CBPO China Bioligic Products Holdings Inc

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 20-F

(Mark One)

☐    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

☒    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019

OR

☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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 ___________________

For the transition period from ___________________________ to ___________________________

Commission File No. 001-34566

CHINA BIOLOGIC PRODUCTS HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

N/A

(Translation of Registrant’s Name Into English)

Cayman Islands

(Jurisdiction of Incorporation or Organization)

18th Floor, Jialong International Building, 19 Chaoyang Park Road

Chaoyang District, Beijing 100125

People’s Republic of China

(Address of principal executive offices)

Joseph Chow, Chief Executive Officer

Telephone: +86 (10) 6598-3111

18th Floor, Jialong International Building, 19 Chaoyang Park Road

Chaoyang District, Beijing 100125

People’s Republic of China

(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.

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 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: 38,459,769 ordinary shares, par value $0.0001 per share, as of December 31, 2019.

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

⌧ Yes ◻ No

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If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

◻ Yes ⌧ No

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

⌧ Yes ◻ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

⌧ Yes ◻ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards^† provided pursuant to Section 13(a) of the Exchange Act. ◻

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

◻ Item 17 ◻ Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

☐ Yes ⌧ No

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS.)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

◻ Yes ◻ No

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Annual Report on Form 20-F

Year Ended December 31, 2019

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Special Note Regarding Forward Looking Statements

In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as “believe,” “expect,” “anticipate,” “project,” “target,” “plan,” “optimistic,” “intend,” “aim,” “will” or similar expressions which are intended to identify forward-looking statements. Such statements include, among others, those concerning market and industry growth and demand and acceptance of new and existing products; expectations regarding governmental approvals of our new products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, as well as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of our company to differ materially from those expressed or implied by such forward-looking statements. Risks and uncertainties that could cause actual results to differ materially from those anticipated include risks related to, among others, our ability to overcome competition from local and international pharmaceutical enterprises; decrease in the availability, or increase in the cost, of plasma; failure to renew plasma collection permits for plasma collection stations; failure to meet the GMP standard or other mandatory requirements for any of our facilities; failure to obtain PRC governmental approval to increase retail prices of certain of our biopharmaceutical products; loss of key members of our senior management; and unexpected changes in the PRC government’s regulation of the biopharmaceutical industry in China, or changes in China’s economic situation and legal environment. Additional disclosures regarding factors that could cause our results and performance to differ from results or performance anticipated by this report are discussed in “Item 3.D. Key Information—Risk Factors”.

Readers are urged to carefully review and consider the various disclosures made by us in this report and our other filings with the SEC. These reports attempt to advise interested parties of the risks and factors that may affect our business, prospects, financial condition and results of operations. The forward-looking statements made in this report speak only as of the date hereof and we disclaim any obligation, except as required by law, to provide updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or future events.

Use of Certain Terms

Except as otherwise indicated by the context and for the purposes of this report only, references in this report to:

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D. Risk Factors

An investment in our ordinary shares involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this report, before making an investment decision. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, the trading price of our ordinary shares could decline, and you may lose all or part of your investment. You should read the section entitled “Special Note Regarding Forward Looking Statements” above for a discussion of what types of statements are forward-looking statements, as well as the significance of such statements in the context of this report.

RISKS RELATING TO OUR BUSINESS

The biopharmaceutical industry in China is strictly regulated and changes in such regulations, including banning or limiting plasma products, may have a material adverse effect on our operations, revenues and profitability.

We are principally engaged in the research, development, manufacture and sales of human plasma-based biopharmaceutical products in China. The biopharmaceutical industry in China is strictly regulated by the government. The regulatory regime regulates the process of administrative approval of medicine and its production, and includes laws and regulations such as the PRC Pharmaceutical Law, the Implementation Rules on the PRC Pharmaceutical Law and the Regulations on the Administration of Blood Products. These laws and regulations require entities producing plasma products to comply strictly with certain hygienic standards and specifications promulgated by the government. In the event that a plasma product is discovered to be not compliant with the government’s hygienic standards and specifications, the health department may revoke its approval of such plasma product, or otherwise limit the use of such plasma product. Changes in these laws and regulations, including banning or limiting plasma products, could have a material adverse effect on our operations, revenues and profitability.

If the biopharmaceutical products we sell are found to be contaminated, our operation, revenues and profitability would be severely and adversely affected and we may be subject to civil and criminal liabilities.

The principal raw material of our existing and planned biopharmaceutical products is human source plasma, which, due to its unique nature, is subject to risks of contaminations and blood-borne diseases. In addition, current technology cannot eliminate entirely the risk of biological hazards inherent in plasma that are not currently known or for which screens are not currently commercially available, which could result in a widespread epidemic due to blood infusion. If any of our human donors is infected with diseases, then the plasma from such donor may be contaminated. Although we pre-screen all donors in order to ensure that they are not infected with HIV and hepatitis C and have not contracted liver diseases, screening tests may fail to identify and exclude from our supply the plasma from infected donors due to technical limitation and human errors. In addition, we purchase source plasma from Xinjiang Deyuan. Although we perform screening tests on the purchased plasma before putting it into production, we may fail to identify contaminated plasma from Xinjiang Deyuan due to the technical limitation and/or human errors. If any contaminated plasma is not appropriately screened out, our entire plasma supply for the relevant plasma collection station may become contaminated. If the plasma from our collection or purchased from Xinjiang Deyuan is contaminated and we sell biopharmaceutical products made from such plasma, we could be subject to civil liability from suits brought by consumers. Further, we may lose our registration and have criminal liability if we are found by the government to have been criminally negligent. In addition, we may be subject to civil liabilities from suits brought by consumers of our products. If any of these occurs, our business, prospects, results of operations and financial condition will be materially and adversely affected.

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If our supply of quality plasma is interrupted, our results of operations and profitability will be adversely affected. In addition, if we experience any shortage of raw materials in the future, we may be unable to proceed with our long-term business plan and we may be forced to curtail or cease our operations or further business expansion.

The production of plasma products relies on the supply of plasma of suitable quality. For 2019, 2018 and 2017, the cost of plasma we used for production accounted for approximately 80.8%, 80.4% and 80.9%, respectively, of total production cost of our plasma products. The supply and market prices of plasma may be adversely affected by factors such as heightened or new regulatory restrictions, higher living standards or outbreaks of diseases, any of which would affect our costs of production. We may not be able to pass on any resulting increase in costs to our customers and therefore any substantial fluctuation in supply or market prices of plasma may adversely affect our results of operations and profitability. For example, the recent outbreak of the coronavirus disease in China has caused the closure of our plasma collection stations since late January 2020. Although most of our stations resumed operations in early March 2020, it is uncertain when the plasma collection volume could reach the normal level. And if the coronavirus disease continues to spread or not be contained in relevant regions, the stations might be closed again. If such interruption to our operations continues, we may experience a shortage of plasma supply and/or incur substantial additional costs to obtain substitute plasma, and our results of operations and financial condition may be materially and adversely affected.

Our production volume, capacity utilization and future expansion are affected by a contraction in the supply of raw materials, especially plasma. In addition to the plasma collected from our own plasma collection stations, we also outsource plasma from Xinjiang Deyuan pursuant to a cooperation agreement entered into in August 2015 and supplemented by a supplementary agreement entered into in August 2018. Under these agreements, Xinjiang Deyuan had sold us more than 500 tonnes of source plasma in batches from August 2015 to August 2018 and agreed to sell to us no less than 500 tonnes of source plasma over a three year period from August 2018 to August 2021. As of December 31, 2019, 802 tonnes of plasma under these agreements had been delivered to us. Since November 2019, however, Xinjiang Deyuan has significantly reduced the plasma volume delivered to us due to its operating cash shortfall and its disagreement with us regarding payment arrangements for the plasma. While we are in negotiation with Xinjiang Deyuan and endeavoring to resolve the disagreement, we cannot assure you that the plasma supply from Xinjiang Deyuan will be resumed to normal level at any time soon, or at all. Further, even if the current disagreement is resolved, we cannot assure you that Xinjiang Deyuan will always deliver the source plasma on schedule in the future or such plasma will always pass our quality inspection. In addition, there is a possibility that such contract might not be extended after August 2021. If we experience any shortage of plasma supply or fail to secure sufficient plasma supply for our production, we may not be able to fully utilize our production capacity or proceed with our expansion plans.

In addition to plasma products, we also manufacture and sell placenta polypeptide products, which use placenta as the main raw material, and regenerative medical biomaterial products, including artificial dura mater and spinal dura mater products, which use extracted collagen as the main raw material. If we experience any shortage of these raw materials in the future, our business and results of operations may also be adversely affected.

We may not be able to carry on our business if we lose any of the required permits and licenses.

Shandong Taibang, Guizhou Taibang, and Huitian, a company in which we hold an indirect minority equity interest, manufacture plasma products and are required to obtain from various PRC governmental authorities certain permits and licenses and maintain certain qualifications, including permits for pharmaceutical manufacturing and the compliance with the GMP standards for each of our production facilities, as well as pharmaceutical distribution permits.

TianXinFu, a medical device company in which we acquired 80% interest in January 2018 and the remaining 20% interest in August 2019, is also required to obtain certain permits and licenses, including registration certificate of medical devices and Medical Device Manufacturing Enterprise License (“MDMEL”) for its production activities, as well as Permit for Medical Device Operation.

We have obtained permits and licenses (including the MDMEL) and complied with the GMP standards required for the manufacturing and sales of our products. Our permits and licenses are subject to periodic renewal and/or reassessment by the relevant PRC governmental authorities, and the compliance standards may change from time to time. We intend to apply for the renewal of such permits and licenses when required by applicable laws and regulations. However, we cannot guarantee that we will be able to renew such permits and licenses in a timely manner, or at all. If we are unable to renew our permits and licenses or fail an inspection which would impair our permits and licenses, our business, prospects, financial condition and results of operations may be materially and adversely affected.

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In addition, any changes in compliance standards, or any new laws or regulations that may prohibit or restrict our business activities or increase our compliance costs may adversely affect our operations and profitability.

We may fail to obtain, maintain or renew required licenses and permits for our plasma collection stations. In addition, if we fail to adequately monitor our plasma collection stations, follow proper procedures or comply with safety requirements, we may be subject to sanctions by the government, or civil or criminal liabilities.

We currently operate sixteen plasma collection stations through Shandong Taibang (including two former branch collection facilities re-categorized as collection stations by relevant authorities in 2019, and one new collection station for which we obtained an operating permit in January 2020) and three plasma collection stations through Guizhou Taibang. Huitian, a company in which we hold a minority interest, operates three plasma collection stations in Shaanxi Province. To enable growth in our sales, we are seeking opportunities to build more plasma collection stations. The operation of plasma collection stations, however, is highly regulated and we cannot assure you that we will be able to obtain, maintain and renew the required licenses and permits for existing and new plasma collection stations in desirable locations or in a timely manner, if at all. For example, we have experienced difficulties and delays in renewing the business licenses and collection permits for four plasma collection stations that we acquired in Guizhou Province. While we monitor our plasma intake procedures through frequent unscheduled inspections of our stations, there remain risks that our plasma collection stations may fail to comply with hygiene and procedural requirements for plasma screening, collection, storage and tracking. If we fail to comply with any of these requirements, we may lose our plasma collection permits or incur criminal liability if we are found by the government to have been criminally negligent. Any such incident may subject us to government sanctions, or civil or criminal liabilities. If any of these events were to occur, our business, reputation and prospects would be materially and adversely affected.

Our operations, sales, profit and cash flow will be adversely affected if our plasma products fail to pass inspection in a timely manner.

The PRC regulatory authorities inspect each batch of our plasma products before we can ship it to our customers. The NMPA has quality standards which require the regulators to assess, among other things, the appearance, packing capacity, thermal stability, pH value, protein content and purity of the product. We must strictly comply with relevant rules and regulations throughout the lifecycle of each product, including plasma collection, delivery, production and packaging. Regulators typically take more than a month to inspect one batch of plasma products. The process begins when the regulator randomly selects samples of our products and delivers them to the PRC National Institute for Food and Drug Control, or NIFDC, for testing, and the process ends when the products are given final approval by NIFDC. In the event that the regulators delay the approval of or reject our products or change the requirements such that we are unable to comply, our operations, sales, profit and cash flow will be adversely affected.

Current or worsening economic conditions may adversely affect our business and financial condition.

We currently generate sufficient operating cash flows which provide us with significant working capital. However, any uncertainty arising out of economic conditions may affect our ability to manage normal relationships with our customers, suppliers and creditors and adversely affect our results of operations, cash flows and financial condition, or those of our customers, suppliers and creditors. Current or worsening economic conditions may adversely affect the ability of our customers to pay for our products, and curtail their spending on healthcare generally. This could result in a decrease in the demand for our products, declining cash flows, longer sales cycles, slower adoption of new technologies and increased price competition. These conditions may also adversely affect certain of our suppliers, which could cause a disruption in our production capacities. Such reductions and disruptions could have a material adverse effect on our business operations.

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Our inability to successfully research and develop new biopharmaceutical products could have an adverse effect on our future growth.

We believe that the successful development of biopharmaceutical products can be affected by many factors. Products that appear to be promising in the early phases of research and development may fail to be commercialized for various reasons, including the failure to obtain the necessary regulatory approvals. In addition, the research and development cycle for any new medicine is a relatively lengthy process. In our experience, the process of conducting research and various tests on new products before obtaining a new medicine certificate from the NMPA and subsequent procedures may take approximately three to five years, or even longer. For example, in October 2017, we received from the NMPA approval for commercial manufacturing and the GMP certificate of human fibrinogen product, for which the pre-clinical research started in 2008 and the approval for Phase III clinical trials was received in 2012. We cannot assure you that our future research and development projects will be successful or that they will be completed within the anticipated time frame or budget. Also, we cannot guarantee that we will receive the necessary approvals from relevant authorities for the production of our newly developed products. Even if such products could be successfully commercialized, we cannot assure you that they will be accepted by the market as anticipated.

We do not have discretion to increase the prices of certain of our products, which are subject to the regional government tendering mechanism and/or reimbursement ceilings.

Prices of certain pharmaceutical  and medical device products are subject to various price-related regulations in China. Although the NDRC removed the retail price ceilings for all drug products (except for anesthetics and category I antipsychotics) in China in 2015, the pricing of our plasma products is still subject to provincial and local tendering mechanisms where we compete with other manufacturers in the price and quality of products. Among our plasma products, tetanus immunoglobulin, Factor VIII and PCC are included on the life-saving EDL in most Chinese provinces, for which drug procurement was prioritized and the hospitals are allowed to directly purchase drugs from manufacturers through an on-line procurement process. Other plasma products such as albumin and IVIG and certain of our medical device products are subject to tendering process in most provinces. During the past three to four years, PRC central government implemented a series of healthcare reform measures, and regional governments adopted various forms of tendering policies accordingly. Although currently there is no standardized tendering rule across the country and the tendering prices for most of our products remain comparatively stable, some provinces have begun to adopt a policy of on-line disclosure of tendering prices, which may narrow the differences in tenders among different provinces and make the tendering practice more uniform across the country. This may increase the price pressure since provinces intend to benchmark to the lowest nationwide prices. Moreover, the relevant authorities are also setting up tendering rules such as nationwide or multiple-province level centralized procurement to stimulate manufactures to cut prices in order to ensure their products being included in the procurement lists or improve the procurement volume of their products. Since late 2019, high-price medical consumables, in addition to pharmaceutical products, have been gradually included in the scope of centralized procurement under the organization of the state or local governments. Although our products have not been included in such nationwide or multiple-province level centralized procurement process, there is a possibility that they could be included in the future.

In addition, retail prices of pharmaceutical products fully or partially covered under the national insurance system are also affected by the reimbursement ceilings set out in the National Reimbursement Drug List, or the NRDL, which may be adjusted by the NHSA from time to time. A new edition of the NRDL was launched in August 2019. Eight of our principal products (namely human albumin, IVIG, human immunoglobulin, human rabies immunoglobulin, human tetanus immunoglobulin, factor VIII, PCC and fibrinogen) are included in the NRDL. Before this new edition of the NRDL, each province could make revisions to the NRDL within certain limits and establish their own provincial reimbursement drug lists. According to the relevant notice of the new NRDL in August 2019, each province must strictly follow the national list for reimbursement coverage with no local modifications, and must remove drugs that had only been on the provincial lists from reimbursement by the end of a three-year transition period. However, the reimbursable amount for each drug in each province is still subject to each provincial social security funding situation and could be adjustable periodically. These reimbursement ceilings put pressure on the manufacturers’ pricing of the relevant products. Similarly, certain of our medical device products are also subject to provincial or regional limitation on reimbursable amount. See “Item 4.B. Information on the Company—Business Overview—Business—Regulation” for further details.

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Because of the tender process and the reimbursement ceiling for certain of our products, we do not have discretion to increase the prices we charge our customers and distributors for such products above certain levels. We may not be able to increase our prices even if the cost of manufacturing our products increases as a result of increases in the cost of raw materials or other costs, and, our revenue and profitability would be adversely affected. If the margin of any of these products becomes prohibitively low, we may stop manufacturing such product, which may further adversely affect our revenue and profitability.

Our ability to increase the prices of our products is limited by general market conditions and intense competition.

Our pricing practices may also be affected by the general market conditions and intense competition. To the extent the demand for our products declines or competition intensifies, we may decide to respond by reducing our prices in order to capture the declining market demand and maintain the competitiveness of our products. See also “Item 3.D. Key Information—Risk Factors—Risks Relating to Our Business—We are subject to intense competition and may encounter increased competition from both local and overseas pharmaceutical enterprises if PRC regulators relax the approval process for plasma products or international trade restrictions. A change in our competitive environment could adversely affect our profitability and prospects” below. If the margin of any of our products becomes prohibitively low, we may stop manufacturing such product, which may further adversely affect our revenue and profitability.

Our ability to distribute our products is limited by PRC healthcare reform measures.

During the past three to four years, the PRC government initiated a series of healthcare reform measures, including but not limited to the prohibition on drug sale mark-ups in public hospitals, the limitation on the ratio of drug sale revenue to total revenue in public hospitals, and the two-invoice policy in drug and medical device distribution channels.

Pursuant to the no mark-up policy of the central government, all public hospitals in China had cancelled the 15% mark-ups on drug sales by the end of 2017. Since then, we have seen a substantial drop in public hospitals’ operational budgets, which has negatively impacted those hospitals’ incentive to purchase drugs. In 2019, such no mark-up policy has extended to medical consumables and all public hospitals in China had been required to cancel the mark-ups on sales of medical consumables by the end of 2019.

In addition, the central government has required the drug sales revenue of each public hospital to be no more than 30% of its total revenue. In order to comply with such rule, the hospitals have implemented measures such as requiring doctors to prescribe drugs only in accordance with approved indications shown on the drug label. As most of our products have high unit prices, we have experienced a reduction in the purchase volumes of our products, in particular albumin and IVIG products, by a number of hospitals since the end of 2017. In 2019, the central government began to implement a series of indicators for performance appraisal at hospital level to better monitor the effectiveness of treatment and efficiency of prescription, which replaced the single indicator of drug sales revenue percentage, but the constraint on the volume growth of our major products continued.

Also as part of the healthcare reform, the two-invoice policy system in the pharmaceutical and medical device supply chains was designed to limit the number of distribution layers between manufacturers and hospitals with the aim of stabilizing prices and enhancing transparency. The two-invoice policy for drugs had been formally implemented in all provinces in China by the end of 2018 and the implementation of such policy for medical consumables has commenced in most provinces in 2019. Many pharmaceutical and medical device manufacturers used to sell their products through multiple layers of distributors. Under the new two-invoice policy, manufacturers can only sell products to one layer of distributors (with one invoice issued), which then directly sell to the hospital customers (with the second invoice issued). As a result, many regional smaller distributors who have less access to hospital customers are no longer able to continue their businesses. This in turn intensifies competition among product manufacturers for access to competent large distributors. Our sales model for plasma products focuses on direct sales to hospitals and inoculation centers, which is complemented by distributor sales mostly with one layer of distributor between hospital and us, so our plasma business has been substantially in compliance with the two-invoice policy. However, the intensified competition partly caused by the implementation of the two-invoice policy in the plasma industry negatively impacted us in both the ex-factory price to distributors and sales volume. In addition, our placenta polypeptide product used to be sold through multiple layers of distributors to hospitals, and its sales volume shrank significantly since the implementation of the two-invoice policy. For TianXinFu, part of its medical device products have already been sold through only one layer of distributors to hospitals, and we will adjust our strategy when such policy for medical device is officially implemented in more regions to minimize the effects resulting therefrom, but we cannot ensure that there would not be a negative impact on us.

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Furthermore, we cannot assure you that the government will not mandate more healthcare reform regulations that may have a negative impact on us. For example, in June 2019, NHC and the PRC National Administration of Traditional Chinese Medicine jointly issued the first batch of “national key drug list for monitoring and prescription control” - which was previously expected to be called the “adjuvant drug list”, for treatments applied as supplements to initial therapies. This first national list consists of 20 chemical or biological drugs and will serve as the basis for developing provincial lists, which could be tailored by provincial regulators and further modified at the hospital level. The government has requested all hospitals and medical institutions to strengthen the control on the drugs in the list, including establishing new prescription instructions and requiring doctors to strictly follow label uses. Although none of our products are included in this first batch of list and we believe that most of our products are essential treatments to many diseases, we cannot assure you that our products would not be included in the regional or next batches of national drug lists for monitoring and prescription control. For example, our placenta polypeptide product has been included in many regional adjuvant drug lists and its sales volume has been negatively impacted. If our placenta polypeptide product is included in more provincial lists and/or the national list for monitoring and prescription control, its sales volume may be further negatively impacted. In addition, in January 2020, NHC issued the first batch of national list of high-price medical consumables under key regulation, and such list consists of 18 high-price medical consumables and will serve as the basis for developing provincial lists, which could be tailored by provincial regulators and further modified at the hospital level, and the government has requested all hospitals and medical institutions to strengthen the management on the high-price medical consumables in the lists pursuant to the Administrative Measures for Medical Consumables for Medical Institutions (for Trial Implementation) that was promulgated in June 2019 and became effective in September 2019. Although none of our medical consumable products are included in this first national list, our dura mater product was included in certain provincial lists for monitoring and prescription control for high-price medical consumables in late 2019, and we cannot assure you that our medical consumable products will not be included in future national or regional lists.

If reimbursement or other payment for our current or future products is reduced or modified in the PRC, including through the implementation of government-sponsored healthcare reform or other similar actions, cost containment measures, or changes to policies with respect to pricing, then our business could suffer.

Sales of our products depend, in part, on the extent to which the costs of our products are paid by public payers. These public payers mainly consist of local governments which reimburse the medicines and medical devices covered by the reimbursement catalog. The NHSA issues the National Reimbursement Drug List, or the NRDL from time to time, and the latest edition of the NRDL was launched in August 2019. Eight of our principal products (namely human albumin, IVIG, human immunoglobulin, human rabies immunoglobulin, human tetanus immunoglobulin, factor VIII, PCC and fibrinogen) are included in the current NRDL. Before this new edition of the NRDL, each province could make revisions to the NRDL within certain limits and establish their own provincial reimbursement drug lists. According to the relevant notice of the new NRDL in August 2019, each province must strictly follow the national list for reimbursement coverage with no local modifications, and must remove drugs that had only been on the provincial lists from reimbursement by the end of a three-year transition period. The drugs that had been on a regional reimbursement list but were excluded from the new NRDL, such as placenta polypeptide products, will be negatively impacted by this new regulation. Similarly, certain of our medical device products are also subject to provincial or regional restrictions on the reimbursable amount. These measures by local governments may limit, reduce or eliminate payments for our products and adversely affect both pricing flexibility and demand for our products.

Legislation and regulations affecting reimbursement for our products may change at any time and in ways that may be adverse to us. We cannot predict the impact of these pressures and initiatives, or any negative effects of any additional regulations that may affect our business.

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Some of our owned or leased properties have title defects or non-compliance, which could adversely affect our business operations.

Some of our owned or leased properties have title defects or non-compliance. For example, we use properties built on collectively owned rural land for two of our plasma collection stations. We are also in the process of obtaining the property ownership certificate for another one of our plasma collection stations. Although such title defects and non-compliance have not adversely affected our business operations, we cannot assure you that we will be able to rectify such defects and non-compliance in a timely manner or at reasonable costs, if at all. For example, under PRC laws, collectively owned rural land may not be used for commercial purposes and we may be required to vacate and seek other space to house our collection facilities. For the collection stations built on collectively owned rural land, under the lease agreement for the collectively owned rural land among us, the local government and the economic collective which owns the land, the economic collective is required to assist us in securing legal rights to use such land. If the economic collective fails to perform its obligations under the lease agreement, or the lease agreement is deemed to be void, voidable or otherwise unenforceable, or if ownership disputes or claims regarding the land otherwise arise, we may be required to relocate our collection station. Any disputes or claims relating to our owned or leased properties or land or any efforts in securing alternative sites and properties could divert our resources and management’s attention from our regular business operations. In addition, we may not be able to secure alternative sites and properties, if required, in a timely manner or at reasonable costs, which could adversely affect our business operations.

Our financial position and operations may be materially and adversely affected if our product liability insurance does not sufficiently cover our liabilities.

Under current PRC laws, manufacturers and vendors of defective products in China may incur liability for loss and injury caused by such products. Pursuant to the General Principles of the Civil Law of the PRC, or the PRC Civil Law, which became effective in 1987, a defective product that causes property damage or physical injury to any person may subject the manufacturer or vendor of such product to civil liability.

Under the Product Quality Law of the PRC, which was enacted in 1993 and revised in 2000 to protect the rights and interests of end-users and consumers and to strengthen the supervision and control of the quality of products, manufacturers who produce defective products may be subject to fines and production suspension, and in severe cases, be subject to criminal liability and may have their business licenses revoked.

The Tort Liability Law of the PRC enacted in December 2009 also imposes liability on manufacturers for damages caused by defects in their products.

In addition, all businesses in the PRC, including ours, must observe and comply with the PRC Law on the Protection of the Rights and Interests of Consumers, which was enacted in 1993 to protect the legal rights and interests of consumers in connection with the purchase or use of goods and services.

We maintain two product liability insurance policies for sales in China for Shandong Taibang and Guizhou Taibang’s products in the amount of $2.9 million (RMB20 million) each. If our products are found to be defective and our insurance coverage is insufficient to cover a successful claim against us, our financial position and operations may be materially and adversely affected.

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Product liability claims or product recalls involving our products could have a material adverse effect on our business.

Our business exposes us to the risk of product liability claims that are inherent in the manufacturing, distribution and sale of biopharmaceutical and medical device products. For example, plasma is a biological substance that is capable of transmitting viruses and pathogens, whether known or unknown. Therefore, our plasma and plasma products, if not properly collected, tested, pathogen-inactivated, processed, stored or transported, could cause serious disease and possibly death to patients. Further, there are viral and other infections of plasma which may escape detection using current testing methods and which are not susceptible to inactivation methods. Our other biopharmaceutical and medical device products are also required to be of very high quality as they are used in intravenous injections or surgeries. Any infection of disease by persons using our products could result in claims against us. Since our establishment in 2002, we have been subject to four lawsuits filed by patients who were treated with our products and received blood and/or plasma transfusions. In all of these four cases, we were ordered to contribute a portion of the compensation for the patients even though the courts did not find that our products were defective or caused the patients’ illness. Although the required contribution by us was immaterial in these four cases, we cannot assure you that there will be no future claims against us that would subject us to a significant loss or that we will always succeed in defending against such claims. Furthermore, the presence of a defect in a product could require us to carry out a recall of such product.

A product liability claim, regardless of merit or eventual outcome, or a product recall could result in substantial financial losses, civil and criminal liabilities, administrative sanctions, revocation of business and product permits and licenses, negative reputational repercussions and loss of customers. If our products are found to be defective and our insurance coverage is insufficient to cover a successful claim against us, our financial position and operations may be materially and adversely affected.

We are subject to intense competition and may encounter increased competition from both local and overseas pharmaceutical enterprises if PRC regulators relax the approval process for plasma products or international trade restrictions. A change in our competitive environment could adversely affect our profitability and prospects.

We face intense competition from local and foreign entities that manufacture and sell products that compete with ours in China. These competitors may have more capital, better research and development resources, more expanded manufacturing and marketing capabilities and more experience than we do. The plasma-based biopharmaceutical manufacturing industry in China is highly regulated, and although we believe that compliance with the regulatory requirements pose a competitive barrier to enter into the Chinese market, over time, however, there may be new entrants. If the government relaxes these restrictions and allows more competitors to enter into the market, these competitors may pose a threat to our business. Our operating results and financial condition may be adversely affected if competition intensifies, competitors reduce prices to gain market share, or competitors develop new products having comparable medicinal applications or therapeutic effects which are more effective or less costly than ours.

In addition, we also face competition from imported products. Since 2009, there has been a substantial increase in volume of imported human albumin in China, which competes in domestic human albumin market. In addition, we compete with foreign biopharmaceutical manufacturers that set up production facilities in China and compete directly with us. The increased supply of both domestic and foreign biopharmaceutical products in China may result in lower sales or lower prices for our products. We cannot assure you that we will remain competitive or that our profitability and prospects will not be adversely affected.

We depend on key personnel, and turnover of key employees and senior management could harm our business.

Our success, to a certain extent, is attributable to the expertise and experience of our senior management and key research and technical personnel who carry out key functions in our operation. If we lose the service of any of our senior management or key research or technical personnel or fail to attract additional personnel with suitable experience and qualification, our business operations and research capability may be adversely affected.

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We have a secondment agreement with the Shandong Institute, which is expected to terminate upon its future privatization, for certain of our employees. If the secondment agreement is breached or terminated, it could have an adverse effect on our operations and on our financial results.

Shandong Institute provided us with 23 of our employees, including certain key management personnel, such as Shandong Taibang's general manager, out of our total of approximately 2,269 employees as of December 31, 2019, pursuant to a secondment agreement dated October 28, 2002, between Shandong Taibang and the Shandong Institute. Pursuant to the secondment agreement, we are responsible for the salaries of these employees, as well as for their social benefits such as insurance. Our secondment agreement with the Shandong Institute will expire on the earlier of October 2032 or the privatization of the Shandong Institute, which was originally scheduled to occur before the end of 2008. However, the privatization of the Shandong Institute has been delayed indefinitely due to delay by the Shandong Department of Health in implementing the privatization plan. Upon expiration or termination of the secondment agreement, we plan to hire the seconded employees directly. However, we cannot assure you that all of the employees will accept our employment offers at that time. Although none of our seconded employees have indicated that they do not plan to continue working for us after the privatization, if the secondment agreement is terminated or expires and we are unable to hire those employees or their replacements on time, our operations, as well as our financial results, may be materially and adversely affected.

We may not realize the anticipated benefits of our acquisition of TianXinFu.

We may face unknown challenges in integrating the business of TianXinFu with our existing business to realize the anticipated benefits of our acquisition of TianXinFu. For example, we may not be able to effectively utilize TianXinFu’s sales network and marketing expertise to promote the sale of our existing plasma products due to the sales team’s lack of familiarity with our plasma products and the plasma markets or due to any loss of key sales personnel. Furthermore, we may not be able to introduce our plasma products as perioperative therapeutics to surgical departments covered by TianXinFu as planned. If we fail to realize the anticipated benefits from this acquisition, our liquidity, results of operations, financial condition and share price may be adversely affected. In addition, at times, the attention of certain members of our management and resources may be focused on the integration of the businesses and diverted from day-to-day business operations, which may disrupt our business.

The acquisition of TianXinFu may negatively impact our financial results.

The acquisition of TianXinFu has been accounted for under the acquisition method of accounting and the assets acquired and liabilities assumed have been recorded at their respective fair values at the acquisition date. The excess of the purchase price over those fair values has been recorded as goodwill. If the value of goodwill or intangible assets becomes impaired in the future, we may incur material charges relating to such impairment. Such a potential impairment charge could have a material impact on our operating results. In addition, a portion of our continuing revenues and earnings per share are derived from the operation of TianXinFu. Therefore, any negative impact on the operations of TianXinFu could potentially harm our operating results.

We have limited experience in operating the business of regenerative medical biomaterial products.

We have been principally engaged in the research, development, manufacturing and sales of plasma products in China, while our acquired business of TianXinFu focuses on the manufacturing and sale of regenerative medical biomaterial products, mainly artificial dura mater and spinal dura mater products. Our lack of familiarity with the regenerative medical biomaterial industry may make it difficult for us to anticipate the demands and preferences in the market and to develop products that meet the requirements and preference of customers in a timely and cost-effective manner, or at all. As a result, the operating results of TianXinFu may be less desirable than our expectations, which in turn may negatively impact our overall financial position.

Future acquisitions may have an adverse effect on our ability to manage our business.

Selective acquisitions form part of our strategy to further expand our business. If we are presented with appropriate opportunities, we may acquire additional companies, products or technologies. Future acquisitions and the subsequent integration of new companies into ours would require significant attention from our management. The diversion of our management’s attention and any difficulties encountered in any integration process could have an adverse effect on our ability to manage our business. Future acquisitions would expose us to potential risks, including risks associated with the integration of new operations, technologies and personnel, unforeseen or hidden liabilities, the diversion of resources from our existing businesses and technologies, the inability to generate sufficient revenue to offset the costs and expenses of acquisitions, and potential loss of, or harm to, relationships with employees, customers and suppliers as a result.

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We may lose our competitive advantage and our operations may suffer if we fail to prevent the loss or misappropriation of, or disputes over, our intellectual property or proprietary information.

We regard our intellectual property, particularly our patents and trade secrets, to be of considerable value and importance to our business and our success. We rely on a combination of patent, trademark and trade secret laws, as well as confidentiality agreements to protect our intellectual property rights. Failure to protect our intellectual property rights could harm our brands and our reputation, and adversely affect our ability to compete effectively. Further, enforcing or defending our intellectual property rights, including our patents and trade secrets, could result in the expenditure of significant financial and managerial resources.

As of December 31, 2019, we held 105 issued patents and had 48 pending patent applications in China for certain manufacturing processes and packaging designs. We may not be able to successfully obtain the approval of the PRC authorities for our patent applications. As of December 31, 2019, we also had 36 trademarks registered in China.

While we are not aware of any infringement on our intellectual property and we have not been notified by any third party that we are infringing on their intellectual property, our ability to compete successfully and to achieve future revenue growth will depend, in significant part, on our ability to protect our proprietary technologies and operate without infringing upon the intellectual property rights of others. Policing unauthorized use of proprietary technologies is difficult and expensive. The steps we have taken may not be adequate to prevent unauthorized use of our intellectual property rights.

The legal regime in China for the protection of intellectual property rights is still at its early stage of development. Despite many laws and regulations promulgated and other efforts made by China over the years to tighten up its regulation and protection of intellectual property rights, private parties may not enjoy intellectual property rights in China to the same extent as they would in many more developed countries, including the United States, and the enforcement of such laws and regulations in China has not achieved the levels reached in those countries. The administrative agencies and the court system in China are not well-equipped to deal with violations or handle the nuances and complexities between compliant technological innovation and noncompliant infringement.

We also rely on confidentiality agreements with our management and employees to protect our confidential proprietary information. However, the protection of our intellectual property may be compromised as a result of:

Any of these events or occurrences may have a material adverse effect on our operations.

We cannot assure you that the steps taken by us to protect our intellectual property rights will be adequate or that third parties will not infringe on or misappropriate our patents, trademarks, confidential proprietary information or similar proprietary rights. Litigation may be necessary to enforce our intellectual property rights and the outcome of any such litigation may not be in our favor. Given the relative unpredictability of China’s legal system and potential difficulties enforcing a court judgment in China, we cannot guarantee that we would be able to halt any unauthorized use of our intellectual property through litigation in a timely manner.

Furthermore, we cannot assure you that other parties will not assert infringement claims against us, and we may have to pursue litigation against other parties to assert our rights. Any such claim or litigation could be costly and we may lack the resources required to defend against such claims. If we are unsuccessful in defending against such infringement claims, we may be required to pay damages, modify our products or suspend the production and sale of such products. We cannot guarantee that we will be able to modify our products on commercially reasonable terms.

Finally, any event that would jeopardize our proprietary rights or any claims of infringement by third parties could have a material adverse effect on our ability to market or sell our brands, and profitably exploit our products.

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A disruption in the supply of utilities, fire or other calamity at our manufacturing plant would disrupt production of our products and adversely affect our business.

Our plasma products are manufactured at our production facilities located in Tai’an, Shandong Province and Guiyang, Guizhou Province in China. TianXinFu’s manufacturing of regenerative medical biomaterial products primarily operates in Beijing. While we have not in the past experienced any calamities which disrupted production, any disruption in the supply of utilities, in particular, electricity or power supply, or any outbreak of fire, flood or other calamity resulting in significant damage at our facilities would severely affect our production and have a material adverse effect on our business, financial condition and results of operations.

We maintain insurance policies covering losses with respect to damages to our properties and products. We do not have insurance coverage for most of our inventories of raw materials or business interruption. We cannot assure you that our insurance would be sufficient to cover all of our potential losses.

In addition, the epidemic of the coronavirus disease in early 2020 has resulted in certain measures being implemented by the governments and companies in many regions of China to control the spread of the disease, including, among others, restrictions on manufacturing and the movement of employees. Our manufacturing facilities are still in normal operation since the coronavirus outbreak, with additional measures taken to protect the health and safety of our employees and to prevent cross-infections. However, should the coronavirus disease continue to spread or not be contained, the operations of our manufacturing facilities might be interrupted.

If we do not maintain strong financial controls, investor confidence in us may decline and our stock price may decline as a result.

As required by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring every public company to include a management report on such company’s internal control over financial reporting in its annual report, which must also contain management’s assessment of the effectiveness of our company’s internal control over financial reporting. In addition, the independent registered public accounting firm auditing the financial statements must also attest to the operating effectiveness of our company’s internal controls.

A report of our management and attestation by our independent registered public accounting firm is included in our annual report on Form 20-F for the year ended December 31, 2019. Our management has concluded that our internal controls over financial reporting as of December 31, 2019 were effective. We have in the past discovered, and may in the future discover, material weakness in our internal controls. For example, we identified material weaknesses related to review controls on the accounting for income taxes and derivative instrument valuation as described under Item 9A of our annual report on Form 10-K for the year ended December 31, 2010, which were subsequently remediated in 2011 as described under Item 9A of our annual report on Form 10-K for the year ended December 31, 2011. However, we cannot guarantee that these remedies will continue to be effective. Failure to achieve and maintain an effective internal control environment could result in us not being able to accurately report our financial results, prevent or detect fraud or provide timely and reliable financial and other information pursuant to the reporting obligations we have as a public company, which could have a material adverse effect on our business, financial condition and results of operations. This could reduce investors’ confidence in our reported financial information, which in turn could result in lawsuits being filed against us by our shareholders, otherwise harm our reputation or negatively affect the trading price of our ordinary shares.

We are treated as a U.S. corporation for U.S. federal tax purposes.

Pursuant to Section 7874 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), we are treated as a U.S. corporation for U.S. federal income tax purposes. As a result, we are subject to U.S. federal corporate income tax as if we were incorporated in the United States. Shareholders should consult their tax advisers regarding the U.S. federal income tax consequences of holding our ordinary shares in their particular circumstances.

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RISKS RELATING TO DOING BUSINESS IN CHINA

Changes in China’s political or economic situation could harm us and our operating results.

Economic reforms adopted by the PRC government have had a positive effect on the economic development of the country. The reformed economic infrastructure and legal systems, however, may be subject to abrupt adjustments by the government. These adjustments, especially in the following areas, could either benefit or damage our operations and profitability:

The PRC economy differs from the economies of most member countries of the Organization for Economic Cooperation and Development, or the OECD, in many ways. For example, state-owned enterprises still constitute a large portion of China’s economy, and weak corporate governance and the lack of a flexible currency exchange policy still prevail in China. As a result of these differences, we may not develop in the same way or at the same rate as might be expected if the PRC economy was similar to those of the OECD member countries. Substantially all of our operations are conducted in China and substantially all of our revenues are generated in China. Adverse changes in economic and political policies of the PRC government could have a material adverse effect on overall economic growth in China, which in turn could materially adversely affect our business.

Uncertainties with respect to the PRC legal system could limit the legal protections available to you and us.

We conduct substantially all of our business through our operating subsidiaries in China. Our operating subsidiaries are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to foreign-invested enterprises. The PRC legal system is based on written statutes, and prior court decisions may be cited for reference but have limited precedential value. Since 1979, a series of new PRC laws and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since the PRC legal system continues to evolve rapidly, the interpretations of many laws, regulations, and rules are not always uniform, and enforcement of these laws, regulations, and rules involve uncertainties, which may limit legal protections available to you and us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.

Furthermore, the PRC legal system is partly based on government policies and internal rules, some of which are not published in a timely manner or at all, and some of which may have retroactive effects. As a result, we may not be aware of our violation of any of these policies or rules until sometime after the violation. Such uncertainties, including the uncertainty over the scope and effect of our contractual, property (including intellectual property) and procedural rights under the PRC legal system could materially adversely affect our business and impede our ability to continue our operations.

The PRC government exerts substantial influence over the manner in which we must conduct our business activities.

The PRC government has exercised and continues to exercise substantial control over virtually every sector of the PRC economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to foreign investments, licenses and permits for business operation, foreign exchange, taxation, import and export tariffs, environmental regulations, land use rights, property, and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.

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Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy and any regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.

Restrictions on currency exchange may limit our ability to use the cash generated from our sales effectively.

Substantially all of our sales are denominated in RMB, and any future restrictions on currency exchanges may limit our ability to use cash generated from sales in RMB to fund any future business activities outside China or other payments in U.S. dollars. Although the PRC government introduced regulations in 1996 to allow greater convertibility of RMB for current account transactions, significant restrictions still remain, including primarily the restriction that foreign-invested enterprises may only buy, sell or remit foreign currencies after providing valid commercial documents at those banks in China authorized to conduct foreign exchange business. In addition, conversion of RMB for capital account items, including direct investments and loans, is subject to governmental approval and companies are required to open and maintain separate foreign exchange accounts for capital account items. We cannot be certain that the PRC regulatory authorities will not impose more stringent restrictions on the convertibility of RMB.

Fluctuations in exchange rates could adversely affect our business and the value of our securities.

The value of our ordinary shares will be indirectly affected by the foreign exchange rate between the U.S. dollars and RMB and between those currencies and other currencies in which our sales may be denominated. Appreciation or depreciation in the value of RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividends we issue that will be exchanged into U.S. dollars, as well as earnings from, and the value of, any U.S. dollar-denominated investments we make in the future.

Since July 2005, RMB has no longer been pegged to U.S. dollars. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, RMB may appreciate or depreciate significantly in value against U.S. dollars in the medium to long term. Moreover, it is possible that in the future PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.

Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.

Currently, some of our raw materials and major equipment are imported. In the event that the U.S. dollars appreciate against RMB, our costs will increase. If we cannot pass the resulting cost increases on to our customers, our profitability and operating results will suffer. In addition, if our sales to international customers grow, we will be increasingly subject to the risk of foreign currency depreciation.

Restrictions under PRC law on our PRC subsidiaries’ ability to make dividends and other distributions could materially and adversely affect our ability to grow, make investments or acquisitions, pay dividends to you and otherwise fund and conduct our business.

Substantially all of our profits are generated by our PRC subsidiaries. However, PRC regulations restrict the ability of our PRC subsidiaries to make dividends and other payments to their offshore parent companies. PRC legal restrictions permit payments of dividends by our PRC subsidiaries only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC subsidiaries are also required under PRC laws and regulations to allocate at least 10.0% of their annual after-tax profits determined in accordance with PRC generally accepted accounting principles to a statutory general reserve fund until the amounts in such fund reach 50.0% of their registered capital. Allocations to these statutory reserve funds can only be used for specific purposes and are not transferable to us in the form of loans, advances or cash dividends. Any limitations on the ability of our PRC subsidiaries to transfer funds to us could materially limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.

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Failure to comply with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to personal liability, limit our ability to acquire PRC companies or to inject capital into our PRC subsidiaries, limit the ability of our PRC subsidiaries to distribute profits to us or otherwise materially adversely affect us.

Pursuant to the Circular on Relevant Issues concerning Foreign Exchange Administration of Overseas Investment and Financing and Return Investments Conducted by Domestic Residents through Overseas Special Purpose Vehicle, or Circular 37, which was promulgated by SAFE, and became effective on July 4, 2014, (1) a PRC resident must register with the local SAFE branch before he or she contributes assets or equity interests in an overseas special purpose vehicle, or an Overseas SPV, that is directly established or controlled by the PRC resident for the purpose of conducting investment or financing; and (2) following the initial registration, the PRC resident is also required to register with the local SAFE branch for any major change, in respect of the Overseas SPV, including, among other things, a change in the Overseas SPV’s PRC resident shareholder, name of the Overseas SPV, term of operation, or any increase or reduction of the Overseas SPV’s registered capital, share transfer or swap, and merger or division.

We have requested the beneficial holders of our ordinary shares who are PRC residents to register with the relevant branch of SAFE in connection with their equity interests in us and our acquisitions of equity interests in our PRC subsidiaries pursuant to Circular 37 or the predecessor regulation of Circular 37, namely the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing and Roundtrip Investments via Overseas Special Purpose Vehicles, as the case may be. Because of uncertainty over how Circular 37 will be interpreted and implemented, and how or whether SAFE will apply it to us, we cannot predict how it will affect our business operations or future strategies. For example, the ability of our present and prospective PRC subsidiaries to conduct foreign exchange activities, such as the remittance of dividends and foreign currency-denominated borrowings, may be subject to compliance with Circular 37 by our PRC resident beneficial holders.

In addition, such PRC residents may not always be able to complete the necessary registration procedures required by Circular 37. We also have little control over either our present or prospective direct or indirect shareholders or the outcome of such registration procedures. Failure of our present or future PRC resident beneficial holders to comply with Circular 37 could subject these PRC resident beneficial holders to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit the ability of our PRC subsidiaries to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.

Failure to comply with PRC regulations regarding the registration requirements for share option plans may subject PRC plan participants or us to fines and other legal or administrative sanctions.

Our employees and directors who are PRC residents and who participate in our employees’ share incentive plan are required to register with SAFE and complete other procedures through a domestic qualified agent, and to retain an overseas entrusted institution to handle matters in connection with their exercise or sale of share options. In addition, the PRC agent is required to make amendment registrations with respect to the share incentive plan if there is any material change to the share incentive plan, the PRC agent or the overseas entrusted institution or other material changes. Failure to comply with such requirements will subject us or our PRC resident option holders to fines and other legal or administrative sanctions. To date, we have completed the SAFE foreign exchange registration with respect to our share incentive plans in which our employees and directors who are PRC residents participated, but there can be no assurance that we will be able to continue to do so in the future if the requirements are amended or changed, which would make it more difficult for us to incentivize our employees.

Furthermore, our employees working in the PRC who exercise share options, or whose restricted shares or restricted share units, or RSUs, vest, will be subject to PRC individual income tax. Our PRC subsidiaries are required to file documents related to employee share options, restricted shares or RSUs with the relevant tax authorities and to withhold individual income taxes of those employees related to their share options, restricted shares or RSUs. If the employees fail to pay, and our PRC subsidiaries fail to withhold, such PRC individual income taxes, our PRC subsidiaries may face sanctions imposed by the PRC tax authorities.

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We may be unable to complete a business combination transaction efficiently or on favorable terms due to complicated merger and acquisition regulations.

In August 2006, six PRC regulatory agencies, including the China Securities Regulatory Commission, or CSRC, promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or Circular 10, which became effective in September 2006 and was amended in June 2009. This regulation, among other things, governs the approval process by which a PRC company may participate in an acquisition of assets or equity interests. Depending on the structure of the transaction, Circular 10 requires the PRC parties to make a series of applications and supplemental applications to the government agencies. In some instances, the application process may require the presentation of economic data concerning a transaction, including appraisals of the target business and evaluations of the acquirer, which are designed to allow the government to assess the transaction. Government approvals will have expiration dates by which a transaction must be completed and reported to the government agencies. Compliance with Circular 10 is likely to be more time-consuming and expensive than in the past and the government can now exert more control over the combination of two businesses. Accordingly, due to Circular 10, our ability to engage in business combination transactions has become significantly more complicated, time-consuming and expensive, and we may not be able to negotiate a transaction that is acceptable to our shareholders or sufficiently protect their interests in a transaction.

Circular 10 allows PRC government agencies to assess the economic terms of a business combination transaction. Parties to a business combination transaction may have to submit to the PRC Ministry of Commerce, or MOFCOM, and other relevant government agencies an appraisal report, an evaluation report and the acquisition agreement, all of which form part of the application for approval, depending on the structure of the transaction. The regulations also prohibit a transaction at an acquisition price obviously lower than the appraised value of the PRC business or assets and in certain transaction structures, require that consideration must be paid within defined periods, generally not in excess of a year. The regulation also limits our ability to negotiate various terms of the acquisition, including aspects of the initial consideration, contingent consideration, holdback provisions, indemnification provisions and provisions relating to the assumption and allocation of assets and liabilities. Transaction structures involving trusts, nominees and similar entities are prohibited. Therefore, such regulation may impede our ability to negotiate and complete a business combination transaction on financial terms that satisfy our investors and protect our shareholders’ economic interests.

Under the Enterprise Income Tax Law, we may be classified as a “resident enterprise” of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC shareholders.

The Enterprise Income Tax Law, or the EIT Law, became effective on January 1, 2008 and was amended on December 29, 2018, and its implementing rules became effective on January 1, 2008 and was amended on April 23, 2019. Under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a PRC enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define de facto management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise.

On April 22, 2009, State Taxation Administration, or SAT, issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies, or the Notice, which was amended on January 29, 2014, further interpreting the application of the EIT Law and its implementation on non-PRC enterprise or group controlled by a PRC enterprise or a PRC enterprise group. Pursuant to the Notice, an enterprise incorporated in an offshore jurisdiction and controlled by a PRC enterprise or group will be classified as a “non-domestically incorporated resident enterprise” if (1) its senior management in charge of daily operations reside or perform their duties mainly in China; (2) its financial or personnel decisions are made or approved by bodies or persons in China; (3) its substantial assets and properties, accounting books, corporate chops, board and shareholder minutes are kept in China; and (4) at least half of its directors with voting rights or senior management often reside in China. A resident enterprise would be subject to an enterprise income tax rate of 25.0% on its worldwide income and must pay a withholding tax at a rate of 10.0% when paying dividends to its non-PRC shareholders. However, it remains unclear as to whether the Notice is applicable to an offshore enterprise not controlled by a PRC enterprise or a PRC enterprise group. Nor are detailed measures on imposition of tax from non-domestically incorporated resident enterprises available. Therefore, it is unclear how the PRC tax authorities will determine tax residency based on the facts of each case.

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We may be deemed to be a resident enterprise by PRC tax authorities. If the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25.0% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as interest on financing proceeds and non-PRC source income would be subject to PRC enterprise income tax at a rate of 25.0%. Second, although under the EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to a 10.0% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. In addition, dividends paid by us to non-PRC shareholders may be subject to PRC withholding tax and gains on dispositions of our shares by non-PRC shareholders may be subject to PRC tax. In that case, the tax rate would be 10.0% in the case of non-PRC enterprise shareholder or 20.0% in the case of non-PRC individual shareholder. Finally, if we were treated as a “resident enterprise” by PRC tax authorities, we would be subject to taxation in both the U.S. and China, and our PRC tax may not be creditable against our U.S. tax.

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

According to the Announcement of the State Administration of Taxation on Several Issues Concerning the Enterprise Income Tax on Indirect Property Transfer by Non-Resident Enterprises, or SAT Notice 7, promulgated by the SAT on February 3, 2015, as most recently amended on December 29, 2017, and the Announcement of the State Administration of Taxation on Matters Concerning Withholding of Enterprise Income Tax of Non-Resident Enterprises at Source, or SAT Notice 37, promulgated by the SAT on October 17, 2017, effective on December 1, 2017 and as amended on June 15, 2018, if a non-resident enterprise transfers its shares in an overseas holding company, which directly or indirectly owns PRC taxable properties, including shares in a PRC company, via an arrangement without reasonable commercial purpose, such transfer shall be deemed as indirect transfer of the underlying PRC taxable properties. Accordingly, the transferee shall be deemed to be a withholding agent with the obligation to withhold and remit the enterprise income tax to the competent PRC tax authorities. Factors that may be taken into consideration when determining whether there is a “reasonable commercial purpose” include, among other factors, the economic essence of the transferred shares, the economic essence of the assets held by the overseas holding company, the taxability of the transaction in offshore jurisdictions, and economic essence and duration of the offshore structure. Under the terms of SAT Notice 7, the transfer which meets all of the following circumstances shall be deemed as having no reasonable commercial purposes: (i) over 75% of the value of the equity interests of the offshore holding company are directly or indirectly derived from PRC taxable properties; (ii) at any time during the year before the indirect transfer, over 90% of the total properties (other than cash) of the offshore holding company are investments within PRC territory, or in the year before the indirect transfer, over 90% of the offshore holding company’s revenue is directly or indirectly derived from PRC territory; (iii) the function performed and risks assumed by the offshore holding company are insufficient to substantiate its corporate existence; and (iv) the foreign income tax imposed on the indirect transfer is lower than the PRC tax imposed on the direct transfer of the PRC taxable properties.

SAT Notice 7 also sets out safe harbors for the “reasonable commercial purpose” test. SAT Notice 7 contains an exemption for transfers of shares of a holding company listed outside the PRC, when the shares are acquired and sold in the public market.

However, uncertainties exist on testing the reasonable commercial purpose. For example, the relevant authority has not yet promulgated any formal provisions or formally declared or stated how to calculate the effective tax rates in foreign tax jurisdictions. As a result, we may become at risk of being taxed under SAT Notice 7 and SAT Notice 37 and the related SAT regulations and we may be required to expend valuable resources to comply with SAT Notice 7 and SAT Notice 37 and the related SAT regulations or to establish that we should not be taxed under SAT Notice 7 and SAT Notice 37 and the related SAT regulations, which could have a material adverse effect on our financial condition and results of operations.

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We may be exposed to liabilities under the Foreign Corrupt Practices Act and PRC anti-corruption laws, and any determination that we violated these laws could have a material adverse effect on our business.

We are subject to the Foreign Corrupt Practice Act, or FCPA, and other U.S. laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the relevant statute, for the purpose of obtaining or retaining business. We have operations, agreements with third parties, and make most of our sales in China. PRC anti-corruption laws also strictly prohibit bribery of government officials. Our activities in China create the risk of unauthorized payments or offers of payments by our employees, consultants, sales agents, or distributors, as they may not always be subject to our control. It is our policy to implement safeguards to discourage these practices by our employees. However, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants, sales agents, or distributors may engage in conduct for which we might be held responsible. Particularly, most of the hospitals and inoculation centers in China are state-owned entities, whose employees may be recognized as foreign government officials for the purpose of FCPA. Therefore, any payments, expensive gifts or other benefits provided to an employee of the state-owned hospitals or inoculation centers may be deemed violation of FCPA. Violations of FCPA or PRC anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, prospects, operating results and financial condition. In addition, the U.S. government may seek to hold us liable for successor liability under FCPA violations committed by companies in which we invest or that we acquire.

If we become directly subject to the scrutiny, criticism or negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business operations, stock price and reputation and could result in a loss of your investment in our stock, especially if such matter cannot be addressed and resolved favorably.

In recent years, U.S. public companies that have substantially all of their operations in China, particularly companies like us which have completed the “reverse merger” transactions, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S.-listed PRC-based companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits, SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on us, our business and our stock price. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend our Company. This situation will be costly and time-consuming and distract our management from growing our Company. If such allegations are not proven to be groundless, our Company and our business operations will be severely impacted and your investment in our stock could be rendered worthless.

The disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in China. Accordingly, our public disclosure should be reviewed in light of the fact that no governmental agency that is located in China where substantially all of our operations and business are located has conducted any due diligence on our operations or reviewed or cleared any of our disclosure.

We are regulated by the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under the Securities Act and the Exchange Act. However, since substantially all of our operations and business take place in China, it may be difficult for the Staff of the SEC to overcome the geographic and cultural obstacles that are present when reviewing our disclosure. These same obstacles are not present for similar companies whose operations or business take place entirely or primarily in the United States. Furthermore, our SEC reports and other disclosure and public pronouncements are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings are not subject to the review of the CSRC, a PRC regulator that is tasked with oversight of the capital markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with the understanding that no local regulator has done any due diligence on our Company and with the understanding that none of our SEC reports, other filings or any of our other public pronouncements has been reviewed or otherwise scrutinized by any local regulator.

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Our independent registered public accounting firm may be temporarily suspended from practicing before the SEC if unable to continue to satisfy SEC investigation requests in the future. If a delay in completion of our audit process occurs as a result, we could be unable to timely file certain reports with the SEC, which may lead to the delisting of our shares.

Substantially all of our sales are to customers in China, and we have all of our operations in China. Like many U.S.-listed companies with significant operations in China, our independent registered public accounting firm is located in China.

On January 22, 2014, Judge Cameron Elliot, an SEC administrative law judge, issued an initial decision suspending the Chinese member firms of the “Big Four” accounting firms, including our independent registered public accounting firm, from practicing before the SEC for six months. In February 2014, the initial decision was appealed. While under appeal and in February 2015, the Chinese member firms of “Big Four” accounting firms reached a settlement with the SEC. As part of the settlement, each of the Chinese member firms of “Big Four” accounting firms agreed to settlement terms that include a censure, undertakings to make a payment to the SEC, procedures and undertakings as to future requests for documents by the SEC, and possible additional proceedings and remedies should those undertakings not be adhered to.

If the settlement terms are not adhered to, Chinese member firms of “Big four” accounting firms may be suspended from practicing before the SEC which could in turn delay the timely filing of our financial statements with the SEC. In addition, it could be difficult for us to timely identify and engage another qualified independent auditor to replace our independent registered public accounting firm. A delinquency in our filings with the SEC may result in Nasdaq initiating procedures, which could adversely harm our reputation and have other material adverse effects on our overall growth and prospects.

Our independent registered public accounting firm’s audit documentation related to their audit reports included in our annual report is located in China. The PCAOB currently cannot inspect audit documentation located in China and, as such, you may be deprived of the benefits of such inspection.

Our independent registered public accounting firm issued opinions on the consolidated financial statements and internal control over financial reporting included in our annual reports filed with the SEC. Our independent registered public accounting firm’s audit documentation related to their audit reports included in our annual reports is located in China. As auditors of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board, or the PCAOB, our auditor is required by the laws of the United States to undergo regular inspections by the PCAOB. However, work papers located in China are not currently inspected by the PCAOB because the PCAOB is currently unable to conduct inspections without the approval of the PRC authorities.

Inspections of certain other firms that the PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. However, the PCAOB is currently unable to inspect an auditor’s audit work related to a company’s operations in China and where such documentation of the audit work is located in China. As a result, our investors may be deprived of the benefits of the PCAOB’s oversight of auditors that are located in China through such inspections.

The inability of the PCAOB to conduct inspections of an auditor’s work papers in China makes it more difficult to evaluate the effectiveness of any of our auditor’s audit procedures or quality control procedures that may be located in China as compared to auditors outside of China that are subject to PCAOB inspections. Investors may consequently lose confidence in our reported financial information and procedures and the quality of our financial statements.

RISKS RELATING TO OUR ORDINARY SHARES

The market price of our ordinary shares is volatile, leading to the possibility of its value being depressed at a time when you want to sell your holdings.

The market price of our ordinary shares is volatile, and this volatility may continue. Numerous factors, many of which are beyond our control, may cause the market price of our ordinary shares to fluctuate significantly. These factors include, among others:

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Securities class action litigation is often instituted against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs to us and divert our management’s attention and resources. Moreover, securities markets may from time to time experience significant price and volume fluctuations for reasons unrelated to operating performance of particular companies. For example, in July 2008, the securities markets in the United States, China and other jurisdictions experienced the largest decline in share prices since September 2001. These market fluctuations may adversely affect the price of our ordinary shares and other interests in our Company at a time when you want to sell your interest in our Company.

There can be no assurance of a consummation of the proposed going-private transaction, and the announcement and pendency of the transaction could materially and adversely affect our business, results of operations and financial condition.

In September 2019, we received a preliminary non-binding proposal letter with respect to a going-private transaction. For more details, see “Item 4.A. History and Development of the Company — Proposed Going-private Transaction.” There can be no assurance that any definitive offer will be made, that any agreement will be executed or that any proposed going-private transaction will be approved or consummated. These uncertainties may increase the volatility of the market price of our ordinary shares and have a material adverse effect on the market price of our ordinary shares.

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In addition, the process of the proposed going-private transaction or any other significant strategic transaction involving our Company could cause disruptions in our business and divert our management's attention and other resources from day-to-day operations, which could have an adverse effect on our business, results of operations and financial condition. We have incurred, and will continue to incur, costs, expenses, and fees for professional services and other transaction costs in connection with the proposed going-private transaction. All the fees and costs will be payable by us even if the transaction is not completed. Additionally, current and prospective employees and members of management could become uncertain about their future roles with us in the event the going-private transaction is completed. This uncertainty could adversely affect our ability to retain and hire employees and members of management. In addition, the announcement and pendency of the proposed going-private transaction could have an adverse effect on our relationships with customers and third-party service providers.

The provisions in our currently effective memorandum and articles of association and our preferred shares rights agreement might discourage, delay or prevent a change of control of our Company or changes in our management and, therefore depress the trading price of our ordinary shares.

Our amended and restated memorandum and articles of association adopted on July 21, 2017 contain provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive to the raider and to encourage prospective acquirers to negotiate with our board of directors, rather than to attempt a hostile takeover.

These provisions include, among others:

On February 22, 2017, our board of directors adopted a preferred shares rights agreement between us and the Securities Transfer Corporation, as the rights agent, which was amended and restated on July 28, 2017 and further amended on February 20, 2019 (the “Rights Agreement”). The Rights Agreement provides, among other things, that when specified events occur, our shareholders will be entitled to purchase from us a fraction of a share of series A participating preferred share for each ordinary share they own. Such preferred share purchase rights are triggered by the earlier to occur of (1) 10 business days (or a later date determined by our board of directors before the rights are separated from our ordinary shares) after the public announcement that a person or group has become an “acquiring person” by acquiring beneficial ownership of 15.0% or more of our outstanding ordinary shares or (2) 10 business days (or a later date determined by our board of directors before the rights are separated from our ordinary shares) after a person or group begins a tender or exchange offer that, if completed, would result in that person or group becoming an acquiring person. The issuance of preferred shares pursuant to the Rights Agreement would cause substantial dilution to a person or group that attempts to acquire us on terms not approved by our board of directors. For more information about the Rights Agreement, see “Item 10.B. Additional Information—Memorandum and Articles of Association—Preferred Shares Rights Plan.”

We do not intend to pay dividends for the foreseeable future.

For the foreseeable future, we intend to retain substantially all earnings to finance the development and expansion of our business, and we do not anticipate paying any cash dividends on our ordinary shares. Accordingly, investors must be prepared to rely on sales of their ordinary shares after price appreciation to earn an investment return, which may never occur. Investors seeking cash dividends should not purchase our ordinary shares. Any determination to pay dividends in the future will be made at the discretion of our board of directors and will depend on our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant.

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Stock prices of companies with business operations primarily in China have fluctuated widely in recent years, and the trading prices of our ordinary shares are likely to be volatile, which could result in substantial losses to investors.

The trading prices of our ordinary shares are likely to be volatile and could fluctuate widely in response to factors beyond our control. For example, if one or more of the industry analysts or ratings agencies who cover us downgrades us or our ordinary share, or publishes unfavorable research about us, the price of our ordinary shares may decline. If one or more of these analysts or agencies cease to cover our Company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause the price of our ordinary shares or trading volume to decline. In addition, the performance and fluctuation of the market prices of other China-based, U.S.-listed healthcare companies may affect the volatility in the price of and trading volume for our ordinary shares. In recent years, a number of China-based companies have listed their securities, or are in the process of preparing for listing their securities, on U.S. stock markets. Some of these companies have experienced significant volatility, including significant price declines following their initial public offerings. The trading performances of the securities of these China-based companies’ securities at the time of or after their offerings may affect the overall investor sentiment towards China-based companies listed in the United States and consequently may affect the trading performance of our ordinary shares. These broad market and industry factors may significantly affect the market price and volatility of our ordinary shares, regardless of our actual operating performance.

In addition to market and industry factors, the price and trading volume for our ordinary shares may be highly volatile for specific business reasons. Any of these factors may result in large and sudden changes in the volume and price at which our ordinary shares will trade. We cannot assure you that these factors will not occur in the future again. In the past, following periods of volatility in the market price of a company’s securities, shareholders have often instituted securities class action litigation against that company. If we were involved in a class action lawsuit, it could divert the attention of senior management, and, if adversely determined, could have a material adverse effect on our business, financial condition and results of operations.

You may have difficulty enforcing judgments against us.

We are an exempted company incorporated under the laws of the Cayman Islands. Most of our assets are located in China and most of our current operations are conducted in China. In addition, most of our directors and officers are nationals and residents of countries other than the United States and substantially all the assets of these persons are located outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon our PRC operations and these persons. It may also be difficult for you to enforce in U.S. courts judgments on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors.

There is no statutory enforcement in the Cayman Islands of judgments obtained in the federal or state courts of the United States (and the Cayman Islands are not a party to any treaties for the reciprocal enforcement or recognition of such judgments), a judgment obtained in such jurisdiction will be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment (1) is given by a foreign court of competent jurisdiction, (2) imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given, (3) is final, (4) is not in respect of taxes, a fine or a penalty, and (5) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands. However, the Cayman Islands courts are unlikely to enforce a judgment obtained from the U.S. courts under civil liability provisions of the U.S. federal securities law if such judgment is determined by the courts of the Cayman Islands to give rise to obligations to make payments that are penal or punitive in nature. Because such a determination has not yet been made by a court of the Cayman Islands, it is uncertain whether such civil liability judgments from U.S. courts would be enforceable in the Cayman Islands.

There is also uncertainty as to whether the PRC courts would recognize or enforce judgments of U.S. courts. Although recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law, recognition and enforcement of a foreign judgment by PRC courts depend on treaties or reciprocity between China and the country where the judgment is made. China does not have any treaties or other arrangements with the United States that provide for the reciprocal recognition and enforcement of U.S. judgments. In addition, according to the PRC Civil Procedures Law, PRC courts will not enforce a foreign judgment if they decide that the judgment violates basic principles of PRC law or national sovereignty, security, or the public interest. So it is uncertain whether a PRC court would enforce a judgment rendered by a court in the United States.

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Since we are a Cayman Islands company, the rights of our shareholders may be more limited than those of shareholders of a company organized in the United States.

Our corporate affairs are governed by our memorandum and articles of association, as amended and restated from time to time, by the Companies Law (2020 Revision) of the Cayman Islands (the “Companies Law”), and by the common law of the Cayman Islands. The rights of shareholders to take action against our directors, actions by minority shareholders and the fiduciary duties of our directors to our Company 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 and from English common law, the decisions of whose courts are of persuasive authority but are not binding on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our directors, although clearly established under Cayman Islands law, are not specifically prescribed in statute or a particular document in the same way that they are in certain statutes or judicial precedents in some jurisdictions of the United States. In particular, the Cayman Islands has a less developed body of securities laws relative to the United States. Therefore, our shareholders may have more difficulty in protecting their interests in the face of actions by our management, directors or controlling shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States. In addition, shareholders of Cayman Islands companies may not have standing to initiate a shareholder derivative action before the federal courts of the United States.

We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions of the Exchange Act applicable to U.S. domestic public companies.

Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including:

We are required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our results on a quarterly basis as press releases, distributed pursuant to the rules and regulations of Nasdaq. Press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information that would be made available to you were you investing in a U.S. domestic issuer.

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As a foreign private issuer, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from Nasdaq corporate governance listing standards; these practices may afford less protection to shareholders than they would enjoy under Nasdaq corporate governance listing standards.

As a Cayman Islands company listed on Nasdaq, we are subject to Nasdaq corporate governance listing standards. However, Nasdaq rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from Nasdaq corporate governance listing standards. For example, neither the Companies Law nor our memorandum and articles of association requires a majority of our directors to be independent and we could include non-independent directors as members of our compensation committee and nominating committee, and our independent directors would not necessarily hold regularly scheduled meetings at which only independent directors are present. Except as disclosed in “Item 16G. Corporate Governance”, we have not taken any exemption from the Nasdaq corporate governance rules to follow our home country practices. However, if we choose to follow any home country practice in the future, our shareholders may be afforded less protection than they otherwise would under Nasdaq corporate governance listing standards applicable to U.S. domestic issuers.

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On January 1, 2018, we acquired 80% equity interest in TianXinFu, a medical device company primarily engaging in the manufacturing and sale of regenerative medical biomaterial products, from PW Medtech Group Limited (“PWM”). On August 1, 2019, we acquired the remaining 20% equity interest in TianXinFu and as a result, TianXinFu became our indirect wholly owned subsidiary.

The common stock of China Biologic Products, Inc. was initially quoted on the over-the-counter market maintained by Pink Sheets LLC. On February 29, 2008, the common stock of China Biologic Products, Inc. was approved for quotation on the Over-The-Counter Bulletin Board under the trading symbol “CBPO.OB.” On November 25, 2009, the common stock of China Biologic Products, Inc. was approved for listing on the Nasdaq Global Market under the symbol “CBPO” and subsequently approved for listing on the Nasdaq Global Select Market on December 7, 2010. Upon the completion of the redomicile merger on July 21, 2017, the common stock of China Biologic Products, Inc. was converted into ordinary shares of China Biologic Products Holdings, Inc., which continued to be listed on the Nasdaq Global Select Market under the symbol “CBPO” effective July 24, 2017.

Recent Developments

In late April 2019, the Company completed the share repurchase program previously authorized by its board of directors in 2018, having repurchased an aggregate of 1,074,376 shares for a total consideration of $100 million.

In May 2019, the Company's board of directors authorized an additional share repurchase program under which the Company may repurchase up to $150 million worth of shares over a 12-month period. As of December 31, 2019, the Company had repurchased 121,852 shares for a total consideration of $11.0 million under this program.

In June 2019, the Company obtained approval from the NMPA to begin human clinical trials on a Human von Willebrand Factor product, which is intended to be used for the treatment of bleeding episodes including surgical bleeding in patients with von Willebrand disease.

In July 2019, the Company received the operating permit for and commenced operations at its new Wenchang plasma collection station in Hainan Province.

On August 1, 2019, the Company acquired the remaining 20% equity interest in TianXinFu through its wholly-owned subsidiary Taibang Biotech (Shandong) Co., Ltd., and as a result, TianXinFu became the Company's indirect wholly owned subsidiary.

In November 2019, Guizhou Taibang received approval from the Health Commission of Chongqing City to build a new plasma collection station in Youyang County.

In January 2020, the Company obtained the operating permit for its new collection station in Linqu County, Weifang City of Shandong Province, which commenced operations in early March 2020.

In January 2020, Shandong Taibang received approval from the Health Commission of Shandong Province to build a new plasma collection station in Liangshan County, Jining City of Shandong Province.

Proposed Going-private Transaction

On September 18, 2019, our board of directors received a preliminary non-binding proposal letter from Beachhead Holdings Limited, CITIC Capital China Partners IV, L.P., PW Medtech Group Limited, Parfield International Ltd., HH Sum-XXII Holdings Limited and V-Sciences Investments Pte. Ltd (collectively, the “Buyer Group”), proposing to acquire all of our outstanding ordinary shares not already owned by the Buyer Group for $120 per share in cash in a going-private transaction.

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On September 24, 2019, a special committee of our board of directors (the “Special Committee”), consisting solely of independent directors, Mr. Sean Shao, Dr. Yungang Lu and Mr. Qi Ning, was formed and proceeded to consider the proposed going-private transaction and other strategic options available to us. As of the date of this annual report, the Special Committee is still in the process of evaluating the proposal. No definitive offer has been made, nor has any definitive agreement been executed, with respect to the proposed going-private transaction.

There can be no assurance that the proposed going-private transaction will continue to be pursued, approved or consummated. See “Item 3.D. Key Information — Risk Factors — Risks Relating to Our Business — There can be no assurance of a consummation of the proposed going-private transaction, and the announcement and pendency of the transaction could materially and adversely affect our business, results of operations and financial condition.”

B.    Business Overview

We are a biopharmaceutical company principally engaged in the research, development, manufacturing and sales of human plasma-based biopharmaceutical products, or plasma products, in China. We are among the top five producers of plasma products in China in terms of 2019 sales, based on our industry knowledge. We operate our plasma business through a majority owned subsidiary, Shandong Taibang, a company based in Tai’an, Shandong Province, and a wholly owned subsidiary, Guizhou Taibang, a company based in Guiyang, Guizhou Province. We also hold a minority equity interest in Huitian, a plasma products company based in Xi’an, Shaanxi Province.

We have a strong biopharmaceutical product portfolio covering over 20 different dosage forms of plasma products across nine categories and one chemical drug, placenta polypeptide. All of our plasma products and the placenta polypeptide product are prescription medicines administered in the form of injections. Our principal products are human albumin and immunoglobulin for intravenous injection, or IVIG. Albumin has been used for almost 50 years to treat critically ill patients by assisting the maintenance of adequate blood volume and pressure. IVIG is used for certain disease prevention and treatment by enhancing specific immunity. These products use human plasma as their principal raw material. Sales of human albumin products represented approximately 37.3%, 32.0% and 35.8% of our total sales for 2019, 2018 and 2017, respectively. Sales of IVIG products represented approximately 23.2%, 24.3% and 31.7% of our total sales for 2019, 2018 and 2017, respectively. Our sales model for plasma products focuses on direct sales to hospitals and inoculation centers and is complemented by distributor sales.

On January 1, 2018, we acquired 80% equity interest in TianXinFu, a medical device company primarily engaging in manufacturing and sale of regenerative medical biomaterial products, including artificial dura mater and spinal dura mater products. Its pipeline products mainly include absorbable oral repair membrane for oral and maxillofacial surgery and the second generation artificial dura mater. In August 2019, we acquired the remaining 20% equity interest in TianXinFu and as a result, TianXinFu became our indirect wholly owned subsidiary.

We started reporting our financial results in segments along products lines since our acquisition of TianXinFu in 2018 and classified our reportable operating segments into (i) biopharmaceutical products and (ii) biomaterial products. Biopharmaceutical products currently include plasma products and placenta polypeptide.

We do not account for the results of our operations on a geographic or other basis.

PLASMA INDUSTRY

Overview

We operate primarily in the plasma industry in China, which is the second largest plasma products market in the world, after the United States, and has experienced a significant growth in the past decade. Based on our industry knowledge, China’s plasma products market (excluding recombinant products) grew from $0.80 billion in 2009 to $4.3 billion in 2019 in terms of sales revenue, representing a compound annual growth rate, or CAGR, of 18.3%. Human albumin products dominated China’s plasma products market with a market share of 63.1% in terms of production value in 2019, and IVIG products accounted for 21.3% of the market. Other plasma products, including coagulation factors, accounted for the remaining 15.6% of the market in 2019.

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Compared to more developed countries, China has a lower per capita usage level of plasma products, and China’s plasma products market is significantly different in terms of product composition and range. In more developed countries such as the United States, IVIG products account for a majority of plasma product sales. This difference reflects the maturity levels of the plasma industries in these countries. The current low per capita consumption of IVIG products in China is primarily attributable to a lack of awareness of the benefits of IVIG therapy, especially in medical conditions such as primary immune deficiency or chronic inflammatory demyelinating polyneuropathy, and lower per capita healthcare spending in China. China’s plasma products market is expected to be increasingly driven by IVIG products in the future as IVIG therapy becomes more widespread as a result of the combined efforts of physician education and product promotion, among other factors.

Based on our industry knowledge, China National Biotec Group, or CNBG, China Biologic, Hualan Biological Engineering Inc., or Hualan, Shanghai RAAS Blood Products Co., Ltd., or RAAS, and Sichuan Yuanda Shuyang Pharmaceutical Co., Ltd., or Shuyang, were the top five plasma product manufacturers in terms of sales revenue in 2019.

Overall Plasma Products Market Trends

Compared to more developed countries, China’s plasma products market has distinctive characteristics and trends, including the following:

High Entry Barriers. The PRC State Council has ceased issuing new plasma fractionation licenses since 2001, and there are approximately 30 licensed producers of plasma products in China, of which only approximately 26 are currently in operation. Nearly all of these producers make albumin and IVIG products, but only four operate with the product portfolio comprising at least nine categories of plasma products. Furthermore, foreign investment in domestic producers of plasma products is subject to stringent government approval process. As a result, existing China-based producers with large production capacities face limited competition and are well positioned to gain more market share during the industry consolidation phase.

Stringent regulation. China’s plasma products market is stringently regulated. Because of the public health crises of contaminated plasma products experienced by China in the 1990s, China has implemented, and is expected to continue to maintain, stringent regulations for the plasma products industry in the foreseeable future. The opening of a new plasma collection station in China requires the approval by three levels of government authorities, namely the provincial, municipal and county level authorities, which is a time-consuming and difficult process. To be eligible to open a new collection station, a company must produce no fewer than six types of plasma products, which must include products in three mandatory categories, namely human albumin, immunoglobulin and coagulation factors. From 2010 to 2015, various local governments approved the opening of plasma collection stations by small companies that were not able to produce all the mandatory products. In response, in December 2016, the NHC and NMPA jointly released a new guideline on the regulation of plasma collection stations. The guideline aims to strengthen regulatory oversight for existing collection stations and approval requirements for new plasma collection stations, and to tighten safety control at the plasma collection stations to improve the quality of plasma collected. The guideline states that in considering the applications for the opening of new plasma collection stations, the relevant authorities should give priority to companies with strong research and development capabilities, high plasma utilization rate and good management practice. We believe this guideline will benefit large plasma products manufacturers like China Biologic by reducing the chance for smaller manufacturers to open new plasma collection stations.

Demand outstripping supply. Due to stringent regulations on the collection of raw plasma from human beings and a lack of plasma donation, China has experienced a shortage of plasma products since the 1980s. There are approximately 261 plasma collection centers in China, compared to over 600 in the United States. The restriction on approving new collection centers in China, cultural barriers to plasma donation, concerns over plasma donation safety, and low quantity per donation and long intervals between donations contribute to the supply shortage.

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Ban on imports. As a measure to prevent a range of viral risks, China strictly prohibits the import of plasma products, except for human albumin and recombinant factor VIII products. In other market segments, such as IVIG, where import is prohibited, domestic producers are shielded from competition from their multinational peers, and the demand for such products in China has been supplied entirely by domestically-sourced plasma only.

Low consumption level and huge growth potential. While China’s plasma products market has experienced rapid growth in recent years, China’s per capita consumption of plasma products lags substantially behind more developed countries.

Based on our industry knowledge, as a result of the growing number of patients seeking treatment of plasma products, an increasing awareness of health benefits of plasma products and the rising affordability of plasma products since the commencement of China’s healthcare reform, China’s plasma products market is expected to continue to have substantial growth potential.

Improved fractionation technologies. In the early years of plasma fractionation in China, technologies used were not as sophisticated as those in the United States, resulting in relatively low yields and a product portfolio limited to only two or three products (albumin, IVIG and hyper-immune globulin products). Technologies used by and yields from leading domestic manufacturers are, however, on par with international standards, and these manufacturers are well positioned to manufacture safer products and have higher production efficiency compared with other domestic companies.

Increasing market concentration of top players. China’s current landscape of plasma products market is relatively fragmented. However, factors such as stringent regulations, tightened quality control and heavy capital expenditure requirements have contributed to the increasing industry consolidation in recent years. For instance, the NMPA issued new GMP requirements to re-certify all the fractionation plants by the end of 2013, which has resulted in the shutdown of smaller fractionation plants that were unable to upgrade their production lines by the deadline. China’s plasma industry has also witnessed multiple merger and acquisition transactions in recent years. Market leaders with stable plasma supplies complemented by further collection expansion potentials, strong product portfolios and robust research and development capabilities are expected to be able to continue to solidify their positions and further gain development advantages.

BUSINESS

Our Competitive Strengths

We believe that the following competitive strengths enable us to compete effectively in and capitalize on the growth of the plasma products and the biomaterial products markets:

Leading producer of plasma products in China with strong growth potential

We are one of the top five producers of plasma products in terms of 2019 sales revenue based on our industry knowledge. In the albumin segment, which accounts for a majority of the plasma products market in China, we are the second largest domestic producer with a market share of approximately 6.7% in terms of 2019 production volume, based on our industry knowledge. In the IVIG segment, which is the second largest segment of the plasma products market in China, we are also the second largest producer overall in China with a market share of approximately 15.1% in terms of 2019 production volume, based on our industry knowledge.

We have a strong product portfolio covering over 20 different dosage forms of plasma products across nine categories and a robust near-term product pipeline of six products. We believe that we are one of the only four plasma products manufacturers in China with the product portfolio comprising at least nine categories of plasma products. Since different types of plasma products utilize different protein components of plasma, different types of plasma products can be produced from the same raw plasma supply with minimal incremental raw material cost. Our broad product portfolio, supported by our strong research and development capabilities, therefore, provides us with the benefit of more comprehensive plasma utilization, which in turn contributes to higher profit margins.

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We believe that product safety and supply stability are the most critical considerations for hospitals and inoculation centers in making purchase decisions on plasma products. We implement stringent quality control measures throughout our production process, and have not historically experienced failure to receive pre-sale approval or had a recall with respect to any of our plasma products. Our manufacturing facilities in Shandong Province and Guizhou Province together have a production capacity of 1,600 tonnes. As a leading producer of plasma products, we have been able to maintain a steady plasma supply volume and sales volume over the years. Our safety record and the stability of our supply, we believe, have strengthened our business relationship with existing customers and enhanced our ability to acquire new customers.

China’s plasma products market is, and will continue to be, subject to stringent government regulation. In recent years, however, PRC regulators have also taken initiatives to increase plasma collection volume by approving more new plasma collection stations and expanding plasma collection coverage for existing plasma collection stations. We are well positioned to benefit from these favorable regulatory trends as we are able to meet the associated quality control and technology investment requirements.

Stable and growing supply of plasma with strategically located collection stations

Our ability to secure and expand our supply of plasma, a critical raw material for our operations, is one of our key strengths. Our plasma collection network consists of 19 captive plasma collection stations. In addition, Huitian, a company in which we hold a minority equity interest, operates three plasma collection stations. In 2019, we were among the top five plasma collectors in China in terms of collection volume with approximately 12.1% of the total national supply, based on our industry knowledge.

We operate twelve plasma collection stations in Shandong Province (including two former branch collection facilities re-categorized as collection stations by relevant authorities in 2019), two in Guangxi Province, two in Guizhou Province, two in Hebei Province, and one in Hainan Province, covering an aggregate population of approximately 62.9 million. Shandong Province has one of the largest populations in China. Guangxi Province and Guizhou Province are among the least economically developed regions in China. The population of Hainan Province has a stable donor base as its population migrates less frequently compared to many other provinces. All of these are favorable characteristics underpinning a strong and stable plasma supply. Hebei Province is an underdeveloped province for plasma collection that provides convenient and economic transportation to our manufacturing facilities in adjacent Shandong Province.

We continue to seek innovative ways to identify and attract potential plasma donors. We regularly organize a variety of community events to deliver our messages that focus on the life-saving and other social contribution aspects of plasma donation. We also regularly review our donor compensation to ensure that it remains competitive. In addition, we actively seek to expand the geographic coverage of our existing collection stations to gain access to additional donor populations. As a result of our collection efforts, our average plasma collection volume is greater than the national average by approximately 74.8% in 2019 based on our industry knowledge. Our total plasma collection volume increased by approximately 9.8% from 2018 to 2019.

In addition to increasing our collection volume at existing plasma collection stations, we also seek to build new plasma collection stations to expand our donor base. For example, in July 2019, we received the operating permit for and commenced operations at our new plasma collection station in Wenchang City in Hainan Province. In January 2020, we received the operating permit for our new plasma collection station in Linqu County in Shandong Province, which commenced operations in early March 2020. In November 2019 and January 2020, we received the regulatory approval to build a new plasma collection station in Youyang County of Chongqing City and Liangshan County of Shandong Province, respectively.

Robust near-term product pipeline to capture full plasma value chain backed by strong research and development capabilities

We currently have six new plasma products under development, with one of them in registration stage and expected to be commercially launched by the first half of 2020. We expect our expanding product portfolio to further increase our comprehensive plasma utilization, which will in turn lead to higher profit margins. With our current and pipeline products, we believe that our product offerings will be able to capture substantially all of the value along the plasma products value chain.

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Benefiting, in part, from our direct sales to hospitals and inoculation centers, our ability to bring new products to market reflects a research and development process that is demand-driven and highly responsive to physician feedback and the latest market trends in medicine. To complement our research and development efforts, we also work closely with a number of leading research institutes in China specializing in plasma products. As of December 31, 2019, we held 86 patents for plasma products.

Leading position in China’s fast-growing immunoglobulin products market

We were among the top three producers of immunoglobulin products in China in 2019 in terms of production value, and ranked the second for IVIG, the second for human tetanus immunoglobulin and the third for human rabies immunoglobulin in China in 2019 in terms of production volume, based on our industry knowledge. Our total sales revenue of immunoglobulin products, accounting for approximately 37.5% of our total sales, increased to $189.2 million in 2019 from $97.0 million in 2013, representing a CAGR of 11.8% between 2013 and 2019. We attribute our rapid growth and leading position in the immunoglobulin products market, in part, to our continued marketing efforts to promote these products, especially the promotion of IVIG therapy to physicians in tier-one cities and large regional hospitals.

Based on our industry knowledge, the sales revenue of China’s IVIG products reached approximately $0.9 billion in 2019, representing a CAGR of approximately 13.6% during the period from 2010 to 2019. The substantial growth of China’s IVIG products market in the past decade was mainly due to increasing awareness by doctors of the benefits of IVIG therapy. In more developed countries, major applications of IVIG therapy are for chronic diseases such as primary immune deficiency and chronic inflammatory demyelinating polyneuropathy, which require treatment for a number of years or even lifetime. In contrast, IVIG therapy is only used to treat acute diseases and infections in China. Compared with markets in more developed countries, China’s IVIG products market is far from mature. The per capita consumption of IVIG products in China is significantly lower than that in the more developed countries. Therefore, there is tremendous growth potential as China’s IVIG consumption draws closer to that of the more developed countries as a result of growing awareness of IVIG therapy and favorable government reimbursement policies. Developing this market requires significant efforts from IVIG manufacturers to educate physicians, the public and the health authorities on the benefits of IVIG therapy for a number of medical conditions. As a leading player with own marketing and promotion team in China’s IVIG products market, we are uniquely positioned to benefit from the anticipated increase in demand from the popularization of IVIG therapy.

Leading producer of dura mater products in China with strong growth potential

TianXinFu is a medical device company primarily engaged in the manufacturing and sale of regenerative medical biomaterial products. Its core product, artificial dura mater, accounting for 91.9% of its sales in 2019, is widely used in neurosurgeries. Based on our industry knowledge, TianXinFu is the largest dura mater manufacturer in China.

In addition, TianXinFu also has several products in its pipeline to help ensure future sustainable growth, including one product in the registration stage which are expected to receive the manufacturing approval in early 2020, and several others under clinical trial or are preparing for clinical trial. As these products launch in the future, TianXinFu will further improve its position in the tissue repair market.

Flexible and effective sales and distribution model aimed to maximize penetration

We have a flexible sales model for plasma products that focuses on direct sales to hospitals and inoculation centers and is complemented by distributor sales. Under this sales model, our products reach 30 provinces, municipalities and autonomous regions in China. For medical device products, TianXinFu also has an extensive sales and marketing network covering over 2,000 Chinese hospitals in approximately 30 provinces in China. With the integration of TianXinFu, we benefit from TianXinFu’s extensive nationwide sales networks and professional marketing expertise to further improve the distribution of our plasma products.

In 2019, half of our plasma product sales were generated from direct sales, and our direct sales network covered approximately 709 hospitals and inoculation centers. Our sales and marketing team, consisting of 262 employees as of December 31, 2019, is responsible for the sales and marketing efforts to our end customers and provide product educational programs and other sales support directly to doctors and nurses. These efforts are designed to ensure effective and seamless communications with our end customers, particularly with respect to clinical education, which provides us with first-hand intelligence on the latest industry trends and market demands and enables us to provide better after-sale services and support. For example, our sales and marketing team actively promotes new IVIG indications that are widely accepted in more developed countries but less known among Chinese physicians.

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Our direct sales network is complemented by sales through distributors, which accounted for another half of our plasma product sales in 2019. We select our distributors through a rigorous process, which focuses on market leadership in the covered region, the degree of control we have over to which hospitals our products are sold (i.e., larger and higher tiered hospitals are preferred), and the level of access we have to our customers (i.e., greater access enables us to better track the sales of our products).

We believe that our flexible sales model of focusing on direct sales is cost-effective and has helped us to achieve strong financial performance. Our selling expenses as a percentage of sales were 15.9%, 20.5% and 9.4% in 2019, 2018 and 2017, respectively; and our operating margin was 32.5%, 31.3% and 36.7% during these periods, respectively.

Experienced and committed management team

We have an experienced, dedicated and visionary management team with an in-depth understanding of the pharmaceutical industry in China. Our Chairman and Chief Executive Officer, Mr. Joseph Chow, has over 20 years of experience in corporate finance, financial advisory and management, has held senior executive and managerial positions in various public and private companies, and is instrumental in the development and implementation of our business strategy. Our Chief Financial Officer, Mr. Ming Yang, has more than 20 years of financial management and accounting experience. Mr. Guangli Pang and Mr. Gang Yang, the general manager of Shandong Taibang and Guizhou Taibang, respectively, have more than 30 and 20 years of experience in the plasma products industry in China, respectively. TianXinFu’s management team also has many years of experience in their industry. With our reformed senior management team that was put in place in 2019, we have been committed to improving corporate governance and enhancing shareholder value. We believe our management team, with their extensive industry background and strong management talent, provides a strong foundation for the execution of our growth strategy and achievement of our goals.

Our Business Strategy

Our mission is to build a world-class biopharmaceutical and biotechnology company, with a leading position in key therapeutic areas. To achieve this objective, we have implemented a business strategy with the following key components:

Securing the supply of plasma

To secure the supply of plasma, we plan to build new plasma collection stations in regions not covered by our existing collection network as well as to expand collection territories of existing plasma collection stations. We currently have a total of 19 plasma collection stations in operation, of which twelve are in Shandong Province, two in Guangxi Province, two in Guizhou Province, two in Hebei Province and one in Hainan Province. In July 2019, we received the operating permit for and commenced operations at our new plasma collection station in Wenchang City of Hainan Province. In January 2020, we received the operating permit for our new plasma collection station in Linqu County in Shandong Province, which commenced operations in early March 2020. In November 2019 and January 2020, we received the regulatory approval to build a new plasma collection station in Youyang County of Chongqing City and Liangshan County of Shandong Province, respectively. Meanwhile, we are carrying out various promotional activities to stabilize and expand our donor base for our existing plasma collection stations.

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Further strengthening of research and development capability

We believe that, unlike other more developed countries such as the United States, China’s plasma products are at an early stage of development. There are many other plasma products that are being used in the United States, which are not currently manufactured or used widely in China. We intend to strengthen our research and development capabilities through in-house development and partnership with leading international players to expand our product line to include plasma products that have higher margins and are technologically more advanced. We also intend to continue to improve the yield for our products. As a result of our research and development efforts, we currently have six new plasma products under development, with one of them in registration stage and expected to be commercially launched in the first half of 2020. TianXinFu also has several products in its pipeline to help ensure the sustainable growth in the future. For further details of our pipeline products, see “Item 4.B. Information on the Company—Business Overview—Business—Our Research and Development Efforts” below. We believe that our increased focus on research and development will give us a competitive advantage in China over our competitors.

Market development and network expansion

We intend to further strengthen our terminal promotion capabilities and boost demand for our products through medical education targeted at end users. In particular, we plan to make promotional efforts by educating doctors and patients in our hospital partners, with a focus on IVIG and new products such as PCC and Fibrinogen, of which we continue to see a significant gap in usage between China and Western countries. In parallel, we will select new high-potential hospitals and get our products listed in those hospitals effectively. We also plan to identify and establish strong partnerships with reliable distributors to supplement our direct sales efforts and support market access. In addition, we are exploring partnerships with various retail pharmacy chains which we consider as an alternative channel to hospital sales.

Organic growth complemented by acquisition of competitors and/or other new biopharmaceutical and medical device products

We have expanded organically by securing sufficient plasma supply and strengthening in-house development efforts. In addition to organic growth, acquisition is an important part of our expansion strategy. Although there are approximately 30 approved plasma-based biopharmaceutical manufacturers in the market, we believe that there are approximately 26 manufacturers currently in operation in China, only about half of which are competitive. We estimate that the top five manufacturers in China accounted for approximately 72% market share (excluding imports) in terms of sales revenue in 2019. We believe that the regulatory authorities are considering further industry reform and those smaller, less competitive manufacturers will face possible revocation of their manufacturing permits by the regulators due to the compliance cost, making them potential targets for acquisition. If we are presented with appropriate opportunities, we may acquire additional companies in the plasma sectors.

Furthermore, we plan to add new biopharmaceutical and medical device products to our portfolio, and potentially acquire stronger operational capabilities in commercial activities, research and development and manufacturing. We also plan to expand our industry leadership position to markets outside of China, by transitioning from plasma products to other related therapeutic areas and medical devices, which will help us evolve into a world-class leading biopharmaceutical and biotech company. Potential targets for mergers and acquisitions may bring us products and technology in strategic therapeutic areas. In addition, they may also bring us highly valuable operational capabilities in different areas.

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Our Products

Our principal plasma products are our approved human albumin and IVIG products. Human albumin is principally used to treat critically ill patients by replacing lost fluid and maintaining adequate blood volume and pressure. IVIG products are primarily used to enhance specific immunity, a defense mechanism by which the human body generates certain immunoglobulin, or antibodies, against invasion by potentially dangerous substances. In a situation where the human body cannot effectively react to these foreign substances, injection of IVIG products may provide sufficient antibodies to neutralize such substances. We also have one chemical drug, placenta polypeptide. In addition, TianXinFu primarily engages in manufacturing and sale of regenerative medical biomaterial products. All of the plasma products and the main category of other products that we are currently approved to produce are listed in the table below. All of our approved plasma products and the placenta polypeptide products are prescription medicines administered in the form of injections.

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Raw Materials

Plasma from in-house collection

Plasma is the principal raw material for our biopharmaceutical products. We currently operate 16 plasma collection stations through Shandong Taibang (including two former branch collection facilities re-categorized as collection stations by relevant authorities in 2019) and three plasma collection stations through Guizhou Taibang. We plan to build new plasma collection stations throughout China as well as to expand collection territories of existing plasma collection stations. In July 2019, we received the operating permit for and commenced operations at our new plasma collection station in Wenchang City of Hainan Province. In January 2020, we received the operating permit for our new plasma collection station in Linqu County in Shandong Province, which commenced operations in early March 2020. In November 2019 and January 2020, we received the regulatory approval to build a new plasma collection station in Youyang County of Chongqing City and Liangshan County of Shandong Province, respectively. We believe that our plasma collection stations give us a stable source of plasma supply and control over product quality. Also, we believe that we have enjoyed benefits of economies of scale, including sharing certain administration and management expenses across our several plasma collection stations.

Plasma sourced from Xinjiang Deyuan

In addition to our in-house collection, we also outsource plasma from Xinjiang Deyuan pursuant to a cooperation agreement entered into with Xinjiang Deyuan and its controlling shareholder in August 2015 and supplemented by a supplementary agreement entered into in August 2018. Under these agreements, Xinjiang Deyuan had sold us more than 500 tonnes of source plasma in batches from August 2015 to August 2018 and agreed to sell to us no less than 500 tonnes of source plasma over a three year period from August 2018 to August 2021. As of December 31, 2019, an aggregate of 802 tonnes of plasma had been delivered to us under these agreements. Since November 2019, however, Xinjiang Deyuan has significantly reduced the plasma volume delivered to us due to its operating cash shortfall and its disagreement with us regarding payment arrangements for the plasma. We are currently in negotiation with Xinjiang Deyuan and endeavoring to resolve the disagreement. See "Item 3.D. Key Information—Risk Factors—Risks Relating to Our Business—If our supply of quality plasma is interrupted, our results of operations and profitability will be adversely affected. In addition, if we experience any shortage of raw materials in the future, we may be unable to proceed with our long-term business plan and we may be forced to curtail or cease our operations or further business expansion."

Other raw materials and packaging materials

Other raw materials used in the production of our biopharmaceutical products include reagents and consumables such as filters and alcohol. The principal packaging materials we use include glass bottles for our injection products as well as external packaging and printed instructions for our biopharmaceutical products. TianXinFu uses extracted collagen as the main raw material to produce the regenerative medical biomaterial products. We acquire our raw materials and packaging materials from our approved suppliers in China and overseas. We select our suppliers based on quality, consistency, price and delivery of the raw materials which they supply.

Our five largest suppliers for other raw materials and packaging materials in the aggregate accounted for approximately 32.7%, 34.2% and 32.8% of our total procurement for the years ended December 31, 2019, 2018 and 2017, respectively. We have not experienced any shortage of supply or significant quality issue with respect to any raw materials and packaging materials.

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Plasma Collection

Our plasma collection stations purchase, collect, examine and deepfreeze plasma on behalf of Shandong Taibang and Guizhou Taibang and are subject to provincial health bureau’s rules, regulations and specifications for quality, packaging and storage. Each station is only allowed to collect plasma from healthy donors within its respective districts and in accordance with a time table set by its respective parent company, Shandong Taibang or Guizhou Taibang. The plasma must be tested negative for HBsAb, HCV and HIV antibodies and the RPR test, contain ALT 25 units (ALT) and plasma protein 55g/l, and contain no virus pollution or visible erythrolysis, lipemia, macroscopic red blood cell or any other irregular finding. The plasma is packaged in 25 to 30 separate 600g bags in each box and then stored at a temperature of -20°C or lower within limited time after collection to ensure that it will congeal within six hours. Each bag is labeled with a computer-generated tracking code. Shandong Taibang and Guizhou Taibang are responsible for the overall technical and quality supervision of the plasma collection, packaging and storage at each plasma collection station.

Sales, Marketing and Distribution

Because all of our biopharmaceutical products are prescription drugs and the medical device products are used in surgeries, we can only sell to hospitals and inoculation centers directly or through approved distributors. For 2019, 2018 and 2017, direct sales to hospitals and inoculation centers represented approximately 49.0%, 50.6% and 60.7%, respectively, of our total plasma products sales and the other biopharmaceutical and medical device products are mostly sold through distributors. Our five largest customers, which are all plasma products customers, in the aggregate accounted for approximately 10.9%, 12.4% and 16.8% of our total sales for 2019, 2018 and 2017, respectively. Our largest customer accounted for approximately 3.9%, 5.8% and 5.8% of our total sales for 2019, 2018 and 2017, respectively.

We select our distributors through a rigorous process, which focuses on market leadership in the covered region, the degree of control we have over to which hospitals our products are sold (i.e. larger and higher tiered hospitals are preferred), and the level of access we have to our customers (i.e. greater access enables us to better track the sales of our products). As part of our effort to ensure the quality of our distributors, we also conduct due diligence to verify whether potential distributors have obtained necessary permits and licenses and facilities (such as cold storage) for the distribution of our products and assess their financial condition. Certain of our regional distributors are appointed on an exclusive basis within a specified geographic territory. Our supply contracts set out the quantity and price of products to be supplied by us. For distributors, our contracts also contain guidelines for the sale and distribution of our products, including restrictions on the geographical territory in which the products may be sold. We provide our distributors with training in relation to our products and on sales techniques.

Our largest geographic market of biopharmaceutical products is Shandong Province, representing approximately 21.8%, 18.6% and 23.8% of our total sales for 2019, 2018 and 2017, respectively. Jiangsu Province is our second largest geographic market of biopharmaceutical products, representing 9.8%, 11.0% and 10.0% of our total sales for 2019, 2018 and 2017, respectively. In addition to Shandong Province and Jiangsu Province, we also have sales presence in 28 other provinces, municipalities and autonomous regions.

As of December 31, 2019, our marketing and after-sales services department consisted of 262 employees, including 72 employees of TianXinFu.

We believe that due to the nature of our products, our competitiveness centers on product safety, steady supply, brand recognition, timely availability and pricing. As all of our biopharmaceutical products are prescription medicines and the medical device products are used in surgeries, we are not allowed to advertise our products in the mass media. For 2019, 2018 and 2017, total sales and marketing expenses amounted to approximately $80.3 million, $95.6 million and $34.8 million, respectively, representing approximately 15.9%, 20.5% and 9.4%, respectively, of our total sales.

Seasonality of Our Sales

Our operating results and operating cash flows historically have not been subject to seasonal variations. This pattern may change, however, as a result of new market opportunities or new product introductions.

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Our Research and Development Efforts

Each of Shandong Taibang, Guizhou Taibang and TianXinFu has its own research and development department. All of our research and development researchers hold degrees in medicine, pharmacy, biology, biochemistry or other relevant fields. Our research and development departments are responsible for the development and registration of our products. We also cooperate with a number of leading institutions in China specializing in plasma products to strengthen our research and development capacity.

We employ a market driven approach to initiate research and development projects, including both product and production technique development. We believe that the key to our industry’s developments is the safety of products and maximizing the yield per unit volume of plasma. Our research and development efforts for plasma products are focused on the following areas:

All the products we currently manufacture have been developed in-house. The following table outlines our research and development work for biopharmaceutical products in progress:

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*    These stages refer to the stages in the regulatory approval process for our biopharmaceutical products described in “— Regulation.”

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TianXinFu also has its own research and development department. Among TianXinFu’s pipeline products, the clinical trial of the second generation artificial dura mater has been completed and TianXinFu has submitted documentation for the registration purpose. The clinical trial of absorbable oral repair membrane for oral and maxillofacial surgery is approaching the completion of the supplementary clinical trial as required by the regulator after the previous submission of documentation for the registration purpose. The clinical trials of two products, (1) bio-artificial membrane for repairing maxillofacial bone defect and (2) bio-artificial intraocular pressure maintenance membrane for ophthalmic surgery, have commenced.

For 2019, 2018 and 2017, total research and development expenses amounted to approximately $11.7 million, $9.5 million and $6.5 million, respectively, representing approximately 2.3%, 2.0% and 1.7%, respectively, of our total sales.

Competition

We face intense competition. There are both local and overseas pharmaceutical enterprises that engage in the manufacture and sale of potential substitutes or similar biopharmaceutical and medical device products as our products in China. These competitors may have more capital, better research and development resources, and stronger manufacturing and marketing capabilities than we do. In our industry, we compete based upon product quality, production cost, ability to produce a diverse range of products and logistical capabilities.

Our profitability may be adversely affected if competition intensifies, competitors reduce prices, regulators promulgate or strengthen regulations that have the effect of controlling the prices of our products, or competitors develop new products or product substitutes with comparable medicinal applications or therapeutic effects that are more effective or less costly than ours.

There are approximately 30 approved manufacturers of plasma products in China of which approximately 26 are currently in operation. Many of these manufacturers are essentially producing the same type of products that we produce, including human albumin and various types of immunoglobulin. We believe, however, that it is difficult for new manufacturers to enter into the industry due to current regulatory barrier. We believe that our major competitors in China include CNBG, Hualan, Shanghai RAAS Blood Products Co., Ltd., Sichuan Yuanda Shuyang Pharmaceutical Co., Ltd., and Boya Bio-Pharmaceutical Group Co., Ltd.

In addition, we also face competition from imported products where allowed. Since 2009, China has experienced a substantial increase in volume of imported human albumin. If the import of human albumin continues to increase, we may face more fierce competition in the domestic human albumin market.

Based on our industry knowledge, we are among the top five plasma products manufacturer in China in terms of 2019 sales revenue. To solidify our market position, we have expanded our plasma product portfolio to nine categories, including three coagulation factor products, namely factor VIII, human prothrombin complex concentrate, or PCC, and human fibrinogen. For factor VIII, we obtained the manufacturing approval certificate and the GMP certification for production facility from the NMPA in 2012. For PCC, we obtained the manufacturing approval certificate in July 2013 and the GMP certification for the production facility in March 2014. For human fibrinogen, we obtained the manufacturing approval certificate and the GMP certification for the production facility in October 2017. We believe that we are one of the only four plasma products manufacturers in China with the product portfolio comprising at least nine categories of plasma products.

We will continue to meet challenges and secure our market position by enhancing our existing products, introducing new products to meet customer demand, delivering quality products to our customers in a timely manner and maintaining our established industry reputation.

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Our Intellectual Property

We held 105 issued patents and 48 pending patent applications in China for certain manufacturing processes and packing designs as of December 31, 2019. We also had 36 registered trademarks in China as of December 31, 2019.

In addition, we had registered four domain names as of December 31, 2019, namely, www.chinabiologic.com, www.ctbb.com.cn, www.taibanggz.com.cn and www.txfmedical.com.

Regulation

Set forth below is a summary of the major PRC regulations relating to our business.

Due to the nature of our products, we are supervised by various levels of the NHC and/or NMPA. Such supervision includes the safety standards regulating our raw material supplies (mainly plasma), our manufacturing process and our finished products.

We are also subject to other PRC regulations, including those relating to taxation, foreign currency exchange and dividend distributions.

Plasma collection

Plasma collection stations are commonly used to collect plasma in China and substantially all plasma donations for commercialized plasma products are made at plasma collection stations. Plasma donation means that donors give only plasma but not the other blood components such as platelets, red cells and infection-fighting white cells. In China, current regulations only allow an individual donor to donate plasma in at least 14-day intervals, with a maximum quantity of 580ml (or about 600 gram) per donation.

The following are the general regulatory requirements to establish a plasma collection station in China:

Plasma collection stations were historically owned and managed by the PRC health authorities. In March 2006, the NHC and other eight central governmental departments of the PRC State Council promulgated the Measures for the Reform of Blood Collection Stations whereby the ownership and management of the plasma collection stations are required to be transferred to plasma-based biopharmaceutical companies while the regulatory supervision and administrative control remain with the government. As a result, all plasma collection stations are now having direct supply relationship with their parent fractionation facilities.

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Set out below are some of the safety features at China’s plasma collection stations:

The operation of plasma collection stations is subject to stringent regulations by the PRC government. We estimate that there were approximately 261 plasma collection stations in operation in China as of December 31, 2019.

Importation of plasma products

According to current PRC regulations, all the plasma products shall be subject to certain examination and approval before being imported into China. As far as we know, currently only human albumin and certain recombinant factor products are allowed to be imported into China and such products are subject to specific examinations and approval.

Production of plasma products

The manufacture and sale of plasma products are subject to stringent regulations by the PRC government. Under PRC law, each variation in the packaging, dosage and concentration of medical products requires separate registration and approval by the NMPA before it may be commercially available for sale. For example, among our human albumin products, only human albumin 20%/10ml, 20%/25ml, 20%/50ml, 10%/100ml, 10%/20ml, 10%/50ml, 25%/50ml and 20%/50ml (10g, from factor IV) products have been approved and are commercially available. All references in this report to our manufacture and sale of human albumin relate to our approved human albumin products.

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The table below illustrates the PRC approval process for the development and registration of new medicines:

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Pharmaceutical Manufacturing Permit

To manufacture pharmaceutical products in China, a pharmaceutical manufacturing enterprise should obtain a Pharmaceutical Manufacturing Permit issued by the competent pharmaceutical administration authorities at the provincial level. Among other things, such a permit sets forth the permit number, the name, legal representative and registered address of the enterprise, the site and scope of production, issuing institution, date of issuance and effective period.

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. Such enterprise is required to apply for renewal of such permit within six months prior to its expiration and will be subject to re-assessment by the issuing authorities in accordance with the then effective legal and regulatory requirements for the purposes of such renewal.

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We have obtained the Pharmaceutical Manufacturing Permit for the pharmaceutical products of Shandong Taibang in January 1, 2016, which will expire on December 31, 2020; the Pharmaceutical Manufacturing Permit for the pharmaceutical products of Guizhou Taibang in January 1, 2016, which will expire on December 31, 2020; and the Pharmaceutical Manufacturing Permit for the pharmaceutical products of Huitian in February 19, 2016, which will expire on December 31, 2020.

GMP standard

The World Health Organization encourages the adoption of good manufacturing practice, or GMP, standards in pharmaceutical production in order to minimize the risks involved in any pharmaceutical production that cannot be eliminated by testing the final products.

A GMP certification certifies that a manufacturer’s factory and quality management system have met certain criteria for engaging in the planning and manufacturing of drug products in various aspects, including, among others, institution and staff qualifications, production premises and facilities, equipment, production management, quality controls, production operation, maintenance of sales records and management of customer complaints and adverse event reports.

Under the former Pharmaceutical Administration Law of the PRC (Revised in 2015) issued on April 24, 2015, all of our pharmaceutical production facilities were required to obtain GMP certificates for their pharmaceutical production activities. Shandong Taibang obtained the GMP certificate for its new plasma production facility in February 2018. In January 2019, Guizhou Taibang obtained the renewed GMP certificates for both of its plasma production facility and its placenta polypeptide production facility. Huitian obtained the GMP certificate from the NMPA for its plasma production facility in February 2016.

In August 2019, the Pharmaceutical Administration Law of the PRC was amended, which became effective on December 1, 2019. According to such amendment and the relevant notices issued by the NMPA, the manufacturers of pharmaceutical products must continue to comply with the GMP standards; however, no GMP certifications will be issued after December 1, 2019. Instead, the manufacturers' compliance with the GMP standards will be examined through spot checks conducted by the relevant authorities. It is expected that the GMP standards will be included in the application procedures of the Pharmaceutical Manufacturing Permits, and manufacturers that fail to meet the GMP standards will lose the Pharmaceutical Manufacturing Permits.

MDMEL

Pursuant to the Measures for the Supervision and Administration of Medical Device Production promulgated on July 30, 2014 by the NMPA and amended on November 17, 2017, to establish an enterprise producing Class I medical devices, the applicant shall undergo the formalities for the recordation of Class I medical devices at the local medical products administration at the level of a districted city, and submit the photocopy of the recordation certificate for the produced medical devices held by the enterprise undergoing recordation and relevant materials. To establish an enterprise engaging in the production of Class II or Class III medical devices, the applicant shall file an application for production licensing with the local medical products administration of the province, autonomous region, or municipality directly under the Central Government. The medical products administration of a province, autonomous region or municipality directly under the Central Government shall examine the application materials within 30 working days after the date of acceptance, and conduct on-site verification according to the requirements of quality management rules for medical device production. If the prescribed conditions are met, the medical products administration shall make a written decision to approve licensing in accordance with law, and issue the MDMEL within ten working days; and if the prescribed conditions are not met, the medical products administration shall make a written disapproval decision, and give an explanation on reasons. Therefore, a manufacturer will not be able to commence any business operations without submitting a filing or obtaining a MDMEL.

Pursuant to the Administrative Measures for the Registration of Medical Devices promulgated by the NMPA, which became effective on October 1, 2014, Class I medical devices shall be managed by record-filing, while Class II and Class III medical devices shall be managed by registration. Manufacturers engaging in producing Class I medical devices are required to file with the city-level medical products administrative authorities of which the manufacturers are located. Production of Class II medical devices is subject to the inspection and approval and the grant of registration certificates for medical device by the medical products administrative authorities under the PRC government at the province, autonomous region and municipality levels. Production of Class III medical devices is subject to the inspection and approval and the grant of a medical device registration certificate by the NMPA. A medical device registration certificate is valid for five years and the holder of a certificate shall apply for extension within six months prior to its expiration.

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TianXinFu is required to obtain the MDMEL for its production activities and it obtained the renewal of the MDMEL from Beijing Food and Drug Administration in April 2019. The scope of production activities covered by such MDMEL includes Class III medical device (2002 Classified Catalogues): III-6846-1, III-6846-2, III-6864-1; Class II medical device (2002 Classified Catalogues): II-6810; and Class II medical device (2017 Classified Catalogues): II-03-10.

Permit for Medical Device Operation

According to Measures on the Supervision and Administration of the Business Operations of Medical Devices promulgated by the NMPA on July 30, 2014, which was last amended and became effective on November 17, 2017, the business operations of medical devices shall be subject to classified management according to the degree of risks of medical devices. Enterprises engaging in the operations of Class I medical devices are not required to obtain approval or submit a filing; enterprises engaging in the operation of Class II medical devices are required to file with medical products administrative authorities at the city level in which the enterprises operate, while enterprises engaging in the operations of Class III medical devices shall apply to the medical products administrative authorities at the city level in which the enterprises operate to obtain the operation permits. The term of validity of the Permit for Medical Device Operation is five years. The operating enterprise is required to submit an annual report to the medical products administrative authorities each year. To maintain the validity of the permit, the operating enterprise is required to submit an extension application six months prior to its expiration date.

TianXinFu obtained the renewed Permit for Medical Device Operation for engaging in the operations of certain Class III medical devices on March 4, 2020, and TianXinFu completed statutory filing procedures with Beijing Food and Drug Administration for business operations of certain Class II medical devices on March 25, 2019.

Pricing

Prior to June 1, 2015, retail prices of certain pharmaceutical products were subject to various price-related regulations. According to the “Regulations on Controlling Blood Products” promulgated by the PRC State Council in 1996, regional offices of the Pricing Bureau and the NHC had the authority to regulate retail prices for controlled plasma products. Effective on June 1, 2015, the NDRC removed the retail price ceilings for all drug products (except for anesthetics and category I antipsychotics) in China. After the pricing ceiling for plasma products was removed, the pricing of our products is mainly subject to the provincial tendering mechanism. In addition, retail prices of our plasma products fully or partially covered under the national insurance system are also affected by the reimbursement ceilings set out in the NRDL. See “Item 3.D. Key Information—Risk Factors—Risks Relating to Our Business—We do not have discretion to increase the prices of certain of our products, which are subject to the regional government tendering mechanism and/or reimbursement ceilings.”

Two-invoice System

As required by the 2016 List of Major Tasks in Furtherance of the Healthcare and Pharmaceutical Reforms issued by the General Office of the State Council on April 21, 2016, the “two-invoice System” has been fully implemented in the PRC for pharmaceutical products. According to the Circular on Issuing the Implementing Opinions on Carrying out the Two-invoice System for Drug Procurement among Public Medical Institutions (for Trial Implementation), or Circular 4, which was effective from December 26, 2016, the two-invoice system means one invoice between the pharmaceutical manufacturer and the pharmaceutical distributor, and one invoice between the pharmaceutical distributor and the hospital, and thereby only allows a single level of distributor for the sale of pharmaceutical products from the pharmaceutical manufacturer to the hospital. Since early 2018, the two-invoice system has begun to be implemented in high-price medical consumable sectors. According to the Reform Plan for Regulating High-price Medical Consumables issued by the General Office of the State Council of the PRC on July 19, 2019, local authorities are encouraged to reduce the layers of distribution channels for high-price medical consumables through the two-invoice system and other measures to promote the transparency of purchases and sales of medical consumables.

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Foreign Investment

The National People's Congress promulgated the Foreign Investment Law of the PRC, or the Foreign Investment Law, on March 15, 2019, which came into effect on January 1, 2020, and the State Council promulgated the Implementing Rules to the Foreign Investment Law, or the Implementing Rules, on December 26, 2019, which came into effect on January 1, 2020. The Foreign Investment Law and the Implementing Rules replaced previous laws and regulations governing foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-Owned Enterprise Law, together with their implementation rules and ancillary regulations. The Foreign Investment Law and the Implementing Rules were formulated to regulate and promote foreign investment, protect the legitimate rights and interests of foreign investors, rationalize PRC's regulation of foreign investments in line with the international practice and unify the corporate legal requirements for both foreign and domestic investments.

The Foreign Investment Law and the Implementing Rules provide that systems of pre-entry national treatment and negative list shall be applied for the administration of foreign investments. The “pre-entry national treatment” means that the treatment given to foreign investors and their investments at market access stage is not less favorable than that given to domestic investors and their investments. The “negative list” is a list issued or approved by the State Council from time to time, which classifies foreign investments into three categories: foreign investors are prohibited from investing in the prohibited fields listed in the negative list, are subject to certain restrictions or requirements when investing in the restricted fields listed in the negative list, and are treated equally with the domestic investors when investing in the fields and industries not listed in the negative list. On June 30, 2019, the National Development and Reform Commission and the MOFCOM promulgated the Special Administrative Measures for Access of Foreign Investment (Negative List) (2019 Version), which came into effect on July 30, 2019. None of our business falls under the current version of the negative list. The Foreign Investment Law and the Implementing Rules also provide that the organization form, organizational structure and standard of conduct of a foreign-invested enterprise, or FIE, shall be subject to the provisions of the Company Law of the PRC and other applicable laws, and a foreign-invested enterprise may retain its original organization form for five years following the effective date of the Foreign Investment Law.

Taxation

Enterprise Income Tax

On March 16, 2007, the National People’s Congress of China passed the Enterprise Income Tax Law, or the EIT Law, as most recently amended on December 29, 2018, and on November 28, 2007, the PRC State Council passed its implementation rules, which became effective on January 1, 2008, as most recently amended on April 23, 2019. The EIT Law and its implementation rules impose a unified EIT of 25.0% on all domestic-invested enterprises and FIEs, unless they qualify under certain limited exceptions. According to the EIT Law and its implementation rules, the income tax rate of an enterprise that has been determined to be a high and new technology enterprise may be reduced to 15.0% with the approval of relevant tax authorities.

In addition to the changes to the tax structure, under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a resident enterprise and will normally be subject to an EIT of 25.0% on its global income. The implementation rules define the term “de facto management bodies” as “an establishment that exercises, in substance, overall management and control over, among others, the production, business, recruitment and accounting aspects of a Chinese enterprise.”

If the PRC tax authorities subsequently determine that we should be classified as a resident enterprise, then our global income will be subject to PRC income tax of 25%. For detailed discussion of PRC tax issues related to resident enterprise status, see “Item 3.D. Key Information—Risk Factors—Risks Relating to Doing Business in China—Under the Enterprise Income Tax Law, we may be classified as a ‘resident enterprise’ of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC shareholders.”

The EIT Law confirmed that qualified high and new technology enterprises may enjoy a preferential income tax rate of 15%, instead of the uniform enterprise income tax rate of 25%. The PRC Ministry of Science and Technology, the PRC Ministry of Finance and the State Administration of Taxation, or SAT, jointly promulgated the Measures for Determination of High and New Technology Enterprise January 29, 2016 to provide the detailed rules for the examination of qualifications and approval of certificates for high and new technology enterprises. Each high and new technology enterprise certificate is valid for three years.

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Shandong Taibang was recognized by Shandong provincial government as a high and new technology enterprise in 2008 and the latest renewal of its qualification was obtained in December 2017, which entitled it to continue to enjoy a preferential income tax rate of 15.0% for a three-year period from 2017 to 2019. Guizhou Taibang was recognized by Guizhou provincial government as a high and new technology enterprise and the latest renewal of its qualification was obtained in November 2017, which entitled it to continue to enjoy a preferential income tax rate of 15.0% for a three-year period from 2017 to 2019. TianXinFu was recognized by Beijing provincial government as a high and new technology enterprise in 2009 and the latest renewal of its qualification was obtained in September 2018, which entitled TianXinFu to enjoy a preferential income tax rate of 15.0% until the end of 2020. Huitian was recognized by Shaanxi provincial government as a high and new technology enterprise in 2009 and the latest renewal of its qualification was obtained in October 2017, which entitled Huitian to enjoy a preferential income tax rate of 15.0% from 2017 to 2019. Each of Shandong Taibang, Guizhou Taibang and Huitian is in the process of applying for a renewal of its respective qualification for an additional three years, and TianXinFu will apply for a renewal of its qualification upon the expiration of its existing qualification.

According to Notice on Issues Concerning Relevant Tax Policies in Deepening the Implementation of the Western Development Strategy jointly promulgated by the PRC Ministry of Finance, the PRC General Administration of Customs and SAT on July 27, 2011, enterprises located in the western region of China which have at least 70.0% of their income from the businesses falling within the Category of Encouraged Industries in western region of China may enjoy a preferential income tax of 15.0% within the period from January 1, 2011 to December 31, 2020. Guizhou Taibang, being a qualified enterprise located in the western region of China, enjoys a preferential income tax rate of 15.0% effective from January 1, 2011 to December 31, 2020.

Foreign currency exchange

The principal regulation on foreign currency exchange in the PRC is the Regulations of the People’s Republic of China on Foreign Exchange Control, promulgated by the State Council on January 29, 1996, and as most recently amended on August 5, 2008. Under these regulations, RMB is freely convertible for current account items, such as trade and service-related foreign exchange transactions, but not for capital account items, such as direct investment, loan or investment in securities outside China unless the prior approval of, and/or registration with SAFE or its local counterparts (as the case may be) is obtained.

Pursuant to the Regulations of the People’s Republic of China on Foreign Exchange Control Rules, FIEs in China may purchase foreign currency without the approval of SAFE for trade and service-related foreign exchange transactions by providing commercial documents evidencing these transactions. They may also retain foreign exchange (subject to a cap approved by SAFE) to satisfy foreign exchange liabilities or to pay dividends. In addition, if a foreign company acquires a company in China, the acquired company will also become an FIE. However, the relevant PRC government authorities may limit or eliminate the ability of FIEs to purchase and retain foreign currencies in the future. In addition, foreign exchange transactions for direct investment, loan and investment in securities outside China are still subject to limitations and require approvals from, and/or registration with, SAFE.

The Notice of the State Administration of Foreign Exchange on Reforming the Administrative Approach Regarding the Settlement of the Foreign Exchange Capitals of Foreign-invested Enterprises came into effect on June 1, 2015, as most recently amended on December 30, 2019, and was specified by the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Administrative Provisions on Capital Account Foreign Exchange Settlement promulgated on June 9, 2016, which deepened the reform of the foreign exchange administration system and helped meet the needs of FIEs for business and fund operations. This notice allows FIEs to settle their foreign exchange capitals on a discretionary basis. Moreover, the Provisions on Foreign Exchange Administration Over Direct Investment Made by Foreign Investors in the PRC were promulgated by the SAFE on May 10, 2013 and most recently amended on December 30, 2019 in order to promote and facilitate foreign investors to make direct investment in the PRC, which allow a FIE that needs to remit funds abroad to purchase and remit foreign exchange with the relevant bank due to capital reduction, liquidation, advance recovery of investment, profit distribution, etc. after due registration.

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SAFE promulgated the Circular on Further Improving Reform of Foreign Exchange Administration and Optimizing Authenticity and Compliance Verification, or SAFE Circular 3, effective on January 26, 2017. SAFE Circular 3 relaxes the policy restriction on foreign exchange inflow to further enhance trade and investment facilitation, including expanding the scope of foreign exchange settlement for domestic foreign exchange loans, allowing the capital repatriation for offshore financing backed by domestic guarantee, facilitating the centralized management of foreign exchange funds of multinational companies, and allowing the offshore institutions within pilot free trade zones to settle foreign exchange in domestic foreign exchange accounts. SAFE Circular 3 also tightens the authenticity and compliance verification process of cross-border transactions and cross-border capital flow, such as requiring banks to verify board resolutions, tax filing form, and audited financial statements before wiring foreign invested companies’ foreign exchange distribution above US$50,000.

SAFE promulgated the Circular of the State Administration of Foreign Exchange on Further Promoting the Facilitation of Cross-border Trade and Investment, or SAFE Circular 28, effective on October 23, 2019. SAFE Circular 28 provides that non-investment foreign-invested enterprises are allowed to use their capital funds to make equity investments in China, provided that such investments do not violate the then effective Special Administrative Measures for Access of Foreign Investment (Negative List) and the domestic projects are genuine and in compliance with applicable laws. Since SAFE Circular 28 was recently promulgated, its interpretation and implementation in practice are still subject to substantial uncertainty.

Dividend distributions

Under applicable PRC regulations, a company in China (including FIE) may pay dividends only out of its accumulated profits, if any, after setting off any losses from prior fiscal years and as determined in accordance with PRC accounting standards and regulations. In addition, a PRC company (including FIE) is not permitted to distribute any profits until certain amount of after-tax profits is set aside to the statutory reserve and the discretionary reserve (if any). The statutory reserve required of a PRC company (including FIE) is an amount of at least 10% of its after-tax profits based on PRC accounting standards each year until the accumulative amount of such reserve reaches 50% of its registered capital. The discretionary reserve is a portion of after-tax profits of a PRC company (including FIE) that its shareholder(s) may approve to set aside, which may not be distributed to equity owners except in the event of liquidation.

In addition, under the EIT law, the Notice of the State Administration of Taxation on Negotiated Reduction of Dividends and Interest Rates, promulgated on January 29, 2008, the Arrangement between the PRC and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion, or the Double Taxation Treaty, which became effective on August 21, 2006, and the Notice of the State Administration of Taxation Regarding Beneficial Owners under Tax Treaties, which became effective on February 3, 2018, dividends from our PRC subsidiary, Taibang Biotech (Shandong) Co., Ltd., paid to us through our Hong Kong subsidiary, Taibang Holdings, may be subject to a withholding tax at a rate of 10%, or at a rate of 5% if Taibang Holdings is considered a “beneficial owner” that is generally engaged in substantial business activities in Hong Kong and entitled to treaty benefits under the Double Taxation Treaty.

Our Employees

As of December 31, 2019, 2018 and 2017, we employed 2,269, 2,187 and 1,912 full-time employees, respectively, of which 23, 27 and 41, respectively, were seconded to us by Shandong Institute of Biological Products, or the Shandong Institute. As of December 31, 2019, we had 51 employees in our headquarter in Beijing, 685 employees in the production facility in Shandong Province, 408 employees in the production facility in Guizhou Province, 171 employees in the production facility in Beijing, and 954 employees in total in our plasma collection stations in Shandong, Guizhou, Hebei, Guangxi and Hainan.

We believe we are in material compliance with all applicable labor and safety laws and regulations in China. We participate in various employee benefit plans that are organized by municipal and provincial governments, including retirement, medical, unemployment, work injury and maternity benefit plans for our managerial and key employees. In addition, we provide short term insurance plans for certain employees while on duty to cover work related accidents. We believe that we maintain a satisfactory working relationship with our employees and we have not experienced any significant labor disputes or any difficulties in recruiting staff for our operations.

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C.    Organizational Structure

The following chart reflects our current corporate structure as of the date of this report:

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D.    Property, Plants and Equipment

Our corporate offices, which occupy approximately 2,769 square meters, are leased and located at 17th and 18th Floor, Jialong International Building, 19 Chaoyang Park Road, Chaoyang District, Beijing 100125, the People’s Republic of China. The information of other material properties is listed as below.

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We believe that all of our properties have been adequately maintained, are generally in good condition, and are suitable and adequate for our business.

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Financial Performance Highlights

The following are some financial highlights for 2019:

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, immunoglobulin and coagulation factor products is human plasma. The collection of human plasma in China is generally influenced by a number of factors such as government regulations, geographical locations of plasma collection stations, sanitary conditions of plasma collection stations, living standards of the donors, and cultural and religious beliefs. If we experience any shortage of plasma supply, we may not be able to fully utilize our production capacity. We currently operate 16 plasma collection stations through Shandong Taibang and three plasma collection stations through Guizhou Taibang. These plasma collection stations provide us with a stable source of plasma supply.

Biological collagen is the primary raw material for our biomaterial products. The supply and market prices of biological collagen may be adversely affected by intense competition and availability and conditions of supply.

Prices of and demand for our products

The demand for our products is largely affected by the general economic conditions in China because the prices of our products are still not affordable to many patients. A significant improvement in the economic environment in China will likely improve consumer income which in turn could make our products more affordable and consequently increase the demand for our products. We have been able to expand our product range and consumer base by introducing new products required by customers. We believe that our technical expertise is important in introducing products that are in demand.

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Production capacity

Our sales volume is limited by our annual production capacity. As we grow our business in the future, our ability to fulfill additional and larger orders will depend on our ability to increase our production capacity. Our plan to expand our production capacity will depend on the availability of capital to meet our needs of expansion or upgrading of production lines, and the availability of stable raw material supply. To comply with applicable PRC laws and regulations, we have maintained permits and licenses necessary for the current operations of our plasma collection stations and production plants, and are required to apply for such permits and licenses to operate new plasma collection stations and production plants. As a result, our expansion plan also depends on our ability to renew existing permits and licenses and obtain new permits and licenses.

Competition

We face intense competition from local and foreign entities that manufacture and sell products that compete with ours in the PRC. These competitors may have more capital, better research and development resources, more expanded manufacturing and marketing capabilities and more experience than we do. In our industry, we compete based upon product quality, production cost, ability to produce a diverse range of products and logistical capabilities.

Our profitability may be adversely affected if competition intensifies, competitors reduce prices, PRC government requires us to reduce the prices of our products, or competitors develop new products or product substitutes with comparable medicinal applications or therapeutic effects which are more effective or less costly than ours. See “Item 4.B. Information on the Company—Business Overview—Business—Competition” for more information.

Taxation

China Biologic is subject to United States tax as if it was a U.S. corporation. The U.S. federal income corporate tax rate is 21%.

Taibang Biological is incorporated in the BVI, and not subject to taxation.

Taibang Holdings is incorporated in Hong Kong, and under the current laws of Hong Kong, is subject to a Profits Tax of 16.5% on profits arising in Hong Kong. However, no provision for Hong Kong Profits Tax has been made as Taibang Holdings has no taxable income.

Health Forward is incorporated in Hong Kong, and under the current laws of Hong Kong, is subject to a Profits Tax of 16.5% on profits arising in Hong Kong. However, no provision for Hong Kong Profits Tax has been made as Health Forward has no taxable income.

According to the PRC government policy, new or high technology companies may enjoy a preferential income tax rate of 15.0%, instead of 25.0% under the EIT Law. In December 2017, Shandong Taibang renewed its high and new technology enterprise qualification, which entitled it to enjoy a preferential income tax rate of 15.0% for a period of three years from 2017 to 2019. TianXinFu was recognized by Beijing provincial government as a high and new technology enterprise since 2009 and renewed the certificate in September 2018, as a result of which TianXinFu is entitled to enjoy a preferential income tax rate of 15.0% for a period of three years from 2018 to 2020. According to Notice on Issues Concerning Relevant Tax Policies in Deepening the Implementation of the Western Development Strategy jointly promulgated by the PRC Ministry of Finance, the PRC General Administration of Customs and SAT dated July 27, 2011, Guizhou Taibang, being a qualified enterprise located in the western region of China, enjoys a preferential income tax rate of 15.0% effective from January 1, 2011 to December 31, 2020. All of our other PRC subsidiaries are subject to the statutory income tax rate of 25.0%.

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Critical Accounting Policies

The preparation of financial statements in conformity with United States generally accepted accounting principles, or U.S. GAAP, requires our management to make assumptions, estimates and judgments that affect the amounts reported in the financial statements, including the notes thereto, and related disclosures of commitments and contingencies, if any. We consider our critical accounting policies to be those that require the more significant judgments and estimates in the preparation of financial statements, including the following:

Business Combination

We accounts for our business combination using the acquisition method in accordance with ASC Topic 805 (“ASC 805”): Business Combinations. An acquirer is required to recognize the identifiable acquired assets, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. The consideration transferred of an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued as well as the contingent considerations and all contractual contingencies as of the acquisition date. The costs directly attributable to the acquisition are expensed as incurred. The excess of (i) the total purchase price and fair value of the non-controlling interests over (ii) the fair value of the identifiable net assets of the acquiree, is recorded as goodwill. The allocation of the purchase consideration requires management to make estimates and assumptions, based in part on our judgments, in determining the fair value of assets acquired and liabilities assumed, especially with respect to intangible assets. Our estimates and assumptions may include, but are not limited to, future cash flows of an acquired business, other assumptions and the appropriate discount rate. These estimates are inherently difficult, subjective and unpredictable, and if different estimates were used, the fair value allocation to the acquired intangible assets could be different. Therefore, our assessment of the estimated fair value of each of these assets can have a material effect on our consolidated financial statements.

Goodwill

Goodwill represents the excess of the aggregate purchase price over the fair value of identifiable assets acquired and liabilities assumed. We conduct goodwill impairment testing at the reporting unit level at least annually or more frequently if events or changes in circumstances indicate that it is more likely than not (i.e. with a likelihood of greater than 50%) that the fair value of a reporting unit is less than its carrying amount. Our goodwill impairment review involves the following steps:

Qualitative assessment – Evaluate qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. The factors we consider include, but are not limited to, macroeconomic conditions, industry and market considerations, cost factors, financial performance or event specific to that reporting unit. If or when we determine it is more likely than not that the fair value of a reporting unit is less than the carrying amount, including goodwill, we would move to the quantitative method.

Quantitative method – Compare the fair value for each reporting unit to its carrying value, including goodwill. Fair value is determined based on estimated discounted cash flows.

We performed qualitative assessments for the reporting unit in 2019 and 2018. We weighed all factors in their entirety and concluded that it was not more-likely-than-not the fair value was less than the carrying amount of the reporting unit, and further impairment testing on goodwill was unnecessary as of December 31, 2019 and 2018. No impairment of goodwill was recognized for any of the years presented.

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The following table summarizes the breakdown of sales by product categories:

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As a percentage of total sales, sales from human albumin products and IVIG products accounted for 37.3% and 23.2%, respectively, for 2019.

The average price for human albumin declined slightly by 0.7% in RMB terms in 2019 compared to 2018. The average prices for IVIG products decreased by 2.5% in RMB terms in 2019 compared to 2018 because of higher sales volume in the distributor channel and lower prices to certain distributors to enhance our sales volume in response to the intensified market competition. In USD terms, the average price for human albumin and IVIG products decreased by 4.4% and 6.7%, respectively, in 2019 compared to 2018.

The sales volume of our products depends on market demand and our production volume. The production volume of our human albumin products and IVIG products depends primarily on the general plasma supply. The production volume of our hyper-immune products, which include human rabies immunoglobulin, human hepatitis B immunoglobulin and human tetanus immunoglobulin products, is subject to the availability of specific vaccinated plasma and our production capacity. The supply of specific vaccinated plasma requires several months of lead time. Our production facility currently can only accommodate the production of one type of hyper-immune products at any given time and we rotate the production of different types of hyper-immune products from time to time in response to market demand. As such, the sales volume of any given type of hyper-immune products may vary significantly from period to period.

The sales volume of our human albumin increased by 31.5% in 2019 as compared to 2018, with growth both in direct sales to hospitals and inoculation centers and in the distributor channels, primarily due to a temporary shortage of albumin supply in the market related to a lower import volume in the first quarter of 2019. The sales volume of IVIG products increased by 10.6% for 2019 compared to 2018, reflecting our efforts to enhance our sales and marketing capabilities.

The sales increase of other immunoglobulin products for 2019 as compared to 2018 was mainly attributable to the increase in sales volume of both human rabies immunoglobulin and human tetanus immunoglobulin products.

Revenue from other plasma products increased by 69.9% in USD terms, or 76.6% in RMB terms, in 2019 compared to 2018, with growth in revenue from all the three other plasma products, namely human coagulation factor VIII, human prothrombin complex concentrate and human fibrinogen products, reaching 10.7% of total sales of 2019 compared to 6.8% of total sales of 2018.

Revenue from placenta polypeptide products decreased by 60.4% for 2019 as compared to 2018, representing 5.4% of total sales of 2019 compared to 14.6% of total sales of 2018. The main reason for this decrease is that this product was included in the drug lists for monitoring and prescription control in many regions, which put a downward pressure on its sales volume.

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Cost of sales & gross profit

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Our cost of sales was $174.6 million, or 34.7% of our sales, for 2019, as compared to $146.8 million, or 31.4% of our sales for 2018. Our gross profit was $329.1 million and $320.1 million for 2019 and 2018, respectively, representing gross margins of 65.3% and 68.6%, respectively.

Our cost of sales and gross margin are affected by the product pricing, raw material costs, product mix, yields and manufactory efficiency. In an effort to increase plasma collection volume and expand our donor base, we increased the nutrition fees paid to donors consistent with the industry practice. We expect the nutrition fees to be paid to donors will continue to increase as a result of improving living standards in China. Consequently, future improvements on margins will need to be derived from increases in product pricing, yields and manufacturing efficiency, as well as from optimizing the product mix.

The increase in cost of sales as a percentage of total sales was a combined result of a lower percentage of higher-margin placenta polypeptide products in total sales, decreased sales prices for the Company’s major plasma products and increased plasma collection costs.

Operating expenses

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Our total operating expenses decreased by $8.5 million, or 4.9%, to $165.4 million for 2019 from $173.9 million for 2018. As a percentage of total sales, total expenses decreased to 32.8% for 2019 from 37.3% for 2018. This decrease mainly consisted of a decrease of $15.3 million in selling expenses, partially offset by the increases of $4.6 million in general and administrative expenses and $2.2 million in research and development expenses.

Selling expenses

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For 2019, our selling expenses decreased by $15.3 million, or 16.0%, to $80.3 million from $95.6 million for 2018. The decrease is primarily due to the decrease in marketing and promotion expenses related to placenta polypeptide products, whose sales revenue decreased significantly in 2019. This decrease is partly offset by increased selling expenses for plasma products. As a percentage of total sales, selling expenses decreased to 15.9% in 2019 from 20.5% in 2018.

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General and administrative expenses

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For 2019, our general and administrative expenses increased by $4.6 million, or 6.7%, to $73.4 million from $68.8 million for 2018. The increase was mainly due to an increase of $3.5 million in share-based compensation expenses. As a percentage of total sales, general and administrative expenses decreased to 14.6% for 2019 from 14.8% for 2018.

Research and development expenses

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For 2019, our research and development expenses increased by $2.2 million, or 23.2%, to $11.7 million from $9.5 million for 2018. In 2019 and 2018, we received government grants totaling $1.2 million and $0.7 million, respectively, and recognized them as a reduction of research and development expenses. Excluding this impact, our research and development expenses increased by $2.7 million for 2019 from 2018. As a percentage of total sales, our research and development expenses increased to 2.3% for 2019 from 2.0% for 2018.

Equity in income of equity method investee

Our equity method investment represented our 35.0% equity interest in Huitian, our equity method investee. For 2019, our equity in income of equity method investee decreased by $0.8 million to $1.6 million from $2.4 million for 2018.

Income tax expense

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Our provision for income taxes increased by $10.1 million, or 56.1%, to $28.1 million for 2019 from $18.0 million for 2018. During the third quarter of 2018,  according to new regulations and rules issued by the U.S. Department of the Treasury in August 2018, we reversed U.S. corporate income tax of $7.5 million based on the deemed repatriation to the United States of the Company’s accumulated earnings mandated by the U.S. tax reform. Our effective income tax rates were 14.7% and 10.9% for 2019 and 2018, respectively. Excluding the impact of repatriation tax, our provision for income taxes increased by $2.6 million, or 10.2%, from 2018 to 2019, and our effective income tax rate was 14.7% and 15.4% for 2019 and 2018, respectively.

Comparison of years ended December 31, 2018 and 2017

Sales

Our total sales increased by 26.1%, or $96.5 million, to $466.9 million for 2018, compared to $370.4 million for 2017. In RMB terms, our total sales increased by 23.5% for 2018 as compared to 2017. The increase in sales for 2018 was partly attributable to a $44.7 million contribution from TianXinFu, which accounted for approximately 9.6% of total sales for 2018. Excluding TianXinFu, total sales in 2018 increased by 11.7% in RMB terms as a result of increases in the sales of placenta polypeptide products, human albumin products, certain

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special immunoglobulin products, and coagulation factor products, which was partly offset by decreases in the sales of IVIG products. For plasma products, total sales in 2018 increased by 8.0% in RMB terms, or 10.2% in USD terms, to $354.0 million from $321.2 million in 2017.

The following table summarizes the breakdown of sales by product categories:

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As a percentage of total sales, sales from human albumin products and IVIG products accounted for 32.0% and 24.3%, respectively, for 2018. Excluding the contribution from TianXinFu, human albumin and IVIG products were 35.4% and 26.9% of total sales, respectively.

The average prices for human albumin and IVIG products decreased by 5.6% and 2.3%, respectively, in RMB terms in 2018 compared to 2017 because of greater sales volume in the distributor channel and lower prices to certain distributors reflecting intensified market competition for major plasma products. In USD terms, the average price for human albumin decreased by 3.6% in 2018 compared to 2017, and the average price for IVIG remained stable in 2018 compared to 2017.

The sales volume of our products depends on market demand and our production volume. The production volume of our human albumin products and IVIG products depends primarily on the general plasma supply. The production volume of our hyper-immune products, which include human rabies immunoglobulin, human hepatitis B immunoglobulin and human tetanus immunoglobulin products, is subject to the availability of specific vaccinated plasma and our production capacity. The supply of specific vaccinated plasma requires several months of lead time. Our production facility currently can only accommodate the production of one type of hyper-immune products at any given time and we rotate the production of different types of hyper-immune products from time to time in response to market demand. As such, the sales volume of any given type of hyper-immune products may vary significantly from period to period.

The sales volume of our human albumin increased by 17.0% in 2018 as compared to 2017, primarily due to increased sales volumes in the distributor and pharmacy channels, which was partly offset by decreased prescription volumes at various hospitals due to the ongoing healthcare regulatory changes in China. The sales volume of IVIG products decreased by 3.4% for 2018 compared to 2017, mainly reflecting decreased prescription volumes at various hospitals with the same effect of policy headwinds to human albumin.

The sales increase of other immunoglobulin products for 2018 as compared to 2017 was mainly attributable to the increase in sales volume of both human rabies immunoglobulin and human tetanus immunoglobulin products.

Revenue from other plasma products, including human coagulation factor VIII, human prothrombin complex concentrate, and the newly launched human fibrinogen products, increased by 47.9% in RMB terms, or 49.8% in USD terms, in 2018 compared to 2017, representing 6.8% of total sales of 2018. The growth mainly came from the launch of our human fibrinogen products in the beginning of 2018, and the increased sales volumes of our human coagulation factor VIII and human prothrombin complex concentrate products, which is reflective of our ongoing medical marketing activities.

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Revenue from placenta polypeptide products increased by 38.5% for 2018 as compared to 2017, reaching 14.6% of total sales of 2018, which was supported by higher unit selling prices in connection with the wider implementation of the two-invoice policy. However, the sales volume of placenta polypeptide products declined as a result of their inclusion in regional adjuvant drug lists, which put pressure on their prescription volume.

Cost of sales & gross profit

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