approved human albumin and immunoglobulin products.
We are approved to sell human albumin 20%/10ml, 20%/25ml, 20%/50ml, 10%/10ml, 10%/25ml, 10%/50ml and 25%/50ml. Human albumin is our top-selling product. Sales of these human albumin products represented approximately 47.8%, 49.5% and 57.8% of our total revenues, respectively, for the each of the years ended December 31, 2010, 2009 and 2008. Human albumin is principally used to increase blood volume while immunoglobulin, one of our other major products, is used for certain disease preventions and cures. The Company’s approved human albumin and immunoglobulin products use human plasma as the basic raw material. Albumin has been used for almost 50 years to treat critically ill patients by replacing lost fluid and maintaining adequate blood volume and pressure. All of our products are prescription medicines administered in the form of injections.
We sell our products to customers in the PRC, mainly hospitals and inoculation centers directly or through approved distributors. Our sales have historically been made on the basis of short-term arrangements and our largest customers have changed over the years. For the years ended December 31, 2010, 2009 and 2008, our top 5 customers accounted for approximately 12.3%, 10.7% and 16.2%, respectively, of our total revenue. For the years ended December 31, 2010, 2009 and 2008, our largest customer accounted for approximately 2.8%, 4.0% and 6.4%, of our revenue, respectively. As we continue to diversify our geographic presence, customer base and product mix, we expect that our largest customers will continue to change from year to year.
We operate and manage our business as a single segment. We do not account for the results of our operations on a geographic or other basis.
2010 Financial Performance Highlights
We continued to experience strong demand for our products and services during the fiscal year ended December 31, 2010, which resulted in revenue and net income growth. The following are some financial highlights for the year:
*
Sales : Sales increased $20,697,262, or 17.4%, to $139,695,417 for the year ended December 31, 2010, from $118,998,155 for 2009.
*
Gross Profit : Gross profit increased $16,368,021, or 18.9%, to $102,744,268 for the year ended December 31, 2010, from $86,376,247 for 2009. As a percentage of revenues, gross profit increased 0.9% to73.5% for year 2010 from 72.6% for 2009.
*
Income from operations : Income from operations increased $8,148,036, or 13.3%, to $69,525,228 for the year ended December 31, 2010, from $61,377,192 for 2009.
*
Net income : Net income increased $33,168,520, or 176.2%, to $51,992,304 for the year ended December 31, 2010, from $18,823,784 for 2009.
*
Fully diluted net income per share : Fully diluted net income per share was $1.30 for the year ended December 31, 2010, as compared $0.10 for 2009.
Principal Factors Affecting our Financial Performance
The following are key factors that affect our financial condition and results of operations and we believe them to be important to the understanding of our business:
Raw Material Supply and Prices
The primary raw material used in the production of our albumin and immunoglobulin products is human plasma. Collection of human plasma in China is regulated and, until 2006, only licensed Plasmapheresis stations owned and operated by the government could collect human plasma. Each collection station was only allowed to supply plasma to the one manufacturer that has signed the “Quality Responsibility” statement with them. The price of human plasma is negotiated on an annual basis and is determined by a number of factors including, but not limited to, the cost of operating the collection stations, the nutritional supplement fee awarded to the donors for each donation, and the anticipated volume of total plasma donated. However, in March 2006, the Ministry of Health promulgated certain “Measures on Reforming Plasma Collection Stations,” or the Blood Collection Measures, whereby the ownership and management of PRC plasma stations are required to be transferred to plasma-based biopharmaceutical companies while the regulatory supervision and administrative control remain with the State. Plasma stations that did not complete their reform by December 31, 2006, risked revocation of their license to collect plasma.
In December 2006, we acquired five of the six then existing plasma stations in Shandong and on January 1, 2007 we obtained the permits to operate these stations. These acquisitions have allowed us to have a direct influence on the operation of these collection stations and secure a stable source of plasma supply for production. The foregoing acquisitions, as well as the acquisition of Dalin and its indirectly owned plasma stations, have led to an increase in our plasma supply for production and did not result in any material differences in our cost structure. Due to current market conditions, we have generally been able to pass substantially all cost increases in recent years on to our customers.
Prices of and Demand for Our Products
In recent years, due to increased regulatory restrictions and market demand, we have been able to increase the selling price of most of our key products. The demand for our products is largely affected by the general economic conditions in China because they are still not affordable to many patients. As China's economy grows, we expect more Chinese people will become consumers of medical treatments and procedures, including procedures requiring human plasma. A significant improvement in the economic environment in China will likely improve consumer income which in turn would make our products more affordable and consequently increase the demand for our products. We have been able to expand our product range and markets by introducing new products required by customers. We believe that our technical expertise is important in introducing products that are in demand.
Production Capacity
Our sales volume is limited by our annual production capacity. As we grow our business in the future, our ability to fulfill additional and larger orders will depend on our ability to increase our production capacity. Our plan to expand our production capacity will depend on, inter alia, the availability of capital to meet our needs of expansion or upgrading of production lines, and the availability of stable plasma supply.
As of December 31, 2010, the aggregate production capacity of Shandong Taibang and Guizhou Taibang was 1,100 metric tons per annum. We estimate that the production capacity of our major competitors ranges from 300 tons to 1,000 tons per annum. We believe that our current production capacity is sufficient to meet the current demand for our products for the next two years.
Competition
We are subject to intense competition. There are both local and overseas pharmaceutical enterprises that are engaged in the manufacture and sale of potential substitute or similar biopharmaceutical products as our products in the PRC. These competitors may have more capital, better research and development resources, manufacturing and marketing capability and experience than we do. In our industry, we compete based upon product quality, product cost, ability to produce a diverse range of products and logistical capabilities.
We believe that we have strengthened our position in the marketplace with our acquisition of Dalin and its 54% majority-owned operating subsidiary, Guizhou Taibang, and a 35% equity interest in Huitian, a Xi'an-based biopharmaceutical company.
Our profitability may be adversely affected if (i) competition intensifies; (ii) competitors drastically reduce prices; (iii) PRC government’s interference on prices; or (iv) competitors develop new products or product substitutes with comparable medicinal applications or therapeutic effects which are more effective or less costly than those produced by us. Please refer to Item 1, “Business - Competition” for more information regarding this factor.
Taxation
China Biologic is subject to United States tax at a tax rate of 34%. No provision for income taxes in the United States has been made as China Biologic has no income taxable in the United States. Logic Express was incorporated in the BVI, but is not subject to taxation in that jurisdiction. Logic Holdings was incorporated in Hong Kong and under the current laws of Hong Kong, are subject to a Profits Tax of 16.5%. However, no provision for Hong Kong Profits Tax has been made as Logic Holdings has no taxable income.
According to the PRC's central government policy, new or high technology companies will enjoy preferential tax treatment of 15%, instead of 25% under the EIT Law. On December 5, 2008, Shandong Taibang received the new technology or high technology certification from Shandong provincial government. The Certification allows Shandong Taibang to receive the 15% preferential income tax rate, for a period of three years starting from January 1, 2008. Guizhou Taibang enjoyed the preferential income tax rate of 15% also under the 10-year Western Development Tax Concession, which started on January 2001 and ended on December 2010. The PRC tax authority is studying the possibility of extending the concession, especially for those industries that are encouraged by the PRC government, such as ours. In the event that PRC tax authorities discontinue the concession, Guizhou Taibang will apply for the new or high technology preferential tax treatment of 15% like Shandong Taibang. See Item 1, “Business – Regulation – Taxation” for a detailed description of the EIT Law and tax regulations applicable to our PRC subsidiaries.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Overview of Our Business
We are a biopharmaceutical company, through our indirect majority-owned PRC subsidiaries, Shandong Taibang and Guizhou Taibang, and our minority-owned PRC investee, Huitian, principally engaged in the research, development, manufacturing and sales of plasma-based pharmaceutical products in China. Shandong Taibang operates from our manufacturing facility located in Tai’an, Shandong Province and Guizhou Taibang operates from our manufacturing facility located in Guiyang City, Guizhou Province. Our minority-owned investee, Huitian, operates from its facility in Shaanxi Province. The plasma-based biopharmaceutical manufacturing industry in China is highly regulated by both the provincial and central governments. Accordingly, the manufacturing process of our products is strictly monitored from the initial collection of plasma from human donors to finished products. Our principal products include our approved human albumin and immunoglobulin products.
We are approved to sell human albumin 20%/10ml, 20%/25ml, 20%/50ml, 10%/10ml, 10%/25ml, 10%/50ml and 25%/50ml. Human albumin is our top-selling product. Sales of these human albumin products represented approximately 57.2% and 46.9% of our total sales, respectively, for the each of the three months ended March 31, 2011 and 2010. Human albumin is principally used to increase blood volume while immunoglobulin, one of our other major products, is used for certain disease preventions and cures. Our approved human albumin and immunoglobulin products use human plasma as the basic raw material. Albumin has been used for almost 50 years to treat critically ill patients by replacing lost fluid and maintaining adequate blood volume and pressure. All of our products are prescription medicines administered in the form of injections.
We sell our products to customers in the PRC, mainly hospitals and inoculation centers directly or through approved distributors. Our sales have historically been made on the basis of short-term arrangements and our largest customers have changed over the years. For the three months ended March 31, 2011 and 2010, our top 5 customers accounted for approximately 13.5%, and 20.7%, respectively, of our total sales. As we continue to diversify our geographic presence, customer base and product mix, we expect that our largest customers will continue to change from year to year.
We operate and manage our business as a single segment. We do not account for the results of our operations on a geographic or other basis.
Our principal executive offices are located at No. 14 East Hushan Road, Tai’an City, Shandong, the People’s Republic of China 271000. Our corporate telephone number is (86) 538-620-2306 and our fax number is (86)538-620-3895. We maintain a website at http://www.chinabiologic.com that contains information about our company, but that information is not part of this report.
First Quarter Financial Performance Highlights
We continued to experience strong demand for our products and services during the three months ended March 31, 2011, which resulted in growth in our sales and net income. The following are some financial highlights for the three months ended March 31, 2011:
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Sales : Sales increased $7,372,269, or 27.2%, to $34,470,822 for the three months ended March 31, 2011, from $27,098,553 for the same period in 2010.
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Gross Profit : Gross profit increased $4,859,525 or 23.9%, to $25,159,224 for the three months ended March 31, 2011, from $20,299,699 for the same period in 2010.
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Income from operations : Income from operations increased $1,308,295, or 9.9%, to $14,534,179 for the three months ended March 31, 2011, from $13,225,884 for the same period in 2010.
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Net income : Net income decreased $4,354,774, or 40.8%, to $6,308,975 for the three months ended March 31, 2011, from $10,663,749 for the same period in 2010.
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Fully diluted net income per share : Fully diluted net income per share was $0.23 for the three months ended March 31, 2011, as compared to $0.26 for the same period in 2010.
For the three months ended March 31, 2011 and 2010, we reported a net income of $6,308,975 and $10,663,749, respectively. Our results of operations in the first quarter of 2011, as compared to the same period in 2010, was materially impacted by unit price increases and sales volume increases of our products, as well as the reduction of change in derivative liabilities.
Sales . Our sales are derived primarily from the sales of human albumin and various types of immunoglobulin. Our sales increased 27.2%, or $7,372,269, to $34,470,822 for the three months ended March 31, 2011, compared to $27,098,553 for the three months ended March 31, 2010. The increase in sales during the 2011 period is primarily attributable to a general increase in the price and volume of plasma based products. Among the factors that contributed to the growth in revenue, foreign exchange translation accounted for 4.6% of the increase.
Most of our approved products recorded price increases ranging from 2.7% to 25.2%, except for human albumin products, which decreased by 4.9%. For the quarter ended March 31, 2011, the average price for our approved human albumin products, which contributed 57.2% to our total sales, decreased 4.9%, the average price for our approved human hepatitis B immunoglobulin products, which contributed 6.4% to our total sales, increased by 25.2%, the average price for our approved human immunoglobulin for intravenous injection products, which contributed 30.2% to our total sales, increased by 4.2%, the average price for our approved human rabies immunoglobulin products, which contributed 2.2% to our total sales, increased by 14.8%, and the average price for our approved human tetanus immunoglobulin products, which contributed 3.4% to our total sales, increased 2.7%, as compared to the same period in 2010. The general price increase of our immunoglobulin product group was primarily attributable to the continuing shortage in supply of such products, while the average price decrease in human albumin products is mainly due to the continuous increase in the imported volume of this product during the first quarter of 2011.
Volume in sales for our human albumin, human immunoglobulin for intravenous injection, and human tetanus immunoglobulin products increased by 63.2%, 85.5% and 68.5%, respectively, for the three months ended March 31, 2011, as compared to the same period in 2010. Volume in sales for our human hepatitis B immunoglobulin and human rabies immunoglobulin products decreased by 46.9% and 82.7%, respectively, for the three months ended March 31, 2011 as compared to the same period in 2010, mainly due to the lack of availability of qualified raw material supply for these hyper-immune immunoglobulin. We expect the supply of these types of raw material should go to its normal level in the second half of the 2011.
Cost of Sales . Our cost of sales increased $2,512,744, or 37.0%, to $9,311,598 for the three months ended March 31, 2011, from $6,798,854 during the same period in 2010. Cost of sales as a percentage of sales was 27.0% for the three months ended March 31, 2011, as compared to 25.1% during the same period in 2010. The increase in cost of sales is due to the increase in sales, while the increase in cost of sales as a percentage of sales is due to the increase in cost of plasma paid to donors, as well as a change in the mix of products that were sold during 2011.
Gross profit and gross margin . The gross profit increased by $4,859,525, or 23.9%, to $25,159,224 for the three months ended March 31, 2011 from $20,299,699 for the same period in 2010. As a percentage of sales, our gross profit decreased by 1.9% to 73.0% for the three months ended March 31, 2011, from 74.9% for the same period in 2010. The decrease in gross profit is due mainly to raw material cost increase and decreased sales volume of human hepatitis B immunoglobulin and human rabies immunoglobulin products during the 2011 period, as compared to 2010.
Operating expenses . Our total operating expenses increased by $3,551,230, or 50.2%, to $10,625,045 for the three months ended March 31, 2011, from $7,073,815 for the same period in 2010. The increase was primarily attributable to a 159.8% increase in our selling expense and a 50.4% increase in our general and administrative expenses during the 2011 period. As a percentage of sales, total expenses increased by 4.7% to 30.8% for the three months ended March 31, 2011 from 26.1% for the same period in 2010.
Selling expenses . For the three months ended March 31, 2011, our selling expenses increased to $2,449,913, from $942,908 for the three months ended March 31, 2010, an increase of $1,507,005, or 159.8%. As a percentage of sales, our selling expenses for the three months ended March 31, 2011 increased by 3.6% to 7.1%, from 3.5% for the three months ended March 31, 2010. The increase in selling expenses is primarily due to an increase in our promotional and conference activities as we continue our efforts in expanding our customer base into hospital and inoculation centers throughout the PRC.
General and administrative expenses . For the three months ended March 31, 2011, our general and administrative expenses increased to $7,464,141, from $4,962,252 for the three months ended March 31, 2010, a $2,501,889, or 50.4% increase. General and administrative expenses as a percentage of sales increased by 3.4% to 21.7% for the three months ended March 31, 2011 from 18.3% for the same period in 2010. The increase in general and administrative expenses is due mainly to an increase in expenses related to payroll and employee benefit as well as non-cash employee compensation. The increase in payroll is mainly due to our efforts to enhance corporate governance with the addition of two directors during the 2011 quarter and our December 2010 addition of a President, as well as our new corporate offices in Beijing.
Research and development expenses . For the three months ended March 31, 2011 and 2010, our research and development expenses were $710,991 and $1,168,655, respectively, a decrease of $457,664, or 39.2%. As a percentage of sales, our research and development expenses for the three months ended March 31, 2011 and 2010 were 2.1% and 4.3%, respectively. The decrease in research and development expenses is primarily due to the decreased cost associated with the development of two new products that are at the end of their respective development stage. We expect to receive SFDA approval for these two new products in mid-2011.
Change in fair value of derivative liabilities . The embedded derivatives (including the conversion option) in our senior secured convertible notes and warrants issued in June 2009 are classified as derivative liabilities carried at fair value. For the three months ended March 31, 2011 and 2010, we recognized an income from the change in fair value of derivative liabilities in the amounts of $1,021,865 and $3,833,577, respectively. The recognized income from the change in the fair value of derivative liabilities in the first quarter of 2011 is mainly due to a decrease in the price of our common stock from $16.39 to $15.96 as of December 31, 2010 to March 31, 2011, respectively. Future changes in the market price of our common stock could cause the fair value of these derivative financial instruments to change significantly in future periods.
Interest expense (income) . Our interest expense increased $1,347,333 to $1,680,922 for the three months ended March 31, 2011, from $333,589 for the same period in 2010. Our interest income increased $17,595 to $170,131, for the three months ended March 31, 2011, from $152,536 for the same period in 2010. The increase in interest expense is primarily due to the effective interest charges on convertible notes of $1,458,489 and $99,318, respectively, for the three months ended March 31, 2011 and 2010.
Income tax. The Company’s effective income tax rates were 30% and 17% for the three months ended March 31, 2011 and 2010, respectively. The effective income tax rate for the three months ended March 31, 2011 differs from the PRC statutory income tax rate of 25% primarily due to the tax effect of non-deductible expenses and the recognition of valuation allowances on deferred tax assets relating to entities which were in cumulative losses. Management believes it is more likely than not that such deferred tax assets will not be realized. As of March 31, 2011 and December 31, 2010, the valuation allowances were $2,734,304 and $2,575,574, respectively.
In February 2009, Shandong Taibang was granted the High and New Technology Enterprise qualification and was entitled to a 15% preferential income tax rate for a period of three years from 2008 to 2010. Further, Guizhou Taibang was entitled to the preferential income tax rate of 15% under the 10-year Western Development Tax Concession, which also ended in 2010. Accordingly, Shandong Taibang and Guizhou Taibang are subject to income tax at 25% from 2011 onwards. Shandong Taibang is in the process of reapplying the High and New Technology Enterprise qualification for an additional three years from 2011 to 2013.
Our provision for income taxes increased by $1,192,069, or 38.8%, to $4,263,216 for the three months ended March 31, 2011, from $3,071,147 for the same period in 2010.The increase of income tax provision was mainly attributable to the increase in applicable income tax rate from 15% to 25% of Shandong Taibang and Guizhou Taibang as well as our increase of net operating income for the three months ended March 31, 2011, compared with the same period in the prior year.
Our Company’s PRC subsidiaries have cash balance of $56 million as of March 31, 2011 which is planned to be permanently reinvested in the PRC. The distributions from our PRC subsidiaries are subject to the U.S. federal income tax at 34%, less any applicable foreign tax credits. Due to our policy of indefinitely reinvesting our earnings in our PRC business, we have not provided for deferred tax liabilities on undistributed earnings of our PRC subsidiaries.
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Fund Letters
