##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 20-F





(Mark One)

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

or



|x | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year endedDecember 31, 2008

or



| ̈ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from              to

or



| ̈ | Shell company report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | -------------------------------------------------------------------------------------------

Date of event requiring this shell company report

Commission file number 001-33295





3SBio Inc.

(Exact Name of Registrant as Specified in Its Charter)





Cayman Islands

(Jurisdiction of Incorporation or Organization)

No. 3 A1, Road 10

Shenyang Economy & Technology Development Zone

Shenyang 110027

Peoples
Republic of China

(Address of Principal Executive Offices)





Bo Tan, Chief Financial officer

No. 3 A1, Road 10

Shenyang Economy & Technology Development Zone

Shenyang 110027

Peoples Republic of China

Telephone (China): 86.24.2581.1820

Email: tanbo@3sbio.com

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

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



|                                                                                                   |  |                                          
|-------------------------------------------------------------------------------------------------- |  | -----------------------------------------
|Title of Each Class                                                                                |  | Name of Each Exchange on Which Registered
|American Depositary Shares, each representing seven ordinary shares, par value US$0.0001 per share |  | The NASDAQ Stock Market LLC              

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.

150,575,955 ordinary shares, par value US$0.0001, as of December 31, 2008

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.    Yes   ̈    No  x

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934.    Yes   ̈    No  x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ̈

Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   ̈    Accelerated filer  x

Non-accelerated filer   ̈

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

U.S. GAAP  x    International Financial Reporting Standards as issued by the
International Accounting Standards

Board   ̈            Other   ̈

Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17   ̈            Item 18  x

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of
1934).    Yes   ̈    No  x









---

##### Table of Contents

3SBIO INC.

FORM 20-F ANNUAL REPORT

FISCAL YEAR ENDED DECEMBER 31, 2008

TABLE OF CONTENTS



|             |  |                                                                              |  |     
|------------ |  | ---------------------------------------------------------------------------- |  | ----
|             |  |                                                                              |  | Page
|INTRODUCTION |  |                                                                              |  | 3   
|             |  |                                                                             
|PART I       |  |                                                                              |  | 5   
|             |  |                                                                             
|ITEM 1.      |  | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                        |  | 5   
|             |  |                                                                             
|ITEM 2.      |  | OFFER STATISTICS AND EXPECTED TIMETABLE                                      |  | 5   
|             |  |                                                                             
|ITEM 3.      |  | KEY INFORMATION                                                              |  | 5   
|             |  |                                                                             
|ITEM 4.      |  | INFORMATION ON THE COMPANY                                                   |  | 27  
|             |  |                                                                             
|ITEM 4A.     |  | UNRESOLVED STAFF COMMENTS                                                    |  | 53  
|             |  |                                                                             
|ITEM 5.      |  | OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                 |  | 54  
|             |  |                                                                             
|ITEM 6.      |  | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                   |  | 67  
|             |  |                                                                             
|ITEM 7.      |  | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            |  | 73  
|             |  |                                                                             
|ITEM 8.      |  | FINANCIAL INFORMATION                                                        |  | 76  
|             |  |                                                                             
|ITEM 9.      |  | THE OFFER AND LISTING                                                        |  | 78  
|             |  |                                                                             
|ITEM 10.     |  | ADDITIONAL INFORMATION                                                       |  | 80  
|             |  |                                                                             
|ITEM 11.     |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   |  | 85  
|             |  |                                                                             
|ITEM 12.     |  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       |  | 85  
|             |  |                                                                             
|PART II      |  |                                                                              |  | 86  
|             |  |                                                                             
|ITEM 13.     |  | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              |  | 86  
|             |  |                                                                             
|ITEM 14.     |  | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |  | 86  
|             |  |                                                                             
|ITEM 15.     |  | CONTROLS AND PROCEDURES                                                      |  | 86  
|             |  |                                                                             
|ITEM 16A.    |  | AUDIT COMMITTEE FINANCIAL EXPERT                                             |  | 87  
|             |  |                                                                             
|ITEM 16B.    |  | CODE OF ETHICS                                                               |  | 87  
|             |  |                                                                             
|ITEM 16C.    |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                       |  | 87  
|             |  |                                                                             
|ITEM 16D.    |  | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                   |  | 87  
|             |  |                                                                             
|ITEM 16E.    |  | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS       |  | 88  
|             |  |                                                                             
|ITEM 16F     |  | CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT                                 |  | 88  
|             |  |                                                                             
|ITEM 16G     |  | CORPORATE GOVERNANCE                                                         |  | 88  
|             |  |                                                                             
|PART III     |  |                                                                              |  | 89  
|             |  |                                                                             
|ITEM 17.     |  | FINANCIAL STATEMENTS                                                         |  | 89  
|             |  |                                                                             
|ITEM 18.     |  | FINANCIAL STATEMENTS                                                         |  | 89  
|             |  |                                                                             
|ITEM 19.     |  | EXHIBITS                                                                     |  | 89  



2



---

##### Table of Contents

INTRODUCTION

Conventions

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



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

| |  |  | the term our company, the Company, we, us, or our, or any like terms, refer to 3SBio Inc. and its
subsidiaries;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | share(s)or ordinary share(s) refer to our ordinary share(s), with par value US$0.0001 per share;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | ADS(s) refer to our American depositary share(s), each of which represents seven ordinary shares;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | ADR(s) refer to our American depositary receipt(s) that evidence our ADSs;
| | - |  | ----------------------------------------------------------------------------



| |  |  | references to China or PRC are to the Peoples Republic of China, excluding for the purposes of this annual report Hong Kong, Taiwan
and Macau;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | references to province(s) of China are to one or more, as applicable, of the provinces and provincial-level municipalities and autonomous regions of
China;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | all references to RMB or Renminbi are to the legal currency of China;
| | - |  | -------------------------------------------------------------------------



| |  |  | all references to U.S. dollars, USD or US$ are to the legal currency of the United States of America;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | U.S. GAAP refer to the generally accepted accounting principles in the United States of America;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | SFDA refers to the State Food and Drug Administration of PRC.
| | - |  | ---------------------------------------------------------------

Cautionary Statement concerning Forward Looking Statements:

Statutory Safe Harbor

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

What
are Forward-looking Statements

Certain statements, other than statements of historical facts, included or incorporated by reference in
this report, may address activities, events, conditions, or developments that we currently expect or anticipate may occur in the future, including, but not limited to, such things as the growth of our business and operations, our business strategy,
competitive strengths, goals, plans, and future capital expenditure. Such statements may be considered forward-looking statements. References to future successes of our company are usually forward-looking statements. Forward-looking statements
include information about possible or assumed future financial condition and results of operations of the Company.

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

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

Subject to Risks, Uncertainties, and
Assumptions

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

Our actual operation results, performance or financial conditions could differ materially from those contained in forward-looking statements due to a
number of factors, including: competition from other domestic and foreign pharmaceutical companies; our ability to enhance existing products and develop, obtain government approvals for, and market future generations of our existing products and
other new products; the expected market growth for pharmaceutical products in China; market acceptance of our products and hospital or patient demand for our products; our ability to improve and expand our production, sales and distribution network
and other aspects of our operations; our



3



---

##### Table of Contents

ability to diversify our product portfolio; with regard to TPIAO and our proprietary product candidates, our ability to effectively protect our intellectual
property; our ability to identify and acquire new medical technologies, pharmaceutical products and product candidates; changes in the healthcare industry in China, including changes in the healthcare policies and regulations of the PRC government
and changes in the healthcare insurance sector in the PRC; and fluctuations in general economic and business conditions in China.

We
describe in this report some of these risks and uncertainties in greater detail under Item 3 Key InformationRisk Factors. Important information regarding risks and uncertainties may also appear elsewhere in this annual report,
including but not limited to Item 4. Information on the Company, Item 5. Operating and Financial Review and Prospects, Item 8. Financial Information, the Companys consolidated financial
statements referenced in Item 8. Financial Information, and Item 11. Quantitative and Qualitative Disclosures about Market Risk.

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

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

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

Date of Relevance; No Update

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

Applicable to other Disclosures

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



4



---

##### Table of Contents

PART I



|ITEM 1. | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|------- | -----------------------------------------------------

Not applicable.



|ITEM 2. | OFFER STATISTICS AND EXPECTED TIMETABLE
|------- | ---------------------------------------

Not
applicable.



|ITEM 3. | KEY INFORMATION
|------- | ---------------

A. Selected Financial Data

The selected consolidated financial data presented below for the years ended December 31, 2006, 2007 and 2008 are derived from our audited
consolidated financial statements for such periods, all included elsewhere in this annual report except for the balance sheet at December 31, 2006. The selected consolidated financial data presented below for the years ended December 31,
2004 and 2005, and the balance sheet date as of December 31, 2006 are derived from our audited consolidated financial statements for such periods, not included in this annual report.

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



|                                                        |                                                               |                         |   |      |             |   |      |             |   |      |             |   |      |             |   |      |             |  
|------------------------------------------------------- | ------------------------------------------------------------- | ----------------------- | - | ---- | ----------- | - | ---- | ----------- | - | ---- | ----------- | - | ---- | ----------- | - | ---- | ----------- | -
|                                                        |                                                               | Year ended December 31, |  
|                                                        | 2004                                                          |                         |   | 2005 |             |   | 2006 |             |   | 2007 |             |   | 2008 |             |   | 2008 |            
|                                                        | RMB                                                           |                         |   | RMB  |             |   | RMB  |             |   | RMB  |             |   | RMB  |             |   | US$  |            
|                                                        | (in thousands, except per share, share, per ADS and ADS data) |                        
|Statement of Income Data:                               |                                                               |                         |   |      |             |   |      |             |   |      |             |   |      |             |   |      |             |  
|Revenues(1):                                            |                                                               | 77,248                  |   |      | 102,013     |   |      | 127,780     |   |      | 180,173     |   |      | 243,245     |   |      | 35,653      |  
|                                                        |                                                               |                         |   |      |             |   |      |             |   |      |             |   |      |             |   |      |             |  
|Cost of revenues                                        |                                                               | (15,027                 | ) |      | (15,497     | ) |      | (11,598     | ) |      | (17,427     | ) |      | (21,741     | ) |      | (3,187      | )
|                                                        |                                                               |                         |   |      |             |   |      |             |   |      |             |   |      |             |   |      |             |  
|Gross profit                                            |                                                               | 62,221                  |   |      | 86,516      |   |      | 116,182     |   |      | 162,746     |   |      | 221,504     |   |      | 32,466      |  
|                                                        |                                                               |                         |   |      |             |   |      |             |   |      |             |   |      |             |   |      |             |  
|Total operating expenses                                |                                                               | (56,061                 | ) |      | (66,357     | ) |      | (79,649     | ) |      | (114,201    | ) |      | (173,713    | ) |      | (25,462     | )
|                                                        |                                                               |                         |   |      |             |   |      |             |   |      |             |   |      |             |   |      |             |  
|Operating income                                        |                                                               | 6,160                   |   |      | 20,159      |   |      | 36,533      |   |      | 48,545      |   |      | 47,791      |   |      | 7,004       |  
|                                                        |                                                               |                         |   |      |             |   |      |             |   |      |             |   |      |             |   |      |             |  
|Total other income/(expense), net                       |                                                               | 494                     |   |      | (2,486      | ) |      | (855        | ) |      | 36,462      |   |      | 2,851       |   |      | 418         |  
|                                                        |                                                               |                         |   |      |             |   |      |             |   |      |             |   |      |             |   |      |             |  
|Income before income tax expense and minority interests |                                                               | 6,654                   |   |      | 17,673      |   |      | 35,678      |   |      | 85,007      |   |      | 50,642      |   |      | 7,422       |  
|                                                        |                                                               |                         |   |      |             |  
|Net income                                              |                                                               | 6610                    |   |      | 16,055      |   |      | 30,489      |   |      | 81,513      |   |      | 39,542      |   |      | 5,795       |  
|                                                        |                                                               |                         |   |      |             |   |      |             |   |      |             |   |      |             |   |      |             |  
|Diluted weighted average number of shares outstanding   |                                                               | 10,000,998              |   |      | 100,000,998 |   |      | 100,004,720 |   |      | 146,715,042 |   |      | 151,712,749 |   |      | 151,712,749 |  
|                                                        |                                                               |                         |   |      |             |   |      |             |   |      |             |   |      |             |   |      |             |  
|Net income per ADS, basic and diluted                   |                                                               | 0.46                    |   |      | 1.12        |   |      | 2.13        |   |      | 3.89        |   |      | 1.82        |   |      | 0.27        |  
|                                                        |                                                               |                         |   |      |             |   |      |             |   |      |             |   |      |             |   |      |             |  



5



---

##### Table of Contents

|                                                    |  |                    |  |         |   |  |         |   |  |         |   |  |          |   |  |         |  
|--------------------------------------------------- |  | ------------------ |  | ------- | - |  | ------- | - |  | ------- | - |  | -------- | - |  | ------- | -
|                                                    |  | As of December 31, | 
|                                                    |  | 2004               |  | 2005    |   |  | 2006    |   |  | 2007    |   |  | 2008     |   |  | 2008    |  
|                                                    |  | RMB                |  | RMB     |   |  | RMB     |   |  | RMB     |   |  | RMB      |   |  | US$     |  
|                                                    |  | (in thousands)     | 
|Balance Sheet Data:                                 |  |                    |  |         |   |  |         |   |  |         |   |  |          |   |  |         |  
|Cash & cash equivalents and time deposits           |  | 20,151             |  | 25,746  |   |  | 25,372  |   |  | 811,026 |   |  | 733,046  |   |  | 107,445 |  
|Working capital(2)                                  |  | 11,851             |  | (8,239  | ) |  | 49,300  |   |  | 866,270 |   |  | 795,713  |   |  | 116,630 |  
|Total assets                                        |  | 146,249            |  | 150,561 |   |  | 142,475 |   |  | 973,475 |   |  | 952,918  |   |  | 139,672 |  
|Short-term bank loans                               |  | 69,000             |  | 89,000  |   |  | 15,000  |   |  |        |   |  |         |   |  |        |  
|Long-term bank loans                                |  | 30,000             |  |        |   |  | 25,000  |   |  |        |   |  |         |   |  |        |  
|Total liabilities                                   |  | 121,038            |  | 109,439 |   |  | 68,667  |   |  | 29,134  |   |  | 32,523   |   |  | 4,767   |  
|Minority interests                                  |  | 646                |  | 502     |   |  | 474     |   |  | 549     |   |  |         |   |  |        |  
|Total shareholders equity                          |  | 24,565             |  | 40,620  |   |  | 73,334  |   |  | 943,792 |   |  | 920,395  |   |  | 134,905 |  
|                                                    |  |                    |  |         |   | 
|Cash Flow Data:                                     |  |                    |  |         |   |  |         |   |  |         |   |  |          |   |  |         |  
|Net Cash provided by/(used in) operating activities |  | 7,192              |  | 24,839  |   |  | 37,042  |   |  | 68,762  |   |  | 60,468   |   |  | 8,863   |  
|Net Cash provided by/(used in) investing activities |  | 2,268              |  | (9,244  | ) |  | 17,041  |   |  | (36,491 | ) |  | (368,889 | ) |  | (54,070 | )
|Net Cash provided by/(used in) financing activities |  |                   |  | (10,000 | ) |  | (54,457 | ) |  | 801,745 |   |  | (14,467  | ) |  | (2,120  | )



|(1) | Revenues consist of the invoiced value of goods sold, net of value-added taxes, or VAT, discretionary sales returns, trade discounts and allowances.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Working capital is calculated as current assets minus current liabilities.
|--- | --------------------------------------------------------------------------

Exchange Rate Information

Our business is primarily conducted in China, and all of our revenues and operating expenses are
denominated in Renminbi. However, for the convenience of the readers, periodic reports made to shareholders include current period amounts translated into U.S. dollars using a current exchange rate. Unless otherwise indicated, all translations from
Renminbi to U.S. dollars for financial data have been made at a rate of RMB6.8225 to US$1.00, the noon buying rate as certified for customs purposes by the Federal Reserve Bank of New York on December 31, 2008, the last business day in year
2008.

The following table sets forth, as of latest practicable date and for the periods indicated, the noon buying rate for U.S. dollars
in The City of New York for cable transfers in Renminbi as certified for customs purposes by the Federal Reserve Bank of New York.



|         |            |                   |            |        |      |        |     |       
|-------- | ---------- | ----------------- | ---------- | ------ | ---- | ------ | --- | ------
|         |            | Noon Buying Rate 
|         | Period End |                   | Average(1) |        | High |        | Low
|         |            |                   |            |        |      |        |    
|         |            | (RMB per US$1.00)
|Period   |            |                   |            |        |      |        |     |       
|2004     |            | 8.2765            |            | 8.2768 |      | 8.2765 |     | 8.2774
|2005     |            | 8.0702            |            | 8.194  |      | 8.0702 |     | 8.2765
|2006     |            | 7.8041            |            | 7.9723 |      | 7.8041 |     | 8.0702
|2007     |            | 7.2946            |            | 7.5806 |      | 7.2946 |     | 7.8127
|2008     |            | 6.8225            |            | 6.9477 |      | 6.7800 |     | 7.2946
|December |            | 6.8225            |            | 6.8539 |      | 6.8225 |     | 6.8842
|         |            |                   |            |       
|2009     |            |                   |            |        |      |        |     |       
|         |            |                   |            |       
|January  |            | 6.8392            |            | 6.8360 |      | 6.8225 |     | 6.8403
|         |            |                   |            |       
|February |            | 6.8395            |            | 6.8362 |      | 6.8241 |     | 6.8470
|         |            |                   |            |       
|March    |            | 6.8329            |            | 6.8360 |      | 6.8438 |     | 6.8240



|(1) | Annual averages are calculated from month-end rates. Monthly averages are calculated from the daily rates during the relevant period.
|--- | -------------------------------------------------------------------------------------------------------------------------------------

We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may
be, at any particular rate, the rates stated above, or at all. The PRC government



6



---

##### Table of Contents

imposes control over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through
restrictions on foreign trade.

B. Capitalization and Indebtedness

Not applicable.

C. Reasons for the Offer and Use of Proceeds

Not applicable.

D. Risk Factors

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

3.D.1 Risks Related To
Our Company

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

We are largely dependent on sales of our erythropoietin, or EPO, product, which we market
under the name of EPIAO. We began marketing and selling EPIAO in 1998, and it has been our top-selling product since 2002. Revenues from sales of EPIAO accounted for 77.3%, 67.3% and 63.5% of our total revenues for the years ended December 31,
2006, 2007 and 2008, respectively. We have continued our efforts to promote EPO products in 2008 and expect that sales of EPIAO will continue to comprise a substantial portion of our revenues in the future.

Any reduction in revenues from EPIAO will have a direct negative impact on our business, financial condition and results of operations. Our EPO franchise
and associated revenues could be adversely affected by a variety of factors, including:



| |  |  | increased competition;
| | - |  | ----------------------



| |  |  | new product introductions;
| | - |  | --------------------------



| |  |  | government-imposed pricing constraints;
| | - |  | ---------------------------------------



| |  |  | intellectual property issues;
| | - |  | -----------------------------



| |  |  | problems with raw materials supply;
| | - |  | -----------------------------------



| |  |  | disruptions in manufacturing or distribution; and
| | - |  | -------------------------------------------------



| |  |  | newly discovered safety issues.
| | - |  | -------------------------------

Despite our efforts, we may be unable to develop or acquire new products that would enable us to diversify our business and reduce our dependence on EPIAO products.

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

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



| |  |  | the safety and effectiveness of the product;
| | - |  | --------------------------------------------



| |  |  | the effectiveness of our efforts to market our products to hospitals and physicians;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | the products cost effectiveness;
| | - |  | ---------------------------------



7



---

##### Table of Contents

| |  |  | the products perceived advantages and disadvantages relative to competing products or treatments; and
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | the prevalence and severity of side effects.
| | - |  | --------------------------------------------

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

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

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

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

Chinese government is currently undertaking
comprehensive health care reform, which may include certain price control measures that limit the selling prices of our products.

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

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



| |  |  | EPIAO competes with both existing EPO drugs and potential new drug candidates. In China, EPO drugs are offered by established international companies such as Kirin
Brewery Company Limited, or Kirin, and F. Hoffmann-La Roche, Ltd., or Roche, and domestic pharmaceutical companies such as Diao Group Chengdu Diao Jiuhong Pharmaceutical Factory.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Competitors for Tietai Iron Sucrose Supplement include Beijing Novartis Pharmaceutical Co., Ltd. and Nanjing Hencer Pharmaceutical Co., Ltd.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | While we believe TPIAO is the only recombinant human thrombopoietin, or TPO-based therapeutic, available in the Chinese market to date, another Chinese
pharmaceutical company, Shanghai CP Guojian Pharmaceutical Company Limited, or CP Guojian, may have obtained the approval for clinical trials prior to May 2005, and in accordance with Chinese regulations, may not be prohibited from manufacturing and
marketing its TPO product during TPIAOs monitoring period.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

In the future, we expect that our products will compete with new drugs
currently in development, drugs approved for other indications that may be approved for the same indications as those of our products and drugs approved for other indications that are used off-label.

Our products may compete against products that have lower prices, superior performance, greater ease of administration or other advantages compared to
our products. We do not currently have patents of any commercial significance covering EPIAO, our legacy products or many of our other product candidates with which to protect these products from direct competition. Our inability to compete
effectively could reduce sales or margins, which could have a material adverse effect on our results of operations.

As we expand our
product portfolio by adding new products and indications, as well as developing second-generation versions of existing products with the same or overlapping labels, certain of our products may be used as a substitute for our other products in the
same end markets. For instance, although EPIAO and TPIAO are targeted toward patients with different indications and TPIAO is not intended to replace EPIAO in the oncology market, some doctors may prescribe TPIAO for their patients when they would
have otherwise prescribed EPIAO. Consequently, the introduction of TPIAO may adversely affect sales of EPIAO.



8



---

##### Table of Contents

An increasing number of foreign pharmaceutical companies have introduced their pharmaceutical products
into the Chinese market.

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

Furthermore, in order to gain market share in China, competitors may significantly increase their advertising expenditures and promotional activities, or
even engage in irrational or predatory pricing behavior. In addition, our competitors may engage in improper or unfair conducts, or even illegal acts. Third parties may actively engage in activities designed to undermine our brand name and product
quality or to influence customer confidence in our products. Increased competition may result in price reductions, reduced margins and loss of market share, any of which could materially adversely affect our profit margins.

We may not be able to compete effectively against current and future competitors.

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

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

We have a monitoring period for TPIAO through May 2010, during which other pharmaceutical companies are prohibited from
manufacturing or importing similar drugs, except those whose applications for clinical trials were approved by the SFDA prior to May 2005, the commencement of TPIAOs monitoring period. Upon expiration of the monitoring period, other
manufacturers in China may apply for approval by the SFDA to manufacture such product using similar formulae or production techniques.

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

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

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

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

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

The recent global economic crisis and the slowdown in the Chinese economy may materially and
adversely impact on our business, results of operations, and financial conditions, and price of our ADS.

The credit crisis
originated in the U.S. and the market dislocations resulted have deep and wide-ranging adverse impact on many economies, including China, U.S., and many of our export destinations.

In an adverse economic environment, people generally have diminished financial resources to purchase even critical medical care, which can significantly
reduce sales and revenues of our products.



9



---

##### Table of Contents

Our financial assets are issued by or held with various financial institutions whose credit quality
generally decline in such an environment. In such an environment, any income or yields from such financial assets also become much less predictable and may diminish dramatically. In a system-wide downturn, even sound investment management techniques
and strategies may not produce desirable results.

As there is sharply reduced supply of capital in the U.S. capital markets, the price of
our ADS may fall and remain at a very low level not reflecting and commensurate with our business performance for a long period of time. There can be numerous ways that our business, results of operations, and financial conditions, and price of our
ADS may be adversely and materially affected by this crisis, that are not readily amenable to analysis, assessment, or prediction. Any of our observations and assessments in relation to this crisis, whether made in this annual report or otherwise,
or lack of them, suffer from inherent limitations that may be unknown to us, and may not correctly reflect current state of affairs or later developments at all.

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

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

We have limited experience with
respect to these business development activities. Management of a license arrangement, collaboration, or other strategic arrangement or integration of acquired assets or businesses may adversely affect or disrupt our current business, decrease our
profitability, or cause us to incur significant expenses, or divert management resources that otherwise would be available for our existing business. We may not identify or complete any such transactions in a timely manner, on a cost-effective
basis, or at all, and we may not realize the anticipated benefits of any such transaction.

Proposing, negotiating and implementing
collaborations, in-licensing arrangements or acquisitions may be a lengthy and complex process. Other companies, including those with substantially greater financial, marketing, sales, technology, or other business resources, may compete with us for
these opportunities or arrangements. We may not be able to secure or complete such arrangements on acceptable terms, or at all.

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

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

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

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

For example, we have occasionally experienced shortages in
certain components necessary for the formulation, fill and finish of certain of our products in our Shenyang facility without impact on our ability to supply these products.



10



---

##### Table of Contents

However, we may experience shortages in the future resulting in delayed shipments, supply constraints, stock-outs and/or recalls of our products, which could
result in interruptions to our production.

We depend on our distributors for sales of our products.

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

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

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

For more information, see 4B.5
Marketing, Sales and Distribution.

If any one of these large distributors were to voluntarily or involuntarily suspend or terminate
product purchases from us, we would need to divert product sales to other distributors, which could cause disruptions to our revenues and profitability.

If we fail to achieve specified conditions such as sales goals with respect to certain in-licensed products, we may suffer termination of the license agreement, forfeiture of deposits, or other negative consequences.

We distribute third-party products pursuant to in-licensing agreements with other pharmaceutical corporations or developers. If we
fail to achieve specified conditions such as minimum sales targets, we may suffer termination of the license agreement on short notice, forfeiture of deposits, or other negative consequences. Given these risks, there is substantial uncertainty
regarding the success of our current and future collaborative efforts.

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

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

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

We may not achieve our projected development goals in the time frames we announce and expect.

We set goals for, and
made disclosures in this annual report and other public announcements, releases and disclosures, regarding timing of the accomplishment of objectives material to our success, such as the commencement and completion of clinical trials, anticipated
regulatory submission and approval dates, and timing of product launches. As a public company listed in the United States, we make additional announcements in our public reports and in press releases regarding these events, from time to time. The
actual timing of these events can vary dramatically due to factors beyond our control, such as delays or failures in our clinical trials, the uncertainties inherent in the regulatory approval process, and delays in achieving manufacturing or
marketing arrangements sufficient to commercialize our products. There can be no assurance that our clinical trials will be completed, that we will make regulatory submissions or receive



11



---

##### Table of Contents

regulatory approvals as planned or that we will be able to adhere to our current schedule for the launch of any of our products. If we fail to achieve one or
more of these milestones as planned, the price of our shares could decline.

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

Our success depends, in part, on our ability to protect our products from
competition by establishing, maintaining and enforcing intellectual property rights. We try to protect the products and technology that we consider important to our business by filing PRC patent applications, pharmaceutical regulatory protection,
establishing and enforcing confidentiality, relying on trade secrets, or employing a combination of these methods. We do not have any patent protection of commercial significance relating to EPIAO. We have patents and patent applications relating to
TPIAO and certain of our other products, product candidates and technologies. For more details, see 4.B.7Intellectual Property. However, the process of seeking patent protection in the PRC can be lengthy and expensive, and we
cannot assure you that these patent applications, or any patent applications we may make in the future in respect of other products, will result in patents being issued, or that any patents issued in the future will be able to provide us with
meaningful protection or commercial advantage. Any patent issued to us may be challenged, invalidated or circumvented.

In addition to
patents, we rely on trade secrets and proprietary know-how to protect our intellectual property. We have entered into confidentiality agreements with many of our employees, consultants, outside scientific collaborators, sponsored researchers and
other advisors. These agreements may not provide meaningful protection or adequate remedies in the event of unauthorized use or disclosure of our proprietary information. In addition, it is possible that third parties could independently develop
proprietary information and techniques substantially similar to ours or otherwise gain access to our proprietary information.

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

Intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries, due to, among other reasons, lack of procedural rules for discovery and
evidence, low damage awards and lack of judicial independence. Implementation and enforcement of PRC intellectual property-related laws have historically been deficient and ineffective and may be hampered by corruption and local protectionism.
Policing unauthorized use of proprietary technology is difficult and expensive, and we might need to resort to litigation to enforce or defend patents issued to us or to determine the enforceability, scope and validity of our proprietary rights or
those of others. The experience and capabilities of PRC courts in handling intellectual property litigation varies, and outcomes are unpredictable. Further, such litigation may require significant expenditure of cash and management efforts and could
harm our business, financial condition and results of operations. An adverse determination in any such litigation could materially impair our intellectual property rights and may harm our business, prospects and reputation.

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

We depend on administrative protection and monitoring periods for certain of our products, which afford us less protection than
patents.

Under Chinas first patent law enacted in March 1984, drugs were not eligible for patent protection. This law,
however, provided patent protection for the manufacturing methods of pharmaceuticals. The Drug Administration Law of 1984 specified that pharmaceutical products that had never been manufactured in China were classified as new drugs, and allowed
Chinese pharmaceutical companies to produce drugs that are similar in structure and function to foreign drugs so long as the foreign drugs had not been manufactured inside China. To further protect the domestic pharmaceutical industry, in 1999 the
SFDAs predecessor, the State Drug Administration, issued the Regulation on New Drug Protection and Related Technology Transfer, or the 1999 Regulations, which provided a six to twelve year administrative protection period for five categories
of new drugs. In December 2002, the 1999 Regulations were replaced by the Administrative Measures on the Registration of Pharmaceutical Products, or the 2002 Regulations, which were later revised in February 2005. According to the 2002 Regulations,
with a view to protecting public health, the SFDA may provide for administrative monitoring periods of up to five years for new drugs approved to be manufactured, to continually monitor the safety of those new drugs. The key element in determining
the availability and duration of the monitoring period is the safety of the new drug. The SFDA will consider, among other things, whether the new drug has been previously launched domestically or overseas, what type of new drug it is and what
process and technology are involved in the production of the new drug. For example, for a biochemical product that has never been launched domestically or overseas, a five-year monitoring period will be granted; for a biochemical product that has
been launched overseas but not domestically, only a four-year monitoring period will be granted.



12



---

##### Table of Contents

We have administrative protection for TPIAO through 2010 under a five-year monitoring period pursuant to
the 2002 Regulations, during which other pharmaceutical companies are prohibited from manufacturing or importing similar drugs, except those whose applications for clinical trials were approved by the SFDA prior to May 2005, the commencement of
TPIAOs monitoring period. For a detailed discussion of the mechanism for administrative protection under the relevant Chinese regulations, please refer to 4.B.11-cAdministrative protection and monitoring periods for new
drugs.

The period of administrative protection under these Chinese pharmaceutical regulations is considerably shorter than the
exclusivity period afforded by patent protection, which, in the case of invention patents, may last up to 20 years from the national filing date of the patent directed to the product, its use or method of manufacture. Once the monitoring period
expires, all third parties will be free to compete with us, unless we can exclude them from the market through patents or other intellectual property rights.

In addition, the administrative protection for EPIAO in relation to the indication of anemia associated with chemotherapy in cancer patients with non-myeloid malignancies cannot always prevent off label use of other
EPO drugs for this indication. If physicians substitute similar or less expensive drugs for EPIAO, our revenues and financial condition will be adversely affected.

In addition, the PRC government has in the past, and may in the future, change the duration of the monitoring period. If this occurs, we may lose the administrative protection for our new products or the protection
period may be shortened, and we may lose advantage over our competitors with respect to our new products.

If our products infringe the intellectual
property rights of third parties, we may incur substantial liabilities, and we may be unable to sell these products.

Our
commercial success depends significantly on our ability to operate without infringing the patents and other proprietary rights of third parties. Under the PRC Patent Law promulgated by the Peoples Congress in March 1984, as amended, patent
applications are maintained in confidence until their publication at the end of 18 months from the filing date. The publication of discoveries in the scientific or patent literature frequently occurs substantially later than the date on which the
underlying discoveries were made and the date on which patent applications are filed. China adopts the first-to-file system under which whoever first files a patent application (instead of the one who makes first actual discoveries) will be awarded
the patent. By contrast, the United States patent law endorses the first-to-invent system under which whoever makes the first actual discovery will be awarded the patent. Under the first-to-file system, even after reasonable investigation we may not
know with certainty whether we have infringed a third partys patent because such third party may have filed a patent application without our knowledge while we are still developing that product. We are aware of intellectual property rights
held by third parties that relate to products or technologies we are developing. For example, we are aware of a patent held by a third party that may relate to our TPIAO product. We believe, as to each claim in this patent, that we either do not
infringe the claim of the patent or that the claim is invalid. While the validity of issued patents, patentability of pending patent applications and applicability of any of them to our programs are uncertain, if asserted against us, any related
patent rights could adversely affect our ability to commercialize our products.

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



| |  |  | we may become involved in time-consuming and expensive litigation, even if the claim is without merit;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | we may become liable for substantial damages for past infringement if a court decides that our technology infringes a third partys patent;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a court may prohibit us from selling or licensing our product without a license from the patent holder, which may not be available on commercially acceptable terms,
if at all, or which may require us to pay substantial royalties or grant cross licenses to our patents; or
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

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

Failure to implement our growth and expansion strategy could result in deterioration in our results
of operations and financial condition.

In order to achieve our business objectives, we must successfully implement our growth and
expansion strategy, which, as subject to assessment, reevaluation, and adjustments from time to time, currently includes the following components:



| |  |  | expanding our capacity by further process optimization and new facility construction;
| | - |  | -------------------------------------------------------------------------------------



13



---

##### Table of Contents

| |  |  | continuing our research and development efforts to introduce new products;
| | - |  | --------------------------------------------------------------------------



| |  |  | promoting domestic marketing and sales development and growth;
| | - |  | --------------------------------------------------------------



| |  |  | expanding the number, and enhance the expertise in U.S. GAAP financial reporting, of our finance staff;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | implementing our strategy to bifurcate our sales force in the nephrology and oncology areas;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | maintaining and further improving our manufacturing process and proprietary technologies to manufacture products with high quality and competitive prices; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | integrating any new businesses, technologies and products that we acquire by way of in-licensing, acquisitions or investments into our operations.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------

If we do not successfully implement this strategy, we may not be able to maintain our growth in revenues and
profitability.

We have grown steadily since our establishment in 1993. This expansion presented, and our anticipated growth in the future
will continue to present, a significant challenge to our management and administrative systems and resources. If we do not adequately manage this challenge, our results of operations and financial condition could suffer.

We are building manufacturing facilities in Shenyang that are compliant with the regulations of European Medicines Agency, or EMEA, and Chinese current
Good Manufacturing Practice, or GMP, to take advantage of the market opportunity we believe exists in Europe and other selected regulated markets for new versions of biopharmaceutical products whose patents have expired (known as biosimilar
products). Similar to the US FDA, the EMEA is an European agency for the evaluation of medicinal products. China GMP refers to guidelines and regulations issued from time to time pursuant to PRC laws as part of quality assurance to ensure that
products subject to those guidelines and regulations are consistently produced and controlled to the quality and standards appropriate for their intended use. Substantial capital and management resources will be required in order to complete the
construction of the manufacturing facilities on time, secure regional partnerships, seek regulatory approvals and promote our brand. We may be unable to successfully execute the expansion plan due to a delay in obtaining a GMP certificate for our
new manufacturing facilities, inability to obtain suitable partners to assist us with our expansion plans, changing competitive dynamics of the European biosimilar market or inability to obtain approvals for selling our products in Europe. As a
result, our profitability may be adversely affected.

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

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

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

In addition, our production process requires a continuous supply of electricity. We have encountered power shortages in the past due to restricted power
supply to industrial users during summers when the usage of electricity is high and supply is limited or as a result of damage to the electricity supply network. Because the duration of those power shortages was brief, they had no material impact on
our operations. However, interruptions of electricity supply could result in lengthy production shutdowns, increased costs associated with restarting production and the loss of production in progress. Any major suspension or termination of
electricity or other unexpected business interruptions could have a material adverse impact on our business, financial condition and results of operations.

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



14



---

##### Table of Contents

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

We typically generate higher levels of revenues during the third and fourth quarters of the year, primarily because of the tendency of hospitals to place
more orders prior to the year-end holiday season and the fact that more people visit hospitals in the second half of the year, resulting in more prescriptions by physicians during this period.

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



| |  |  | seasonal spending patterns of Chinese consumers, including hospitals, dialysis centers and clinics;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | changes in pricing policies by us, our competitors or the government, an example of which is the one-time downward adjustment by the government of the price ceiling
for all interferon products in China in 1999;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | the loss of key sales personnel or distributors;
| | - |  | ------------------------------------------------



| |  |  | our involvement in litigation;
| | - |  | ------------------------------



| |  |  | changes in government policies or regulations; and
| | - |  | --------------------------------------------------



| |  |  | a downturn in general economic conditions in China.
| | - |  | ---------------------------------------------------

While certain of the factors identified above, including seasonal spending patterns, changes in pricing policies, market acceptance of new products and changes in government policies, have in the past caused
fluctuations in our quarterly financial results, we have not suffered any material and adverse consequences from these fluctuations in the last three years. However, many of these factors are beyond our control, and you should not rely on our
results of operations for prior quarters as an indication of our results in any future period. As our revenues vary significantly from quarter to quarter, our business could be difficult to predict and manage and our quarterly results could fall
below investor expectations, which could cause our ADS price to decline.

We have previously operated as a private Chinese company and have little
experience in complying with requirements applicable to public companies in the United States. We have only relatively recently begun to prepare our financial statements in accordance with U.S. GAAP and continued compliance with these requirements
will continue to increase our costs and require additional management resources.

Historically, we have primarily prepared
unaudited financial statements in accordance with PRC GAAP for the purpose of tax reporting and determining the level of statutory reserves until our initial public offering. As a newly listed company, we have limited resources and a small finance
and accounting team. Although we have since invested additional resources and hired additional staff, we expect to continue to encounter substantial difficulty attracting qualified staff with requisite experience due to the high level of competition
for experienced financial professionals. In the short term, we are providing training for our current staff with respect to U.S. GAAP. Our training may not be sufficient or effective.

We continue to face increased legal, accounting, administrative and other costs and expenses as a public company that we did not incur as a private
company. Compliance with the U.S. Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well as other rules of the Securities and Exchange Commission, the Public Company Accounting Oversight Board and The NASDAQ Stock Market LLC, has resulted in
a significant initial cost to us as well as an ongoing increase in our legal, audit and financial compliance costs, including costs related to our compliance with Section 404 of the Sarbanes-Oxley Act.

We may fail to achieve and maintain effective internal controls.

We are subject to the reporting obligations under the United States securities laws. We are required by the Securities and Exchange Commission, as directed by Section 404 of the Sarbanes-Oxley Act, to include a
report of management on the effectiveness of our internal control over financial reporting. In addition, our principal external auditor must attest to and report on the effectiveness of our internal control over financial reporting.

Although our management concluded that our internal controls are effective in this annual report on Form 20-F, our management may not conclude that our
internal controls are effective in the future. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent public registered accounting firm may disagree. If our independent public
registered accounting firm is not satisfied with our internal control over financial reporting or the level at which our controls are designed, operated, documented or reviewed, it then may issue an adverse opinion on the effectiveness of our
internal control over financial reporting. Any of these possible outcomes could result in the loss of investor confidence in the reliability of our financial statements.



15



---

##### Table of Contents

We may be classified as a passive foreign investment company for United States federal income tax purposes, which
could subject United States investors in the ADSs or ordinary shares to significant adverse tax consequences.

We may be classified
as a passive foreign investment company, or a PFIC, for United States federal income tax purposes.

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

We do not believe that we are currently a PFIC. However, because the PFIC determination is highly fact intensive and made at the end of each taxable year, there can be no assurance that we will not be a PFIC for the
current or any future taxable year or that the Internal Revenue Service will not challenge any determination concerning our PFIC status. If we were to be or become classified as a PFIC, United States investors in our ADSs or ordinary shares may
incur a significantly increased United States income tax liability on gain recognized on the sale or other disposition of our ADSs or ordinary shares and on the receipt of distributions on our ADSs or ordinary shares. See Item10.E 
United States Federal Income Tax Considerations for U.S. Persons.

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

We export our
products outside China and plan to continually expand our exports. The exports may expose us to risks, uncertainties, and liabilities in or related to the destination countries, including particular local forms of products liabilities with respect
to pharmaceutical products, local taxation, other local laws and regulations, language and cultural conflicts, political and economic risks, and other risks, uncertainties, and liabilities. We had previously operated solely within China until 2003,
and had very limited experience in operating internationally and in the destination countries.

3.D.2 Risks Related To Our Industry

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

The pharmaceutical industry in China is subject to extensive government regulation and supervision. The regulatory framework addresses all aspects of
operating in the pharmaceutical industry, including approval, production, licensing and certification requirements and procedures, periodic renewal and reassessment processes, registration of new drugs and environmental protection. Violation of
applicable laws and regulations may materially adversely affect our business. In order to manufacture pharmaceutical products in China, we are required to apply for and obtain a pharmaceutical manufacturing permit from the provincial level food and
drug administrative authority. In addition, in order to manufacture and market any drug in China, we are required to apply for and obtain permits and certificates from the SFDA, including the new drug certificate, drug registration certificate
(which includes the issuance of a drug approval number) and GMP certificate. We are required to renew the pharmaceutical manufacturing permits, drug registration certificates and GMP certificates every five years. China SFDA and other Chinese
regulatory agencies operate under considerable time and resources constraints. There may be additional factors and risks that impact on the process of obtaining or renewal of these certificates, permits, or similar regulatory approvals. If we are
unable to obtain or renew such permits or certificates or any other regulatory approvals required for our operation on a timely basis, or at all, we can be prevented from engaging in the manufacture of our products, or suffer other possible negative
consequences, and our business may be adversely affected.

The regulatory framework regarding the pharmaceutical industry in China is
subject to change and amendment from time to time. Changes to the regulatory framework could materially and adversely affect our business, financial condition and results of operations.

For further information regarding recent changes in government regulations in China, see 4.B.11Regulations.



16



---

##### Table of Contents

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

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



| |  |  | the failure to demonstrate safety and efficacy in preclinical and clinical trials;
| | - |  | ----------------------------------------------------------------------------------



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



| |  |  | our inability to manufacture and commercialize sufficient quantities of the product economically; and
| | - |  | -----------------------------------------------------------------------------------------------------



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

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



| |  |  | our new product research and development efforts will be successfully and timely completed;
| | - |  | -------------------------------------------------------------------------------------------



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



| |  |  | any product we develop will be commercialized or achieve market acceptance.
| | - |  | ---------------------------------------------------------------------------

Delays in any part of the development process or our inability to obtain regulatory approval of our products could adversely affect our operating results
by restricting or delaying our introduction of new products.

Even if we successfully commercialize new products, these products may
address markets that are currently being served by the off-label use of others of our mature products and inadvertently result in a reduction in the sales volume of our mature products or vice versa.

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

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

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



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



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



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



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



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



| |  |  | our product candidates may produce undesirable side effects or may have other unexpected characteristics.
| | - |  | ---------------------------------------------------------------------------------------------------------

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



| |  |  | be delayed in obtaining marketing approval for our product candidates;
| | - |  | ----------------------------------------------------------------------



17



---

##### Table of Contents

| |  |  | not be able to obtain marketing approval; or
| | - |  | --------------------------------------------



| |  |  | obtain approval for indications that are not as broad as intended.
| | - |  | ------------------------------------------------------------------

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

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

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



| |  |  | improve our existing products;
| | - |  | ------------------------------



| |  |  | diversify our product portfolio; and
| | - |  | ------------------------------------



| |  |  | develop new and competitively priced products which meet the requirements of the constantly changing market.
| | - |  | ------------------------------------------------------------------------------------------------------------

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

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

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

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

Furthermore, we are subject to the U.S. Foreign Corrupt Practices Act, or FCPA. The recently increased level of FCPA investigative
and enforcement actions may adversely affect us.

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

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

The government may take steps toward the adoption of more stringent environmental regulations. Due to the possibility of unanticipated regulatory or
other developments, the amount and timing of future environmental expenditures may vary substantially from those currently anticipated. If there is any unanticipated change in the environmental regulations, we may need to incur substantial capital
expenditures to install, replace, upgrade or supplement our pollution control equipment or make operational changes to limit any adverse impact or potential adverse



18



---

##### Table of Contents

impact on the environment in order to comply with new environmental protection laws and regulations. If such costs become prohibitively expensive, we may be
forced to cease certain of our business operations.

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

The development and commercialization of pharmaceutical products entails an inherent risk of harm to the patient and, therefore, product liability. Even
though there are no punitive damages under PRC law, if a product liability claim is brought against us, it may, regardless of merit or eventual outcome, result in damage to our reputation, breach of contract with our customers, decreased demand for
our products, costly litigation, product recalls, loss of revenue and the inability to commercialize some products. We currently are not aware of any existing or anticipated product liability claims with respect to our products.

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

The pricing of all of our products is subject to government approval. Changes in government control on prices of our products
may limit our profitability or cause us to stop manufacturing certain products.

Pursuant to the implementing rules of the Drug
Administration Law, we are required to seek pricing approval for all our products from the NDRC and the price administration authorities of the relevant provinces of the PRC in which our pharmaceutical products are manufactured. We have in the past
been able to successfully obtain pricing-related approvals. In addition, in order to access certain local or provincial-level markets, we enter into government-sponsored competitive bidding processes for EPIAO and our legacy products every year or
every other year with a pre-defined price range. In addition, NDRC policies have required that we lower prices on our higher dosage EPIAO, which we had previously sold at a premium. The competitive bidding in effect sets price ceilings for our
products, thereby limiting our profitability. In some instances, if the price range designated by the provincial government falls below our costs, we may stop manufacturing certain products.

Chinas accession to the World Trade Organization, or WTO, may intensify competition in the pharmaceutical industry in China.

China acceded to the WTO in December 2001. Following the accession, China lowered tariffs on certain imported pharmaceutical products as part of its
obligation under the WTO framework. The reduction or removal of tariffs on imported pharmaceutical products had made such products more competitive with domestic pharmaceutical products. In addition, an increasing number of foreign-invested
pharmaceutical manufacturers may establish operations to engage in the manufacture or distribution of pharmaceutical products in China, which would increase the number of suppliers of pharmaceutical products in the market and intensify the
competition with domestic manufacturers. If we are unable to distinguish our products from imported products or products produced domestically by foreign-invested pharmaceutical manufacturers which may be of higher quality and sold at competitive
prices, we may lose market share to imported products or products produced domestically by foreign-invested pharmaceutical manufacturers.

Furthermore, due to the lack of capital for the research and development of new medicines, most of the domestic pharmaceuticals are imitations of foreign products. Following Chinas accession to the WTO, many more companies in Europe
and the United States have applied for patents in the PRC, thereby increasing the likelihood of litigation for Chinese domestic pharmaceutical companies.

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

Adverse changes in political, economic and other policies of the Chinese government
could have a material adverse effect on the overall economic growth of China, which could reduce the demand for our products, and could otherwise materially and adversely affect our operations and competitive position.

All of our operations are located in China, and substantially all of our sales are made in China. Accordingly, our business, financial condition, results
of operations and prospects are affected significantly by economic, political and



19



---

##### Table of Contents

legal developments in China. The Chinese economy differs from the economies of most developed countries in many respects, including, but not limited to:



| |  |  | the extent of government involvement;
| | - |  | -------------------------------------



| |  |  | the level of development;
| | - |  | -------------------------



| |  |  | the growth rate;
| | - |  | ----------------



| |  |  | the control of foreign exchange;
| | - |  | --------------------------------



| |  |  | the allocation of resources;
| | - |  | ----------------------------



| |  |  | an evolving regulatory system; and
| | - |  | ----------------------------------



| |  |  | lack of sufficient transparency in the regulatory process.
| | - |  | ----------------------------------------------------------

While the Chinese economy has experienced significant growth in the past 20 years, growth has been uneven, both geographically and among various sectors of the economy. The Chinese government has implemented various
measures to encourage economic growth and guide the allocation of resources. Some of these measures, including potential investments in competing biopharmaceutical companies, may benefit the overall Chinese economy, but may also have an adverse
effect on us. Our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. Further, any adverse change in the economic conditions
or government policies in China could have a material adverse effect on overall economic growth and the level of healthcare investments and expenditures in China, which in turn could lead to a reduction in demand for our products and consequently
have a material adverse effect on our businesses.

The Chinese economy has been transitioning from a planned economy to a more
market-oriented economy. Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound
corporate governance in business enterprises, a substantial portion of the productive assets in China is still owned by the Chinese government. The continued control of these assets and other aspects of the national economy by the Chinese government
could materially and adversely affect our business. The Chinese government also exercises significant control over Chinese economic growth through the allocation of resources, controlling payment of foreign currency- denominated obligations, setting
monetary policy and providing preferential treatment to particular industries or companies. Although the government policies have in recent years been encouraging of the growth of the healthcare sector, future attempts by the Chinese government to
slow the pace of growth of the healthcare sector or the overall Chinese economy could result in decreased expenditures by hospitals, which in turn could reduce demand for our products.

Moreover, the political relationship between the United States, Europe, or other Asian nations and China is subject to sudden fluctuation and periodic
tension. Changes in political conditions in China and changes in the state of foreign relations are difficult to predict and could adversely affect our operations.

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

Laws,
regulations or enforcement policies in China, including those regulating healthcare and the pharmaceutical industry, are evolving and subject to frequent changes. Further, regulatory agencies in China may periodically, and sometimes abruptly, change
their enforcement practices. Therefore, prior enforcement activity, or lack of enforcement activity, is not necessarily predictive of future actions. Any enforcement actions against us could have a material adverse effect on us. Any litigation or
governmental investigation or enforcement proceedings in China may be protracted and may result in substantial cost and diversion of resources and management attention, negative publicity, and damage to reputation.

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

We receive all of our revenues in Renminbi, which currently is not a freely convertible currency. A portion of our revenues may be converted into other
currencies to meet our foreign currency obligations, including, among others, payment of dividends declared, if any, in respect of our ordinary shares. Under Chinas existing foreign exchange regulations, we are able to pay dividends in foreign
currencies without prior approval from the State Administration of Foreign Exchange, or the SAFE, by complying with certain procedural requirements. However, the PRC government may take measures to restrict access to foreign currencies for current
account transactions.

Our ability to obtain foreign exchange is subject to significant foreign exchange controls and, in the case of
amounts under the capital account, requires the approval of and/or registration with PRC government authorities, including the SAFE. In particular, if Shenyang Sunshine, our wholly-owned PRC subsidiary, takes out foreign currency loans from foreign
lenders, it must do so within approved limits that satisfy its approval documentation and PRC debt to equity ratio requirements. Further, such loans must be registered with the SAFE. These limitations could affect the ability of Shenyang Sunshine to
obtain capital through offshore debt or equity financing.



20



---

##### Table of Contents

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

Prior to 1994, the Renminbi experienced a significant net devaluation against most major currencies, and there was
significant volatility in the market-based exchange rate during certain periods. From 1994 until July 2005, the Renminbi to U.S. dollar exchange rate was largely stable. On July 21, 2005, the Peoples Bank of China, or PBOC, announced that
the exchange rate of U.S. dollar to Renminbi would be adjusted from US$1.00 to RMB8.27 to US$1.00 to RMB8.11, and it ceased to peg the Renminbi to the U.S. dollar. Instead, the Renminbi has been pegged since that date to a basket of currencies,
which components are adjusted based on changes in market demand and supply under a set of systematic principles. On September 23, 2005, the Chinese government widened the daily trading band for Renminbi against non-US dollar currencies from
1.5% to 3.0% to improve the flexibility of the new foreign exchange system. On May 18, 2007, the Chinese government further widened the daily trading band from 3.0% to 5.0%. The Renminbi may be revalued further against the U.S. dollar or other
currencies, or may be permitted to enter into a full or limited free float, which may result in an appreciation or depreciation in the value of the Renminbi against the U.S. dollar or other currencies, any of which could give rise to uncertainties
in our financial condition and results of operations. Renminbi appreciated for approximately 12.5% against U.S. dollar from January 2, 2007 to March 31, 2009.

Any appreciation of Renminbi may subject us to increased competition from imports; and any devaluation of Renminbi may adversely affect the value of our net assets, earnings and declared dividends in foreign currency
terms, as well as our ability to import raw materials and equipment and service our foreign currency obligations. For example, to the extent that we need to convert our U.S. dollars holdings into Renminbi for our operations, appreciation of the
Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary
shares or ADSs, purchasing equipment and raw materials from overseas, or other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us.

We face risks related to health epidemics and outbreaks of contagious diseases, including avian influenza and Severe Acute Respiratory Syndrome, or SARS.

Our business could be adversely affected by the effects of avian influenza, SARS or other epidemics or outbreaks of contagious diseases.
There have been recent reports of outbreaks of a highly pathogenic avian influenza, or avian flu, caused by the H5N1 virus in certain regions of Asia and Europe. In recent years, there have been reports on the occurrences of avian flu in various
parts of China, including some confirmed human cases. A major outbreak of avian flu in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, particularly in
Asia. Additionally, a recurrence of SARS, a highly contagious form of atypical pneumonia, similar to the occurrence in 2003 which affected China, Hong Kong, Taiwan, Singapore, Vietnam and certain other countries, would also have similar adverse
effects. Since all of our operations and substantially all of our customers and suppliers are based in Asia, an outbreak of avian flu, SARS or other contagious diseases in China, other places in Asia or elsewhere, or the perception that such
outbreak could occur, and the measures taken by the governments of countries affected, would adversely affect our business, financial condition or results of operations. We have not adopted any written preventive measures or contingency plans to
combat any future outbreaks of avian flu, SARS or any other epidemics.

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

We conduct our business through our operating subsidiaries in China, which are governed by PRC law. China is a civil law jurisdiction based on written codes and statutes. Unlike common law jurisdictions, prior court decisions may be cited
as persuasive authority but do not have legally binding force. The PRC government has promulgated laws and regulations in relation to economic matters in general, such as foreign investment, corporate organization and governance, commerce, taxation
and trade, with a view to establishing a comprehensive legal system conducive to investment activities. However, the implementation, interpretation and enforcement of these laws and regulations may involve greater uncertainty compared to those in
the common law jurisdictions due to a relatively short legislative history, limited volume of court cases and their non-binding nature. Furthermore, many laws, regulations and legal requirements have only recently been adopted by the central or
local government agencies, and their implementation, interpretation and enforcement may involve uncertainty due to the lack of established practice available for reference. Depending on the government agency or how an application or a case is
presented to such agency, we may receive less favorable interpretations of law than our competitors. In addition, any litigation in China may be protracted and result in substantial legal costs and diversion of resources and management attention.
Similarly, legal uncertainty in China may limit the legal protection available to our shareholders. We cannot predict the effect of future legal developments in China, including promulgation of new laws, changes to existing laws or the
interpretation or enforcement thereof, or the preemption of local regulations by national law. As a result, there is substantial uncertainty as to the legal protection available to our shareholders.



21



---

##### Table of Contents

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

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

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

As a foreign
invested enterprise, Shenyang Sunshine is subject to restrictions on foreign investment imposed by PRC law from time to time. For instance, under the Foreign Investment Industrial Guidance Catalogue, as amended, some industries are categorized as
sectors which are encouraged, restricted or prohibited for foreign investment.

According to the latest version of this Catalogue, which
became effective on December 1, 2007, our business does not belong to the prohibited or the restricted category. As this Catalogue is updated every few years, there can be no assurance that the PRC government will not change its policies in a
manner that would cause part or all of our businesses to fall within the restricted or prohibited categories. If any of our businesses becomes prohibited or if we cannot obtain approval from relevant approval authorities to engage in businesses
which become restricted for foreign investors, we may be forced to sell or restructure our businesses which have become restricted or prohibited for foreign investment. If we are forced to adjust our corporate structure or business line as a result
of changes in government policy on foreign investment, our business, financial condition and results of operations may be materially and adversely affected.

We rely, or will rely, on dividends and other distributions on equity paid by our wholly owned subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our subsidiaries and affiliated
entities to make payments to us could have a material adverse effect on our ability to conduct our business.

We are a holding
company, and we rely, or will rely, on dividends from our wholly owned subsidiaries in China for our cash and financing requirements. Current PRC regulations permit our subsidiaries to pay dividends to us only out of their accumulated profits, if
any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our subsidiaries in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such
reserve reaches 50% of its registered capital, and each of our subsidiaries may be required to further set aside a portion of its after-tax profits to fund the employee welfare fund at the discretion of the board. These reserves are not
distributable as cash dividends. Furthermore, if our subsidiaries in China incur additional debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. In
addition, the PRC tax authorities may require us to adjust our taxable income under the contractual arrangements we currently have in place in a manner that would materially and adversely affect our subsidiaries and affiliated entities ability
to pay dividends and other distributions to us. Any limitation on the ability of our subsidiaries and affiliated entities to distribute dividends or other payments to us could materially and adversely limit our ability to grow, make investments or
acquisitions that could be beneficial to our businesses, pay dividends, or otherwise fund and conduct our business.

3.D.4 Risks Related To Our
Corporate Structure

Our contractual arrangements with Liaoning Sunshine and its shareholders may not be as effective in providing control over
these entities as direct ownership.

Liaoning Sunshine was established in 2000 to engage in the distribution of pharmaceutical
products, primarily those which we manufacture. As part of our corporate reorganization prior to our initial public offering in February 2007, we transferred our equity ownership in Liaoning Sunshine to Mr. Dan Lou, our chairman, as a result of
which we no longer have equity ownership interests in Liaoning Sunshine.

We rely on contractual arrangements to maintain control over the
business and operations of Liaoning Sunshine. These contractual arrangements may not be as effective in providing control over these entities as direct ownership. For example, Liaoning Sunshine could fail to take actions required for our business
despite its contractual obligation to do so. A significant portion of our sales, including sales of our own and our in-licensed products are conducted through Liaoning Sunshine, which was the direct contracting party with many of our key
distributors. If Liaoning Sunshine or its sole shareholder, Mr. Dan Lou, refuses to make payments or otherwise refuses to perform any contractual obligations necessary for us to realize these sales contracts, our financial condition and results
of operations will be materially and adversely affected. Beginning in January 2007, we started directly contracting with third-party distributors for the sale of the products we manufacture.



22



---

##### Table of Contents

If Liaoning Sunshine or its shareholders fail to perform under their agreements with us, we may have to
rely on legal remedies under PRC law, which may not be effective. In addition, we cannot assure you that the shareholders of Liaoning Sunshine will always act in our best interests.

We currently conduct certain of our sales activities through Liaoning Sunshine by means of contractual arrangements. If the PRC government determines that these contractual arrangements do not comply with
applicable regulations, our business could be adversely affected. Similarly, we may be exposed to liabilities with respect to our historical operations through Beijing Sunshine Bio-product Sales Company, or Beijing Sunshine.

We conduct certain of our sales activities through contractual arrangements with Liaoning Sunshine, which holds the licenses and approvals, including
pharmaceutical trading permits, as described in Item. 4.B.11Distribution of pharmaceutical products, that are essential for the distribution of our own and in-licensed products. We have contractual arrangements with Liaoning
Sunshine and its shareholders that allow us substantial control over it. These contracts include the business cooperation agreement, which impose certain restrictions on the conduct of the Liaoning Sunshines businesses. For more details, see
4.C.2 Economic and Control Arrangements. We cannot assure you that we will be able to enforce these contracts.

Although we
believe we comply with current PRC regulations, we cannot assure you that the PRC government would agree that our arrangements with Liaoning Sunshine comply with PRC licensing, registration or other regulatory requirements, with existing policies or
with requirements or policies that may be adopted in the future. If the PRC government determines that we are not in compliance with applicable law, it could revoke our business and operating licenses, require us to discontinue or restrict our
operations, restrict our right to collect revenues, require us to restructure our operations, impose additional conditions or requirements with which we may not be able to comply, impose restrictions on our business operations or take other
regulatory or enforcement actions against us that could be harmful to our business.

We had similar arrangements with Beijing Sunshine
prior to its dissolution in October 2008. We may be exposed to liabilities with respect to our historical operations through Beijing Sunshine, to the extent of any retroactive applicability of all adverse PRC government determinations, as discussed
in the preceding paragraph.

The principal shareholder of Liaoning Sunshine has potential conflicts of interest with us, which may adversely affect
our business.

Liaoning Sunshine is wholly owned by Mr. Dan Lou, our chairman. While Mr. Dan Lou has a duty of loyalty
and care to us under Cayman Islands law, the potential exists for conflicts of interests between his duties to us and his ownership interests in Liaoning Sunshine. In particular, Mr. Lou may be able to cause our agreements with Liaoning
Sunshine to be performed or amended in a manner adverse to us by, among other things, failing to remit payments to us on a timely basis or operating Liaoning Sunshine so as to cause harm to our business. We cannot assure you that if potential
conflicts of interests arise, these conflicts will not result in a significant loss in corporate opportunities for us or a diversion of our resources to Liaoning Sunshine, which may not be in the best interest of our company and our other
shareholders.

We must receive the approval of the MOFCOM before we may purchase the equity interests in Liaoning Sunshine. We may not receive
approval from the MOFCOM for such purchase on a timely basis, or at all.

We are party to a purchase agreements, pursuant to which
we may acquire 100% of the equity interests in Liaoning Sunshine from Dan Lou, our Chairman. For more details, see 4.C Organization Structure. In order to complete the acquisition of Liaoning Sunshine, we must obtain the approval of
Chinas Ministry of Commerce (MOFCOM) or its local delegate agency. We may not receive such approval on a timely basis, or at all.

3.D.5 Risks Related To Our ADSs and Other Risks

The market price for our ADSs may be volatile.

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



| |  |  | actual or anticipated fluctuations in our quarterly operating results and changes or revisions of our expected results;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | changes in financial estimates by securities research analysts;
| | - |  | ---------------------------------------------------------------



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



23



---

##### Table of Contents

| |  |  | announcements of technological or competitive developments;
| | - |  | -----------------------------------------------------------



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



| |  |  | announcements regarding patent litigation or the issuance of patents to us or our competitors;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | addition or departure of our senior management and key research and development personnel;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | changes in the economic performance or market valuations of other pharmaceutical or health care companies;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | economic, regulatory or political developments in China; and
| | - |  | ------------------------------------------------------------



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

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

Dan Lou, our chairman, and his son, Dr. Jing Lou, our chief executive officer, control a number of shares sufficient to influence corporate actions.

Dan Lou, the chairman of our board of directors, and his son, Dr. Jing Lou, our chief executive officer, together owned or controlled approximately
11.04% of our outstanding ordinary shares as of December 31, 2008. The interests of the Lou family may differ from those of our other shareholders, and they may take actions that advance their interests to the detriment of our other
shareholders. Acting together, they would have sufficient voting power to influence the outcome of corporate actions submitted to the shareholders for approval and to influence our management and affairs, including the election of our board of
directors. Chairman Lou is not required to stand for election at any meeting of our shareholders, and therefore serves for an undetermined period of time. In addition, this concentration of ownership may prevent attempts to remove or replace senior
management.

Our articles of association contain anti-takeover provisions that could adversely affect the rights of holders of our ordinary shares
and ADSs.

Our amended and restated articles of association include provisions that could limit the ability of others to acquire
control of our company or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging
third parties from seeking to obtain control of our company in a tender offer or similar transaction. These provisions could also serve to entrench our existing board of directors and management. For example, our board of directors has the
authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications,
limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares, in the form of ADS or
otherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult. If our board of directors decides to issue preferred shares, the voting
and other rights of the holders of our ordinary shares and ADSs may be adversely affected. In addition, our articles of association provide that only a third of our board must stand for re-election at any annual meeting.

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

Holders of ADSs do not have the same rights as holders of our ordinary shares and ADS holders only have such rights as are specified in the deposit
agreement, which generally are more restricted than the rights of holders of ordinary shares. Under the deposit agreement, if the vote is by show of hands, the depositary will vote the deposited securities in accordance with the voting instructions
received from a majority of holders of ADSs that provided timely voting instructions. If the vote is by poll, the depositary will vote the deposited securities in accordance with the voting instructions it timely receives from ADS holders. In the
event of poll voting, deposited securities for which no instructions are received will not be voted. Under our articles of association, the minimum notice period required to convene a general meeting is seven days. When a general meeting is
convened, you may not receive sufficient notice of a shareholders meeting to permit you to withdraw your ordinary shares to allow you to cast your vote with respect to any specific matter. In addition, the depositary and its agents may not be
able to send voting instructions to you or carry out your voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but we cannot assure you that you will
receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in
which any vote is cast or for the effect of any such



24



---

##### Table of Contents

vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if your ordinary shares are not voted as you requested. In
addition, in your capacity as an ADS holder, you will not be able to call a shareholder meeting.

You may be subject to limitations on transfers of
your ADSs.

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

Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings, and you may not receive cash dividends if it is
impractical to make them available to you.

We may from time to time distribute rights to our shareholders, including rights to
acquire our securities. However, we cannot make rights available to you in the United States unless we register the rights and the securities to which the rights relate under the Securities Act of 1933, as amended, or the Securities Act, or an
exemption from the registration requirements is available. Also, under the deposit agreement, the depositary will not make rights available to you unless the distribution to ADS holders of both the rights and any related securities are either
registered under the Securities Act, or exempted from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration
statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your
holdings.

In addition, the depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian
receives on our ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary may, at its
discretion, decide that it is inequitable or impractical to make a distribution available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value
of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property, in which event you would not receive such distribution.

We are a Cayman Islands company and, because judicial precedent regarding the rights of shareholders is more limited under Cayman Islands law than under United
States law, you may have less protection of your shareholder rights than you would under United States law.

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

There is uncertainty regarding whether Cayman Islands courts would:



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



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

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

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



25



---

##### Table of Contents

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



26



---

##### Table of Contents

|ITEM 4. | INFORMATION ON THE COMPANY
|------- | --------------------------

4.A. History and Development of the
Company

4.A.1 Corporate Information

3SBio Inc. is an exempted company limited by shares in the Cayman Islands, incorporated in August 2006, under the Cayman Islands Companies Law (2004 Revision).

Our principal executive offices are located at No. 3 A1, Road 10, Shenyang Economy & Technology Development Zone, Shenyang 110027. Our telephone number at this address is (86-24) 2581-1820. Our investor
relations firm is Financial Dynamics, with offices at 88 Pine St, # 3201, New York, NY 10005, U.S.

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



| |  |  | we formed Collected Mind Limited, or Collected Mind, a British Virgin Islands company, in July 2006;
| | - |  | ----------------------------------------------------------------------------------------------------



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



| |  |  | we incorporated 3SBio Inc., a Cayman Islands company, which acquired 100% equity interest in Collected Mind in September 2006.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------

Please also refer to 4.C Organization Structure for information concerning our principal affiliated entities.

4.A.2 Principal Capital Expenditures and Divestures

In each of the fiscal years 2006, 2007 and 2008, 3SBios capital expenditures, or additions to fixed assets on the balance sheets, were RMB2.7 million, RMB17.3 million, and RMB36.8 million (US$5.4 million), respectively.
Historically, capital expenditures were incurred for purchases of production and office equipment, research laboratory, upgrading and constructing manufacturing facilities, and office renovations.

Our capital expenditures in 2009 are expected to be approximately RMB140-180 million, a major portion of which is expected to relate to constructing
our new manufacturing facilities.

4.B Business Overview

Overview

We are a leading, fully integrated, profitable biotechnology company focused on researching, developing,
manufacturing and marketing biopharmaceutical products primarily in China. Our recombinant, or genetically engineered, protein-based products and product candidates are designed to address large markets with significant unmet medical needs in
nephrology, oncology, supportive cancer care, inflammation and infectious diseases. We began operations in 1993. Our principal products are EPIAO ( LOGO) and TPIAO ( LOGO), and our legacy products are Intefen ( LOGO) and Inleusin ( LOGO). Our newest internally developed product, TPIAO, was launched in January 2006 and has continued to gain market acceptance, ending in each of the fiscal years 2006, 2007 and 2008 as our second largest revenue
contributor, accounting for 12.6%, 23.9% and 27.8% of our revenues for 2006, 2007 and 2008, respectively. Substantially all of our revenues and profits have been derived from these four existing products. We conduct our manufacturing and marketing
activities through our wholly owned subsidiary, Shenyang Sunshine.

We conduct our distribution and logistics activities through Liaoning
Sunshine. Liaoning Sunshine is a PRC limited liability company that is wholly owned by Dan Lou, our chairman. Liaoning Sunshine is a variable interest entity, or VIE, whose results are consolidated in our financial statements. For more details on
VIE, see Note 1Principal



27



---

##### Table of Contents

activities, reorganization and basis of presentation to our consolidated financial statements and 4.C Organizational Structure.

For the three years ended December 31, 2006, 2007 and 2008, EPIAO generated approximately 77.3%, 67.3% and 63.5% of our total revenues,
respectively. The decrease was due to the launch in early 2006 of our TPIAO and its quick market acceptance since launch, which has outpaced EPIAO growth and rapidly become our second largest revenue contributor. According to data derived from IMS
Health and internally, EPIAO has continued to be the market leader both in terms of revenues and sales volume, with market shares of 41.1% and 29.5%, respectively, at the year end of 2008. In 2007, we received from the SFDA licenses to produce and
sell pre-filled syringe EPIAO in 2,000 IU, 3,000 IU, 4,000 IU, 10,000 IU strengths. We launched the new EPIAO formats in June 2007. The pre-filled syringe EPIAO has been an important addition to our product portfolio because of its increased safety,
ease of use and the flexibility to self-administer the medication at home.

In each of the fiscal years 2006, 2007 and 2008, approximately
4.8%, 2.8% and 2.4%, respectively, of total revenues were generated by sales of our legacy products Inleusin and Intefen (excluding export sales of Inleusin and Intefen). Beginning in 2004, we began to reduce focus on these products due to increased
competition and pricing pressure.

We in-licensed a prescription iron sucrose supplement product, Tietai, which we began to market in
August 2006. Liaoning Sunshine holds the licenses to the Tietai Iron Sucrose Supplement. We are actively pursuing seven product candidates in late-, mid- and early-stage clinical and pre-clinical development, including a high dosage EPIAO and
NuPIAO, our second-generation EPIAO. We also have development programs for a new indication for our TPIAO to treat ITP; NuLeusin, a new version of IL-2 for the treatment of metastatic melanoma, a type of skin cancer, and metastatic renal cell
carcinoma, a type of kidney cancer; a HPV vaccine for the prevention of cervical cancer and an anti-TNF monoclonal antibody product candidate for treating rheumatoid arthritis, psoriasis, and potentially other inflammatory diseases. During 2008, we
completed Phase III programs for the high-dosage EPIAO, NuLeusin and the TPIAO label extension for the treatment of ITP, and submitted them for SFDA approval. Also during 2008, we also entered into a development and commercialization agreement with
AMAG to develop ferumoxytol, an intravenous iron replacement therapeutic agent, to treat iron deficiency anemia in CKD patients and in patients requiring hemodialysis.

We sell our products primarily in China. We also export a small portion of our products to certain developing countries, consisting primarily of Egypt, Pakistan, Thailand, Brazil, Korea, Mexico, Trinidad and Tobago,
where we have been approved to sell these products in compliance with local laws and regulations. While exports still constituted a small percentage of our total sales, at 3.4% in 2008, we intend to continue to develop exports in the future because
of growing opportunities, particularly in the global market for biosimilar products, which are new versions of biopharmaceutical products whose patents have expired.

4.B.1 Products

4.B.1.1 Principal Marketed Products

EPIAO(LOGO)

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

According to IMS Health,
an independent research firm, revenues from all EPO drug sales in China were estimated at approximately RMB479.4 million (US$69.6 million) in 2008, representing an approximately 17.7% compound annual growth rate, or CAGR, from 2003. EPIAO, as
tracked by IMS Health, has been ranked as the number one EPO drug since 2002 in terms of both units sold and revenues among the foreign and domestic biopharmaceutical companies marketing EPO drugs in China, with market shares of 41.1% and 29.5%,
respectively, at the year end of 2008. We have sold over 11.7 million vials of EPIAO since 1999.

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



28



---

##### Table of Contents

The high quality of EPIAO, a key factor contributing to EPIAOs success and leading market position
in China, was further validated by a study sponsored by Amgen. The study shows that among 12 EPO products manufactured in Asia, our EPIAO has the biophysical and biochemical properties that most resemble Epogen. The article was published in the
Journal of Pharmaceutical Sciences in July 2008.

In 2007, we received from the SFDA licenses to produce and sell pre-filled syringe EPIAO
in 2,000 IU, 3,000 IU, 4,000 IU and 10,000 IU strengths. The pre-filled syringe EPIAO is an important addition to our product portfolio because of its increased safety, ease of use and the flexibility to self-administer the medication at home. We
launched our pre-filled syringe EPIAO format in June 2007. We plan to complete pre-clinical trial in early 2009 for NuPIAO, our second-generation EPIAO product candidate. NuPIAO is designed to have a longer half-life relative to our first-generation
EPIAO. In addition, we completed the Phase III trial for a high dose (36,000 IU/vial) formulation of EPIAO, and have applied for SFDA approval in December 2008. If approved, we expect the product to be the first of its kind in the Chinese
market.

TPIAO (LOGO)

We launched TPIAO, our internally developed protein-based therapeutic product,
in January 2006. This product is a TPO indicated for the treatment of chemotherapy-induced thrombocytopenia, a deficiency of platelets. Platelets are disc-shaped cells in the blood that assist in coagulation and the arrest of bleeding by repairing
the walls of blood vessels. TPIAO represents the first protein-based therapeutic of its type approved for thrombocytopenia in China. We have a monitoring period for TPIAO through 2010, during which other pharmaceutical companies are prohibited from
manufacturing or importing a similar drug, except those whose applications for clinical trials were approved by the relevant Chinese authority prior to May 2005, the commencement of TPIAOs monitoring period. For 2008, our total revenues from
TPIAO sales were RMB67.6 million (US$9.9 million), accounting for 27.8% of our overall revenues for the year. With respect to TPIAO for the treatment of idiopathic thrombocytopenic purpura, or ITP, an immune system disorder in which the body
perceives platelets as foreign and destroys them, we have completed the clinical trial and filed for SFDA approval in 2008.

4.B.1.2 Legacy Products

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

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

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

4.B.1.3 In-Licensed Products

Tietai Iron Sucrose
Supplement (

LOGO). Tietai Iron Sucrose Supplement, an intravenously administered prescription drug that is designed to treat anemia associated with iron deficiency, is indicated for patients with end-stage renal disease requiring
iron replacement therapy. We in-licensed five-year exclusive PRC distribution rights for this product from Shenyang Borui Pharmaceutical Company Limited, or Borui, in May 2006. Tietai Iron Sucrose Supplement was launched in China in 2005 by Borui.
We began to generate revenues from the sale of Tietai Iron Sucrose Supplement in the beginning of 2007. We believe such product will be complementary to our EPIAO product lines as we have a strong brand reputation in the nephrology market in China,
and Tietai Iron Sucrose Supplement is designed to treat anemia associated with iron deficiency for patients with renal disease.

In 2008,
we entered into further agreements with Borui and Chengdu Tiantaisan Pharmaceutical Co. Ltd., or Tiantaishan, the manufacturer for this product, to acquire additional rights to Tietai Iron Sucrose Supplement, and have completed the transaction.

Ferumoxytol.We entered into a development and commercialization agreement with AMAG Pharmaceuticals, Inc., or AMAG,
for ferumoxytol, an intravenous iron replacement therapeutic agent being developed to treat iron deficiency anemia in chronic kidney disease (CKD) patients. The product, ferumoxytol, has not received regulatory approval in either U.S. or
the PRC as of December 31, 2008. We plan to initiate SFDA registration trials in 2009, upon receipt of US FDA approval by AMAG.



29



---

##### Table of Contents

4.B.1.4 Three-Year Net Revenues Breakdown by Products



|                |  |                     |  |       |      |  |         |      |       |   |                     |         |  |         |  |       |   |  |         |   |  |          |   
|--------------- |  | ------------------- |  | ----- | ---- |  | ------- | ---- | ----- | - | ------------------- | ------- |  | ------- |  | ----- | - |  | ------- | - |  | -------- | --
|                |  | For the December 31 | 
|                |  | 2006                |  |       | 2007 |  |         | 2008 |       |   | 2008 growth vs 2007 |        
|                |  | RMB'000             |  | %(1)  |      |  | RMB'000 |      | %(1)  |   |                     | RMB'000 |  | US$'000 |  | %(1)  |   |  | RMB'000 |   |  | growth % |   
|                |  |                     |  |       |      |  |         |      |      
|Domestics sales |  |                     |  |       |      |  |         |      |       |   |                     |         |  |         |  |       |   |  |         |   |  |          |   
|                |  |                     |  |       |      |  |         |      |      
|EPIAO           |  | 98,836              |  | 77.3  | %    |  | 121,220 |      | 67.3  | % |                     | 154,570 |  | 22,656  |  | 63.5  | % |  | 33,350  |   |  | 27.5     | % 
|                |  |                     |  |       |      |  |         |      |      
|TPIAO           |  | 16,056              |  | 12.6  | %    |  | 43,074  |      | 23.9  | % |                     | 67,585  |  | 9,906   |  | 27.8  | % |  | 24,511  |   |  | 56.9     | % 
|                |  |                     |  |       |      |  |         |      |      
|Intefen         |  | 4,995               |  | 3.9   | %    |  | 4,123   |      | 2.3   | % |                     | 4,989   |  | 731     |  | 2.1   | % |  | 866     |   |  | 21.0     | % 
|                |  |                     |  |       |      |  |         |      |      
|Inleusin        |  | 1,132               |  | 0.9   | %    |  | 1,027   |      | 0.6   | % |                     | 773     |  | 113     |  | 0.3   | % |  | (254    | ) |  | (24.7    | )%
|                |  |                     |  |       |      |  |         |      |      
|Tietai          |  |                    |  | 0.3   | %    |  | 3,206   |      | 1.8   | % |                     | 6,984   |  | 1,024   |  | 2.9   | % |  | 3,778   |   |  | 117.8    | % 
|                |  |                     |  |       |      |  |         |      |      
|Export sales    |  | 5,878               |  | 4.6   | %    |  | 6,784   |      | 3.8   | % |                     | 8,289   |  | 1,215   |  | 3.4   | % |  | 1,505   |   |  | 22.2     | % 
|                |  |                     |  |       |      |  |         |      |      
|Other           |  | 449                 |  | 0.4   | %    |  | 739     |      | 0.4   | % |                     | 55      |  | 8       |  | 0.0   | % |  | (684    | ) |  | (92.6    | )%
|                |  |                     |  |       |      |  |         |      |       |   |                     |         |  |         |  |       |   |  |         |   |  |          |   
|                |  |                     |  |       |      |  |         |      |      
|Total           |  | 127,780             |  | 100.0 | %    |  | 180,173 |      | 100.0 | % |                     | 243,245 |  | 35,653  |  | 100.0 | % |  | 63,072  |   |  | 35.0     | % 
|                |  |                     |  |       |      |  |         |      |       |   |                     |         |  |         |  |       |   |  |         |   |  |          |   



Notes:

|(1) | % of net revenues.
|--- | ------------------

4.B.1.5 Product Pipeline

We focus our research and development efforts on both novel and validated protein-based therapeutics for the treatment of diseases in the areas of
nephrology, oncology, supportive cancer care, inflammation and infectious diseases. Our product pipeline, which we expect will be a key contributor to our future growth, consists of seven product candidates in various stages of development. We
employ a market-driven approach to our research and development efforts, and our team utilizes the latest molecular biology and biochemical techniques and technologies to develop promising product candidates. Our diversified product pipeline
includes a number of next-generation protein-based therapeutics, including: Ferumoxytol, our in-licensed next generation IV Iron; a high dose (36,000 IU/vial) formulation EPIAO; NuPIAO, our second-generation EPIAO product candidate;
NuLeusin, our next-generation Inleusin product candidate; TPIAO for the treatment of ITP; a human papilloma virus, or HPV, vaccine for the prevention of cervical cancer; and an anti-TNF humanized monoclonal antibody product candidate for the
treatment of rheumatoid arthritis and other autoimmune diseases. We believe that each of these product candidates, if successfully developed and approved, would address significant market opportunities. We are required to conduct extensive
preclinical and clinical trials in order to generate safety and efficacy data to support a filing for approval by the SFDA.

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

The table below summarizes the respective point of development for our product candidates:



30



---

##### Table of Contents

LOGO



|* | The development and commercialization of our product candidates are subject to numerous risks and uncertainties, as noted in 3.D Risk factors.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------

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

4.B.1.6
Expanded Discussion of Products

Our Principal Products

EPIAO (

LOGO)

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



31



---

##### Table of Contents

According to IMS Health, revenues from all EPO drug sales in China were estimated at approximately
RMB479.4 million (US$69.6 million) in 2008, representing a CAGR of approximately 17.7% from 2003 to 2008.

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



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



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



| |  |  | In 2001, we received approval for anemia associated with chemotherapy in cancer patients with non-myeloid malignancies. These patients become anemic as a side
effect of chemotherapy and as a general complication associated with cancer. For this indication, on September 6, 2001 we were also granted a six-year exclusivity under an administrative protection period ending in September 2007, during which
other pharmaceutical companies were prohibited from importing or marketing a similar product.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We were among the first
biotechnology companies to introduce a recombinant form of EPO in China. According to IMS Health, our EPIAO was the most widely used recombinant EPO in China in each of the twenty eight quarters ending with the first quarter of 2009. EPIAO is on the
State Basic Medical Insurance and Work Injury Insurance Drug Catalogue, as amended, for the treatment of anemia associated with chronic renal failure, and on the provincial medicine catalog for the treatment of anemia associated with chemotherapy in
non-myeloid malignancies in certain provinces and cities such as Hubei Province and Shanghai Municipality. (See 4.B.11-b.5 Consumer  Health insurance system.) According to data from IMS Health, our EPIAO has been the market leader
in China since 2002 both in terms of revenues and sales volume, with market shares of 41.1% and 29.5% respectively in 2008.

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

We completed
the Phase III clinical trial for our high dose (36,000 IU/vial) formulation of our first generation EPIAO and applied for SFDA approval in 2008. We expect the product to be the first of its kind in China. In addition, we expect to complete in
early 2009 pre-clinical trial for our NuPIAO, our second-generation EPIAO. We have designed this product candidate to possess a longer half-life versus our first generation EPIAO, and we believe that, in this aspect, it is comparable to Amgens
Aranesp. We have already filed a patent application in China for NuPIAO.

We believe our competitive advantages in marketing our EPIAO lie
in the following areas:

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

Broadest applications and specifications. Since 2002, our EPIAO products have been the only EPO products
approved for each of the following three indications: anemia associated with chronic renal failure; red blood cell mobilization; and chemotherapy induced anemia in cancer patients. We provide our EPIAO products in four dosage forms to meet the needs
of our patients and their doctors. We applied for marketing approval from the SFDA of an additional high dosage form for use in chemotherapy induced anemia in 2008, which we believe, if approved, will be the highest approved dosage formulation of an
EPO drug on the Chinese market.

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

Strong brand awareness. We believe our sustained marketing efforts with medical practitioners and
our focus on pre-sale and post-sale services have established EPIAO and Shenyang Sunshine as well-recognized and well-received brands. We have been implementing a focused marketing strategy since launching the product in 1998. As part of this
strategy, our sales representatives promote our products to doctors by visiting hospitals to better educate physicians and develop brand awareness. We continue to expand our sales team to create a dedicated sales team which focuses specifically on
the oncology areas to supplement our existing focus in nephrology.



32



---

##### Table of Contents

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

In 2001, we completed a multicenter, randomized, double blind, placebo-controlled clinical
extension trial to evaluate the efficacy of EPIAO in 121 cancer patients with anemia resulting from their chemotherapy regimens. The primary endpoint of this clinical trial was restoration of hemoglobin and hematocrit levels. Patients received
either EPIAO or a placebo three times a week for 12 weeks. The results demonstrated that EPIAO was effective in restoring hemoglobin and hematocrit levels in this patient setting. We obtained SFDA approval for this indication in September 2001 and
launched EPIAO for this indication in December 2002. When we obtained the SFDA approval in September 2001, we were also granted a six-year administrative protection period for this indication of EPIAO. During the protection period, other
pharmaceutical companies were prohibited from manufacturing EPO drugs for the same indication or adding the same indication on the label of any existing drugs, pursuant to the Regulations for New Drug Protection and Related Technology Transfer.

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

TPIAO(LOGO)

Launched in January 2006, TPIAO is our recombinant human thrombopoietin product for the
treatment of chemotherapy-induced thrombocytopenia, or platelet deficiency, and represents the first such protein-based therapeutic approved and launched for this indication in China. TPO is a hemopoietic, or blood or blood cell-related, growth
factor protein found in plasma. TPO naturally stimulates production of megakaryoctyes, cells with a mutilobed nucleus in the bone marrow and liver, thereby releasing mature platelets and raising the circulating platelet count without increasing the
platelet function. Patients undergoing blood stem cell transplantation or cancer chemotherapy, or with late-stage liver diseases, or for unknown pathological reasons may suffer from platelet deficiency. We market TPIAO in two strengths: 7,500
IU/vial and 15,000 IU/vial. We began marketing our TPIAO products at the end of 2005 on a trial basis and recorded revenues of RMB16.1 million, RMB43.1 million and RMB67.6 million (US$9.9 million) in the years ended December 31, 2006, 2007 and
2008, respectively.

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

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

Although we obtained SFDA approval for TPIAO in May 2005, the SFDA has required us to conduct a Phase IV post-marketing trial on TPIAO as a supportive cancer care product. We expect that the three-arm trial will
include approximately 1,000 cancer patients being treated with chemotherapy. The primary endpoint will be time to recovery of platelet count to normal levels. We initiated this trial in the fourth quarter of 2006 and plan to release clinical data
for the trial in 2009.

TPIAO was approved in May 2005 for treatment of chemotherapy-induced thrombocytopenia with a monitoring period of
five years, which will expire in May 2010. During the monitoring period, other pharmaceutical companies are prohibited from manufacturing or importing a similar drug except those whose application for clinical trial were approved by the SFDA prior
to May 2005, the commencement of TPIAOs monitoring period, pursuant to the PRC Administrative Measures for the Registration of Medicine. Although we believe TPIAO is the only TPO-based therapeutic available in the Chinese market to date, we
are aware of another Chinese pharmaceutical company, CP Guojian, which we believe may be conducting clinical trials for a TPO-based therapeutic in China. If CP Guojian obtained the approval for any clinical trials prior to commencement of the
monitoring period for TPIAO, CP Guojian



33



---

##### Table of Contents

may not be prohibited from manufacturing and marketing its TPO product during TPIAOs monitoring period. We have no information on when CP Guojian plans
to bring their product to market, nor are we aware of any other company that is developing a similar product.

We have two issued patents
in relation to TPIAO.

Legacy Products

In addition to EPIAO and TPIAO, we market two protein-based therapeutics that have historically been significant contributors to our overall revenues. Due to unfavorable pricing and increased competition, we refocused our sales and
marketing efforts since early 2004 and no longer heavily market these products with our own sales force.

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

We obtained SFDA approval to market Intefen in April 1995 and launched the product in
December 1995. Our Intefen is available in lyophilized powder and injectable solution. Both the powder and solution come in three strengths: 1 MIU (million international unit)/vial, 3 MIU/vial and 5 MIU/vial. Revenues from our Intefen products were
RMB5.0 million (US$0.7 million) in 2008, representing an increase of 21.0% over 2007.

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

Inleusin(LOGO). Inleusin is our recombinant human interleukin-2, or IL-2, product that is structurally and functionally the same to naturally occurring IL-2, a body immune regulator. Inleusin is indicated for treatment of
renal cell carcinoma, melanoma, thoratic fluid build-up caused by cancer, and tuberculosis. IL-2 is a natural part of the bodys immune response to microbial infection. IL-2 promotes the proliferation and maturation of, among others, T-cells
and natural killer cells, both of which are capable of destroying cancer cells directly. IL-2 plays a role in the development of white blood cells or lymphocytes, and anti-inflammatory reactions which are part of the regulation of the immune
response.

We obtained SFDA approval to market Inleusin in the Chinese market in June 1995 and launched the product in March 1996. It was
the first interleukin product introduced into the Chinese market. Our Inleusin products come in four strengths: 0.1 MIU/vial, 0.2 MIU/vial, 0.5 MIU/vial and 1 MIU/vial. Revenues from our Inleusin products were RMB0.8 million (US$0.1 million) in
2008, representing a decrease of 24.7% over 2007.

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

In-Licensed Products

Tietai Iron Sucrose Supplement(LOGO). Tietai Iron Sucrose Supplement is a complex of polynuclear iron (III)-hydroxide, a bioavailable form of iron, in a sucrose solution for intravenous use. It is indicated for the treatment of iron deficiency
anemia in patients with end-stage renal disease and generally considered to have a superior safety profile compared to other forms of iron supplements. Tietai Iron Sucrose Supplement was launched in China in 2005 by Borui. We began to generate
revenues from the sale of Tietai Iron Sucrose Supplement in the beginning of 2007.



34



---

##### Table of Contents

In 2008, we entered into various agreements with Borui and Tiantaishan, to acquire additional rights to
Tietai Iron Sucrose Supplement. Pursuant these agreements, we hold the technical know-how and the exclusive national distribution right to this product until 2013.

Our Product Candidates

Ferumoxytol

We entered into a development and commercialization agreement with AMAG Pharmaceuticals, Inc. (AMAG), for ferumoxytol, an intravenous iron replacement therapeutic agent being developed to treat iron deficiency anemia in chronic
kidney disease (CKD) patients and in patients requiring hemodialysis. The product, ferumoxytol, has not received regulatory approval in either U.S. or the PRC as of December 31, 2008. 3SBio plans to initiate China SFDA registration
trials in 2009, assuming US FDA approval.

Under the terms of the agreement, AMAG granted us exclusive rights to develop and commercialize
ferumoxytol in the PRC, initially for CKD, and with an option to expand into additional indications. We will be responsible for the clinical development, registration, and commercialization of ferumoxytol in the PRC. We and AMAG will form a joint
steering committee, with equal representation from both parties, to oversee and guide the development and commercialization of ferumoxytol in China. The agreement has an initial duration of thirteen years and will be automatically renewed for a set
term if minimum sales thresholds are achieved. AMAG will retain all manufacturing rights for ferumoxytol and will provide, under a separate agreement, commercial supply to us at a predetermined supply price.

NuPIAO

We expect to complete in early 2009
pre-clinical testing and file an Investigation New Drug application with the SFDA to obtain approval for initiating clinical trials for NuPIAO, our second-generation EPIAO that is designed to have a longer half life and is expected to be comparable
in structure to Amgens Aranesp. Aranesp (darbepoietin alpha) is a novel erythropoiesis-stimulating protein with a longer circulating half-life than EPO and is currently the only second-generation EPO product approved by the US FDA. By using
molecular biology and recombinant DNA techniques, we synthesized a series of novel erythropoiesis-stimulating proteins and identified NuPIAO through an activity screening assay. Preliminary testing of NuPIAO has demonstrated an enhanced half-life
comparable to the half-life of darbepoietin alpha.

The effect of extended half-life and increased biologic activity as compared with EPIAO
would allow for less frequent administration, which is more convenient for both patient and caregiver. We have already filed a patent application in China for NuPIAO.

High-Dose EPIAO

In 2007, we completed enrollment registration of patients for a clinical
trial for our 36,000 IU/vial formulation of EPIAO, which is an initial step in the trial process. This product is designed for rapid restoration of hemoglobin to normal levels among cancer patients. we filed an application for SFDA approval of
the high-doage EPIAO at the end of 2008. There currently is no dosage form of this kind on the market in China. In 2006, we initiated a randomized placebo-controlled clinical trial in 200 cancer patients undergoing chemotherapy. In this trial,
100 patients are administered with a 36,000 IU/vial EPIAO once a week for eight weeks. The control group is administered the 10,000 IU/vial EPIAO once every other day. The primary endpoint is the restoration of hemoglobin level.

TPIAO for the treatment of ITP

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

We have completed a Phase III clinical trial to study TPIAO for the
treatment of ITP. The Phase III trial is a multicenter, randomized, placebo-controlled study in 120 ITP patients. All patients are administered Danazol, a synthetic steroid hormone drug routinely used to treat ITP. The treatment group is
administered an additional 1.0 μg (or microgram)/kg TPIAO once daily for 14 days. The primary endpoint of this trial is the measurement of platelet counts during the 14 day treatment. We filed for SFDA approval in 2008.



35



---

##### Table of Contents

NuLeusin (IL-2)

NuLeusin, our second-generation IL-2, is a genetically modified form of IL-2 possessing the same properties as naturally occurring IL-2. It is capable of activating the immune system to recognize and eliminate certain
kinds of cancer cells. The genetic modification enabled us to produce a high dosage form of IL-2 that has increased stability, which we believe has superior efficacy and tolerable therapeutic reactions profile. We believe NuLeusin is comparable to
Chirons Proleukin, which received US FDA approval for treatment of metastatic renal cell carcinoma in 1992, and for treatment of metastatic melanoma in 1998.

In 2005, we completed an open-label, nonrandomized Phase II trial of Nuleusin in 22 patients with metastatic renal cell carcinoma. Patients were treated subcutaneously with Nuleusin every 12 hours for the first five
days and then daily for five weeks. The primary endpoints were whether the patients respond to the treatment in terms of the reduction in size of their tumors after receiving treatment. The data demonstrated that Nuleusin effectively reduced the
size of the tumors in these patients. There were no serious adverse events reported in this study.

We have completed a multicenter,
open-label Phase III clinical study for NuLeusin for the treatment of metastatic melanoma and metastatic renal cell carcinoma and filed for SFDA approval in 2008.

SSS08 (HPV Vaccine)

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

Worldwide, cervical cancer is the second most common cancer in women; and according to the US FDA,
it is estimated to cause, on average, over 470,000 new cases and 233,000 deaths each year. In the majority of developing countries, cervical cancer remains the number one cause of cancer-related deaths among women, with women in developing countries
accounting for approximately 85% of both the yearly cases and deaths from cervical cancer worldwide.

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

SSS07 (Rheumatoid arthritis and other autoimmune diseases)

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

We are currently developing our anti-TNF monoclonal antibody product candidate in collaboration with Epitomics, Inc., a United States-based biotechnology company that is recognized for its proprietary high-affinity
rabbit monoclonal antibody technology. In March 2006, we entered into a collaboration agreement with Epitomics Inc. under which we were granted an exclusive, royalty bearing, non-transferable and perpetual license in the field of therapeutic usage
in order to develop and conduct clinical trials to obtain SFDA approval for the humanized rabbit anti-TNF alpha monoclonal antibody compounds. Under the agreement, we were also granted the right to manufacture, sell, market and distribute (including
distributions by engaging third parties) in China anti-TNF alpha monoclonal antibody therapeutics covered under the intellectual property rights owned by Epitomics. We were required to pay an upfront lump sum fee and a royalty payment equivalent to
a certain percentage of the net sales of therapeutic products should they reach market. Under the agreement, we granted Epitomics the right to use all intellectual property generated during the development of the therapeutic product. However, if
Epitomics uses this intellectual property for the development of the same therapeutic product outside of China, Epitomics shall pay us a royalty equivalent to a certain percentage of the financial benefit from



36



---

##### Table of Contents

licenses and product sales. If any new developments or agents are created as a result of the collaboration agreement, we will grant to Epitomics a
right of first refusal with regard to the commercialization of such agents. The details of a development program to commercialize the therapeutic products and the mechanism for calculating the royalties will be determined between
Epitomics and us at a later date.

4.B.2 Competition and Principal Markets

In China, our EPIAO competes primarily with Kirins ESPO, Roches Recormon and Yi Pei by Diao Group Chengdu Diao Jiuhong
Pharmaceutical Factory. Competitors for Tietai Iron Sucrose Supplement in China include Beijing Novartis Pharmaceutical Co., Ltd. and Nanjing Hencer Pharmaceutical Co., Ltd.

While we believe TPIAO, our newest internally developed protein-based therapeutic product, is the only recombinant human thrombopoietin, or TPO-based
therapeutic, available in the Chinese market to date, we are aware of another Chinese pharmaceutical company, Shanghai CP Guojian Pharmaceutical Company Limited, or CP Guojian, which we believe may be conducting clinical trials for a TPO-based
therapeutic in China. If CP Guojian had obtained the approval for any clinical trials prior to May 2005, the commencement of the monitoring period for TPIAO, CP Guojian may not be prohibited from manufacturing and marketing its TPO product during
TPIAOs monitoring period.

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

4.B.2.1 Export Sales

In addition to our domestic sales, we also export certain of our products to certain developing countries, where we have been approved to sell these
products in compliance with local laws and regulations. We initiated our export business in 2003 to a country in the Middle East through an export company in China. Increasingly in subsequent years, we have worked with local agents in countries in
the Middle East, South America and in Southeast Asia. Our export sales primarily consist of sales of EPIAO, Intefen and Inleusin, in the form of raw material in bulk format as concentrated solutions or as finished products. Export sales accounted
for 4.6%, 3.8% and 3.4% of our total revenues for the years ended December 31, 2006, 2007 and 2008, respectively.



|                      |  |                                  |  |       |  |      
|--------------------- |  | -------------------------------- |  | ----- |  | -----
|                      |  | For the years ended December 31,
|                      |  | 2006                             |  | 2007  |  | 2008 
|                      |  | (in thousands)                  
|Revenues by geography |  |                                  |  |       |  |      
|                      |  |                                  | 
|Egypt                 |  | 819                              |  | 1,052 |  | 407  
|                      |  |                                  | 
|Korean                |  | 11                               |  | 2,770 |  | 1,220
|                      |  |                                  | 
|Brazil                |  | 1,033                            |  | 737   |  | 1,124
|                      |  |                                  | 
|Pakistan              |  | 3,217                            |  | 546   |  | 3,123
|                      |  |                                  | 
|Thailand              |  |                                 |  | 906   |  | 1,279
|                      |  |                                  | 
|Bengal                |  |                                 |  | 218   |  | 694  
|                      |  |                                  | 
|Rest of World         |  | 798                              |  | 555   |  | 442  
|                      |  |                                  | 
|Total Revenues        |  | 5,878                            |  | 6,784 |  | 8,289

4.B.3 Seasonality of Business

Not applicable.

4.B.4 Supply of Raw Material

Our top five suppliers and the single largest supplier as percentages of our overall cost of revenues were 20.8% and 4.8%, respectively, for the year
ended December 31, 2008. We primarily source our raw materials from a variety of



37



---

##### Table of Contents

international suppliers through their local distributors. We do not anticipate any significant fluctuations in price or any significant disruptions in the
supply of our raw materials in the near future. It is our current belief that our switching cost for our suppliers is not high because alternative suppliers are readily available.

4.B.5 Marketing, Sales and Distribution

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

We maintain a sales and marketing force in 30 provinces and major cities in China, including the municipalities of Beijing and Shanghai
and the city of Guangzhou. As of December 31, 2008, our principal products EPIAO and TPIAO were marketed by our 221 sales and marketing professionals and sold by our network of approximately 80 distributors to healthcare providers including,
based on our internal estimates, approximately 2,000 hospitals, clinics and dialysis centers.

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

Our network of approximately 80 distributors distributes our own and
our in-licensed products. We select our distributors based on their reputation, market coverage and sales experience. We conduct credit assessments of each of our distributors or hospital customers before we enter into a purchase agreement. We do
not have an exclusive distribution arrangement with any of our distributors, and some of our distributors market competing brands. For every calendar year, we enter into a distribution agreement with each distributor which provides general terms for
the distribution arrangement, such as the designated sales area, place and method for delivery, targets for annual sales volume and receivable collection. Under our standard distribution agreement, a distributor cannot sell our products outside the
designated geographical area without first obtaining our written consent. The term of a distributor contract is typically for one year, reflecting the prevailing pricing arrangement under the local competitive bidding process. The price under the
agreement may be adjusted by a number of factors, such as the outcome of the competitive bidding process, or regulatory changes during the calendar year.

Hospitals in China typically purchase medical products on credit and sometimes do not make payment until more than a year after the purchase. By contrast, the average credit terms that we give to our distributors
range from 60 days to 180 days, with the majority averaging around 90 days from the date of our delivery, regardless of whether payments from the hospital to the distributors are received. We believe by selling our products through distributors, we
achieve an improved collection rate on our accounts receivable and reduce bad debt expense.

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

We have established relationships with many hospital administrators at
prominent hospitals and other leading medical institutions, many of whom we believe are advocates for our products. We believe our relationships with these major hospitals and medical institutions raise our profile, enhance awareness of our products
in the medical community, medical equipment and supplies industry and among patients, provide us with valuable clinical data to improve our products and keep us abreast of industry trends and developments, all of which in turn helps us market and
sell our products. In 2008, much of our sales and marketing efforts were focused on educating doctors and clinicians on the value and benefits of EPO in the oncology setting.

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

We have adopted a Code of Ethics (See Exhibit 11.1) that applies to all our employees, which, among other requirements, prohibits improper payments and
gifts in our business, and enforce compliance with applicable laws and regulations, including the United States Foreign Corrupt Practice Act.

A significant amount of our revenue is generated by product sales to relatively few distributors, whose mix changes from year to year. For in each of the past three years, sale to our top five distributors accounted for approximately 30% to
40% of our sales revenues. Sales to our top ten distributors accounted for approximately 54%, 53% and 55% of our total revenues for the years ended December 31, 2006, 2007 and 2008, respectively.

4.B.6 Research and Development

As of
December 31, 2008, our research and development team consisted of 28 research personnel and medical professionals. Our research and development staff consists of medical and biotechnology professionals, including two



38



---

##### Table of Contents

PhDs, two MDs, and twelve holders of masters degrees, many of whom have experience in the healthcare and biotechnology research fields, including
experience working in research institutions and hospitals and in proceeding through the SFDA drug approval process.

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

Our research and development expenses for the years ended December 31, 2006, 2007 and 2008 were RMB6.1 million, RMB11.6 million and RMB22.5 million (US$3.3 million), respectively.

4.B.7 Intellectual Property

We currently place
significant reliance on exclusivity under administrative protection periods to provide us with a competitive advantage. TPIAO for the treatment of chemotherapy-induced thrombocytopenia enjoys exclusivity under an administrative protection period
till May 2010. See 4.B.11 Regulations for general discussions on the intellectual property regulations in Chinese pharmaceutical industry.

We expect that we will, in the future, rely on patents to protect our proprietary technology. While we currently expect to seek patent protection only in China, we may opportunistically seek patents to protect our
innovations in other jurisdictions in the future. In China, patents relating to pharmaceutical inventions are effective for 20 years from the date the patent application is filed.

We currently own five issued PRC patents relating to:



| |  |  | the composition of matter of TPIAO, expiring in 2015;
| | - |  | -----------------------------------------------------



| |  |  | a method of manufacturing TPIAO, expiring in 2020;
| | - |  | --------------------------------------------------



| |  |  | a method and application thereof relating to our manufacturing processes, expiring in 2021;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | a formulation of Interferon-alpha that does not relate to our marketed products, expiring in 2022; and
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | a formulation of EPIAO, expiring in 2023.
| | - |  | -----------------------------------------

We have also filed two pending PRC patent applications relating to manufacturing of interleukin analogues and a novel erythropoiesis stimulating protein analogue. We do not own any foreign patents and have not filed any patent applications
outside of the PRC. In addition, we own 11 registered trademarks relating to EPIAO, TPIAO, Intefen and Inleusin.

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

We also rely on trade
secrets, proprietary know-how and continuing technological innovation to develop and maintain a competitive position in our product areas. We generally require our employees, consultants and advisors to enter into confidentiality agreements. These
agreements provide that all confidential information developed or made known to the individual during the course of the individuals relationship with us is to be kept confidential and not disclosed to third parties except under specific
circumstances. In the case of our employees, the agreements provide that all of the technology which is conceived by the individual during the course of employment is our exclusive property. The development of our technology and many of our
processes are dependent upon the knowledge, experience and skills of key scientific and technical personnel. Further, as a matter of company policy, all scientific and technical employees have entered into agreements that generally require
disclosure and assignment to us of ideas, developments, discoveries and inventions made by them. However, these agreements may not effectively prevent disclosure of our confidential information or provide meaningful protection for our confidential
information if there is unauthorized use or disclosure.

The research, development and commercialization of a biopharmaceutical often
involve alternative development and optimization routes, which are presented at various stages in the development process. The preferred routes cannot be predicted at the outset of a research and development program because they will depend upon
subsequent discoveries and test results. There are numerous third-party patents in our field, and it is possible that to pursue the preferred



39



---

##### Table of Contents

development route of one or more of our products we will need to obtain a license to a patent, which would decrease the ultimate profitability of the
applicable product. If we cannot negotiate a license, we might have to pursue a less desirable development route or terminate the program altogether. PRC patent and trademark laws are discussed in greater detail in 4.B.11Patent and
trademark protection.

We cannot assure you that any of our intellectual properties will be able to provide us with meaningful
protection or commercial advantages. Despite any measures we take to protect our intellectual property, no assurance can be made that unauthorized parties will not attempt to copy aspects of our products, manufacturing processes or our proprietary
technology or to otherwise obtain and use information that we regard as proprietary. The protection of intellectual property rights and proprietary information in China may not be as effective as in the United States or other countries. For example,
implementation and enforcement of PRC intellectual property-related laws have historically been deficient and ineffective and may be hampered by corruption and local protectionism. Policing unauthorized use of proprietary technology is difficult and
expensive, and we might need to resort to litigation to enforce or defend patents issued to us or to determine the enforceability, scope and validity of our proprietary rights or those of others. The experience and capabilities of PRC courts in
handling intellectual property litigation varies, and outcomes are unpredictable. Further, such litigation may require significant expenditure of cash and management efforts and could harm our business, financial condition and results of operations.

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

4.B.8 Manufacturing

Our Shenyang-based manufacturing operations consist of bulk manufacturing and formulation, fill and finish activities for the production of EPIAO, TPIAO, Intefen, Inleusin and other product candidates for both
clinical and commercial purposes. We also manufacture our product candidates for clinical trials at this facility. All fill, finish and packaging activities in relation to our domestic sales are conducted at our Shenyang facility. A portion of our
exported products are packaged in our Shenyang facility, and the rest is shipped overseas in bulk format as concentrated solutions of recombinant human erythropoietin, interferon alpha-2a or interleukin-2 and finished and packaged locally. Our
Shenyang facility is re-certified in accordance with Chinese current GMP, and such GMP certificate is valid for five years, until 2010. We specialize in manufacturing proteins with mammalian expression systems, although we are capable of
manufacturing with bacterial expression systems. Our facilities give us the capability to manufacture products at up to 105-grams scale using bacterial production systems for our legacy products and up to 270-grams scale using mammalian cell
expression systems for EPIAO and TPIAO.

We generally produce our products based on quarterly order forecasts and anticipated additional
orders that we are reasonably confident will be obtained. Lead times for raw materials and components vary and depend on the specific supplier and the availability and demand for the raw materials. Raw materials and supplies are generally available
from various suppliers in quantities adequate to meet our needs. However, we have single-source suppliers for some components and value-added steps, including EPO Elisa Kit by R&D systems Inc, GIBCO cell culture medium by Invitrogen Inc.,
Pharmacia chromatography purification medium by GE Healthcare, a division of GE, and Disc, a microcarrier for cell cultures, by New Brunswick Scientific Inc. We have not experienced any disruptions in the supply of these raw materials in the past.
Unlike in the United States, we do not need SFDA approval to change suppliers. In the event that any one of these supply arrangements or agreements is terminated or the ability of any one of these suppliers to perform under our agreements were to be
materially adversely affected, we believe that we will be able to locate, qualify and enter into an agreement with a new supplier on a timely basis. We maintain long-term relationships with most of our suppliers and place orders from these suppliers
from time to time on an as-needed basis. We expect that our existing manufacturing facilities and outside sources will allow us to meet near-term manufacturing needs for our commercial products and other products that are in clinical trials.

As part of our overall strategy to increase our manufacturing capacity, we have commenced construction of new manufacturing facilities,
which commenced November 2007. We aim to complete construction on our new facilities within next 9-18 months, which will not only support the future growth of EPIAO in China, but serve as a first step towards exploring global biosimilar
opportunities.

4.B.8.1 Quality Control and Assurance

We have our own independent quality control system and devote significant attention to quality control for the designing, manufacturing and testing of our products. We have established a quality control system in
accordance with SFDA regulations. Our four laboratories fully comply with the Chinese GMP guidelines and are staffed with highly educated and skilled technicians to ensure quality of all batches of product release. We implemented European
Pharmacopoeia 2002 version on quality control in 2004. European Pharmacopeia of the Council of Europe is a wide range of active substances and excipients used to prepare pharmaceutical products in Europe.



40



---

##### Table of Contents

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

4.B.9 Facilities

Our state-of-art manufacturing facilities are located in the Shenyang
Economy & Technology Development Zone, where we own three buildings with an aggregate of approximately 3,000 square meters of office, research and development and manufacturing spaces, including cleanrooms of approximately 1,600 square
meters. Our facilities in Shenyang consist of three separate divisions capable of producing bulk products, including bacterial expressed proteins and manufacturing expressed proteins, and formulating final products. Our manufacturing facilities are
equipped with state-of-art and top-line branded equipment, such as bioreactors, centrifuges, chromatography systems and lyophilizers. We own all of our manufacturing facilities in Shenyang. Please refer to 4.B.8 Manufacturing for
productive capacity, products, and other information. Our manufacturing facilities are compliant with Chinese environment regulations.

We
are building new manufacturing facilities in Shenyang to meet increased demand for our products. We commenced construction in November 2007, and have expended approximately RMB 41.8 million as of December 31, 2008 in this construction
project. At present, we expect, barring any disruptive or delaying circumstances, to substantially complete the construction within the next 9 to 18 months, with approximately RMB140-175 million budgeted in additional expenditures. Upon
completion, the new facilities are estimated to increase our manufacturing capacity by three to five times, subject to actual conditions and other operating parameters. We have funded, and expect to fund, such capital expenditures with a combination
of cash generated from operating activities and proceeds from our initial public offering in February 2007.

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

The following table contains information concerning significant real
properties owned by us through Shenyang Sunshine:



|                |  |                                                                              
|--------------- |  | -----------------------------------------------------------------------------
|Location        |  | General Character, Size and Use of Property                                  
|Shenyang, China |  | 3,000 square meter, used for office, manufacturing, research and development.
|                | 
|Shenyang, China |  | 400 square meter, used for general corporate purposes.                       
|                | 
|Beijing, China  |  | 1,000 square meter, used for sales and marketing.                            

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

4.B.10 Employees

We had 313, 373 and 483 employees
as of December 31, 2006, 2007 and 2008, respectively. The following table sets forth the number of our employees categorized by function as of December 31, 2008:



|                           |  |                        
|-------------------------- |  | -----------------------
|                           |  | As of December 31, 2008
|Manufacturing and services |  | 114                    
|Research and development   |  | 28                     
|General and administration |  | 97                     
|Marketing and sales        |  | 244                    
|Total                      |  | 483                    

From time to time, we also employ independent contractors to support our marketing and sales and
clinical support and research. We plan to hire additional employees for marketing and sales, customer service and manufacturing and assembly as we grow our business. None of our employees is represented by a labor union and we consider our
relationship with our employees to be good.

In accordance with applicable regulations in the PRC, we participate in a pension contribution
plan, a medical insurance plan, an unemployment insurance plan and a personal injury insurance plan for our employees. We have made adequate provisions in accordance with applicable regulations.



41



---

##### Table of Contents

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

4.B.11 Regulations

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

4.B.11-a Regulatory authorities

In the PRC, the
State Food and Drug Administration, or the SFDA, is the authority that monitors and supervises the administration of pharmaceutical products and medical appliances and equipment as well as food, health food and cosmetics. The SFDAs
predecessor, the State Drug Administration, or the SDA, was established on August 19, 1998 as an organization under the State Council to assume the responsibilities previously handled by the MOH, the State Pharmaceutical Administration Bureau
of the PRC and the State Administration of Traditional Chinese Medicine of the PRC. The SFDA was founded in March 2003 to replace the SDA and reported to the State Council until the MOH was reorganized and assumed administrative responsibility for
the SFDA in March 2008.

The primary responsibilities of the SFDA include:



| |  |  | monitoring and supervising the administration of pharmaceutical products, medical appliances and equipment as well as food, health food and cosmetics in the PRC;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | formulating administrative rules and policies concerning the supervision and administration of food, health food, cosmetics and the pharmaceutical industry;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | evaluating, registering and approving of new drugs, generic drugs, imported drugs and traditional Chinese medicine;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | approving and issuing permits for the manufacture and export/import of pharmaceutical products and medical appliances and equipment and approving the establishment
of enterprises to be engaged in the manufacture and distribution of pharmaceutical products; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | examining and evaluating the safety of food, health food and cosmetics and handling significant accidents involving these products.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------

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

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

Drug administration laws and regulations

The PRC Drug Administration Law as promulgated by the Standing Committee of the National Peoples Congress in 1984 and the Implementing Measures of the PRC Drug Administration Law as promulgated by the MOH in
1989 have laid down the legal framework for the establishment of pharmaceutical manufacturing enterprises, pharmaceutical trading enterprises and for the administration of pharmaceutical products including the development and manufacturing of new
drugs and medicinal preparations by medical institutions. The PRC Drug Administration Law also regulates the packaging, trademarks and the advertisements of pharmaceutical products in the PRC.

Certain revisions to the PRC Drug Administration Law took effect on December 1, 2001. They were formulated to strengthen the supervision and
administration of pharmaceutical products, and to ensure the quality of pharmaceutical products and the safety of pharmaceutical products for human use. The revised PRC Drug Administration Law applies to entities and individuals engaged in the
development, production, trade, application, supervision and administration of pharmaceutical products. It regulates and prescribes a framework for the administration of pharmaceutical manufacturers, pharmaceutical trading companies, medicinal
preparations of medical institutions and the development, research, manufacturing, distribution, packaging, pricing and advertisements of pharmaceutical products.

The PRC Drug Administration Implementation Regulations promulgated by the State Council took effect on September 15, 2002 to provide detailed implementation regulations for the revised PRC Drug Administration
Law.



42



---

##### Table of Contents

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

Examination and approval of new medicines

In October 2002, the SFDA promulgated the Administrative
Measures on the Registration of Pharmaceutical Products, which were later revised on February 28, 2005 and subsequently replaced by the new Administrative Measures on the Registration of Pharmaceutical Products on October 1, 2007. Under
the current applicable regulations, new medicines generally refer to those medicines that have not yet been marketed in the PRC. In addition, certain marketed medicines may also be treated as new medicines if the type or application method of such
medicines has been changed or new therapeutic functions have been added to such medicines. According to the prevailing Administrative Measures on the Registration of Pharmaceutical Products, the approval of new medicines requires the following
steps:



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



| |  |  | if all the requirements are complied with, the SFDA will issue a notice of acceptance of application and proceed with its assessment on whether or not to grant the
approval for conducting the clinical research on the new medicine;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | after obtaining the SFDAs approval for conducting the clinical research, the applicant may proceed with the relevant clinical research (which is generally
conducted in three phases for a new medicine under the Medicine Registration Measures) at institutions with appropriate qualification:
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



| |  |  | after completion of the relevant clinical research, the applicant shall submit its clinical research report together with the relevant supporting documents to the
drug regulatory authorities at the provincial level and shall provide raw materials of the standard products to the PRC National Institute for the Control of Pharmaceutical and Biological Products;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | the PRC National Institute for the Control of Pharmaceutical and Biological Products will arrange for the examination of the sample new drug supplied by the
relevant medicine examination institutes and will then issue the examination result report to the SFDA; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | if all the regulatory requirements are satisfied, the SFDA will grant a new drug certificate and a pharmaceutical approval number (assuming the applicant has a
valid pharmaceutical manufacturing permit and the requisite production conditions for the new medicine have been met).
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Permits and
licenses for manufacturing and registration of drugs

Production License. To manufacture pharmaceutical products in the PRC,
a pharmaceutical manufacturing enterprise must first obtain a pharmaceutical manufacturing permit issued by the relevant pharmaceutical administrative authorities at the provincial level where the enterprise is located. Among other things, such a
permit must set 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. The enterprise is required to apply for renewal of such permit within six months prior to its expiry and will be subject to
reassessment by the issuing authorities in accordance with then prevailing legal and regulatory requirements for the purposes of such renewal.



43



---

##### Table of Contents

Business Licenses. In addition to a pharmaceutical manufacturing permit, the manufacturing
enterprise must also obtain a business license from the administrative bureau of industry and commerce at the local level after it has obtained the requisite pharmaceutical manufacturing permit. The name, legal representative and registered address
of the enterprise specified in the business license must be identical to that set forth in the Pharmaceutical manufacturing permit.

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

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

Chinas Guidelines on Good Manufacturing Practices, as amended in 1998, or the Guidelines, took effect on
August 1, 1999 and set the basic standards for the manufacture of pharmaceuticals. These Guidelines cover issues such as the production facilities, the qualification of the staff at the management level, production plant and facilities,
documentation, material packaging and labeling, inspection, production management, sales and return of products and customers complaints. On October 23, 2003, the SFDA issued the Notice on the Overall Implementation and Supervision of
Accreditation of Good Manufacturing Practice Certificates for Pharmaceuticals, which required all pharmaceutical manufacturers to apply for the GMP certificates by June 30, 2004. Those enterprises that failed to obtain the GMP certificates by
December 31, 2004 would have their pharmaceutical manufacturing permit revoked by the drug administrative authorities at the provincial level. The GMP certificate is valid for a term of five years and application for renewal must be submitted
six months prior to its expiration date.

4.B.11-b.3 Distribution

Distribution of pharmaceutical products

According to the PRC Drug Administration Law and its
implementing regulations and the Administrative Measures on Oversight of Distribution of Pharmaceutical Products, a manufacturer of pharmaceutical products in the PRC can only engage in the trading of the pharmaceutical products that the
manufacturer has produced itself. In addition, such manufacturer can only sell its products to:



| |  |  | wholesalers and retailers holding Pharmaceutical trading permits;
| | - |  | -----------------------------------------------------------------



| |  |  | other holders of pharmaceutical manufacturing permits; or
| | - |  | ---------------------------------------------------------



| |  |  | medical practitioners holding Medical practice permits.
| | - |  | -------------------------------------------------------

A pharmaceutical manufacturer in the PRC is prohibited from selling its products to end-users, or individuals or entities other than holders of Pharmaceutical trading permits, the pharmaceutical manufacturing permits
or the Medical practice permits.

The granting of a Pharmaceutical Trading Permit to wholesalers shall be subject to approval of the
provincial level FDA, while the granting of a retailer permit shall be subject to the approval of the FDA above the county level. Unless otherwise expressly approved, no pharmaceutical wholesaler may engage in the retail of pharmaceutical products,
and neither may pharmaceutical retailers engage in wholesale.

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



| |  |  | Personnel with pharmaceutical expertise as qualified according to law;
| | - |  | ----------------------------------------------------------------------



| |  |  | Business site, facilities, warehousing and sanitary environment compatible to the distributed pharmaceutical products;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | Quality management system and personnel compatible to the distributed pharmaceutical products; and
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | Rules and regulations to ensure the quality of the distributed pharmaceutical products.
| | - |  | ---------------------------------------------------------------------------------------

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

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



44



---

##### Table of Contents

Pharmaceutical distributors can only distribute pharmaceutical products obtained from those with a
pharmaceutical manufacturing permit and a Pharmaceutical Trading Permit.

Restrictions on Foreign Ownership in Pharmaceutical Wholesale and Retail
Businesses

Under Foreign Investment Industrial Guidance Catalogue, as amended, foreign investment in wholesale and retail sales and
distribution of pharmaceutical products is restricted.

The Administration Rules on Foreign Investment in Sales and Distribution and
related administrative pronouncements permit foreign companies to establish or invest in wholly-foreign-owned enterprises or joint ventures that engage in wholesale or retail sales of pharmaceutical productss in China, subject to certain review and
filing requirements.

Price control and Competitive Bidding

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

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

In each province where we market our products, we participate in a government-sponsored competitive bidding process every year or every few years for procurement by state-owned hospitals of a medicine included in the provincial medicine
catalogs. A government-appointed committee reviews bids submitted by pharmaceutical companies and selects one or more medicines for treatment of a particular medical condition. The selection is based on a number of factors, including bid price,
quality and manufacturers reputation and service. The bid price of the selected medicine will become the price required for purchases of that medicine by all state-owned hospitals in the relevant province or local district. This bidding
mechanism was first instituted in 2004 and has been adopted across PRC, and, according to our PRC counsel, with provincial variations.

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

Our pharmaceutical manufacturing enterprise permit was issued by Liaoning Food and Drug Administration, or
Liaoning FDA, on January 1, 2006 and will expire on December 31, 2010. Liaoning Sunshines pharmaceutical distribution enterprise permit was issued by Liaoning FDA on January 1, 2005 and will expire on December 31, 2009. Our
GMP certificate in relation to TPIAO was issued by the SFDA on July 29, 2005 and will expire on July 28, 2010. Our GMP certificate in relation to EPIAO and our legacy products was issued by the SFDA on April 14, 2005 and will expire
on April 14, 2010.

4.B.11-b.5 Consumer

Product liability

In addition to the strict new drug approval process, certain PRC laws have been promulgated to protect
the rights of consumers and to strengthen the control of medical products in the PRC. Under current PRC law, manufacturers and vendors of defective products in the PRC may incur liability for loss and injury caused by such products. Pursuant to the
General Principles of the Civil Law of the PRC, or the PRC Civil Law, promulgated on April 12, 1986, a defective



45



---

##### Table of Contents

product which causes property damage or physical injury to any person may subject the manufacturer or vendor of such product to civil liability for such
damage or injury.

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

On October 31, 1993, the PRC Law on the Protection of the Rights and Interests of Consumers, or the Consumers Protection Law, was promulgated and
provides further protection to the legal rights and interests of consumers in connection with the purchase or use of goods and services. At present, all business operations must observe and comply with the Consumers Protection Law when they provide
their goods and/or consumer services.

Health insurance system

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

Reimbursement under the National Medical
Insurance Program

As of the end of 2006, approximately 157.4 million people were enrolled into the national medical insurance
program. The Ministry of Labor and Social Security, together with other government authorities, determines which medicines are to be included in or removed from the Catalogue for the national medical insurance program, and under which category a
medicine should fall, both of which affect the amounts reimbursable to program participants for their purchases of those medicines. These determinations are based on a number of factors, including price and efficacy. A national medical insurance
program participant can be reimbursed for the full cost of a Category A medicine and 80 to 90% of the cost of a Category B medicine. Although it is designated as a national program, the implementation of the national medical insurance program is
delegated to various provincial governments, each of which has established its own medicine catalog. A provincial government must include all Category A medicines listed in the Catalogue in its provincial medicine catalog, but may use its discretion
based on its own selection criteria to add other medicines to, or exclude Category B medicines listed in the Catalogue from, its provincial medicine catalog, so long as the combined numbers of the medicines added and excluded do not exceed 15% of
the number of the Category B medicines listed in the Catalogue. In addition, provincial governments may not downgrade a nationally classified Category A medicine to Category B. The total amount of reimbursement for the cost of prescription and
over-the-counter medicines, in addition to other medical expenses, for an individual program participant in a calendar year is capped at the amount in that participants individual account. The amount in a participants account varies,
depending upon the amount of contributions from the participant and his or her employer. Generally, program participants who are from relatively wealthier eastern parts of China and relatively wealthier metropolitan centers have greater amounts in
their individual accounts than those from less developed provinces.

Prescription regulations

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

4.B.11-c Intellectual Property

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

The PRC first allowed patents for the protection of proprietary rights, as set forth in the 1985 China Patent Law (revised on December 27, 2008, to
take effect as of October 1, 2009). Pharmaceutical inventions were not patentable



46



---

##### Table of Contents

under the China Patent Law until 1994. Patents relating to pharmaceutical inventions are effective for 20 years from the date the patent application is
filed.

Patent prosecution

The Chinese
patent prosecution system is different from the United States system in a number of ways. The Chinese patent system, like most countries other than the United States, adopts the principle of first to file. This means that, where more
than one person files a patent application for the same invention, a patent will be granted to the person who first filed the application. The United States uses a principle of first to discover to determine the granting of patents. In addition, the
PRC requires absolute novelty in order for an invention to be patentable. Pursuant to this requirement, any prior written or oral publication, demonstration or use before filing the patent application prevents an invention from being patented in the
PRC. Conversely, inventors in the United States have a one year grace period after publication of the invention in which they may file a patent. Patents issued in the PRC are not enforceable in Hong Kong, Taiwan or Macau, each of which has
independent patent systems. Patents are filed at the State Intellectual Property Office, or SIPO, in Beijing.

Patent enforcement

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

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

Compulsory license

Under the Patent Law, where a person possesses the means to utilize a patented
technology, but such person cannot obtain a license from the patent holder on reasonable terms and in a reasonable period of time, SIPO is authorized to grant a compulsory license. A compulsory license can also be granted where a national emergency
or any extraordinary state of affairs occurs or where the public interest so requires. We do not believe a compulsory license has yet been granted by the SIPO.

International patent treaties

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

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

4.B.11-c.2 Trademarks

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

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



47



---

##### Table of Contents

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



| |  |  | use of a trademark that is identical with or similar to a registered trademark in respect of the same or similar commodities without the authorization of the
trademark registrant;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | sale of commodities infringing upon the exclusive right to use the trademark;
| | - |  | -----------------------------------------------------------------------------



| |  |  | counterfeiting or making, without authorization, representations of a registered trademark of another person, or sale of such representations of a registered
trademark as were counterfeited, or made without authorization;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changing a registered trademark and putting commodities on which the changed registered trademark is used into the market without the consent of the trademark
registrant; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | otherwise infringing upon the exclusive right of another person to use a registered trademark.
| | - |  | ----------------------------------------------------------------------------------------------

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



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



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



| |  |  | injunctions;
| | - |  | ------------



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



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



| |  |  | The amount of compensation is calculated according to either the gains acquired by the infringer from the infringement during the infringement, or the loss suffered
by the trademark owner, including expenses incurred by the trademark holder to deter such infringement. If it is difficult to determine the gains acquired by the infringer from the infringement, or the loss suffered by the trademark owner, the court
may elect to award compensation of not more than RMB500,000.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

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

In April 1999, the SFDA promulgated the Regulations for New Drug Protection and Related Technology Transfer, or the 1999 Regulations, which provided a six to twelve year administrative protection period for different
categories of new drugs. During the protection period of a new drug manufactured by a specific pharmaceutical company, other enterprises or individuals are prohibited from manufacturing a similar drug or expanding the label of any existing drug to
include the same indication. In December 2002, the 1999 Regulations were replaced by the Administrative Measures on the Registration of Pharmaceutical Products, or the 2002 Regulations, which were later revised in February 2005. However, according
to an official notice of the SFDA, administrative protection periods granted prior to September 2002 pursuant to the 1999 Regulations will stay valid until their respective expiration dates.

According to the 2002 Regulations, with a view to protecting public health, the SFDA may provide for administrative monitoring periods of up to five
years for new drugs approved to be manufactured, to continually monitor the safety of those new drugs. The key element in determining the availability and duration of the monitoring period is the safety of the new drug. The SFDA will consider, among
other things, whether the new drug has been previously launched domestically or overseas, what type of new drug it is and what process and technology are involved in the production of the new drug. For example, for a biochemical product that has
never been launched domestically or overseas, a five-year monitoring period will be granted; for a biochemical product that has been launched overseas but not domestically, only a four-year monitoring period will be granted.

During the monitoring period of a new drug, the SFDA will not approve any other enterprises application to manufacture or import a similar new
drug. The only exception is that the SFDA will continue to handle any application if, prior to the commencement of the monitoring period, the SFDA has already approved the applicants clinical trial for a similar new drug. If such application
conforms to the relevant provisions, the SFDA may approve such applicant to manufacture or import the similar new drug during the remainder of the monitoring period.



48



---

##### Table of Contents

Any applicant who is not satisfied with the SFDAs decision can appeal within ten days of its
receipt of the SFDAs decision. If the applicant is dissatisfied with the result of the appeal, it may apply for an administrative review with a special committee consisting of senior officials of the SFDA or file an administrative lawsuit with
a peoples court in China.

We rely on exclusivity under administrative protection periods to provide us with a competitive advantage.
TPIAO for the treatment of chemotherapy-induced thrombocytopenia enjoys exclusivity under an administrative protection period till May 2010.

4.B.11-d PRC Enterprise Income Tax

The PRC government has provided various incentives to high
technology companies in order to encourage development of the high technology industry and foreign investments. Such incentives include reduced tax rates and other measures.

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

There is a transition period for enterprises, whether foreign-invested or domestic, that were receiving preferential tax treatments granted by relevant
tax authorities at the time the EIT Law became effective. Enterprises that are subject to an enterprise income tax, or EIT, rate lower than 25% may continue to enjoy the lower rate and gradually transition to the new tax rate within five years after
the effective date of the EIT Law. Enterprises that are currently entitled to exemptions or reductions from the standard income tax rate for a fixed term may continue to enjoy such treatment until the fixed term expires. Preferential tax treatments
will continue to be granted to industries and projects that are strongly supported and encouraged by the state, and enterprises otherwise classified as such encouraged high-tech enterprises will be entitled to a 15% EIT rate. On
April 14, 2008, the Measures for the Recognition and Administration of New and High-tech Enterprises, or the Measures, were promulgated jointly by the Ministry of Science and Technology, the Ministry of Finance and the State Administration of
Taxation and became retroactively effective from January 1, 2008. Under the Measures, the term high-tech enterprise is defined as a resident enterprise that has been registered in the PRC (excluding Hong Kong, Macao or Taiwan) for
more than one year, conducts business in the new and high-tech fields encouraged by government as listed in an appendix to the Measures, continuously undertakes research and development and technology conversion, and relies on self-owned
intellectual property rights as the basis of its business operation. Such new and high-tech enterprises may apply for tax incentives.

On
December 5, 2008, Shenyang Sunshine obtained the High and New Technology Enterprise certificate that entitles it to a preferential EIT rate of 15%, which was effective retroactively from January 1, 2008, to December 31,
2010.

The new EIT law also imposes a 10% withholding tax for dividends distributed by a foreign-invested enterprise to its immediate
holding company outside China beginning on January 1, 2008.

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

Foreign currency exchange

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



| |  |  | the Foreign Currency Administration Rules (1996), as amended, or the Exchange Rules; and
| | - |  | ----------------------------------------------------------------------------------------



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

Under the Exchange Rules, the Renminbi is convertible for current account items, including the distribution of dividends, interest payments, trade and
service-related foreign exchange transactions. Conversion of Renminbi for capital account items, such as direct investment, loan, security investment and repatriation of investment, however, is still subject to the approval of the SAFE.

Under the Administration Rules, foreign-invested enterprises in China, such as Shenyang Sunshine, may only buy, sell and/or remit foreign currencies
at those banks authorized to conduct foreign exchange business after providing valid commercial documents and, in the case of capital account item transactions, obtaining approval from the SAFE. Capital investments by foreign-invested enterprises
outside of China are also subject to limitations, which include approvals by the SAFE and other relevant government authorities.



49



---

##### Table of Contents

Dividend distribution

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



| |  |  | the Wholly Foreign Owned Enterprise Law (1986), as amended; and
| | - |  | ---------------------------------------------------------------



| |  |  | the Wholly Foreign Owned Enterprise Law Implementation Rules (1990), as amended.
| | - |  | --------------------------------------------------------------------------------

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

Regulation of foreign exchange in certain onshore and offshore transactions

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

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

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

Regulation on overseas listings

On August 8, 2006, six PRC regulatory agencies, including the MOFCOM and the CSRC, jointly adopted the Regulations on Mergers and Acquisitions of
Domestic Enterprises by Foreign Investors, or the New M&A Rule, which became effective on September 8, 2006. The New M&A Rule, among other things, purports to require an offshore special purpose vehicle, or SPV, formed for the purpose
of listing the SPVs securities on an offshore securities exchange and controlled directly or indirectly by PRC companies or individuals, to obtain the approval of the CSRC prior to such offshore listing and trading. On September 21, 2006
the CSRC published on its official website procedures specifying documents and materials required to be submitted to it by SPVs seeking CSRC approval of their overseas listings. However, substantial uncertainty remains regarding the scope and
applicability of the New M&A Rule to overseas listings of offshore SPVs, which may continue to have an impact on us as a company newly listed overseas.

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

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

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

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



50



---

##### Table of Contents

4.C Organizational Structure

The following diagram illustrates our corporate structure and jurisdiction of incorporation of each of our principal subsidiaries and principal affiliated entities as of October 2008, after which time Beijing Sunshine
was dissolved and all components referring thereto shall be deemed removed from this diagram accordingly. Discussions in this section 4.C as to Beijing Sunshine refer to periods prior to its dissolution in October 2008.

LOGO

4.C.1 Principal Affiliated Entities

Historically, we conducted our manufacturing and marketing activities through our wholly owned subsidiary, Shenyang Sunshine, and our distribution and logistics activities through Beijing Sunshine and Liaoning
Sunshine. Under Foreign Investment Industrial Guidance Catalogue, as amended, foreign investment in wholesale and retail sales and distribution of pharmaceutical products is restricted.

Liaoning Sunshine is a domestic limited liability company incorporated in 2000 under PRC law. Liaoning Sunshine is primarily engaged in the distribution
of products manufactured by Shenyang Sunshine and in-licensed products. Prior to our reorganization in anticipation of our initial public offering, Shenyang Sunshine held a 90% equity interest in Liaoning Sunshine, and Shenyang Keweier held the
remaining 10% equity interest in Liaoning Sunshine. The registered capital of Liaoning Sunshine is RMB15.0 million.

As part of our
corporate reorganization, Shenyang Sunshine sold 90% of the equity interest in Liaoning Sunshine to Mr. Dan Lou, our chairman, in November 2006. This sale resulted in Liaoning Sunshine becoming a domestic PRC company operating within its
authorized scope of business.

Similarly, we had held certain equity interest in Beijing Sunshine and sold such interest as part of our
corporate reorganization. Beijing Sunshine was a PRC domestic limited liability company primarily engaged in the distribution of products manufactured by Shenyang Sunshine.

Prior to our reorganization in anticipation of our initial public offering in February 2007, Beijing Sunshine and Liaoning Sunshine, as investees of a
foreign invested enterprise, engaged in distribution of pharmaceutical products without the requisite approvals from the MOFCOM.

As
Beijing Sunshine was duplicative in its role in relation to Liaoning Sunshine, in October 2008, Beijing Sunshine was dissolved.

4.C.2 Economic and
Control Arrangements

In January 2007, Shenyang Sunshine entered into the following contractual arrangements with Liaoning Sunshine, to
enable us to maintain control in it. Under these contractual arrangements, Shenyang Sunshine bears economic risks with respect to, and derives economic benefits from, the operations of Liaoning Sunshine through its entitlement to a majority of its
revenues in the form of technology support, market development and consulting service fees.



51



---

##### Table of Contents

Prior to the dissolution in October 2008, Beijing Sunshine had similar contractual arrangements with
Shenyang Sunshine.

Business cooperation agreement

Pursuant to the business cooperation agreement among Shenyang Sunshine, Liaoning Sunshine and us, Shenyang Sunshine provides technology support services and market development and consulting services to Liaoning
Sunshine, and, as consideration, receives 70% of Liaoning Sunshines annual sales revenues as service fees. In addition, Liaoning Sunshine has agreed that, without the prior written consent of a majority of our independent directors, it will
not increase or decrease its registered capital, declare dividends or make similar payments, make any investment, incur any indebtedness, mortgage or dispose of its material assets, or consolidate or merge with any other entity. Liaoning Sunshine
has further agreed to distribute only those products that are produced by Shenyang Sunshine, except as otherwise agreed to by a majority of our independent directors. Shenyang Sunshine will be entitled to any intellectual property developed during
the term of this contract.

Purchase agreements for the acquisition of equity interest in Liaoning Sunshine

Pursuant to the purchase agreement between Shenyang Sunshine and Mr. Dan Lou, Mr. Dan Lou granted Shenyang Sunshine an exclusive right to
purchase, to the extent permissible under PRC law, his 100% equity interest in Liaoning Sunshine for a purchase price of RMB15.0 million, an amount equivalent to the registered capital of Liaoning Sunshine, immediately after Shenyang Sunshine
obtains the requisite PRC government approval for it to acquire Liaoning Sunshine.

RMB13.5 million of the purchase price pursuant to the
purchase agreement was prepaid by Shenyang Sunshine to Mr. Lou shortly after the signing of this agreement in December 2006. The remaining RMB1.5 million will be paid to Mr. Lou at closing. If Shenyang Sunshine fails to obtain the
requisite government approval for Shenyang Sunshine to complete the acquisition within ten years, Shenyang Sunshine shall have the right to terminate the agreement and Mr. Dan Lou shall return the prepayment of RMB13.5 million to Shenyang
Sunshine. .

Voting agreement

Pursuant to the voting agreement among Shenyang Sunshine, Mr. Dan Lou and Liaoning Sunshine, Mr. Dan Lou is required to consult with and follow any lawful instruction of Shenyang Sunshine whenever he exercises his rights as
Liaoning Sunshines shareholder.

Equity pledge agreement

Pursuant to the equity pledge agreement between Shenyang Sunshine and Mr. Dan Lou, Mr. Dan Lou pledged all of his equity interests in Liaoning
Sunshine to Shenyang Sunshine to guarantee his obligations under the purchase agreement and the voting agreement. If Mr. Dan Lou breaches his contractual obligations, Shenyang Sunshine, as pledgee, will be entitled to certain rights, including
the right to purchase the pledged equity interests or sell the same to any third party. Mr. Dan Lou has agreed not to dispose of the pledged equity interests or take any actions that would prejudice Shenyang Sunshines interest.

4.C.2.1Consolidation and VIE Treatment

Prior to the execution of the above agreements, Shenyang Sunshine held 90% equity interests in Liaoning Sunshine, with the remaining interest held by the former majority shareholder of Shenyang Sunshine, Shenyang
Keweier. Liaoning Sunshine was consolidated by Shenyang Sunshine prior to the execution of the above agreements as a result of its 90% controlling interest in Liaoning Sunshine.

As a result of the above contractual arrangements, Shenyang Sunshine bears economic risks with respect to, and derives economic benefits from, the
operations of Liaoning Sunshine. As Shenyang Sunshine continues to hold the predominant variable interests in Liaoning Sunshine, it is deemed to be the primary beneficiary of Liaoning Sunshine, which was deemed as a variable interest entity, or VIE,
in accordance with Financial Accounting Standards Board (FASB) Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, or FIN 46R, effective from
January 1, 2006. Accordingly, the transfer of equity interest in Liaoning Sunshine did not change the requirement to consolidate, and the financial statements of Liaoning Sunshine continue to be included in our consolidated financial statements
subsequent to the execution of the above agreements.

Similarly, we had consolidated Beijing Sunshine and included its financial statements in our
consolidated financial statements till its dissolution in October 2008.

4.C.3 PRC Legal Risks and Uncertainties



52



---

##### Table of Contents

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



| |  |  | our current ownership structure is in compliance with existing PRC laws and regulations;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | the agreements among our subsidiaries, affiliated entities and their respective shareholders are valid and binding, and are enforceable under, and will not result
in any violation of, existing PRC laws or regulations; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our current business operations as described in this part 4.C of this annual report are not in violation of existing PRC laws, rules and regulations.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

There are, however, substantial uncertainties regarding the interpretation, application and enforcement of PRC
laws and regulations, including but not limited to the laws and regulations governing our business or the enforcement and performance of our contractual arrangements in the event of the imposition of statutory liens, death, bankruptcy and criminal
proceedings. Accordingly, we cannot assure you that PRC authorities will not take a view contrary to ours. See, 3.D.3  Our operations are subject to the uncertainty associated with the legal system in China, which could adversely
affect our business, or limit the legal protection available to existing or potential investors; 3.D.3 - Changes in PRC government policy on foreign investment in China may adversely affect our business and results of
operations; and 3.D.4 Risks Related to Our Corporate Structure.

D. Property, Plant and Equipment

Please refer to 4.B.9 Facilities for a discussion of our property, plants and equipment.



|ITEM 4A. | UNRESOLVED STAFF COMMENTS
|-------- | -------------------------

Not applicable.



53



---

##### Table of Contents

|ITEM 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS
|------- | --------------------------------------------

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

5.A Operating Results

5.A.1 Significant Trends, Developments and Factors

Certain significant trends, developments or factors, as discussed below, have historically affected our results of operations. We believe it is reasonably likely that these trends, developments or factors, as
discussed below, may affect our results of operations in one or more future periods.

5.A.1.1 Continuing Pricing Pressure

The selling prices of some of our products have declined over time due to increased pricing pressure from industry peers and the price control bidding
process in China. For example, the average selling prices of our legacy products and lower dosage EPIAO products have declined over time. We were able to maintain stable overall average selling prices for our higher dosage EPIAO products over the
past few years. However, NDRC policies have caused us to lower prices on such products as well, which had an adverse impact on the average selling price of our EPIAO products. Nonetheless, we remain focused on our strategy of growing sales for our
high-dosage products and increasing sales volumes in order to maintain healthy margins for our EPIAO products. In addition, the stable average prices of our exclusive TPIAO products, combined with their market acceptance since launch, have
contributed to our revenue growth recently and favorable overall margins.

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

Enhancing
Product Mix. We are continually enhancing our product mix through the introduction of new products, such as our proprietary new drug, TPIAO, our pre-filled syringe EPIAO and our in-licensed iron sucrose supplement. Please also
see 5.A.1.2 TPIAO Growth and Reduced Reliance on EPIAO Sales below.

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

Exclusivity. In some instances, we rely on exclusivity under administrative protection periods to
provide us with a competitive advantage. TPIAO for the treatment of chemotherapy-induced thrombocytopenia enjoys exclusivity under an administrative protection period till May 2010.

Export Sales. While export sales accounted for a small percentage of our total revenues in past periods, we believe, in the
long term, growth in export sales may assist us in offsetting pricing pressures in our domestic market. See 4.B.2.1 Export Sales.

5.A.1.2TPIAO Growth and Reduced Reliance on EPIAO Sales.

Our net revenue growth has been primarily
driven by sales of EPIAO. We have established a market leadership position in China with respect to EPIAO, which accounted for 63.5% of our total sales in 2008. In January 2006, we launched our new TPIAO product, which has outpaced EPIAO growth and
become our second largest revenue contributor, with net sales revenue of RMB67.6 million (US$9.9 million) and accounting for 27.8% of our overall sales in 2008. For the three years ended December 31, 2006, 2007 and 2008, EPIAO generated
approximately 77.3%, 67.3%



54



---

##### Table of Contents

and 63.5% of our total revenues, respectively; and TPIAO, 12.6%, 23.9% and 27.8%, respectively. We will remain focused on promoting TPIAO products to
diversify our revenue sources.

5.A.1.3 Chinese Government Undertaking Comprehensive Health Care Reform

Chinese government is undertaking to reform the national health care system. In early April of this year, a comprehensive reform plan entitled
Opinions by the Central Committee of the Chinese Communist Party and the PRC State Council concerning further Reforms of the Medical and Health System, or Opinions, was issued by the highest level of the government. The reform plan
contemplates expanded insurance coverage; increased health care spending and commitments, up to RMB850 billion in three years; increased government insurance reimbursement limits, among many other proposals. On the other hand, the Opinions emphasis
the need to make medical care more affordable, which may include introduction of additional pricing controls, potentially adverse to pharmaceutical producers like us. Since the timing, scope, funding, form, and many particulars, details and
ramifications of the reform measures are not known at this time, we are therefore unable to form an opinion or predict as to its effects on our business.

5.A.1.4 Possible Adverse Effects of the Global Economic Crisis

The financial crisis originated in the U.S. and the
market dislocations ensued has deep and wide-ranging adverse impact on many economies. As of the date of this annual report, we have not observed any immediate material effect of this crisis in relation to our operations. Our net revenues have grown
35% in fiscal 2008 compared to fiscal 2007. Our products provide critical medical care. Exports constitute less than 5% of our total revenues. However our business is susceptible to many factors and risks closely connected with or embedded in the
business environments. For fiscal 2009, we currently expect slower sales and revenues growth.

5.A.1.5 Preferential Tax Status Secured

On December 5, 2008, Shenyang Sunshine was jointly certified by the Liaoning Provincial Office of Science and Technology,
Liaoning Provincial Department of Finance, National Revenue Office of Liaoning Province and Local Revenue Administration of Liaoning Province as a High-Tech Enterprise. Under the relevant national and local regulations, a High-Tech
Enterprise is an official designation accorded to a company that, among other criteria, is engaged in a business field which receives special endorsement from the national government and has more than 60% of its income from high-tech products
or services. This certification entitles Shenyang Sunshine to a preferential EIT rate of 15%, effective retroactively from January 1, 2008, to December 31, 2010.

5.A.2 Significant Components of Revenues and Expenses and Other Items

Revenues

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

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

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

VAT



55



---

##### Table of Contents

Our revenues are recorded net of VAT. VAT is charged based on the selling price of our products at a
general rate of 17%. In China, pharmaceutical companies are accustomed to having the market sales data referenced to the gross revenues, inclusive of the VAT. For example, the data quoted by IMS Health throughout this annual report are quoted on
gross revenues.

Allowance for doubtful accounts

We maintain allowances for doubtful accounts for estimated losses resulting from the failure of our customers to make required payments. We review the accounts receivable on a periodic basis and make general and
specific allowances when there is doubt as to the collectibility of individual balances. In evaluating the collectibility of our customers balances, we consider many factors, including the aging of the receivables, the customers past
payment history and current credit-worthiness. We are subject to stringent requirements mandated by scrutiny of the local Chinese tax authorities on write-offs of bad debts. For example, bad debts must be aged over three years and sufficient
evidence must be provided to prove customers inability to make payments. As a result, this creates a substantial time lag between the time when our bad debt provision is made and the removal of such doubtful debt from our books. We made an
allowance for doubtful accounts of RMB777, 000 (US$113,000) for the year ended December 31, 2008. As of December 31, 2008, there were no material amounts of receivables outstanding for more than one year that was not reserved.

Cost of revenues

Our cost of revenues
includes costs of raw materials, packaging, labor costs and manufacturing overhead. Our manufacturing overhead is primarily comprised of factory staff costs, allocated utilities and depreciation of our production facilities. We believe the
relatively low cost of labor in the PRC provides us with a significant competitive advantage compared to international competitors that are not producing products in the PRC. We expect that, after we commence operations in our new manufacturing
facilities, depreciation charges will increase on a per unit basis in early years before the full deployment of the capacity of our new manufacturing facilities.

Operating expenses

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

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



| |  |  | Direct and allocated salaries and related expenses for research and development personnel;
| | - |  | ------------------------------------------------------------------------------------------



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



| |  |  | Direct cost of materials used in research and development;
| | - |  | ----------------------------------------------------------



| |  |  | Direct cost of equipment that lacks an alternative future use;
| | - |  | --------------------------------------------------------------



| |  |  | Fees paid to independent research organizations in conjunction with preclinical animal studies;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | Allocated depreciation of research equipment and laboratory facilities;
| | - |  | -----------------------------------------------------------------------



| |  |  | Manufacturing costs of our clinical trial supply quantities for our product candidates;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | Costs associated with other clinical development such as seminar hosting and process optimization; and
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | Costs for seeking EMEA approval so that we may enter the European market for biosimilar products.
| | - |  | -------------------------------------------------------------------------------------------------

In accordance with U.S. GAAP, we expense both internal and external research and development costs as incurred, other than laboratory equipment with
alternative future uses, which we capitalize.

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



|                     |  |                         |  |       |  |       |  |     
|-------------------- |  | ----------------------- |  | ----- |  | ----- |  | ----
|                     |  | Year ended December 31,
|                     |  | 2006                    |  | 2007  |  | 2008  |  | 2008
|                     |  | RMB                     |  | RMB   |  | RMB   |  | US$ 
|                     |  | (in thousands)         
|R&D cost for Product |  |                         |  |       |  |       |  |     
|EPIAO                |  | 2,253                   |  | 3,976 |  | 3,539 |  | 519 
|TPIAO                |  | 1,514                   |  | 4,556 |  | 5,271 |  | 773 



56



---

##### Table of Contents

|       |  |  |  |       |  |        |  |        |  |      
|------ |  |  |  | ----- |  | ------ |  | ------ |  | -----
|Others |  |  |  | 2,333 |  | 3,103  |  | 13,667 |  | 2003 
|       |  |  |  |       |  |        |  |        |  |      
|       |  |  |  | 6,100 |  | 11,635 |  | 22,477 |  | 3,295
|       |  |  |  |       |  |        |  |        |  |      

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

Sales,
marketing and distribution expenses. Our sales, marketing and distribution expenses primarily consist of salaries, employee benefits, bonuses and related expenses for our sales and marketing staff. They also include the direct costs
attributable to our sales and marketing activities, such as conferences and seminar hosting and attendance, travel, entertainment and advertising expenses. We expect our sales, marketing and distribution expenses to increase in absolute dollar
amounts in the future as we continue to expand the portfolio of our products. In future periods, we will seek to maintain a relatively stable or moderate improvement in terms of percentage of the sales, marketing and distribution expenses relative
to our total revenues.

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

Other income/(expense), net

We record our other income net of interest expense and foreign currency exchange losses. Our other income principally comprises interest income, grant
income and various non-recurring items that are not part of our normal operating activities.Other income, or expenses, also includes income, or loss on available-for-sale securities.

5.A.3 Critical Accounting Policies and Estimates

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

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

Consolidation of Beijing Sunshine and Liaoning Sunshine as VIEs

(* Discussions as to Beijing Sunshine refer to periods prior to its dissolution in October 2008.)

Variable interest entities, or VIEs, are those entities in which a company, through contractual and/or other arrangements, bears the risks of, and enjoys
the rewards normally associated with ownership of the entities, and therefore the company is the primary beneficiary of these entities. We have adopted FIN 46R, which requires certain VIEs to be consolidated by the primary beneficiary of the VIE if
equity investors in the VIE do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without subordinated financial support from other parties. The results
of VIEs are consolidated in a companys financial statements from the date the company became the primary beneficiary of the VIE.

The
total equity investment at risk is not sufficient to permit either Beijing Sunshine or Liaoning Sunshine to finance its activities without additional subordinated financial support provided by Shenyang Sunshine. Shenyang Sunshine finances each of
Beijing Sunshine and Liaoning Sunshine in the form of subordinated trade payables arising from the sales of products from Shenyang Sunshine to Beijing Sunshine or Liaoning Sunshine. Shenyang Sunshine bears economic risks with respect to, and derives
economic benefits from, the operations of Beijing Sunshine and of Liaoning Sunshine.

As variable interests in each of Beijing Sunshine and
Liaoning Sunshine are predominately held by Shenyang Sunshine, Shenyang Sunshine is deemed to be the primary beneficiary of each of Beijing Sunshine and Liaoning Sunshine under FIN 46R. Accordingly, the financial statements of Beijing Sunshine and
Liaoning Sunshine are



57



---

##### Table of Contents

consolidated in Shenyang Sunshines financial statements from the respective dates Shenyang Sunshine became involved with each of Beijing Sunshine and
Liaoning Sunshine. The transfers of our equity interest in Beijing Sunshine and Liaoning Sunshine in 2006 did not change our requirement to consolidate Beijing Sunshine and Liaoning Sunshine under FIN 46R.

For more details, see 4.C. Organizational Structure.

Revenue recognition

Sales of our pharmaceutical products represent the invoiced value of goods sold, net of VAT,
trade discounts and allowances, and, in very rare circumstances, sales returns. Revenues from these sales transactions are generally recognized upon delivery, which is considered to have occurred when the customer has taken risks and awards
associated with the ownership of delivered products.

For the two legacy products Intefen and Inleusin which we market using third parties
sales efforts and reimburse expenses incurred by the agency distributors based on a predetermined percentage of sales and timeliness of collection, we account for revenues from this type of sales channel in accordance with EITF Issue No. 01-9.
Under EITF Issue No. 01-9, our cost reimbursement offered to distributors is classified as a reduction in sales revenue. Based on the terms and conditions agreed with the distributors, we accrued and recorded the reimbursements of expenses to
the distributors as reduction in revenue, which reduced net sales by RMB1.4 million, RMB2.1 million and RMB1.7 million (US$0.25 million) in the years ended December 31, 2006, 2007 and 2008, respectively.

Determination of other-than-temporary impairment of investment securities

A decline in the market value of any investment security, including those that are available-for-sale that is deemed to be other-than-temporary results in an impairment to reduce the carrying amount to fair value. The
impairment is charged to earnings and a new cost basis for the security is established. To determine whether an impairment is other-than-temporary, the Company considers whether it has the ability and intent to hold the investment until a market
price recovery and considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the
impairment, changes in value subsequent to year-end, forecasted performance of the investee, and the general market condition in the geographic area or industry the investee operates in. The current economic environment has increased the degree of
uncertainty inherent in our assessment of other-than-temporary impairments of investment securities.

Research and development costs

We expense research and development costs except for equipment that has alternative future uses in accordance with Statement of
Financial Accounting Standards (SFAS) No. 2 Accounting for Research and Development Costs. We critically identify any research and development activities that could be objectively measured and recognized and are aimed at the
discovery of new products, indications, or betterment of processes. We capitalize the costs of materials and equipment that have alternative uses and amortize them over their useful life. Elements of research and development costs may include direct
materials, direct labor and overhead allocation including other related personnel engaged in research and development activities. Expenses relating to new products are charged to the statement of income until such time that we obtain the new
medicine certificate. The costs of research and development services such as pre-clinical tests outsourced or contract consulting services for upgrading our facilities are also included. Upfront and milestone payments made to third parties in
connection with research and development collaborations prior to regulatory approval are expensed as incurred. Payments made to third parties subsequent to regulatory approval are capitalized and amortized over the shorter of the remaining license
period or product patent life. The determination of alternative use requires judgment about the application of developed processes and know-how as well as market acceptance of related products. Different judgments regarding alternative uses could
result in a change in the timing and amount of costs capitalized as materials and equipment.

Estimated useful lives and impairment of long-lived
assets

We make estimates of the useful lives of property, plant and equipment with finite useful lives, in order to determine the
amount of depreciation expense to be recorded during any reporting period. Our total depreciation expenses in the years ended December 31, 2006, 2007 and 2008 were RMB5.5 million, RMB4.9 million and RMB5.7 million (US$0.8 million),
respectively. The useful lives are estimated at the time the assets are acquired and are based on historical experience with similar assets as well as anticipated technological or other changes. If technological changes were to occur more rapidly
than anticipated or in a different form than anticipated, the useful lives assigned to these assets may need to be shortened, resulting in the recognition of increased depreciation expense in future periods.

Long-lived assets, including property, plant and equipment assets with finite useful lives, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount



58



---

##### Table of Contents

of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated
future undiscounted cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Fair value is measured by the assets discounted cash flows or market value, if
readily determinable.

Allowance for doubtful accounts

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

Inventories and allowance for obsolescence

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

5.A.4 Result of Operations

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



|                                                   |  |                                |   |  |       |   |  |       |  
|-------------------------------------------------- |  | ------------------------------ | - |  | ----- | - |  | ----- | -
|                                                   |  | For the year endedDecember 31, |  
|                                                   |  | 2006                           |   |  | 2007  |   |  | 2008  |  
|                                                   |  | %                              |   |  | %     |   |  | %     |  
|Statement of Income Data:                          |  |                                |   |  |       |   |  |       |  
|Revenues:                                          |  |                                |   |  |       |   |  |       |  
|EPIAO                                              |  | 77.3                           |   |  | 67.3  |   |  | 63.5  |  
|TPIAO                                              |  | 12.6                           |   |  | 23.9  |   |  | 27.8  |  
|Intefen                                            |  | 3.9                            |   |  | 2.3   |   |  | 2.1   |  
|Inleusin                                           |  | 0.9                            |   |  | 0.6   |   |  | 0.3   |  
|Iron                                               |  |                                |   |  | 1.8   |   |  | 2.9   |  
|Export                                             |  | 4.6                            |   |  | 3.8   |   |  | 3.4   |  
|Others                                             |  | 0.7                            |   |  | 0.3   |   |  | 0.0   |  
|Total                                              |  | 100                            |   |  | 100   |   |  | 100   |  
|Cost of revenues                                   |  | (9.1                           | ) |  | (9.7  | ) |  | (8.9  | )
|Gross margin                                       |  | 90.9                           |   |  | 90.3  |   |  | 91.1  |  
|Operating expenses:                                |  |                                |   |  |       |   |  |       |  
|Research and development                           |  | (4.8                           | ) |  | (6.5  | ) |  | (9.3  | )
|Sales, marketing and distribution                  |  | (47.9                          | ) |  | (46.7 | ) |  | (49.3 | )
|General and administrative                         |  | (9.6                           | ) |  | (10.2 | ) |  | (12.9 | )
|Subtotal                                           |  | (62.3                          | ) |  | (63.4 | ) |  | (71.5 | )
|Operating margin                                   |  | 28.6                           |   |  | 26.9  |   |  | 19.6  |  
|Other income/(expense), net                        |  |                                |   |  |       |   |  |       |  
|Interest income                                    |  | 0.3                            |   |  | 20.1  |   |  | 9.8   |  
|Interest expense                                   |  | (3.3                           | ) |  | (0.5  | ) |  | 0.0   |  
|Grant income                                       |  | 2.5                            |   |  | 0.6   |   |  | 0.2   |  
|Net realized loss on available-for-sale securities |  |                                |   |  |       |   |  | (7.8  | )
|Impairment loss on available-for-sale securities   |  |                                |   |  |       |   |  | (1.8  | )
|Others                                             |  | (0.2                           | ) |  | 0.1   |   |  | 0.8   |  



59



---

##### Table of Contents

|                                                        |  |      |   |  |      |   |  |      |  
|------------------------------------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|Total other income/(expense), net                       |  | (0.7 | ) |  | 20.3 |   |  | 1.2  |  
|Income before income tax expense and minority interests |  | 27.9 |   |  | 47.2 |   |  | 20.8 |  
|Income tax                                              |  | (4.1 | ) |  | (1.9 | ) |  | (4.8 | )
|Income before minority interests                        |  | 23.8 |   |  | 45.3 |   |  | 16.0 |  
|Minority interests, net of tax                          |  | 0.1  |   |  | 0.1  |   |  | 0.3  |  
|Net margin                                              |  | 23.9 |   |  | 45.2 |   |  | 16.3 |  

Year ended December 31, 2007 compared with year ended December 31, 2008

Revenues.Our revenues increased by 35.0%, from RMB180.2 million in 2007 to RMB243.2 million (US$35.7 million) in 2008. This increase was
primarily attributable to the rapid market adoption of our TPIAO products, which grew 56.9% over 2007 in revenues to RMB67.6 million (US$9.9 million) in 2008, compared to RMB43.1 million in 2007. TPIAO was our second largest revenue contributor in
both 2007 and 2008, accounting for 23.9% and 27.8% of total revenues, respectively. The increase was also attributable to greater revenues from our leading EPIAO products, which maintained a strong growth by 27.5%, from RMB121.2 million in 2007 to
RMB154.6 million (US$22.7 million) in 2008. The EPIAO growth was primarily due to the expansion of our oncology sales force and concurrent increase in market share.

Cost of revenues.Our cost of revenues were RMB17.4 million, and RMB21.7 million (US$3.2 million), for the years ended December 31, 2007 and 2008, respectively. The 24.8% increase in cost of revenues
was less than the 35% revenues growth. Cost of revenues as a percentage of revenues went down from 9.7% in 2007 to 8.9% in 2008 due to enhancement of cost control and improvement of raw material utilization rate. The cost increase remained in line
with sales volume.

Operating expenses.Our total operating expenses increased by 52.1% from RMB114.2 million in 2007 to
RMB173.7 million (US$25.5 million) in 2008. The increase was primarily due to an increase in research and development (R&D), sales, marketing and distribution expenses.



| |  |  | Research and development expenses. R&D expenses increased 93.2% to RMB22.5 million (US$3.3 million) for 2008 from RMB11.6 million for 2007. In 2008, we
entered into a development and commercialization agreement with AMAG, for ferumoxytol. Under the agreement, we paid a non-refundable upfront fee of US$ 1 million (approximately RMB6.9 million) to AMAG, which was expensed and classified as
R&D cost for the year ended December 31, 2008.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Sales, marketing and distribution expenses. Our sales, marketing and distribution expenses increased 42.3% to RMB119.8 million (US$17.6 million) in 2008
from RMB84.2million in 2007. The increase was primarily attributable to increased marketing activities, and higher staff costs including salaries and bonuses, travel expenses, and stock-based compensation expenses, as well as increased headcount.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | General and administrative expenses. Our general and administrative expenses increased 71.2% from RMB18.4 million in 2007 to RMB31.5 million (US$4.6
million) in 2008. The increase was primarily attributable to higher staff costs and bonuses in connection with increased headcount, and partly attributable to stock-based compensation expenses, and an increase in audit costs, legal fees and
insurance.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other income/(expense), net.We had net other income of RMB2.9 million (US$0.4 million) in 2008
compared to net other income of RMB36.5 million in 2007, primarily due to net realized loss on disposal of available-for-sale securities totaling RMB19.0 million, and other-than-temporary impairment loss on available-for-sale securities of RMB4.4
million.

Income before income tax expense and minority interests. As a result of the foregoing, our income before income tax
expense and minority interests decreased 40.4% from RMB85.0 million in 2007 to RMB50.6 million (US$7.4 million) in 2008, mainly due to losses and impairment of RMB23.4 million on available-for-sale securities.

Income tax expense. Our income tax expense increased 240.7%, from RMB3.4 million in 2007 to RMB11.6 million (US$1.7 million) in 2008. This
increase in tax amount was mainly due to increased profit earned by Shenyang Sunshine in 2008, which is subject to PRC income tax, as well as one-off reinvestment tax refund and tax credit for purchase of domestic equipment totaling RMB3.1 million
recorded in 2007.

Net income. As a result of the foregoing, our net income experienced a 51.5% decrease from
RMB81.6 million in 2007 to RMB39.5 million (US$5.8 million) in 2008.



60



---

##### Table of Contents

Year ended December 31, 2006 compared with year ended December 31, 2007

Revenues. Our revenues increased by 41.0%, from RMB127.8 million in 2006 to RMB180.2 million in 2007. This increase was primarily
attributable to the rapid market adoption of our TPIAO products, which generated revenues of RMB43.1 million in 2007, compared to RMB16.1 million in 2006. TPIAO was our second largest revenue contributor in 2007, accounting for 23.9% of total
revenues in the year. The increase was also attributable to greater revenues from our leading EPIAO products, which increased by 22.7% from RMB98.8 million in 2006 to RMB121.2 million in 2007, primarily due to the expansion of our oncology sales
force and concurrent increase in market share.

Cost of revenues. Our cost of revenues were RMB11.6 million and RMB17.4 million
for the years ended December 31, 2006 and 2007, respectively. The increase was primarily due to the increase in sales volume, and a one-time cost of RMB1.0 million due to forfeiture of deposits as we did not meet the sales volume target for
Tietai Iron Sucrose Supplement. Cost of revenues as a percentage of revenues remained stable at around 9%.

Operating
expenses. Our total operating expenses increased by 43.4% from RMB79.6 million in 2006 to RMB114.2 million in 2007. The increase was primarily due to an increase in sales, marketing and distribution expenses.



| |  |  | Research and development expenses.Our research and development expenses increased 90.7% to RMB11.6 million for 2007 from RMB6.1 million for 2006. The
increase was mainly attributable to the research and development expenses associated with TPIAOs phase IV post-marketing clinical tests, the development of our new EPIAO product candidates and the continued development of other new products.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Sales, marketing and distribution expenses. Our sales, marketing and distribution expenses increased 37.4% to RMB84.2 million in 2007 from RMB61.3
million in 2006. The increase was primarily attributable to increased marketing activities and higher staff costs and bonuses as a result of an increase in headcount. Sales, marketing and distribution expenses as a percentage of revenues decreased
slightly from 47.9% in 2006 to 46.7% in 2007.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | General and administrative expenses. Our general and administrative expenses increased 49.8% from RMB12.3 million in 2006 to RMB18.4 million in 2007.
The increase was primarily attributable to the increase in staff costs and bonuses as a result of an increase in headcount. General and administrative expenses remained stable at around 10%.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other income/(expense), net.We had net other income of RMB36.5 million in 2007 compared to net other expense of RMB0.9 million in 2006, primarily
due to the interest income on the net proceeds we received from our initial public offering in February 2007 and a decrease in interest expense as we fully repaid our borrowings in 2007.

Income before income tax expense and minority interests. As a result of the foregoing, our income before income tax expense and minority
interests increased 138.3% from RMB35.7 million in 2006 to RMB85.0 million in 2007.

Income tax expense. Our income
tax expense decreased 34.5%, from RMB5.2 million in 2006 to RMB3.4 million in 2007, and our effective tax rate was 4.0% for 2007 as compared to 14.6% for 2006, primarily attributable to a tax rebate of RMB2.7 million from the reinvestment
of retained earnings in a subsidiary and the interest income on the net proceeds from our initial public offering which was paid to our company incorporated in the Cayman Islands and not subject to tax.

Net income. As a result of the foregoing, our net income increased 167.8%, from RMB30.5 million in 2006 to RMB81.6 million in 2007.

5.B Liquidity and Capital Resources

Overview

As of December 31, 2008, we had cash, cash equivalents and time deposits of RMB733.0 million (US$107.4
million) and working capital of RMB795.7 million (US$116.6 million). For the year ended December 31, 2008, our primary sources of funding for both our working capital and our long-term funding needs have been the net proceeds from our initial
public offering in 2007 and cash flows from operating activities. Our primary uses of funds in 2008 have been for the construction of new manufacturing facilities, upgrading of existing facilities, clinical trials, expansion of our sales and
marketing network in China, and purchase of investment securities. As of December 31, 2008, our cash, cash equivalents and time deposits of RMB733.0 million (US$107.4 million) is denominated largely in RMB and in other foreign currencies,
including USD and Hong Kong dollars. Our cash and time deposits position denominated in RMB totaled RMB 118.1 million (US$17.3 million) and our cash and time deposits position denominated in foreign currencies (mainly US$) totaled US$89.5
million. In fiscal year 2008, we have utilized part of cash to invest in available-for-sale securities with the goal of increasing interest income while preserving capital. Due to the changing global economic



61



---

##### Table of Contents

environment and the global financial crisis, a part of our investments was affected. In the face of the changing economic environment, we have been closely
monitoring our current investments and will be more conservative in purchasing new investments in the future to protect our cash position from the financial market uncertainties. As of December 31, 2008, we have cash and cash equivalent of RMB
439.2 million (US$64.4 million) and time deposit of RMB 293.8 million (US$ 43.1 million).

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



|                                                      |  |                                 |   |  |         |   |  |          |   |  |         |  
|----------------------------------------------------- |  | ------------------------------- | - |  | ------- | - |  | -------- | - |  | ------- | -
|                                                      |  | For the Year Ended December 31, |  
|                                                      |  | 2006                            |   |  | 2007    |   |  | 2008     |   |  | 2008    |  
|                                                      |  | RMB                             |   |  | RMB     |   |  | RMB      |   |  | US$     |  
|                                                      |  | (in thousands)                  |  
|Net cash provided by operating activities             |  | 37,042                          |   |  | 68,762  |   |  | 60,468   |   |  | 8,863   |  
|                                                      |  |                                 |   | 
|Net cash provided by / (used in) investing activities |  | 17,041                          |   |  | (36,491 | ) |  | (368,889 | ) |  | (54,070 | )
|                                                      |  |                                 |   | 
|Net cash provided by / (used in) financing activities |  | (54,457                         | ) |  | 801,745 |   |  | (14,467  | ) |  | (2,120  | )

Net cash provided by operating activities

Our net cash provided by operating activities was RMB 60.5 million (US$8.9 million) in 2008 compared to RMB68.8 million in 2007. The decrease of
RMB8.3 million in cash provided by operating activities in 2008 from 2007 reflects a decrease in operating income of RMB0.8 million and interest income of RMB12 million, partially offset by the effect of a RMB 10.1 million decrease in prepaid
expenses and other receivables.

Our net cash provided by operating activities was RMB68.8 million in 2007 compared to RMB37.0 million in
2006. The increase of RMB31.8 million in cash provided by operating activities in 2007 from 2006 reflects an increase in net income of RMB51.0 million, partially offset by a RMB14.8 million increase in accounts receivable primarily due to the
increase in sales volume.

Net cash provided by / (used in) investing activities

Our net cash used in investing activities was RMB368.9million (US$ 54.1million) in 2008, compared to net cash used in investing activities of RMB36.5
million in 2007. The cash outlay in investing activities in 2008 consisted primarily of RMB36.7million (US$5.4 million) for purchases of property, plant and equipment related to the upgrade of existing facilities and other fixed assets and leasehold
improvements, and RMB 293.8 million (US$43.1 million) for time deposits with financial institutions and RMB32.9 million (US$4.8 million) net purchases of investment securities.

Our net cash used in investing activities was RMB36.5 million in 2007, compared to net cash provided by investing activities of RMB17.0 million in 2006.
The cash outlay in investing activities in 2007 consisted primarily of RMB11.7 million for purchases of property, plant and equipment related to the upgrade of existing facilities and other fixed assets and leasehold improvements, RMB5.6 million in
deposits for the acquisition of property, plant and equipment related to construction of new manufacturing facilities, and RMB15.7 million for purchases of available-for-sale securities (primarily in long-term corporate bonds). The net cash inflow
from investing activities in 2006 resulted primarily from the repayment of a loan advanced to shareholder Shenyang Keweier.

Net cash provided
by/(used in) financing activities

Net cash used in financing activities in 2008 was RMB14.5 million (US$2.1 million), which
represents the amount paid for the repurchases of our ADSs, compared to net cash provided by financing activities of RMB801.7 million in 2007, which reflects the net proceeds we received from our initial public offering in 2007.

Net cash provided by financing activities was RMB801.7 million in 2007, compared to RMB54.5 million used in financing activities in 2006, primarily due
to the net proceeds we received from our initial public offering in 2007.

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



62



---

##### Table of Contents

Our indebtedness as of the dates indicated was as follows:



|                      |  |                |  |      |  |      |  |     
|--------------------- |  | -------------- |  | ---- |  | ---- |  | ----
|                      |  | 2006           |  | 2007 |  | 2008 |  | 2008
|                      |  | RMB            |  | RMB  |  | RMB  |  | US$ 
|                      |  | (in thousands)
|Short-term bank loans |  | 15,000         |  |     |  |     |  |    
|Long-term bank loans  |  | 25,000         |  |     |  |     |  |    
|Total debt            |  | 40,000         |  |     |  |     |  |    

We do not expect to pay dividends in the near future as we plan to use our resources for our
growth. However, should we decide to pay dividends, our wholly-owned subsidiarys ability to pay dividends to us is subject to various restrictions, including legal restriction in the PRC, which permits payment of dividends only out of net
income determined in accordance with PRC accounting standards and regulations. In addition, under PRC law, our subsidiary is required to set aside 10% of its net income as reserve funds, until such reserves have reached at least 50% of its
respective registered capital. These reserves are not distributable as cash dividends to us for use by us to satisfy our obligations, such as debt incurred at the holding company level. Such dividends are subject to a 10% withholding tax in the PRC
under the new EIT Law.

Capital Expenditures

The following sets forth our total capital expenditures for the periods indicated.



|     |  |                   |  |                  
|---- |  | ----------------- |  | -----------------
|     |  | (RMB inthousands) |  | (US$ inthousands)
|2006 |  | 2,671             |  | N/A              
|2007 |  | 17,314            |  | N/A              
|2008 |  | 36,777            |  | 5,391            

Historically, most of our capital expenditures were incurred for purchases of production and
office equipment, research laboratory, upgrade for our plant and office renovation.

In the year ended December 31, 2008, our capital
expenditure of RMB36.8 million (US$5.4 million) related primarily to upgrading of existing facilities, construction of new manufacturing facilities, and purchases of office equipment and other fixed assets.

In the year ended December 31, 2007, our capital expenditures of RMB17.3 million related primarily to upgrading of existing facilities, office
renovation, and purchases of office equipment and other fixed assets.

In the year ended December 31, 2006, our capital expenditures
of RMB2.7 million related primarily to purchases of office and production equipment for our TPIAO and EPIAO products and, to a lesser extent, purchase of automobiles.

Our future capital requirements may include, but are not limited to, upgrading our existing facilities for our research and development and production to meet EMEA standards and to build new facilities. Although we
are not obligated to meet any absolute minimum dollar spending requirements, our future capital requirements will depend on many factors, including the scope and progress made in building our new manufacturing facilities in the next two years. The
major component of our planned capital expenditures for 2009 is construction of the new manufacturing facilities.

We expect to fund our
capital expenditure needs with a combination of cash generated from operating activities and our existing cash, cash equivalents and time deposits without much need for debt financing. Therefore, we believe that the anticipated higher depreciation
charges related to our ongoing and planned facility expansion could be offset to a certain extent by the expected reduction in interest costs.

5.A-B.1
Recent Issued Accounting Standards



63



---

##### Table of Contents

SFAS No. 159

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. Including an Amendment of FASB Statement No. 115 (SFAS No. 159). SFAS No. 159
permits an entity to elect fair value as the initial and subsequent measurement attribute for many financial assets and liabilities. Entities electing the fair value option would be required to recognize changes in fair value in earnings. Entities
electing the fair value option are required to distinguish, on the face of the balance sheet, the fair value of assets and liabilities for which the fair value option has been elected and similar assets and liabilities measured using another
measurement attribute. We are required to adopt SFAS No. 159 beginning on January 1, 2008. The adjustment to reflect the difference between the fair value and the carrying amount would be accounted for a cumulative-effect adjustment to
retained earnings as of the date of initial adoption. We have determined not to adopt the fair value option for existing eligible items as of January 1, 2008.

SFAS No. 160

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statementsan Amendment of ARB No. 51. SFAS No. 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Among other requirements, the new standard
will result in the presentation of what are currently considered minority interests to be classified as equity. In addition, SFAS No.160 requires that losses be attributed to both the parent and the noncontrolling interest even if the noncontrolling
interests equity balance becomes negative. The guidance will become effective for the fiscal year beginning after December 15, 2008. We are required to adopt SFAS No. 160 beginning on January 1, 2009. The adoption of SFAS
No. 160 is not expected to have a material impact on our consolidated financial statements.

SFAS No. 161

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB Statement
No. 133 (SFAS No. 161). SFAS No. 161 requires entities that utilize derivative instruments to provide qualitative disclosures about their objectives and strategies for using such instruments, as well as any details of
credit-risk-related contingent features contained within derivatives. SFAS No. 161 also requires entities to disclose additional information about the amounts and location of derivatives located within the financial statements, how the
provisions of Statement 133 have been applied, and the impact that hedges have on an entitys balance sheet, statements of income and statements of cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after
November 15, 2008. We are currently evaluating the impact of SFAS No. 161 on the disclosures of derivatives.

FSP 142-3

In April 2008, the FASB issued FASB Staff Position No. FAS 142-3, Determination of the Useful Life of Intangible Assets (FSP FAS
142-3). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other
Intangible Assets, and requires enhanced disclosures relating to: (a) the entitys accounting policy on the treatment of costs incurred to renew or extend the term of a recognized intangible asset; (b) in the period of
acquisition or renewal, the weighted-average period prior to the next renewal or extension (both explicit and implicit), by major intangible asset class; and (c) for an entity that capitalizes renewal or extension costs, the total amount of
costs incurred in the period to renew or extend the term of a recognized intangible asset for each period for which a statement of financial position is presented, by major intangible asset class. FSP FAS 142-3 must be applied prospectively to all
intangible assets acquired as of and subsequent to fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. We are currently evaluating the impact that FSP FAS 142-3 will have
on the consolidated financial statements.

FSP FAS 157-4

In April 2009, the FASB issued Staff Position No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That
Are Not Orderly(FSP FAS 157-4). FSP FAS 157-4 relates to determining fair values when there is no active market or where the price inputs being used represent distressed sales. It reaffirms what SFAS No. 157 states is the
objective of fair value measurementto reflect how much an asset would be sold for in an orderly transaction (as opposed to a distressed or forced transaction) at the date of the financial statements under current market conditions.
Specifically, it reaffirms the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive. This guidance is effective for interim and annual



64



---

##### Table of Contents

periods ending after June 15, 2009, but entities may early adopt this guidance for the interim and annual periods ending after March 15, 2009. We
are currently evaluating the impact that FSP FAS 157-4 will have on the consolidated financial statements.

FSP FAS 115-2 and FAS 124-2

In April 2009, the FASB issued Staff Position No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments(FSP FAS 115-2 and FAS 124-2).FSP FAS 115-2 and FAS 124-2 on other-than-temporary impairments is intended to bring greater consistency to the timing of impairment recognition, and provide greater clarity to investors about
the credit and noncredit components of impaired debt securities that are not expected to be sold. The measure of impairment in comprehensive income remains fair value. The FSP also requires increased and more timely disclosures sought by investors
regarding expected cash flows, credit losses, and an aging of securities with unrealized losses. This guidance is effective for interim and annual periods ending after June 15, 2009, but entities may early adopt this guidance for the interim
and annual periods ending after March 15, 2009. We are currently evaluating the impact that FSP FAS 157-4 will have on the consolidated financial statements.

For more details of recently issued accounting standards, see Note 2(v) to our consolidated financial statements included elsewhere in this annual report.

5.A-B.2 Inflation

Inflation in China has not materially impacted our results of operations.
According to the National Bureau of Statistics of China, the change of consumer price index in China was 1.6%, 4.8% and 5.9% in 2006, 2007 and 2008, respectively. Although we were not materially affected by inflation in the past, we can provide no
assurance that we will not be affected in the future by potentially higher rates of inflation in China. For example, certain operating costs and expenses, such as employee compensation and office operating expenses may increase as a result of higher
inflation. Additionally, because a substantial portion of our assets consists of cash and cash equivalents and short-term investments, high inflation could significantly reduce the value and purchasing power of these assets. We are not able to hedge
our exposure to higher inflation in China.

5.C Research and Development

See 4.B.6 Research and Development

5.D Trend Information

Other than disclosed elsewhere in this annual report, as of this date, we are not aware of any
significant recent trends in production, sales and inventory, the state of the order book and costs and selling prices since fiscal year 2008.

For fiscal year 2009, other than disclosed elsewhere in this annual report, as of this date, we are not aware of any known trends, uncertainties, demands, commitments, or events that are reasonably likely to have a material effect on our
net sales or revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause reported financial information not necessarily to be indicative of future operating results or financial condition.

5.E Off-Balance Sheet Arrangements

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



65



---

##### Table of Contents

5.F Tabular Disclosure of Contractual Obligations

The following table sets forth our contractual obligations and commercial commitments as of December 31, 2008.



|                                 |  |                       |  |                 |  |           |  |           |  |             
|-------------------------------- |  | --------------------- |  | --------------- |  | --------- |  | --------- |  | ------------
|                                 |  | Payment due by period
|                                 |  | Total                 |  | less than1 year |  | 1-3 years |  | 3-5 years |  | after 5years
|                                 |  | (RMB in thousands)   
|Operating Lease Obligations      |  | 1,800                 |  | 1,800           |  |           |  |           |  |             
|Capital Commitments              |  | 19,579                |  | 19,579          |  |          |  |          |  |            
|                                 |  |                       |  |                 |  |           |  |           |  |             
|Total obligation and commitments |  | 21,379                |  | 21,379          |  |          |  |          |  |            
|                                 |  |                       |  |                 |  |           |  |           |  |             

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

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

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

Cautionary Statement:

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



66



---

##### Table of Contents

|ITEM 6 | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|------ | ------------------------------------------

6.A Executive
Officers and Directors

The following table sets forth our executive officers and directors, their ages as of December 31, 2008 and
the positions held by them. The business address for each of our executive officers and directors is Shenyang Sunshine Pharmaceutical Co. Ltd., No. 3 A1, Road 10, Economic & Technology Development Zone, Shenyang 110027, the
Peoples Republic of China.



|                     |  |     |  |                                                                     
|-------------------- |  | --- |  | --------------------------------------------------------------------
|Name                 |  | Age |  | Position                                                            
|Dan Lou              |  | 74  |  | Chairman of Board of Directors                                      
|Dr. Jing Lou         |  | 46  |  | Chief Executive Officer, Director                                   
|Liping Xu            |  | 55  |  | Vice President, Director                                            
|Bin Huang            |  | 48  |  | Vice President of Human Resources, Director                         
|Bo Tan               |  | 36  |  | Chief Financial Officer (principal financial and accounting officer)
|Lawrence S. Wizel(1) |  | 66  |  | Independent Director                                                
|Mingde Yu(1)         |  | 63  |  | Independent Director                                                
|Moujia Qi(1)         |  | 76  |  | Independent Director                                                
|Dr. Yingfei Wei      |  | 48  |  | Chief Scientific Officer, Vice President of Business Development    
|Dr. David Chen       |  | 44  |  | Executive Vice President and Chief Operating Officer                
|Dongmei Su           |  | 39  |  | Chief Technology Officer                                            
|Norman Tong          |  | 40  |  | Controller                                                          
|Ke Li                |  | 41  |  | Corporate Secretary                                                 



|(1) | Member of the audit committee. Member of the compensation committee.
|--- | --------------------------------------------------------------------

Dan Lou is our co-founder and chairman. Mr. Lou established Shenyang Sunshine in 1993 and served as president and chief engineer until 2003. From 1961 to 1993, Mr. Lou served several positions in
Shenhou Institute of Military Medicine, including assistant military doctor, military doctor, deputy director and director of Department of Microbiology and Immunology. Mr. Lou graduated from the Third Military Medical University in 1955.

Dr. Jing Lou is our co-founder, chief executive officer and director. He has served as the chief executive officer of Shenyang
Sunshine since 2000. He joined Shenyang Sunshine as director of research and development in 1995. Prior to joining us, Dr. Lou founded Lifegen, Inc., a Maryland corporation and an investee company of Shenyang Sunshine, to optimize the
manufacturing processes for EPIAO and TPIAO in the United States. Dr. Lou completed his post-doctoral study at the United States National Institute of Health in 1995. He received his Ph.D. in Molecular and Cell Biology in 1993 from Fordham
University, where he researched interferon signal transduction of gene regulation, and received his medical doctor degree in 1985 from Shanghai Second Military Medical University. Mr. Dan Lou is the father of Dr. Jing Lou.

Liping Xu is one of our directors. Ms. Xu has served as the executive director of Shenyang Sunshine from 1993 to 2002. Prior to joining
Shenyang Sunshine, she worked at the Shenhou Institute of Military Medicine. Ms. Xu is a senior engineer. She graduated from Shenyang Pharmaceutical University with a masters degree in microbiology and pharmacology in 1996.

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

Bo Tan has served as our CFO since February
2009. He has extensive experience within the financial and pharmaceutical industries, having worked across private equity, equity research and commercial practice. Previously, he served as the Executive Director and a member of Investment Committee
for Bohai Industrial Fund Management Company, a private equity fund in China. Earlier in his career, he spent six years in the pharmaceutical industry with Eli Lilly & Company and EMD Pharmaceuticals, Inc in North America and went on
to serve as a China healthcare and



67



---

##### Table of Contents

consumer analyst at Lehman Brothers Asia and Macquarie Securities in Hong Kong. He received his MBA degree from
Thunderbird School of International Management, an MA degree in economics from the University of Connecticut and a BA degree in economics from Renmin University of China. Mr. Tan is also a Chartered Financial Analyst.

Lawrence S. Wizel has served as a director since September 2006. Since August 2007, Mr. Wizel has been a member of the board of directors of
Puda Coal, Inc. (OTC:PUDC), a supplier of metallurgical coking coal to the industrial sector in China. Since 2006, Mr. Wizel has served on the board of directors of American Oriental Bioengineering, Inc. (NYSE: AOB), a Chinese company focused
on certain prescription and OTC pharmaceutical products and nutraceutical products. He was a partner at Deloitte & Touche LLP from 1980 to June 2006. He also served as deputy professional practice director and northeast region China service
group leader of Deloitte & Touche LLP from 2002 to 2006. He has extensive experience serving a diverse client base of both publicly-held and private companies and has also assisted numerous Chinese companies with their filings with the
Securities and Exchange Commission. He is a member of the American Institute of Certified Public Accountants and the New York State Society of Certified Public Accountants. He also serves as a Member on the Board of Trustees of Helen Keller Services
for the Blind. He received his bachelors degree in science from Michigan State University.

Mingde Yu has served as one of our
directors since February 2008. He has extensive experience in manufacturing and distribution management in the pharmaceutical industry in China. He has held a number of senior positions both in the government and the private sectors, including as
the Chief Technology Officer and the Head of Manufacturing at both Liaoning Fuxi Pharmaceutical Co. and Fuxi Traditional Chinese Medicine Co. (from 1978 to 1983), Bureau Chief of the Fuxi City Food & Drug Administration from 1983 to 1991,
Bureau Chief of the Liaoning Provincial Food & Drug Administration from 1991 to 1997, Drug Department Chief of the Economic Operations Bureau of the State Economic and Trade Committee from 1997 to 1998 and Vice-Bureau Chief of Economic
Operations Department of the National Development Reform Committee from 1998 to 2003. Mr. Yu is currently the honorary Chairman and Director of the Beijing Pharmaceutical Group and is the Vice Committee Chair for the China Pharmaceutical
Enterprises Administrative Association and China Medical Entrepreneur Association. Mr. Yu also holds senior consultancy roles with the China Chemical Drug Association and the National Pharmaceutical Industry & Commerce Association.
Mr. Yu graduated from the Macromolecule Materials and Engineering Department, Chemical Technology School at Dalian University of Technology.

Moujia Qi has served as one of our directors since August 2006. He has also served as the Chairman of the China Starch Industry Association for the past five years. He was the deputy director and chief engineer of Huabei
Pharmaceutical Factory and has held several management positions in various state-owned companies in the pharmaceutical industry. He has also served as the deputy director and chief director of the State Medicine Administration of the PRC
before he retired in 1994.

Dr. Yingfei Wei, our chief scientific officer and vice president for Business Development, joined us
in August 2006. She has over fifteen years of research and development experience in the biotechnology and pharmaceutical sectors. Before joining us, she was the co-founder, president and chief executive officer of Elixirin Corporation from 2004 to
2005, responsible for overseeing contract research, manufacturing, regulatory approvals and marketing of anti-aging products in the United States and China. Before that, she was director of biotechnology research at Bayer HealthCare Global from 1998
to 2004 and group leader at the discovery research department of Human Genome Sciences Inc. from 1993 to 1998. Dr. Wei is named inventor for 37 patents and has authored several publications, primarily in the areas of protein and antibody drug
discovery and genomics. Dr. Wei was a postdoctoral fellow at Harvard Universitys School of Public Health in 1993. She received her Ph.D. in biochemistry from the University of California in 1990 and a bachelors degree in
biochemistry from Beijing University in 1983.

Dr. David Chen is our executive vice president and chief operating officer.
Dr. Chen held various managerial positions in the United States pharmaceutical industry, including business development, sales and marketing, market research, new product development and research and development portfolio management both with
Eli Lilly and GlaxoSmithKline from 1998 to 2006. Prior to his experience in the United States, Dr. Chen was a practicing orthopedic surgeon at Shanghai Medical University from 1989 to 1992. He received a medical degree from the First Military
Medical University in Guangzhou, China and received a masters degree in Business Administration from the Darden School of Business at the University of Virginia.



68



---

##### Table of Contents

Dongmei Su is our chief technology officer responsible for research and development and
manufacturing process engineering. She is the named co-inventor for four of our patents. Ms. Su joined Shenyang Sunshine in 1993. She served as director of research and development and manufacturing since 1997. She received her bachelors
degree in biochemical engineering from Jilin University in 1992 and her masters degree in microbiology and pharmacology from Shenyang Pharmaceutical University in 2001.

Norman Tong,our controller, joined us in March 2009. Mr. Tong have previously worked with various Fortune 500 companies, including Pepsi and
others, as a senior finance team leader. Mr. Tong received a bachelors degree in accounting from National University of Finance and Economics in 1992 and a masters degree in finance from Liaoning University.

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

6.B Compensation

Our directors and executive officers receive compensation in the form of annual salaries and bonuses. While we do not have a specific bonus plan setting
the calculation of our annual bonuses, each director and executive officer is entitled to receive an annual discretionary bonus based upon his or her performance of such amount as shall be determined by the board of directors and approved by the
independent directors.

In 2008, the aggregate cash compensation we paid to our directors and executive officers, was approximately RMB7.4
million (US$1.1 million), and we granted options to acquire an aggregate of 764,575 ordinary shares to our directors and executive officers.

Other than described in the foregoing, our directors and executive officers may or may not participate in compensatory or benefits plans or arrangements that is available by its terms to employees, officers or directors generally, the
operation of which plan or arrangement uses the same method to allocate benefits to management and non-management participants.

6.C Board Practices

Our board of directors currently consists of seven members, among whom, as determined by our board of directors,
Mr. Lawrence S. Wizel, Mr. Mingde Yu, and Mr. Moujia Qi, are independent directors within the meaning of Rule 4200(a)(15) of the Nasdaq Marketplace Rules as amended from time to time.

6.C.1 Audit Committee

Our audit
committee of the board of directors, consisting of Mr. Lawrence S. Wizel (Chair), Mr. Mingde Yu and Mr. Moujia Qi, was established in October 2006. Since there are no specific requirements under Cayman Islands law on the
composition of our audit committee, our practice was established by our board of directors by reference to similarly situated issuers. Our practice is in line with Rule 4350(d) of the Nasdaq Marketplace Rules that requires the audit committees of
United States companies to have a minimum of three independent directors. All members of our audit committee satisfy the independence requirements of each of the Nasdaq Marketplace Rules and Section 10A(m)(3)(B)(i) of the Securities
Exchange Act of 1934, as amended, or the Exchange Act. The audit committee is responsible for overseeing the accounting and financial reporting processes of our company and audits of our financial statements, including the appointment, compensation
and oversight of the work of our independent auditors.

6.C.2 Compensation Committee

Our compensation committee of the board of directors, consisting of Mr. Mingde Yu (Chair), Mr. Lawrence S. Wizel and Mr. Moujia Qi,
was established in January 2008. Since there are no specific requirements under Cayman Islands law on the composition of our compensation committee, our practice was



69



---

##### Table of Contents

established by our board of directors by reference to similarly situated issuers. All members of our compensation committee satisfy the
independence requirements of the Nasdaq Marketplace Rules.

The compensation committee is responsible for assisting the board
of directors, in fulfilling its responsibilities, to oversee our compensation and benefits programs, and to determine the compensation package of chief executive officer and other executive officers.

6.C.3 Investment Committee

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

6.C.4 Terms of Directors and Executive Officers

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

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

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

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

6.C.5 Employment Agreements and Director Services Appointment

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

Each executive officer has agreed to hold, both during and subsequent
to the term of the employment agreement, our confidential information in strict confidence and not to disclose such information to anyone except our other employees who have a need to know such information in connection with our business. The
executive officers have also agreed to assign to us all rights, titles and interests to or in any inventions that they may conceive or develop during the period of employment, including any copyrights, patents, mark work rights, trade secrets or
other intellectual property rights pertaining to such inventions. Specifically, each executive officer has agreed not to, while employed by us and for a period of three years following the termination or expiration of the employment agreement,
(i) approach our clients, customers or contacts or other persons or entities introduced to the executive



70



---

##### Table of Contents

officer for the purposes of doing business with such persons or entities, and will not interfere with the business relationship between us and such persons
and/or entities; (ii) assume employment with or provide services as a director or otherwise for any of our competitors, or engage, whether as principal, partner, licensor or otherwise, in any business which is in direct or indirect competition
with our business; or (iii) seek directly or indirectly, to solicit the services of any of our employees employed by us at or after the date of the executive officers termination, or in the year preceding such termination.

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

Each of our independent directors has received an appointment letter from us, which stipulates various customary terms and conditions, including advance
notice of termination, services compensation, confidentiality obligations, directorship termination, and indemnification.

6.D Employees

See 4.B.10 Employees.

6.E Share Ownership

Directors and Senior Officers Share Ownership

Please refer to the applicable part under Item 7.A Major Shareholders, reporting under which section share ownership of directors and officers who does not meet the criteria of a major shareholder is for convenience of
reference only and shall be without any substantive significance with respect to that Item.

Employee Participation in the Company Capital: 2006
Stock Incentive Plan

We adopted our 2006 stock incentive plan on September 5, 2006, which provides for the grant of stock
options, restricted stock and restricted stock units, each of which we referred to as awards. The 2006 stock incentive plan is administered by the board of directors. The purpose of the plan is to provide additional incentive to those
officers, employees, directors, consultants and other service providers whose contributions are essential to the growth and success of our business, in order to strengthen the commitment of such persons to us and motivate such persons to faithfully
and diligently perform their responsibilities and attract and retain competent and dedicated persons whose efforts will result in our long-term growth and profitability.

We are authorized under the 2006 stock incentive plan to issue direct awards, to sell shares or grant options to purchase shares for up to cumulatively 10% of the issued shares outstanding from time to time. The 2006
stock incentive plan provides for the grant to our employees, directors, and consultants or any other participants that the board of directors shall decide in good faith. The board of directors has complete discretion to select the grantees and to
establish the terms and conditions of the grants, subject to the provisions of the 2006 stock incentive plan.

Plan Administration.
Our 2006 stock incentive plan is administered by our board of directors or a committee or subcommittee appointed by our board of directors. In each case, our board of directors or the committee will determine the provisions and terms and conditions
of each award grant, including, but not limited to, the exercise price for the options, vesting schedule, form of payment of exercise price and other applicable terms.

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



71



---

##### Table of Contents

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

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

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

Amendment and Termination. Our board of directors may at any time amend, alter or discontinue the plan, provided that no amendment, alteration or
discontinuation shall be made that would impair the rights of a participant under any award theretofore granted without such participants consent. Unless terminated earlier, our 2006 stock incentive plan shall continue in effect for a term of
five years from the effective date of the plan.

Option Grant to Directors and Senior Officers

The following table summarizes, as of December 31, 2008, the latest practicable date, options that we granted to several of our directors and
executive officers and to other individuals as a group under our 2006 stock incentive plan:



|                  |         |                                                      |      |                              |                  |                 |                   |                   
|----------------- | ------- | ---------------------------------------------------- | ---- | ---------------------------- | ---------------- | --------------- | ----------------- | ------------------
|Name              |         | Number of sharesto be issued uponexercise of options |      | Per shareexerciseprice (US$) |                  | Grant date      |                   | Date of Expiration
|Dr. Jing Lou      |         | 179,400                                              |      | 1.60                         |                  | October 1, 2006 |                   | October 1, 2009   
|                  | 168,000 |                                                      | 1.15 |                              | March 7, 2008    |                 | October 1, 2011  
|Bin Huang         |         | 30,000                                               |      | 1.60                         |                  | October 1, 2006 |                   | October 1, 2009   
|                  | 84,000  |                                                      | 1.15 |                              | March 7, 2008    |                 | October 1, 2011  
|Lawrence S. Wizel |         | *                                                    |      | 1.60                         |                  | October 1, 2006 |                   | October 1, 2009   
|Mingde Yu         |         | *                                                    |      | 1.10                         |                  | March 17, 2008  |                   | March 17, 2011    
|Moujia Qi         |         | *                                                    |      | 1.60                         |                  | October 1, 2006 |                   | October 1, 2009   
|                  | *       |                                                      | 1.65 |                              | January 17, 2008 |                 | December 31, 2008
|Dr. Yingfei Wei   |         | *                                                    |      | 1.60                         |                  | October 1, 2006 |                   | October 1, 2009   
|                  | *       |                                                      | 1.15 |                              | March 7, 2008    |                 | October 1, 2011  
|Dr. David Chen    |         | *                                                    |      | 1.60                         |                  | July 23, 2007   |                   | June 1, 2010      
|                  | *       |                                                      | 1.15 |                              | March 7, 2008    |                 | October 1, 2011  
|Dongmei Su        |         | *                                                    |      | 1.60                         |                  | October 1, 2006 |                   | October 1, 2009   
|                  | *       |                                                      | 1.15 |                              | March 7, 2008    |                 | October 1, 2011  
|Ke Li             |         | *                                                    |      | 1.60                         |                  | October 1, 2006 |                   | October 1, 2009   
|                  | *       |                                                      | 1.15 |                              | March 7, 2008    |                 | October 1, 2011  



|* | Upon exercise of all options granted, the grantee would beneficially own less than 1% of our outstanding ordinary shares.
|- | -------------------------------------------------------------------------------------------------------------------------



72



---

##### Table of Contents

|ITEM 7 | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|------ | -------------------------------------------------

A. Major
Shareholders

The following table sets forth information with respect to beneficial ownership of our ordinary shares as of
December 31, 2008, the latest practicable date, by:



| |  |  | each of our executive officers and directors; and
| | - |  | -------------------------------------------------



| |  |  | each person known by us to beneficially own 5% or more of our ordinary shares.
| | - |  | ------------------------------------------------------------------------------



|                                          |  |                                         |  |      
|----------------------------------------- |  | --------------------------------------- |  | -----
|                                          |  | Ordinary Shares beneficiallyowned(1)(2)
|Name                                      |  | Number of OrdinaryShares                |  | %    
|Directors and executive officers:         |  |                                         |  |      
|Dan Lou(3)                                |  | 11,429,898                              |  | 7.59 
|Dr. Jing Lou(4)                           |  | 5,203,652                               |  | 3.45 
|Liping Xu(5)                              |  | 7,333,554                               |  | 4.87 
|Dr. Yingfei Wei                           |  | *                                       |  | *    
|Lawrence S. Wizel                         |  | *                                       |  | *    
|Mingde Yu                                 |  | *                                       |  | *    
|Dr. David Chen                            |  | *                                       |  | *    
|Bo Tan                                    |  | *                                       |  | *    
|Moujia Qi                                 |  | *                                       |  | *    
|Bin Huang(6)                              |  | 1,769,542                               |  | 1.17 
|Dongmei Su                                |  | *                                       |  | *    
|Ke Li                                     |  | *                                       |  | *    
|Norman Tong                               |  | *                                       |  | *    
|                                          |  |                                        
|Principal Shareholders:                   |  |                                         |  |      
|Achieve Well International Limited(7)     |  | 24,868,079                              |  | 16.52
|Happyview Finance Limited(8)              |  | 15,024,393                              |  | 9.98 
|Lans Holdings Limited(9)                 |  | 11,732,219                              |  | 7.79 
|Starry Investments Limited(10)            |  | 8,460,006                               |  | 5.62 
|W&W International Investments Limited(11) |  | 7,732,074                               |  | 5.13 



|* | Upon exercise of all options currently exercisable or vesting within 60 days of the date of this annual report such person beneficially would own less than 1% of our
outstanding ordinary shares.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(1) | Beneficial ownership is determined in accordance with Rule 13d-3 of the General Rules and Regulations under the Exchange Act, and includes voting or investment power with respect to
the ordinary shares.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The number of ordinary shares outstanding in calculating the percentages for each listed person includes the ordinary shares underlying options held by such person. Percentage of
beneficial ownership of each listed person is based on 150,575,955 ordinary shares outstanding as of December 31, 2008, the latest practicable date, as well as the ordinary shares underlying options exercisable by such person within 60 days of
the date of this annual report on Form 20-F.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Mr. Dan Lous total holdings, as reported here, include 6,599,478 ordinary shares held in trust on his behalf by Achieve Well International Limited, and 4,830,420 ordinary
shares, indirectly through his wholly-owned company, Witty Mind International Limited.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Dr. Jing Lous total holdings, as reported here, include 4,856,252 ordinary shares held in trust on his behalf by Achieve Well International Limited., and 347,400 ordinary
shares underlying options exercisable by Dr. Jing Lou within 60 days of the date of this annual report on Form 20-F.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Ms. Liping Xus holdings, as reported here, include 6,119,093 ordinary shares held in trust on her behalf by Achieve Well International Limited, and 1,214,461 ordinary
shares, indirectly through her wholly-owned company, Precious Winwin Limited.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Ms. Bin Huangs holdings, as reported here, include 1,655,542 ordinary shares held in trust on her behalf by Achieve Well International Limited., and 114,000 ordinary
shares underlying options exercisable by Ms. Bin Huang within 60 days of the date of this annual report on Form 20-F.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



73



---

##### Table of Contents

|(7) | Achieve Well International Limited is a British Virgin Islands international business company for investment purpose with its business address at No. 3 A1, Road 10, Shenyang
Economy & Technology Development Zone, Shenyang, P.R. China. Achieve Well International Limited is beneficially owned, as of the date hereof, by Mr. Dan Lou (approximately 24.7%), Ms. Liping Xu (approximately 23.0%), Mr. Jing
Lou (approximately 18.2%), Mr. Bin Huang (approximately 6.2%), Ms. Dongmei Su (approximately 3.7%), Mr. Ke Li (approximately 3.1%) and certain other individuals. Each beneficial owner of Achieve Well International Limited has the
voting rights with respect to the securities beneficially owned by him or her.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | Happyview Finance Ltd. is a British Virgin Islands international business company solely owned by Mr. Ou Su, who shares with Happyview Finance Ltd. both voting and dispositive
power over our ordinary shares. Its business address is at Room 608, Block Q, Huiyuan Gong Yu, Ya Yun Cun, Chaoyang District, Beijing, PRC. This share information is as of December 31, 2007 and is based upon a report on schedule 13G filed by
Happyview Finance Ltd. with the Securities and Exchange Commission. We have no further information regarding the beneficial ownership of Happyview Finance Ltd.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) | Lans Holdings Limited is a British Virgin Islands international business company owned by Mr. Xiaobing Liu (49%) and Ms. Ying Luan (51%), each of whom has both
investment and voting authority with respect to the voting securities held by him or her. Its business address is at Room 22B, No. 969 Beijing Road West, Jianan District, Shanghai, PRC.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | Starry Investments Limited is a Samoan international business company solely owned by Ms. Lili Liu, who has both investment and voting authority with respect to the voting
securities of such company. Its business address is at 4 Zhong Xing Street, Heping District, Shenyang, Liaoning, PRC and Ms. Lili Liu is its sole director.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) | W&W International Investments Limited is a British Virgin Islands international business company solely owned by Ms. Lisha Zhang, who has both investment and voting
authority with respect to the voting securities of such company. Its business address is at 9B1 Hexiang Yuan, No. 12, Hexiang West Road, Kaiyuan District, Xiamen, PRC and Ms. Lisha Zhang is its sole director.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

There are no different voting rights among holders of our ordinary shares, except certain requirements and limitations may apply to our ADS.

We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.

Except as discussed below, we are not aware of any significant change in the percentage ownership held by any major shareholders during the past three
years:



| |  |  | Sansar Capital Management, L.L.C., a Delaware limited liability company, with Sansar Family II, L.L.C. as the managing member of Sansar Capital Management,
L.L.C. (with Sanjay Motwani as the managing member of Sansar Family II, L.L.C.), owned 5,368,888 ordinary shares as of December 31, 2008, less than 5% of our outstanding ordinary shares at such time, according to an amended report on Schedule
13G filed by Sansar Capital Management, L.L.C. with the Securities and Exchange Commission on February 13, 2009, compared to 7,913,458 ordinary shares reported as of December 31, 2007.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Pacven Walden Ventures VI, LP, a Cayman Islands limited partnership, of which the beneficial owner is Pacven Walden Management VI Co. Ltd., previously owned
9,404,313 ordinary shares. We no longer have information concerning its share ownership. Its business address is at 2806A Central Plaza, 18 Harbour Road, Wanchai, Hong Kong.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

B. Related Party Transactions

Certain agreements with VIE
entities

See 4.C.2 Economic and Control Arrangements for certain agreements with VIE entities.

Agreements with Epitomics Inc.

The collaboration
partner for our development of TNF alpha monoclonal antibody, Epitomics Inc., or Epitomics, is a related party, whose Chief Executive Officer is an immediate family member of our Chief Scientific Officer. The collaboration combines our development
capabilities and Epitomics approach for generating a large panel of therapeutic leads for the purpose of the identification of best-in-class drug candidates for anti-TNF therapy. There were no fees paid to Epitomics during
fiscal 2008. Under the terms of the agreement, Epitomics may receive royalties on any potential future products sold in China.



74



---

##### Table of Contents

C. Interests of Experts and Counsel

Not Applicable.



75



---

##### Table of Contents

|ITEM 8. | FINANCIAL INFORMATION
|------- | ---------------------

A. Consolidated Statements and Other
Financial Information

Consolidated Financial Statements

See Item 18. Financial Statements.

Legal Proceedings

We are not aware of any legal or arbitration proceedings, or any governmental proceedings pending or known to be contemplated, which may have, or have,
had, in the recent past, significant effects on the companys financial position or profitability. From time to time, we may be subject to various claims and legal actions arising in the ordinary course of business.

Our intellectual property is subject to theft and other unauthorized use, and our ability to protect our intellectual property is limited. In addition,
we may in the future be subject to claims that we have infringed the intellectual property rights of others. See 3.D.1If our products infringe the intellectual property rights of third parties, we may incur substantial liabilities, and
we may be unable to sell these products. Please also refer to discussions under Item 3.D Risk Factors with respect to other significant regulatory and legal risks.

Dividend Policy

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

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

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

B. Significant Changes

Lloyds Investment
Loss

The Company evaluates whether unrealized losses on investment securities indicate other-than-temporary impairment. During the year
ended December 31, 2008, the Company acquired certain fixed rate perpetual capital securities (the Perpetual Securities) issued by Lloyds TSB Bank plc (Lloyds) totalling US$2,000,000. The Perpetual Securities, bearing
interest at 7.875% per annum, have no maturity date and are not redeemable at the option of the Company at any time. The Perpetual Securities may be redeemed at the option of Lloyds on or after the five years of the issue date at their
principal amount together with any interest payments which are outstanding. Lloyds may at any time elect to exchange the Perpetual Securities for Qualifying Tier 1 Securities as specified in the terms of the Perpetual Securities.

On December 16, 2008, Lloyds gave a notice to the holders of Perpetual Securities that on January 19, 2009, the Perpetual
Securities would be exchanged for corresponding non-cumulative preference shares totalling US$2,000,000 in the share capital of Lloyds TSB Group plc (the Preference Shares), the parent company of Lloyds, in accordance with the terms of
the Perpetual Securities. The holder of the Preference Shares has a right to a preferential dividend at a rate of 7.875% per annum. Under the terms of the Preference Shares, the dividends are discretionary and non-cumulative.

As of December 31, 2008, the fair value of Perpetual Securities was RMB9,254,000 (US$1,356,000) based on quoted market price. Since the Perpetual
Securities were exchanged for Preference Shares in January 2009 and the fair value of the Preference Shares at the date of exchange was lower than the fair value as of December 31, 2008, the Company has recognized an other-than-temporary
impairment loss on the Perpetual Securities of RMB4,391,000



76



---

##### Table of Contents

(US$644,000) for the year ended December 31, 2008. Other-than-temporary impairment losses are included in other income/(expense), net on the
consolidated statements of income and comprehensive income/(loss).

Subsequent to the year ended December 31, 2008, in addition to the
impairment losses recognized as of December 31, 2008, a loss on investment in the Perpetual Securities of RMB4,612,000 (US$676,000) was further recognized in earnings in the first quarter of 2009. The loss was based on the fair value of the
Preference Shares at the date of exchange.

No Other Change (as qualified)

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



77



---

##### Table of Contents

|ITEM 9. | THE OFFER AND LISTING
|------- | ---------------------

A. Offer and Listing Details

Our ADSs have been listed on the NASDAQ Global Market under the symbol SSRX since February 7, 2007. The outstanding
ADSs are identified by the CUSIP number 885754105. Each of our ADSs represents the right to receive seven shares.

The following table
provides the high and low closing prices for our ADSs on the Nasdaq Global Market for (1) the full financial years ended December 31, 2007 and 2008, (2) each full fiscal quarter of the financial years ended December 31, 2007 and
2008, and (3) each of the most recent six months.



|                                |  |               |  |       
|------------------------------- |  | ------------- |  | ------
|                                |  | Closing Price
|                                |  | Per ADS      
|                                |  | HighUS$       |  | LowUS$
|                                |  |              
|2007                            |  | 21.21         |  | 8.79  
|First Quarter (from February 7) |  | 16.79         |  | 10.90 
|Second Quarter                  |  | 11.59         |  | 9.17  
|Third Quarter                   |  | 15.00         |  | 8.79  
|Fourth Quarter                  |  | 21.21         |  | 10.02 
|2008                            |  | 14.63         |  | 4.97  
|First Quarter                   |  | 14.63         |  | 7.32  
|Second Quarter                  |  | 10.99         |  | 8.61  
|Third Quarter                   |  | 10.42         |  | 6.15  
|September                       |  | 9.82          |  | 6.15  
|Fourth Quarter                  |  | 7.80          |  | 4.97  
|October                         |  | 6.70          |  | 5.43  
|November                        |  | 6.19          |  | 4.97  
|December                        |  | 7.80          |  | 5.84  
|2009                            |  |               |  |       
|First Quarter                   |  | 7.46          |  | 4.51  
|January                         |  | 7.46          |  | 5.16  
|February                        |  | 5.50          |  | 5.00  
|March                           |  | 6.77          |  | 4.51  

| | 
| | 

Source: Bloomberg

B. Plan of Distribution

Not applicable.

C. Markets

Our ADSs, each representing seven of
our ordinary shares, have been listed on the NASDAQ Global Market of The NASDAQ Stock Market LLC since February 7, 2007 under the symbol SSRX.



78



---

##### Table of Contents

D. Selling Shareholders

Not applicable.

E. Dilution

Not applicable.

F. Expenses of the Issue

Not applicable.



79



---

##### Table of Contents

|ITEM 10. | ADDITIONAL INFORMATION
|-------- | ----------------------

A. Share Capital

Not applicable.

B. Memorandum and Articles of
Association

We incorporate by reference into this annual report the description of our amended and restated memorandum and articles of
association contained in our F-1 registration statement (File No. 333-140099), as amended, initially filed with the Commission on January 19, 2007. Our shareholders adopted our amended and restated memorandum and articles of association by
unanimous resolutions on September 5, 2006.

C. Material Contracts

We have not entered into any material contracts other than in the ordinary course of business, or other than those listed in the Exhibits hereto or
discussed elsewhere in this annual report.

D. Exchange Controls

There are no exchange control regulations or currency restrictions in the Cayman Islands.

For exchange
control in China, please refer to 4.B.11 Regulations

E. Taxation

Cayman Islands Taxation

The Cayman Islands currently levies no taxes on individuals or corporations
based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the Government of the Cayman Islands except for stamp duties
which may be applicable on instruments executed in, or after execution brought within the jurisdiction of the Cayman Islands.

The Cayman
Islands is not party to any double tax treaties.

United States Federal Income Tax Considerations for U.S. Persons

The following is a summary of the material United States federal income tax considerations relating to the acquisition, ownership, and disposition of ADSs
or ordinary shares by U.S. Holders (as defined below) that will hold their ADSs or ordinary shares as capital assets (generally, property held for investment) under the United States Internal Revenue Code (the Code). This
summary is based upon existing United States federal income tax law, which is subject to differing interpretations or change, possibly with retroactive effect. This summary does not discuss all aspects of United States federal income taxation that
may be important to particular investors in light of their individual circumstances, and does not deal with the tax consequences to investors subject to special tax rules (for example, financial institutions, insurance companies, broker-dealers,
partnerships and their partners, and tax-exempt organizations (including private foundations)), holders who are not U.S. Holders, holders who own (directly, indirectly, or constructively) 10% or more of our voting stock, investors that will hold
ADSs or ordinary shares as part of a straddle, hedge, conversion, constructive sale, or other integrated transaction for United States federal income tax purposes, or investors that have a functional currency other than the United States dollar, all
of whom may be subject to tax rules that differ significantly from those summarized below.

This discussion is not a comprehensive
description of all of the U.S. federal tax consequences that may be relevant with respect to the ownership and disposition of ADSs or ordinary shares. We urge you to consult your own tax advisor regarding your particular circumstances and the U.S.
federal income and estate tax consequences to you of owning and disposing of ADSs or ordinary shares, as well as any tax consequences arising under the laws of any state, local or foreign or other tax jurisdiction and the possible effects of changes
in U.S. federal or other tax laws.

General

For purposes of this summary, a U.S. Holder is a beneficial owner of ADSs or ordinary shares that is, for United States federal income tax purposes, (i) an individual who is a citizen or resident of
the United States; (ii) a corporation or other entity taxable as a corporation for United States federal income tax purposes, created in, or organized under the law of, the United States or any State or the District of Columbia; (iii) an
estate, the income of which is includible in gross income for United States federal income tax purposes regardless of its source; or (iv) a trust (A) the administration of which is subject to the primary supervision of a United States
court and which has one or more United States persons



80



---

##### Table of Contents

who have the authority to control all substantial decisions of the trust or (B) that has otherwise validly elected to be treated as a United States
person under the Code.

If a partnership is a beneficial owner of our ADSs or ordinary shares, the tax treatment of a partner in the
partnership will generally depend upon the status of the partner and the activities of the partnership.

For United States federal income
tax purposes, U.S. Holders of ADSs will be treated as the beneficial owners of the underlying shares represented by the ADSs.

Threshold PFIC Classification Matters.

A non-United States corporation, such as the company, will be treated as a
passive foreign investment company (a PFIC), for United States federal income tax purposes, if 75% or more of its gross income consists of certain types of passive income or 50% or more of its assets (based on an
average of the quarterly values during a taxable year) are classified as assets that either produce passive income or are held for the production of passive income. Passive income includes, for example, dividends, interest, certain rents
and royalties, certain gains from the sale of stock and securities, and certain gains from commodities transactions.

Certain look
through rules apply for purposes of the income and asset tests described above. If we own, directly or indirectly, 25% or more of the total value of the outstanding shares of another foreign corporation, we will be treated as if we held
directly a proportionate share of the other corporations assets and received directly a proportionate share of the other corporations income. The determination of whether we are, or will become, classified as a PFIC is a fact intensive
determination that is made annually based on the composition and amounts of income that we earn and the composition and valuation of our assets, all of which are subject to change. For this purpose, cash is categorized as a passive asset and the
companys unbooked intangibles are taken into account.

Based upon the composition and valuation of our assets, we do not believe that
we were a PFIC for our taxable year ending December 31, 2008. Based on our current income and assets, it is uncertain whether we will be classified as a PFIC for United States federal income tax purposes for our current taxable year ending
December 31, 2008, a determination that can only be made after the close of the taxable year, or future taxable years. The overall level of our passive assets will be significantly affected by the amount and time-frame within which we disperse
the cash raised in our initial public offering, and other liquid assets that we presently hold, for the purpose of the capital expenditures described in this annual report or other projects.

Additionally, in estimating the value of our goodwill and other unbooked intangibles, we have taken into account our market capitalization. Among other
matters, if our market capitalization subsequently declines, we may be or become classified as a PFIC for the current or one or more future taxable years. Further, while we believe our valuation approach is reasonable, it is possible that the
Internal Revenue Service may challenge the valuation of our goodwill and other unbooked intangibles, which may result in the company being classified as a PFIC for the taxable year ending December 31, 2007, the current taxable year, or one or
more future taxable years. If we are classified as a PFIC for any year during which a U.S. Holder holds our ADSs or ordinary shares, we generally will continue to be treated as a PFIC for all succeeding years during which such U.S. Holder holds our
ADSs or ordinary shares.

Because PFIC status is a fact intensive determination made on an annual basis, no assurance can be given that we
are not or will not become classified as a PFIC and will depend upon, in great measure, the timing of our capital expenditures and the value of our unbooked intangibles. The discussion below under Distributions on ADSs or Ordinary Shares
and Sale or Other Disposition of ADSs or Ordinary Shares is written on the basis that we will not be classified as a PFIC for United States federal income tax purposes. The discussion further below under Passive Foreign Investment
Company summarizes the PFIC rules that would be applicable to an investment in our ADSs or ordinary shares if we were to be or become classified as a PFIC.

Distributions on ADSs or Ordinary Shares

We do not currently intend to pay dividends in the foreseeable future. Any
cash distributions paid on ADSs or ordinary shares out of our earnings and profits, as determined under United States federal income tax principles, will be includible in the gross income of a U.S. Holder as dividend income. Because we do not intend
to determine our earnings and profits on the basis of United States federal income tax principles, any distribution paid will generally be treated as a dividend for United States federal income tax purposes. For taxable years beginning
before January 1, 2011, a non-corporate recipient of dividend income generally will be subject to tax on dividend income from a qualified foreign corporation at a maximum United States federal tax rate of 15% rather than the
marginal tax rates generally applicable to ordinary income provided that certain holding period requirements are met. A non-United States corporation (other than a corporation that is classified as a PFIC for the taxable year in which the dividend
is paid or the preceding taxable year) generally will be considered to be a qualified foreign corporation (i) if it is eligible for the benefits of a comprehensive tax treaty with the United States which the Secretary of Treasury of the United
States determines is satisfactory for purposes of this provision and which includes an exchange of information program or (ii) with respect to



81



---

##### Table of Contents

any dividend it pays on stock which is readily tradable on an established securities market in the United States. There is currently no tax treaty in effect
between the United States and the Cayman Islands. It is expected that our ADSs will be readily tradable as a result of being listed on The NASDAQ Stock Market LLC, an established securities market in the United States.

In addition, for dividends to qualify for the reduced rate, you generally must have held the ADSs or ordinary shares for more than 60 days during the
121-day period beginning 60 days prior to the ex-dividend date. However, your holding period will be reduced for any period during which the risk of loss is diminished. Moreover, a dividend will not qualify for the reduced rate to the extent you are
under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property.

Cash distributions in excess of our earnings and profits will be treated as a tax-free return of capital to the extent of the U.S. Holders adjusted tax basis in its ADSs or ordinary shares, and thereafter as
gain from the sale or exchange of a capital asset. The amount of any cash distribution paid in Renminbi should equal the United States dollar value of the Renminbi on the date of the distribution, regardless of whether the Renminbi is actually
converted into United States dollars at that time. Gain or loss, if any, recognized on a subsequent sale, conversion, or other disposition of Renminbi generally will be United States source ordinary income or loss. Dividends received on the ADSs or
ordinary shares will not be eligible for the dividends-received deduction allowed to corporations.

A U.S. Holder may be eligible, subject
to a number of complex limitations, to claim a foreign tax credit in respect of any foreign withholding taxes imposed on dividends received on ADSs or ordinary shares. Dividends generally will be treated as income from foreign sources for United
States foreign tax credit purposes. The foreign tax credit limitation is calculated separately with respect to specific classes of income. For this purpose, distributions characterized as dividends distributed by us will generally constitute
passive category income or, in the case of certain U.S. Holders, general category income. A U.S. Holder who does not elect to claim a foreign tax credit for such withholding taxes, may instead claim a deduction, for United
States federal income tax purposes, in respect of such withholdings, but only for a year in which such holder elects to do so for all creditable foreign income taxes.

Dispositions of ADSs or Ordinary Shares

Subject to the discussion in Passive Foreign
Investment Company below, you generally will recognize taxable gain or loss realized on the sale or other taxable disposition of ADSs or ordinary shares equal to the difference between the U.S. dollar value of (i) the amount realized on
the disposition (i.e., the amount of cash plus the fair market value of any property received), and (ii) your adjusted tax basis in the ADSs or ordinary shares. Such gain or loss will be capital gain or loss.

If you have held the ADSs or ordinary shares for more than one year at the time of disposition, such capital gain or loss will be long-term capital gain or loss.
Preferential tax rates for long-term capital gain (currently, with a maximum rate of 15% for taxable years beginning before January 1, 2011) will apply to non-corporate U.S. Holders. If you have held the ADSs or ordinary shares for one year or
less, such capital gain or loss will be short-term capital gain or loss taxable as ordinary income at your marginal income tax rate. The deductibility of capital losses is subject to limitations.

Generally, any gain or loss recognized will not give rise to foreign source income for U.S. foreign tax credit purposes.

You should consult your own tax advisor regarding the U.S. federal income tax consequences if you receive currency other than U.S. dollars upon the
disposition of ADSs or ordinary shares.

Passive Foreign Investment Company

If we are or were to become classified as a PFIC for any taxable year during which you hold our ADSs or ordinary shares, unless you make a
mark-to-market election (as described below), you would be subject to special rules with respect to (i) any gain realized on the sale or other disposition of ADSs or ordinary shares, and (ii) any excess distribution
made by us on ADSs or ordinary shares (generally, any distributions paid to you in respect of ADSs or ordinary shares during a single taxable year that are greater than 125% of the average annual distributions received by you during the three
preceding taxable years or, if shorter, your holding period for such ADSs or ordinary shares).

Under the PFIC rules:



| |  |  | the gain or excess distribution would be allocated ratably over your holding period for ADSs or ordinary shares;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | the amount allocated to the taxable year in which the gain or excess distribution was realized, and any taxable year prior to the first taxable year that you held
ADSs or ordinary shares in which we are classified as a PFIC (a pre-PFIC year), would be taxable as ordinary income; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the amount allocated to each prior year, other than the current year and any pre-PFIC year, would be subject to tax at the highest tax rate in effect for that year,
and an interest charge generally applicable to
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



82



---

##### Table of Contents

| | underpayments of tax would be imposed on the resulting tax for each such year for the period it had been deferred.
| | ------------------------------------------------------------------------------------------------------------------

In addition, notwithstanding any election you may make, dividends that you receive from us will not be eligible for the preferential tax rates applicable
to distributions made by qualified foreign corporations (as discussed above in Distributions on ADSs or Ordinary Shares)

As an alternative to the foregoing rules, a holder of marketable stock in a PFIC may make a mark-to-market election, provided that the shares are regularly traded on a qualified exchange, such as The
NASDAQ Stock Market LLC. Stock is regularly traded for any calendar year during which it is traded (other than in de minimis quantities) during each calendar quarter. While the company anticipates that the ADSs will qualify as being
regularly traded on The NASDAQ Stock Market LLC, no assurances may be given that the ADSs will qualify as being regularly traded on such exchange. If you make a valid mark-to-market election, you will generally (i) include as
ordinary income for each taxable year the excess, if any, of the fair market value of your ADSs as determined at the end of the taxable year over the adjusted tax basis of such ADSs and (ii) deduct as an ordinary loss the excess, if any, of the
adjusted tax basis of your ADSs over the fair market value of such ADSs as determined at the end of the taxable year, but only to the extent of the amount previously included in income as a result of the mark-to-market election. Your adjusted tax
basis in your ADSs would be adjusted to reflect any income or loss resulting from the mark-to-market election.

Alternatively, if you make
an election to treat the company as a qualified electing fund (QEF Election) you generally will not be subject to the special rules discussed above. Instead, you will be subject to current U.S. federal income tax on your pro
rata share of our ordinary earnings and net capital gain, regardless of whether such amounts are actually distributed to you by us. However, you can make a QEF Election only if we agree to furnish you annually with certain tax information and we
currently do not intend to prepare or provide such information.

If you own ADSs or ordinary shares during any year that we are classified
as a PFIC, you must file an annual Internal Revenue Service Form 8621 that describes the distributions received on ADSs or ordinary shares and the gain realized on the disposition of ADSs or ordinary shares. You are urged to consult your tax advisor
concerning the United States federal income tax consequences of acquiring, holding, and disposing of ADSs or ordinary shares if we are or become classified as a PFIC, including the possibility of making a mark-to-market election.

Information Reporting and Backup Withholding

Generally, information reporting requirements will apply to distributions on ADSs or ordinary shares or proceeds on the disposition of ADSs or ordinary shares paid within the United States (and, in certain cases, outside the United States)
to U.S. Holders other than certain exempt recipients, such as corporations. Furthermore, backup withholding (currently at 28%) may apply to such amounts if the U.S. Holder fails to (i) provide a correct taxpayer identification number,
(ii) report interest and dividends required to be shown on its U.S. federal income tax return, or (iii) make other appropriate certifications in the required manner. U.S. Holders who are required to establish their exempt status generally
must provide such certification on IRS Form W-9.

Backup withholding is not an additional tax. Amounts withheld as backup withholding from
a payment to you may be credited against your U.S. federal income tax liability and you may obtain a refund of any excess amounts withheld by filing the appropriate claim for refund with the IRS and furnishing any required information in a timely
manner.

F. Dividends and Paying Agents

Not applicable.

G. Statement by Experts

Not applicable.

H. Documents on Display

We have previously filed with the Commission our registration statement on Form F-1, as amended.

We are subject to the periodic reporting and other informational requirements of the Exchange Act. Under the Exchange Act, we are required to file
reports and other information with the Securities and Exchange Commission. Specifically, we are required to file annually a Form 20-F no later than six months after the close of each fiscal year, which is December 31. Copies of reports and
other information, when so filed, may be inspected without charge and may be obtained at prescribed rates at the public reference facilities maintained by the Securities and Exchange Commission at 100 F Street, N.E., Washington, D.C. 20549, and at
the regional office of the Securities and Exchange Commission located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The public may obtain



83



---

##### Table of Contents

information regarding the Washington, D.C. Public Reference Room by calling the Commission at 1-800-SEC-0330. The Securities and Exchange Commission also
maintains a web site at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the Securities and Exchange Commission using its EDGAR system.

As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy
statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.



84



---

##### Table of Contents

|ITEM 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------

Cautionary Statement:

Not to affect the general applicability of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 to this or other parts of this annual report, as more fully discussed in Cautionary Statement concerning Forward Looking Statements at the beginning of this annual report, all the
information contained under this Item, as provided under Form 20-F Item 11(d), constitutes forward looking statement within the meaning of those laws and are subject to various risks and uncertainties, except for information
regarding how our primary market risk exposures are managed and certain historical facts.

Interest Rate Risk

Interest-earning instruments carry a degree of interest rate risk. Our exposure to interest rate risk primarily relates to the interest income generated
by cash invested in demand and time deposits from our initial public offering proceeds. We have not used any derivative financial instruments to manage our interest risk exposure. If market interest rates for such deposits decrease in the near
future, such decrease may cause the amount of our interest income to fall. A hypothetical 10% decrease in the annual average applicable interest rate in fiscal year 2009 would result in a decrease of approximately RMB 2.3 million in interest
income on our balance of such demand and time deposits as of December 31, 2008.

Foreign Currency Risk

On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the current policy, the
RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in substantial appreciation of the RMB against the U.S. dollar since then. While the international
reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of
the RMB against the U.S. dollar.

Substantially all of our revenues and costs are denominated in RMB, while a significant portion of our
financial assets are denominated in U.S. and Hong Kong dollars, to which our exposure to foreign exchange risk primarily relates. We have not hedged exposures denominated in foreign currencies or any other derivative financial instruments.

To the extent that we need to convert U.S. dollars we have received from our initial public offering into Renminbi for our operations,
fluctuation in the exchange rate between the Renminbi and U.S. dollar would have full impact on the Renminbi amount we receive from the conversion. Our cash, cash equivalents and time deposits with original maturities over three months denominated
in U.S. dollars was US$89.5 million as of December 31, 2008. If we had converted such balance from US dollar to RMB at December 31, 2008, the converted amount would have been RMB610.8 million (using an exchange rate of 1USD=6.8225 RMB at
Dec. 31, 2008). If RMB were to appreciate by 5% against U.S. dollar over the Dec. 31, 2008 exchange rate, the converted amount would be RMB580.2 million.



|ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
|-------- | ------------------------------------------------------

Not Applicable.



85



---

##### Table of Contents

PART II



|ITEM 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
|-------- | -----------------------------------------------

Not Applicable.



|ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
|-------- | ----------------------------------------------------------------------------

None.



|ITEM 15. | CONTROLS AND PROCEDURES
|-------- | -----------------------

Evaluation of disclosure controls and
procedures

We maintain disclosure controls and procedures, as such term is defined in Rule 13a15(e) under the
Exchange Act, that are designed to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods
specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of
achieving the desired control objectives.

As required by Rule 13a-15(b) under the Exchange Act, we carried out an evaluation, under the
supervision and with the participation of the Companys management, including our chief executive officer and our chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end
of the fiscal year covered by this report. Based on their evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective at a reasonable assurance level.

Report of Management on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) under the Exchange Act, for our company. Our internal control over
financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Included in our internal
control over financial reporting are policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations from our management and
directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.

Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance with respect to
preparation and presentation of financial statements, and may not prevent or detect all misstatements. In addition, projections of any evaluation of effectiveness of our internal control over financial reporting to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As required by Section 404 of the Sarbanes-Oxley Act of 2002 and related rules as promulgated by the Securities and Exchange Commission, our management has assessed the effectiveness of our internal control over
financial reporting as of December 31, 2008 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, our management
has concluded that our internal control over financial reporting was effective as of December 31, 2008.

Our principal external
auditor, KPMG, has audited the effectiveness of our companys internal control over financial reporting as of December 31, 2008, as stated in their report which appears on page F-1 of this annual report on Form 20-F, which expressed an
unqualified opinion on the effectiveness of our internal control over financial reporting.



86



---

##### Table of Contents

Changes in Internal Controls

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15 or 15d-15 in the Exchange Act that occurred during the period covered by
this annual report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



|ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT
|--------- | --------------------------------

Our board of
directors has determined that Mr. Lawrence S. Wizel qualifies as an audit committee financial expert as defined in Item 16A of the instruction to Form 20-F. Each of the members of our Audit Committee is an independent
director as defined in the Nasdaq Marketplace Rules.



|ITEM 16B. | CODE OF ETHICS
|--------- | --------------

Our board of directors has adopted
a code of ethics, which is applicable to all of our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.

We have filed our code of ethics as an exhibit to our annual report on Form 20-F for the year ended December 31, 2006 and have posted
the code on our website www.3sbio.com. We hereby undertake to provide to any person, without charge, a copy of our code of business conduct and ethics within ten working days after we receive such persons written request.



|ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|--------- | --------------------------------------

The
following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by our principal external auditor, KPMG, for the periods indicated. We did not pay any other fees to our principal
external auditors during the periods indicated below.



|                   |  |                                 |  |       |  |       |  |     
|------------------ |  | ------------------------------- |  | ----- |  | ----- |  | ----
|                   |  | For the year ended December 31,
|                   |  | 2006                            |  | 2007  |  | 2008  |  | 2008
|                   |  | RMB                             |  | RMB   |  | RMB   |  | US$ 
|                   |  | (in thousands)                 
|Audit Fees         |  | 1,380                           |  | 2,338 |  | 3,521 |  | 516 
|Audit-related Fees |  | 5,250                           |  | 1,173 |  | 1,136 |  | 167 
|Tax Fees           |  | 55                              |  |      |  |      |  |    
|Other Fees         |  |                                |  |      |  |      |  |    

As described in the Audit Committee Charter, the pre-approval policy and procedures for accounting
fees are summarized below:



| |  |  | Prior to formally re-appointing the principal external auditor, our audit committee reviews and assesses the independence of the principal external auditor,
including but not limited to any relationships with us, or any other entity that may impair the principal external auditors judgment or independence in respect to us.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our audit committee discusses with the principal external auditor the overall scope of the external audit, including identified risk areas and any additional
agreed-upon procedures.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our audit committee reviews the principal external auditors compensation to ensure that an effective, comprehensive and complete audit can be conducted for
the agreed compensation level.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
|--------- | ----------------------------------------------------------

None.



87



---

##### Table of Contents

|ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
|--------- | ----------------------------------------------------------------------

The following table (also see Footnote below) sets out information concerning purchases of our ADSs made by us during the fiscal year ended December 31, 2008.



|                           |  |                                  |  |                               |  |                                                                |  |                                                                    
|-------------------------- |  | -------------------------------- |  | ----------------------------- |  | -------------------------------------------------------------- |  | -------------------------------------------------------------------
|Period                     |  | (a) TotalNumberofSharesPurchased |  | (b) AveragePrice PaidperShare |  | (c ) SharesPurchasedasPart ofPubliclyAnnouncedPlans orPrograms |  | (d) Numberof Sharesthat MayYet BePurchasedUnder thePlans orPrograms
|August 1st  31st, 2008    |  | 804,300                          |  | 1.38753                       |  | 804,300                                                        |  | *                                                                  
|September 1st  30th, 2008 |  | 718,900                          |  | 1.40241                       |  | 718,900                                                        |  | *                                                                  



|* | Footnote: On March 19, 2008, we announced that our board of directors has authorized to purchase up to US$20 million worth of our outstanding ADSs. Under the program,
repurchases may be made from time to time on the open market over a period of 12 months commencing from March 21, 2008, depending on market conditions, the trading price of the ADSs and other factors, as well as subject to relevant rules under
United States securities regulations. This program expired on March 21, 2009.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|ITEM 16F. | CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT
|--------- | --------------------------------------------

None



|ITEM 16G. | CORPORATE GOVERNANCE
|--------- | --------------------

In lieu of NASDAQ corporate
governance rules, but subject to certain exceptions, we may follow home country practice.

Our board of directors does not currently have a
majority of independent directors. Further, our board of directors does not currently have a nomination committee. These home country practices of ours differ from Rule 4350(c) of the Nasdaq Marketplace Rules . There are no specific requirements
under Cayman Islands law on: (1) a majority of independent directors on the board of directors; or (2) the establishment of the nominations committee or independent directors involvement in the selection of director nominees.



88



---

##### Table of Contents

PART III



|ITEM 17. | FINANCIAL STATEMENTS
|-------- | --------------------

The registrant has elected to
provide the consolidated financial statements and related information specified in Item 18 in lieu of Item 17.



|ITEM 18. | FINANCIAL STATEMENTS
|-------- | --------------------

The audited consolidated
financial statements and the report of our principal external auditor are included in this annual report beginning on page F-1.



|ITEM 19. | EXHIBITS
|-------- | --------



|               |  |                                                                                                                                                                                                                                                                                                                                                                                            
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibits                                                                                                                                                                                                                                                                                                                                                                    
|1.1            |  | Amended and Restated Memorandum of Association of 3SBio Inc. (incorporated by reference to Exhibit 3.1 from our F-1 registration statement (File No. 333-140099), as amended, initially filed with
the Commission on January 19, 2007)                                                                                                                                                     
|               | 
|1.2            |  | Amended and Restated Articles of Association of 3SBio Inc. (incorporated by reference to Exhibit 3.2 from our F-1 registration statement (File No. 333-140099), as amended, initially filed with
the Commission on January 19, 2007)                                                                                                                                                       
|               | 
|2.1            |  | Form of Share Certificate of 3SBio Inc. (incorporated by reference to Exhibit 4.1 from our F-1 registration statement (File No. 333-140099), as amended, initially filed with the Commission on
January 19, 2007)                                                                                                                                                                          
|               | 
|2.2            |  | Form of Deposit Agreement, including Form of ADR, of 3SBio Inc. (incorporated by reference to Exhibit 4.2 from our F-1 registration statement (File No. 333-140099), as amended, initially filed
with the Commission on January 19, 2007)                                                                                                                                                  
|               | 
|4.1            |  | Stock Option Plan adopted by 3SBio Inc., dated as of September 5, 2006 (incorporated by reference to Exhibit 10.1 from our F-1 registration statement (File No. 333-140099), as amended, initially
filed with the Commission on January 19, 2007)                                                                                                                                          
|               | 
|4.2*           |  | Form Purchase Contract for FCS between Shenyang Sunshine Pharmaceutical Company Limited and Shanghai Weike Biochemical Reagent Co., Ltd. (portions of this exhibit have been omitted and filed
separately with the Commission pursuant to a request for confidential treatment).                                                                                                           
|               | 
|4.3            |  | Collaboration Agreement for License and Co-development of anti-TNF alpha monoclonal antibody therapeutics between Shenyang Sunshine Pharmaceutical Company Limited and Epitomics Inc. dated as of
March 4, 2006 (incorporated by reference to Exhibit 10.14 from our F-1 registration statement (File No. 333-140099), as amended, initially filed with the Commission on January 19, 2007)
|               | 
|4.4            |  | Form of Distribution Agreement (incorporated by reference to Exhibit 10.15 from our F-1 registration statement (File No. 333-140099), as amended, initially filed with the Commission on January
19, 2007)                                                                                                                                                                                 
|               | 
|4.5            |  | Equity Transfer Agreement of Liaoning Sunshine Pharmaceutical Company Limited between Shenyang Sunshine Pharmaceutical Company Limited and Dan Lou dated as of November 10, 2006 (incorporated by
reference to Exhibit 10.17 from our F-1 registration statement (File No. 333-140099), as amended, initially filed with the Commission on January 19, 2007)                               
|               | 
|4.6            |  | Form of Purchase Agreement for the Acquisition of Equity Interest in Liaoning Sunshine Pharmaceutical Company Limited between Shenyang Sunshine Pharmaceutical Company Limited and Dan Lou
(incorporated by reference to Exhibit 10.18 from our F-1 registration statement (File No. 333-140099), as amended, initially filed with the Commission on January 19, 2007)                     
|               | 
|4.7            |  | Form of Pledge Agreement of Equity Interest in Liaoning Sunshine Pharmaceutical Company Limited between Shenyang Sunshine Pharmaceutical Company Limited and Dan Lou (incorporated by reference to
Exhibit 10.19 from our F-1 registration statement (File No. 333-140099), as amended, initially filed with the Commission on January 19, 2007)                                           
|               | 
|4.8            |  | Form of Voting Agreement between Shenyang Sunshine Pharmaceutical Company Limited and Dan Lou                                                                                                                                                                                                                                                                                              



89



---

##### Table of Contents

|               |  |                                                                                                                                                                                                                                                                                                                                           
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibits                                                                                                                                                                                                                                                                                                                   
|               |  | (incorporated by reference to Exhibit 10.20 from our F-1 registration statement (File No. 333-140099), as amended, initially filed with the Commission on January 19, 2007)                                                                                                                                                               
|               | 
|4.9            |  | Form of Business Cooperation Agreement among 3SBio Inc., Shenyang Sunshine Pharmaceutical Company Limited and Liaoning Sunshine Pharmaceutical Company Limited (incorporated by reference to
Exhibit 10.21 from our F-1 registration statement (File No. 333-140099), as amended, initially filed with the Commission on January 19, 2007)
|               | 
|4.10*          |  | Equipment Purchase Contract between Shenyang Sunshine Pharmaceutical Company Limited and Johs.Rieckermann e.K. dated as of July 30, 2007 (portions of this exhibit have been omitted and filed
separately with the Commission pursuant to a request for confidential treatment).                                                          



|               |  |                                                                                                                                                                                
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibits                                                                                                                                                        
|8.1*           |  | List of subsidiaries of 3SBio Inc.                                                                                                                                             
|               | 
|11.1           |  | Code of Ethics (incorporated by reference to Exhibit 11.1 from our annual report on Form 20-F for the year ended December 31, 2006, filed with the Commission on June 29, 2007)
|               | 
|12.1*          |  | CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                    
|               | 
|12.2*          |  | CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                    
|               | 
|13.1*          |  | CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                    
|               | 
|13.2*          |  | CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                    
|               | 
|15.1*          |  | Consent of KPMG                                                                                                                                                                



|* | Filed herewith.
|- | ---------------



90



---

##### Table of Contents

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.



3SBio Inc.By:

/s/ Dr. Jing LouName:

Dr. Jing LouTitle:

Chief Executive OfficerDate:

April 21, 2009




91



---

##### Table of Contents

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                                        |  |     
|----------------------------------------------------------------------------------------------------------------------- |  | ----
|Consolidated Financial Statements of 3SBio, Inc.                                                                        |  | Page
|Report of Independent Registered Public Accounting Firm                                                                 |  | F-1 
|Consolidated Balance Sheets as of December 31, 2007 and 2008                                                            |  | F-2 
|Consolidated Statements of Income and Comprehensive Income/(Loss) for the years ended December 
31, 2006, 2007 and 2008 |  | F-4 
|Consolidated Statements of Shareholders Equity for the years ended December 31, 2006, 2007 and 2008                    |  | F-6 
|Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2007 and 2008                              |  | F-7 
|Notes to Consolidated Financial Statements                                                                              |  | F-11



---

##### Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

3SBio Inc.

We have audited the accompanying consolidated balance sheets of 3SBio Inc. (the Company) and subsidiaries as of December 31, 2007 and 2008, and the
related consolidated statements of income and comprehensive income/(loss), shareholders equity and cash flows for each of the years in the three-year period ended December 31, 2008, all expressed in Renminbi. These consolidated financial
statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of 3SBio Inc. and subsidiaries
as of December 31, 2007 and 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.

The accompanying consolidated financial statements as of and for the year ended December 31, 2008 have been translated into United States dollars
solely for the convenience of the reader. We have audited the translation and, in our opinion, such consolidated financial statements expressed in Renminbi have been translated into United States dollars on the basis set forth in note 2(b) to the
consolidated financial statements.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the Company and subsidiaries internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO), and our report dated April 21, 2009 expressed an unqualified opinion on the effectiveness of the Company and subsidiaries internal control over financial reporting.

Hong Kong, China

April 21, 2009



F-1



---

##### Table of Contents

Consolidated balance sheets

At December 31, 2007 and 2008

(RMB and US$ expressed in thousands, except share data)



|                                                                                                                               |  |      |  |              |  |         |  |        
|------------------------------------------------------------------------------------------------------------------------------ |  | ---- |  | ------------ |  | ------- |  | -------
|                                                                                                                               |  |      |  | December 31,
|                                                                                                                               |  | Note |  | 2007         |  | 2008    |  | 2008   
|                                                                                                                               |  |      |  | RMB          |  | RMB     |  | US$    
|ASSETS                                                                                                                         |  |      |  |              |  |         |  |        
|                                                                                                                               |  |      |  |             
|Current assets                                                                                                                 |  |      |  |              |  |         |  |        
|                                                                                                                               |  |      |  |             
|Cash and cash equivalents                                                                                                      |  |      |  | 811,026      |  | 439,237 |  | 64,380 
|Time deposits with financial institutions                                                                                      |  |      |  |             |  | 293,809 |  | 43,065 
|Accounts receivable, less allowance for doubtful accounts: December 31, 2007  RMB5,257; December 31, 2008  RMB4,503
(US$660) |  | 3    |  | 55,186       |  | 73,767  |  | 10,812 
|Inventories                                                                                                                    |  | 4    |  | 6,882        |  | 7,748   |  | 1,136  
|Prepaid expenses and other receivables                                                                                         |  | 5    |  | 12,074       |  | 8,249   |  | 1,209  
|Structured deposits                                                                                                            |  | 6    |  | 3,527        |  |        |  |       
|Deferred tax assets                                                                                                            |  | 18   |  | 2,335        |  | 1,802   |  | 264    
|                                                                                                                               |  |      |  |              |  |         |  |        
|                                                                                                                               |  |      |  |             
|Total current assets                                                                                                           |  |      |  | 891,030      |  | 824,612 |  | 120,866
|                                                                                                                               |  |      |  |             
|Available-for-sale securities                                                                                                  |  | 7    |  | 15,196       |  | 26,700  |  | 3,914  
|Property, plant and equipment, net                                                                                             |  | 8    |  | 49,465       |  | 78,185  |  | 11,459 
|Lease prepayments                                                                                                              |  | 9    |  | 9,247        |  | 8,894   |  | 1,304  
|Non-current deposits                                                                                                           |  | 10   |  | 6,124        |  | 8,521   |  | 1,249  
|Intangible assets, net                                                                                                         |  | 11   |  |             |  | 5,225   |  | 766    
|Income tax receivable                                                                                                          |  |      |  | 556          |  |        |  |       
|Deferred tax assets                                                                                                            |  | 18   |  | 1,857        |  | 781     |  | 114    
|                                                                                                                               |  |      |  |              |  |         |  |        
|                                                                                                                               |  |      |  |             
|Total assets                                                                                                                   |  |      |  | 973,475      |  | 952,918 |  | 139,672
|                                                                                                                               |  |      |  |              |  |         |  |        
|                                                                                                                               |  |      |  |             
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                           |  |      |  |              |  |         |  |        
|                                                                                                                               |  |      |  |             
|Current liabilities                                                                                                            |  |      |  |              |  |         |  |        
|                                                                                                                               |  |      |  |             
|Accounts payable                                                                                                               |  |      |  | 1,693        |  | 1,939   |  | 284    
|Deferred grant income                                                                                                          |  | 12   |  | 374          |  | 374     |  | 55     
|Accrued expenses and other payables                                                                                            |  | 13   |  | 22,626       |  | 25,273  |  | 3,705  
|Income tax payable                                                                                                             |  |      |  |             |  | 1,256   |  | 184    
|Other current liabilities                                                                                                      |  |      |  | 67           |  | 57      |  | 8      
|                                                                                                                               |  |      |  |              |  |         |  |        
|                                                                                                                               |  |      |  |             
|Total current liabilities                                                                                                      |  |      |  | 24,760       |  | 28,899  |  | 4,236  
|                                                                                                                               |  |      |  |             
|Deferred grant income                                                                                                          |  | 12   |  | 3,526        |  | 3,152   |  | 462    
|Other liabilities                                                                                                              |  |      |  | 848          |  | 472     |  | 69     
|                                                                                                                               |  |      |  |              |  |         |  |        



F-2



---

##### Table of Contents

Consolidated balance sheets

At December 31, 2007 and 2008 (continued)

(RMB and US$ expressed in thousands, except share data)



|                                                                                                                                                                                             |  |      |  |              |   |  |          |   |  |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- |  | ------------ | - |  | -------- | - |  | ------- | -
|                                                                                                                                                                                             |  |      |  | December 31, |  
|                                                                                                                                                                                             |  | Note |  | 2007         |   |  | 2008     |   |  | 2008    |  
|                                                                                                                                                                                             |  |      |  | RMB          |   |  | RMB      |   |  | US$     |  
|LIABILITIES AND SHAREHOLDERS EQUITY (continued)                                                                                                                                             |  |      |  |              |   |  |          |   |  |         |  
|                                                                                                                                                                                             |  |      |  |             
|Total liabilities                                                                                                                                                                            |  |      |  | 29,134       |   |  | 32,523   |   |  | 4,767   |  
|                                                                                                                                                                                             |  |      |  |              |   |  |          |   |  |         |  
|                                                                                                                                                                                             |  |      |  |             
|Commitments and contingencies                                                                                                                                                                |  | 24   |  |              |   |  |          |   |  |         |  
|                                                                                                                                                                                             |  |      |  |             
|Minority interests                                                                                                                                                                           |  |      |  | 549          |   |  |         |   |  |        |  
|                                                                                                                                                                                             |  |      |  |              |   |  |          |   |  |         |  
|                                                                                                                                                                                             |  |      |  |             
|Shareholders equity                                                                                                                                                                         |  | 14   |  |              |   |  |          |   |  |         |  
|                                                                                                                                                                                             |  |      |  |             
|Share capital  ordinary shares US$0.0001 par value, 500,000,000 shares authorized, 152,099,155 and 150,575,955 shares issued and
outstanding as of December 31, 2007 and 2008, respectively |  |      |  | 122          |   |  | 121      |   |  | 18      |  
|Additional paid-in capital                                                                                                                                                                   |  |      |  | 917,527      |   |  | 908,377  |   |  | 133,144 |  
|Accumulated other comprehensive loss                                                                                                                                                         |  |      |  | (48,338      | ) |  | (102,126 | ) |  | (14,970 | )
|Retained earnings                                                                                                                                                                            |  |      |  | 74,481       |   |  | 114,023  |   |  | 16,713  |  
|                                                                                                                                                                                             |  |      |  |              |   |  |          |   |  |         |  
|                                                                                                                                                                                             |  |      |  |             
|Total shareholders equity                                                                                                                                                                   |  |      |  | 943,792      |   |  | 920,395  |   |  | 134,905 |  
|                                                                                                                                                                                             |  |      |  |              |   |  |          |   |  |         |  
|                                                                                                                                                                                             |  |      |  |             
|Total liabilities, minority interests and shareholders equity                                                                                                                               |  |      |  | 973,475      |   |  | 952,918  |   |  | 139,672 |  
|                                                                                                                                                                                             |  |      |  |              |   |  |          |   |  |         |  

See accompanying notes to the consolidated financial statements.



F-3



---

##### Table of Contents

Consolidated statements of income and comprehensive income/(loss)

for the years ended December 31, 2006, 2007 and 2008

(RMB and US$
expressed in thousands, except share data)



|                                                        |  |      |  |                         |   |  |          |   |  |          |   |  |         |  
|------------------------------------------------------- |  | ---- |  | ----------------------- | - |  | -------- | - |  | -------- | - |  | ------- | -
|                                                        |  |      |  | Year ended December 31, |  
|                                                        |  | Note |  | 2006                    |   |  | 2007     |   |  | 2008     |   |  | 2008    |  
|                                                        |  |      |  | RMB                     |   |  | RMB      |   |  | RMB      |   |  | US$     |  
|Revenues                                                |  | 15   |  | 127,780                 |   |  | 180,173  |   |  | 243,245  |   |  | 35,653  |  
|Cost of revenues                                        |  | 16   |  | (11,598                 | ) |  | (17,427  | ) |  | (21,741  | ) |  | (3,187  | )
|                                                        |  |      |  |                         |   |  |          |   |  |          |   |  |         |  
|                                                        |  |      |  |                         |  
|Gross profit                                            |  |      |  | 116,182                 |   |  | 162,746  |   |  | 221,504  |   |  | 32,466  |  
|                                                        |  |      |  |                         |   |  |          |   |  |          |   |  |         |  
|                                                        |  |      |  |                         |  
|Operating expenses                                      |  |      |  |                         |   |  |          |   |  |          |   |  |         |  
|                                                        |  |      |  |                         |  
|Research and development costs                          |  | 16   |  | (6,100                  | ) |  | (11,635  | ) |  | (22,477  | ) |  | (3,295  | )
|Sales, marketing and distribution expenses              |  | 16   |  | (61,280                 | ) |  | (84,187  | ) |  | (119,778 | ) |  | (17,556 | )
|General and administrative expenses                     |  | 16   |  | (12,269                 | ) |  | (18,379  | ) |  | (31,458  | ) |  | (4,611  | )
|                                                        |  |      |  |                         |   |  |          |   |  |          |   |  |         |  
|                                                        |  |      |  |                         |  
|Total operating expenses                                |  |      |  | (79,649                 | ) |  | (114,201 | ) |  | (173,713 | ) |  | (25,462 | )
|                                                        |  |      |  |                         |   |  |          |   |  |          |   |  |         |  
|                                                        |  |      |  |                         |  
|Operating income                                        |  |      |  | 36,533                  |   |  | 48,545   |   |  | 47,791   |   |  | 7,004   |  
|                                                        |  |      |  |                         |   |  |          |   |  |          |   |  |         |  
|                                                        |  |      |  |                         |  
|Other income/(expense), net                             |  |      |  |                         |   |  |          |   |  |          |   |  |         |  
|                                                        |  |      |  |                         |  
|Interest income                                         |  |      |  | 436                     |   |  | 36,015   |   |  | 23,953   |   |  | 3,511   |  
|Interest expense                                        |  |      |  | (4,245                  | ) |  | (825     | ) |  |         |   |  |        |  
|Grant income                                            |  | 12   |  | 3,146                   |   |  | 1,067    |   |  | 388      |   |  | 57      |  
|Net realized loss on available-for-sale securities      |  | 7(a) |  |                        |   |  |         |   |  | (18,995  | ) |  | (2,784  | )
|Impairment loss on available-for-sale securities        |  | 7(b) |  |                        |   |  |         |   |  | (4,391   | ) |  | (644    | )
|Others                                                  |  |      |  | (192                    | ) |  | 205      |   |  | 1,896    |   |  | 278     |  
|                                                        |  |      |  |                         |   |  |          |   |  |          |   |  |         |  
|                                                        |  |      |  |                         |  
|Total other (expense)/income, net                       |  |      |  | (855                    | ) |  | 36,462   |   |  | 2,851    |   |  | 418     |  
|                                                        |  |      |  |                         |   |  |          |   |  |          |   |  |         |  
|                                                        |  |      |  |                         |  
|Income before income tax expense and minority interests |  |      |  | 35,678                  |   |  | 85,007   |   |  | 50,642   |   |  | 7,422   |  
|                                                        |  |      |  |                         |  
|Income tax expense                                      |  | 18   |  | (5,217                  | ) |  | (3,419   | ) |  | (11,649  | ) |  | (1,707  | )
|                                                        |  |      |  |                         |   |  |          |   |  |          |   |  |         |  
|                                                        |  |      |  |                         |  
|Income before minority interests                        |  |      |  | 30,461                  |   |  | 81,588   |   |  | 38,993   |   |  | 5,715   |  
|                                                        |  |      |  |                         |  
|Minority interests                                      |  |      |  | 28                      |   |  | (75      | ) |  | 549      |   |  | 80      |  
|                                                        |  |      |  |                         |   |  |          |   |  |          |   |  |         |  
|                                                        |  |      |  |                         |  
|Net income                                              |  |      |  | 30,489                  |   |  | 81,513   |   |  | 39,542   |   |  | 5,795   |  
|                                                        |  |      |  |                         |   |  |          |   |  |          |   |  |         |  



F-4



---

##### Table of Contents

Consolidated statements of income and comprehensive income/(loss)

for the years ended December 31, 2006, 2007 and 2008 (continued)

(RMB and US$ expressed in thousands, except share data)



|                                                                            |  |      |  |                         |  |         |   |  |         |   |  |        |  
|--------------------------------------------------------------------------- |  | ---- |  | ----------------------- |  | ------- | - |  | ------- | - |  | ------ | -
|                                                                            |  |      |  | Year ended December 31, | 
|                                                                            |  | Note |  | 2006                    |  | 2007    |   |  | 2008    |   |  | 2008   |  
|                                                                            |  |      |  | RMB                     |  | RMB     |   |  | RMB     |   |  | US$    |  
|Other comprehensive income/(loss)                                           |  |      |  |                         |  |         |   |  |         |   |  |        |  
|                                                                            |  |      |  |                         | 
|Net unrealized gain/(loss) in available-for-sale securities, net of nil tax |  | 7    |  |                        |  | 298     |   |  | (790    | ) |  | (115   | )
|Transfer to income on disposal of available-for-sale securities             |  |      |  |                        |  |        |   |  | (113    | ) |  | (16    | )
|Foreign currency translation adjustments, net of nil tax                    |  |      |  |                        |  | (48,636 | ) |  | (52,885 | ) |  | (7,752 | )
|                                                                            |  |      |  |                         |  |         |   |  |         |   |  |        |  
|                                                                            |  |      |  |                         | 
|Other comprehensive loss                                                    |  |      |  |                        |  | (48,338 | ) |  | (53,788 | ) |  | (7,883 | )
|                                                                            |  |      |  |                         |  |         |   |  |         |   |  |        |  
|                                                                            |  |      |  |                         | 
|Comprehensive income/(loss)                                                 |  |      |  | 30,489                  |  | 33,175  |   |  | (14,246 | ) |  | (2,088 | )
|                                                                            |  |      |  |                         |  |         |   |  |         |   |  |        |  
|                                                                            |  |      |  |                         | 
|Net income per share:                                                       |  |      |  |                         |  |         |   |  |         |   |  |        |  
|                                                                            |  |      |  |                         | 
|- Basic                                                                     |  |      |  | 0.30                    |  | 0.56    |   |  | 0.26    |   |  | 0.04   |  
|                                                                            |  |      |  |                         |  |         |   |  |         |   |  |        |  
|                                                                            |  |      |  |                         | 
|- Diluted                                                                   |  |      |  | 0.30                    |  | 0.56    |   |  | 0.26    |   |  | 0.04   |  
|                                                                            |  |      |  |                         |  |         |   |  |         |   |  |        |  

See accompanying notes to the consolidated financial statements.



F-5



---

##### Table of Contents

Consolidated statements of shareholders equity

for the years ended December 31, 2006, 2007 and 2008

(RMB and US$
expressed in thousands, except share data)



|                                                                      |  |             |  |               |     |  |                   |     |  |                          |     |  |                   |     |  |                                   |     |  |                                       |     |  |                          |     |  |         |  
|--------------------------------------------------------------------- |  | ----------- |  | ------------- | --- |  | ----------------- | --- |  | ------------------------ | --- |  | ----------------- | --- |  | --------------------------------- | --- |  | ------------------------------------- | --- |  | ------------------------ | --- |  | ------- | -
|                                                                      |  |             |  | Share capital |     |  | Registeredcapital |     |  | Additionalpaid-incapital |     |  | Statutoryreserves |     |  | Accumulatedothercomprehensiveloss |     |  | (Accumulateddeficit)/retainedearnings |     |  | Totalshareholdersequity |    
|                                                                      |  | Note        |  | No. ofshares  |     |  | Amount            |     |  |                          |     |  |                   |    
|                                                                      |  |             |  |               | RMB |  |                   | RMB |  |                          | RMB |  |                   | RMB |  |                                   | RMB |  |                                       | RMB |  |                          | RMB | 
|Balance as of January 1, 2006                                         |  |             |  |              |     |  |                  |     |  | 62,974                   |     |  | 15,167            |     |  | 2,266                             |     |  |                                      |     |  | (39,787                  | )   |  | 40,620  |  
|                                                                      |  |             |  |               |     |  |                   |     | 
|Capital on incorporation                                              |  | 14(a)       |  | 1             |     |  |                  |     |  |                         |     |  |                  |     |  |                                  |     |  |                                      |     |  |                         |     |  |        |  
|Effect of reorganization                                              |  | 14(a)       |  | 100,000,997   |     |  | 80                |     |  | (62,974                  | )   |  | 62,974            |     |  | (2,266                            | )   |  |                                      |     |  | 2,266                    |     |  | 80      |  
|Net income                                                            |  |             |  |              |     |  |                  |     |  |                         |     |  |                  |     |  |                                  |     |  |                                      |     |  | 30,489                   |     |  | 30,489  |  
|Share-based compensation, net of nil tax                              |  |             |  |               |     |  |                   |     |  |                          |     |  |                   |     |  |                                   |     |  |                                       |     |  |                          |     |  |         |  
|- shares granted to executives                                        |  | 19(a)       |  |              |     |  |                  |     |  |                         |     |  | 1,915             |     |  |                                  |     |  |                                      |     |  |                         |     |  | 1,915   |  
|- share options granted to executives                                 |  | 19(b)       |  |              |     |  |                  |     |  |                         |     |  | 230               |     |  |                                  |     |  |                                      |     |  |                         |     |  | 230     |  
|                                                                      |  |             |  |               |     |  |                   |     |  |                          |     |  |                   |     |  |                                   |     |  |                                       |     |  |                          |     |  |         |  
|                                                                      |  |             |  |               |     |  |                   |     | 
|Balance as of December 31, 2006                                       |  |             |  | 100,000,998   |     |  | 80                |     |  |                         |     |  | 80,286            |     |  |                                  |     |  |                                      |     |  | (7,032                   | )   |  | 73,334  |  
|                                                                      |  |             |  |               |     |  |                   |     | 
|Issuance of new shares, net of issuance costs                         |  | 1(a), 14(a) |  | 52,083,157    |     |  | 42                |     |  |                         |     |  | 836,246           |     |  |                                  |     |  |                                      |     |  |                         |     |  | 836,288 |  
|Net income                                                            |  |             |  |              |     |  |                  |     |  |                         |     |  |                  |     |  |                                  |     |  |                                      |     |  | 81,513                   |     |  | 81,513  |  
|Share-based compensation, net of nil tax                              |  |             |  |               |     |  |                   |     |  |                          |     |  |                   |     |  |                                   |     |  |                                       |     |  |                          |     |  |         |  
|- shares granted and issuance of shares to an executive               |  | 19(a)       |  | 15,000        |     |  |                  |     |  |                         |     |  | 52                |     |  |                                  |     |  |                                      |     |  |                         |     |  | 52      |  
|- share options granted to executives                                 |  | 19(b)       |  |              |     |  |                  |     |  |                         |     |  | 943               |     |  |                                  |     |  |                                      |     |  |                         |     |  | 943     |  
|Net unrealised gain in available-for-sale securities, net of nil tax  |  | 7           |  |              |     |  |                  |     |  |                         |     |  |                  |     |  |                                  |     |  | 298                                   |     |  |                         |     |  | 298     |  
|Net effect of foreign currency translation adjustment, net of nil tax |  |             |  |              |     |  |                  |     |  |                         |     |  |                  |     |  |                                  |     |  | (48,636                               | )   |  |                         |     |  | (48,636 | )
|                                                                      |  |             |  |               |     |  |                   |     |  |                          |     |  |                   |     |  |                                   |     |  |                                       |     |  |                          |     |  |         |  
|                                                                      |  |             |  |               |     |  |                   |     | 
|Balance as of December 31, 2007                                       |  |             |  | 152,099,155   |     |  | 122               |     |  |                         |     |  | 917,527           |     |  |                                  |     |  | (48,338                               | )   |  | 74,481                   |     |  | 943,792 |  
|                                                                      |  |             |  |               |     |  |                   |     | 
|Repurchase and cancellation of shares                                 |  | 14(a)       |  | (1,523,200    | )   |  | (1                | )   |  |                         |     |  | (14,466           | )   |  |                                  |     |  |                                      |     |  |                         |     |  | (14,467 | )
|Net income                                                            |  |             |  |              |     |  |                  |     |  |                         |     |  |                  |     |  |                                  |     |  |                                      |     |  | 39,542                   |     |  | 39,542  |  
|Share-based compensation, net of nil tax                              |  |             |  |               |     |  |                   |     |  |                          |     |  |                   |     |  |                                   |     |  |                                       |     |  |                          |     |  |         |  
|- shares granted to executives                                        |  | 19(a)       |  |              |     |  |                  |     |  |                         |     |  | 121               |     |  |                                  |     |  |                                      |     |  |                         |     |  | 121     |  
|- share options granted to executives                                 |  | 19(b)       |  |              |     |  |                  |     |  |                         |     |  | 5,195             |     |  |                                  |     |  |                                      |     |  |                         |     |  | 5,195   |  
|Net unrealised loss in available-for-sale securities, net of nil tax  |  | 7           |  |              |     |  |                  |     |  |                         |     |  |                  |     |  |                                  |     |  | (790                                  | )   |  |                         |     |  | (790    | )
|Transfer to income on disposal of available-for-sale securities       |  |             |  |              |     |  |                  |     |  |                         |     |  |                  |     |  |                                  |     |  | (113                                  | )   |  |                         |     |  | (113    | )
|Net effect of foreign currency translation adjustment, net of nil tax |  |             |  |              |     |  |                  |     |  |                         |     |  |                  |     |  |                                  |     |  | (52,885                               | )   |  |                         |     |  | (52,885 | )
|                                                                      |  |             |  |               |     |  |                   |     |  |                          |     |  |                   |     |  |                                   |     |  |                                       |     |  |                          |     |  |         |  
|                                                                      |  |             |  |               |     |  |                   |     | 
|Balance as of December 31, 2008                                       |  |             |  | 150,575,955   |     |  | 121               |     |  |                         |     |  | 908,377           |     |  |                                  |     |  | (102,126                              | )   |  | 114,023                  |     |  | 920,395 |  
|                                                                      |  |             |  |               |     |  |                   |     |  |                          |     |  |                   |     |  |                                   |     |  |                                       |     |  |                          |     |  |         |  
|                                                                      |  |             |  |               |     |  |                   |     | 
|Balance as of December 31, 2008- US$                                  |  |             |  |               |     |  | 18                |     |  |                         |     |  | 133,144           |     |  |                                  |     |  | (14,970                               | )   |  | 16,713                   |     |  | 134,905 |  
|                                                                      |  |             |  |               |     |  |                   |     |  |                          |     |  |                   |     |  |                                   |     |  |                                       |     |  |                          |     |  |         |  

See accompanying notes to the consolidated financial statements.



F-6



---

##### Table of Contents

Consolidated statements of cash flows

for the years ended December 31, 2006, 2007 and 2008

(RMB and US$
expressed in thousands)



|                                                                                  |  |      |  |                         |   |  |        |   |  |        |   |  |       |  
|--------------------------------------------------------------------------------- |  | ---- |  | ----------------------- | - |  | ------ | - |  | ------ | - |  | ----- | -
|                                                                                  |  |      |  | Year ended December 31, |  
|                                                                                  |  | Note |  | 2006                    |   |  | 2007   |   |  | 2008   |   |  | 2008  |  
|                                                                                  |  |      |  | RMB                     |   |  | RMB    |   |  | RMB    |   |  | US$   |  
|Cash flow from operating activities                                               |  |      |  |                         |   |  |        |   |  |        |   |  |       |  
|Net income                                                                        |  |      |  | 30,489                  |   |  | 81,513 |   |  | 39,542 |   |  | 5,795 |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |  |                         |   |  |        |   |  |        |   |  |       |  
|- Loss on disposal of property, plant and equipment                               |  |      |  | 187                     |   |  | 445    |   |  | 519    |   |  | 76    |  
|- Depreciation of property, plant and equipment                                   |  | 16   |  | 5,500                   |   |  | 4,888  |   |  | 5,743  |   |  | 842   |  
|- Amortization of intangible assets                                               |  | 11   |  |                        |   |  |       |   |  | 275    |   |  | 40    |  
|- Amortization of deferred grant income                                           |  |      |  | (924                    | ) |  | (611   | ) |  | (374   | ) |  | (55   | )
|- Share-based compensation                                                        |  |      |  | 2,145                   |   |  | 995    |   |  | 4,988  |   |  | 731   |  
|- Minority interests                                                              |  |      |  | (28                     | ) |  | 75     |   |  | (549   | ) |  | (80   | )
|- Net realized loss on available-for-sale securities                              |  | 7(a) |  |                        |   |  |       |   |  | 18,995 |   |  | 2,784 |  
|- Impairment loss on available-for-sale securities                                |  | 7(b) |  |                        |   |  |       |   |  | 4,391  |   |  | 644   |  
|- Loss/(gain) on structured deposits                                              |  |      |  |                        |   |  | 10     |   |  | (459   | ) |  | (67   | )
|- Foreign currency exchange loss/(gain), net                                      |  |      |  |                        |   |  | 859    |   |  | (2,435 | ) |  | (357  | )
|- Deferred income tax expense/(benefit)                                           |  |      |  | 1,297                   |   |  | (549   | ) |  | 1,609  |   |  | 236   |  



F-7



---

##### Table of Contents

Consolidated statements of cash flows

for the years ended December 31, 2006, 2007 and 2008 (continued)

(RMB and US$ expressed in thousands)



|                                                         |  |      |  |                         |   |  |         |   |  |          |   |  |         |  
|-------------------------------------------------------- |  | ---- |  | ----------------------- | - |  | ------- | - |  | -------- | - |  | ------- | -
|                                                         |  |      |  | Year ended December 31, |  
|                                                         |  | Note |  | 2006                    |   |  | 2007    |   |  | 2008     |   |  | 2008    |  
|                                                         |  |      |  | RMB                     |   |  | RMB     |   |  | RMB      |   |  | US$     |  
|Cash flow from operating activities (continued)          |  |      |  |                         |   |  |         |   |  |          |   |  |         |  
|Changes in operating assets and liabilities:             |  |      |  |                         |   |  |         |   |  |          |   |  |         |  
|Lease prepayments                                        |  | 9    |  | 353                     |   |  | 353     |   |  | 353      |   |  | 52      |  
|Accounts receivable, net                                 |  |      |  | (3,026                  | ) |  | (17,784 | ) |  | (18,581  | ) |  | (2,722  | )
|Inventories                                              |  |      |  | (2,232                  | ) |  | 1,800   |   |  | (866     | ) |  | (127    | )
|Prepaid expenses and other receivables                   |  |      |  | (2,296                  | ) |  | (7,351  | ) |  | 2,766    |   |  | 405     |  
|Accounts payable                                         |  |      |  | 433                     |   |  | (76     | ) |  | 246      |   |  | 36      |  
|Accrued expenses, other payables and liabilities         |  |      |  | 5,279                   |   |  | 5,918   |   |  | 2,493    |   |  | 365     |  
|Amount due to a related party                            |  |      |  | (1,423                  | ) |  |        |   |  |         |   |  |        |  
|Income tax receivable                                    |  |      |  |                        |   |  | (556    | ) |  | 556      |   |  | 81      |  
|Income tax payable                                       |  |      |  | 1,288                   |   |  | (1,167  | ) |  | 1,256    |   |  | 184     |  
|                                                         |  |      |  |                         |   |  |         |   |  |          |   |  |         |  
|Net cash provided by operating activities                |  |      |  | 37,042                  |   |  | 68,762  |   |  | 60,468   |   |  | 8,863   |  
|                                                         |  |      |  |                         |   |  |         |   |  |          |   |  |         |  
|                                                         |  |      |  |                         |  
|Cash flow from investing activities                      |  |      |  |                         |   |  |         |   |  |          |   |  |         |  
|Purchase of property, plant and equipment                |  |      |  | (2,671                  | ) |  | (11,697 | ) |  | (34,671  | ) |  | (5,082  | )
|Deposit for acquisition of property, plant and equipment |  |      |  |                        |   |  | (5,617  | ) |  | (2,106   | ) |  | (308    | )
|Proceeds from disposal of property, plant and equipment  |  |      |  | 37                      |   |  | 41      |   |  | 85       |   |  | 12      |  
|Purchase of available-for-sale securities                |  |      |  |                        |   |  | (15,681 | ) |  | (80,136  | ) |  | (11,746 | )
|Proceeds from disposal of available-for-sale securities  |  |      |  |                        |   |  |        |   |  | 43,421   |   |  | 6,364   |  
|Purchase of structured deposits                          |  |      |  |                        |   |  | (3,537  | ) |  | (9,809   | ) |  | (1,438  | )
|Proceeds from disposal of structured deposits            |  |      |  |                        |   |  |        |   |  | 13,636   |   |  | 1,999   |  
|Purchase of intangible assets                            |  |      |  |                        |   |  |        |   |  | (5,500   | ) |  | (806    | )
|Purchase of time deposits with financial institutions    |  |      |  |                        |   |  |        |   |  | (293,809 | ) |  | (43,065 | )
|Repayment from shareholder                               |  |      |  | 19,675                  |   |  |        |   |  |         |   |  |        |  
|                                                         |  |      |  |                         |   |  |         |   |  |          |   |  |         |  
|Net cash provided/ (used in) by investing activities     |  |      |  | 17,041                  |   |  | (36,491 | ) |  | (368,889 | ) |  | (54,070 | )
|                                                         |  |      |  |                         |   |  |         |   |  |          |   |  |         |  



F-8



---

##### Table of Contents

Consolidated statements of cash flows

for the years ended December 31, 2006, 2007 and 2008 (continued)

(RMB and US$ expressed in thousands)





|                                                            |  |      |     |  |                         |   |  |         |   |  |         |   |  |        |  
|----------------------------------------------------------- |  | ---- | --- |  | ----------------------- | - |  | ------- | - |  | ------- | - |  | ------ | -
|                                                            |  |      |     |  | Year ended December 31, |  
|                                                            |  | Note |     |  | 2006                    |   |  | 2007    |   |  | 2008    |   |  | 2008   |  
|                                                            |  |      |     |  | RMB                     |   |  | RMB     |   |  | RMB     |   |  | US$    |  
|Cash flow from financing activities                         |  |      |     |  |                         |   |  |         |   |  |         |   |  |        |  
|                                                            |  |      |     |  |                        
|Payment of initial public offering issuance costs           |  | 1    | (a) |  | (9,292                  | ) |  | (77,802 | ) |  |        |   |  |       |  
|Payment for repurchase and cancellation of shares           |  | 14   | (a) |  |                        |   |  |        |   |  | (14,467 | ) |  | (2,120 | )
|Gross proceeds from issuance of ordinary shares             |  | 1    | (a) |  |                        |   |  | 923,382 |   |  |        |   |  |       |  
|Principal payments of short-term bank loans                 |  |      |     |  | (89,000                 | ) |  | (15,000 | ) |  |        |   |  |       |  
|Principal payments of long-term bank loans                  |  |      |     |  |                        |   |  | (25,000 | ) |  |        |   |  |       |  
|Proceeds from short-term bank loans                         |  |      |     |  | 15,000                  |   |  |        |   |  |        |   |  |       |  
|Proceeds from long-term bank loans                          |  |      |     |  | 25,000                  |   |  |        |   |  |        |   |  |       |  
|Proceeds from/(repayment to) borrowing from a related party |  |      |     |  | 3,835                   |   |  | (3,835  | ) |  |        |   |  |       |  
|                                                            |  |      |     |  |                         |   |  |         |   |  |         |   |  |        |  
|                                                            |  |      |     |  |                        
|Net cash (used in)/provided by financing activities         |  |      |     |  | (54,457                 | ) |  | 801,745 |   |  | (14,467 | ) |  | (2,120 | )
|                                                            |  |      |     |  |                         |   |  |         |   |  |         |   |  |        |  



F-9



---

##### Table of Contents

Consolidated statements of cash flows

for the years ended December 31, 2006, 2007 and 2008 (continued)

(RMB and US$ expressed in thousands)



|                                                        |  |      |  |                         |   |  |         |   |  |          |   |  |         |  
|------------------------------------------------------- |  | ---- |  | ----------------------- | - |  | ------- | - |  | -------- | - |  | ------- | -
|                                                        |  |      |  | Year ended December 31, |  
|                                                        |  | Note |  | 2006                    |   |  | 2007    |   |  | 2008     |   |  | 2008    |  
|                                                        |  |      |  | RMB                     |   |  | RMB     |   |  | RMB      |   |  | US$     |  
|Effect of foreign currency exchange rate change on cash |  |      |  |                        |   |  | (48,362 | ) |  | (48,901  | ) |  | (7,168  | )
|                                                        |  |      |  |                         |   |  |         |   |  |          |   |  |         |  
|                                                        |  |      |  |                         |  
|Net (decrease)/increase in cash and cash equivalents    |  |      |  | (374                    | ) |  | 785,654 |   |  | (371,789 | ) |  | (54,495 | )
|                                                        |  |      |  |                         |  
|Cash and cash equivalents at beginning of year          |  |      |  | 25,746                  |   |  | 25,372  |   |  | 811,026  |   |  | 118,875 |  
|                                                        |  |      |  |                         |   |  |         |   |  |          |   |  |         |  
|                                                        |  |      |  |                         |  
|Cash and cash equivalents at end of year                |  |      |  | 25,372                  |   |  | 811,026 |   |  | 439,237  |   |  | 64,380  |  
|                                                        |  |      |  |                         |   |  |         |   |  |          |   |  |         |  
|                                                        |  |      |  |                         |  
|Supplemental disclosure of cash flow information        |  |      |  |                         |   |  |         |   |  |          |   |  |         |  
|                                                        |  |      |  |                         |  
|Cash paid during the year for:                          |  |      |  |                         |   |  |         |   |  |          |   |  |         |  
|- Income taxes                                          |  |      |  | (2,632                  | ) |  | (5,691  | ) |  | (8,614   | ) |  | (1,263  | )
|- Interest (net of amount capitalized)                  |  |      |  | (4,311                  | ) |  | (920    | ) |  |         |   |  |        |  
|                                                        |  |      |  |                         |   |  |         |   |  |          |   |  |         |  

See accompanying notes to the consolidated financial statements.



F-10



---

##### Table of Contents

Notes to the consolidated financial statements

(Expressed in RMB and US$)



| | 1. | Principal activities, reorganization and basis of presentation
| | -- | --------------------------------------------------------------



| | (a) | Principal activities
| | --- | --------------------

3SBio Inc. (the Company)
and subsidiaries (collectively the Group) are principally engaged in the research, development, manufacture and distribution of pharmaceutical products in the Peoples Republic of China (PRC). The Group currently
manufactures four types of biopharmaceutical products, which include the following:



| |  | EPIAO, an injectable recombinant human erythropoietin that is used to stimulate the production of red blood cells in patients with anemia and to reduce the need for
blood transfusions;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | TPIAO, a recombinant human thrombopoietin indicated for the treatment of chemotherapy-induced thrombocytopenia; and
|- |  | -------------------------------------------------------------------------------------------------------------------



| |  | two legacy products, including Intefen, a recombinant interferon alpha-2a product indicated for the treatment of carcinoma of the lymphatic or hematopoietic system
and viral infectious diseases; and Inleusin, a recombinant human IL-2 product indicated for the treatment of renal cell carcinoma, metastatic melanoma, thoratic fluid build-up caused by cancer and tuberculosis.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On February 7, 2007, the Companys shares were listed on The Nasdaq Global Market following the completion of the initial public offering (IPO) of
7,700,000 American Depositary Shares (ADSs), representing 53,900,000 ordinary shares, at a price of US$16 per ADS. Each ADS represents seven ordinary shares of the Company. The offering consisted of 7,187,817 ADSs, representing
50,314,719 ordinary shares, newly issued by the Company and 512,183 ADSs, representing 3,585,281 ordinary shares, sold by the selling shareholders. The Company raised net proceeds of approximately RMB807,954,000 (equivalent to approximately
US$104,158,000 at the date of transaction) from the offering.

In March 2007, the underwriters exercised the over-allotment option and the Company issued
an additional 252,634 ADSs, representing 1,768,438 ordinary shares, at US$16 per ADS. The selling shareholders also sold an additional 499,506 ADSs, representing 3,496,542 ordinary shares. The Company raised additional net proceeds of approximately
RMB28,334,000 (equivalent to approximately US$3,661,000 at the date of transaction) from the exercise of the over-allotment option by the underwriters.

In
connection with the IPO, the Company received net proceeds (after deduction of the related issuance costs totalling RMB87,094,000) of RMB836,288,000.



F-11



---

##### Table of Contents

| | 1. | Principal activities, reorganization and basis of presentation (continued)
| | -- | --------------------------------------------------------------------------



| | (b) | Reorganization
| | --- | --------------

The Company was incorporated in the Cayman
Islands in August 2006 under the Cayman Islands Companies Law as an exempted company with limited liability. The Company was incorporated as part of the reorganization of Shenyang Sunshine Pharmaceutical Company Limited (Shenyang
Sunshine) and its consolidated entities (the Reorganization) in preparation of the Companys IPO. In connection with the Reorganization, and pursuant to a shareholders agreement amongst the existing beneficial
shareholders of Shenyang Sunshine, an ultimate beneficial shareholder of Shenyang Sunshine established Collected Mind Limited (Collected Mind) in July 2006 in the British Virgin Islands and held the interest in Collected Mind on behalf
of all the ultimate beneficial shareholders of Shenyang Sunshine or their nominees, in proportion to their respective effective share ownership in Shenyang Sunshine. Collected Mind acquired all of the equity interest in Shenyang Sunshine in August
2006. Shortly after this acquisition, the Company was established as the ultimate holding company. In September 2006, in consideration of the Companys issuance of shares to the ultimate beneficial shareholders of Collected Mind or their
nominees in proportion to each of their beneficial interest in Collected Mind, the entire equity interest in Collected Mind was acquired by the Company. Upon completion of the Reorganization, Collected Mind and the Company became Shenyang
Sunshines immediate and ultimate holding companies, respectively. The proportionate ownership of the Company immediately after the Reorganization is substantially the same.

Shenyang Sunshine was established in the PRC in January 1993 as a Sino-foreign joint stock limited company with registered, issued and paid up capital of 170,000,000 shares of RMB1 each. In connection with the
Reorganization, Shenyang Sunshine became a wholly foreign-owned enterprise in the PRC.

Shenyang Sunshine has investments in two variable interest entities
(VIEs) for which Shenyang Sunshine is the primary beneficiary, namely Liaoning Bio-Pharmaceutical Company Limited (Liaoning Sunshine) and Beijing Sunshine Bio-Product Sales Company Limited (Beijing Sunshine).
Liaoning Sunshine and Beijing Sunshine are domestic limited liability companies incorporated in the PRC and are primarily engaged in the distribution of products manufactured by Shenyang Sunshine.



F-12



---

##### Table of Contents

| | 1. | Principal activities, reorganization and basis of presentation (continued)
| | -- | --------------------------------------------------------------------------



| | (b) | Reorganization (continued)
| | --- | --------------------------



Prior to the Reorganization, Shenyang Sunshine held 90% and 45% equity interests in Liaoning Sunshine and Beijing
Sunshine, respectively, with the remaining interests in the two companies held by the former majority shareholder of Shenyang Sunshine, Shenyang Keweier Advanced Technology Co., Ltd. (Shenyang Keweier). Prior to the Reorganization,
Shenyang Sunshine consolidated both Liaoning Sunshine and Beijing Sunshine since it held a 90% controlling interest in Liaoning Sunshine and it was the primary beneficiary of Beijing Sunshine, which was deemed to be a VIE in accordance with
Financial Accounting Standards Board (FASB) Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51(FIN 46(R)). FIN 46(R) requires certain
VIEs to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its
activities without subordinated financial support from other parties. FIN 46(R) also requires that, for purposes of determining whether an enterprise is the primary beneficiary of a VIE, an enterprise with a variable interest shall treat variable
interests in the same entity held by its related parties as its own interests. Specifically, the total equity investment at risk of Beijing Sunshine is deemed insufficient to fund its activities without additional subordinated financial support from
Shenyang Sunshine which is in the form of subordinated trade payables arising from the sales of products from Shenyang Sunshine to Beijing Sunshine.

In
connection with the Reorganization and for purposes of compliance with certain PRC rules and regulations related to the distribution of pharmaceutical products, Shenyang Sunshine transferred its 45% equity interest in Beijing Sunshine to an
executive officer in October 2006 and its 90% equity interest in Liaoning Sunshine to a director in November 2006. In December 2006 and January 2007, Shenyang Sunshine entered into certain contractual arrangements with Beijing Sunshine and Liaoning
Sunshine, respectively, such that:



| |  | Shenyang Sunshine is entitled to a majority of the revenues of Beijing Sunshine and Liaoning Sunshine which are derived in the form of technology support, market
development and consulting service fees;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Shenyang Sunshine is granted an exclusive right to acquire, to the extent permissible under PRC law, the equity interests in Liaoning Sunshine and Beijing Sunshine;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the equity holders of Liaoning Sunshine and Beijing Sunshine are required to consult with and follow any lawful instruction of Shenyang Sunshine whenever they
exercise their rights as the equity holders of Liaoning Sunshine and Beijing Sunshine; and
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the equity interests in Liaoning Sunshine and Beijing Sunshine are pledged to Shenyang Sunshine to guarantee the obligations of the equity holders under the above
contractual arrangements.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-13



---

##### Table of Contents

| | 1. | Principal activities, reorganization and basis of presentation (continued)
| | -- | --------------------------------------------------------------------------



| | (b) | Reorganization (continued)
| | --- | --------------------------



As a result of the above contractual arrangements, Shenyang Sunshine bears economic risks with respect to, and
derives economic benefits from, the operations of Liaoning Sunshine and Beijing Sunshine. As Shenyang Sunshine holds the predominant variable interests in Liaoning Sunshine and Beijing Sunshine, it is deemed to be the primary beneficiary of both
entities under FIN 46(R). Accordingly, the transfers of equity interests in Liaoning Sunshine and Beijing Sunshine did not change the requirement to consolidate the two entities and the financial statements of Liaoning Sunshine and Beijing Sunshine
continue to be included in the Companys consolidated financial statements subsequent to the Reorganization.

Beijing Sunshine was liquidated during
the year ended December 31, 2008. The impact of the liquidation was not material to the Companys financial results for the year ended December 31, 2008.



| | (c) | Basis of presentation
| | --- | ---------------------

As the Reorganization was completed
for the sole purpose of establishing the legal structure of the Group in preparation for the initial public offering of securities of the Company, and as the shareholders proportionate equity interests in the Company upon consummation of the
Reorganization were substantially identical to their proportionate equity interests in Shenyang Sunshine just prior to the consummation of the Reorganization, the Reorganization has been accounted for in a manner similar to a pooling-of-interests.
Accordingly, the accompanying consolidated financial statements of the Company include the assets and liabilities of Shenyang Sunshine at their historical carrying amounts. In addition, the accompanying consolidated financial statements present the
results of the Group as if Collected Mind, Shenyang Sunshine and its consolidated entities were transferred to the Company as of the beginning of the earliest period presented.

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). This basis of accounting differs in certain material
respects from that used for the preparation of the books of account of Shenyang Sunshine and its consolidated entities, which are prepared in accordance with the accounting principles and the relevant financial regulations applicable to enterprises
limited by shares as established by the Ministry of Finance of the PRC (PRC GAAP), the accounting standards used in the country of their domicile. The accompanying consolidated financial statements reflect necessary adjustments not
recorded in the books of account of Shenyang Sunshine and its consolidated entities to present them in conformity with U.S. GAAP.



F-14



---

##### Table of Contents

| | 2. | Summary of significant accounting policies and practices
| | -- | --------------------------------------------------------



| | (a) | Principles of consolidation
| | --- | ---------------------------

The consolidated financial
statements include the financial statements of the Company and its subsidiaries, including the VIEs for which it is the primary beneficiary, as defined by FIN 46(R). All significant intercompany balances and transactions have been eliminated on
consolidation.

Where losses applicable to the minority exceed the minoritys interest in the equity of a subsidiary, the excess, and any further
losses applicable to the minority, are charged against the Groups interest except to the extent that the minority has a binding obligation to, and is able to, make additional investment to cover the losses. If the subsidiary subsequently
reports profits, the Groups interest is allocated all such profits until the minoritys share of losses previously absorbed by the Group has been recovered.



| | (b) | Foreign currency transactions
| | --- | -----------------------------

The functional currency of
Shenyang Sunshine, Liaoning Sunshine and Beijing Sunshine is Renminbi (RMB), whereas the functional currency of the Company is the U.S. dollar (US$). The reporting currency of the Group is RMB.

Transactions of Shenyang Sunshine, Liaoning Sunshine and Beijing Sunshine denominated in currencies other than RMB are translated into RMB at the exchange rates quoted
by the Peoples Bank of China (the PBOC) prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into RMB using the applicable exchange rates quoted by the PBOC
at the balance sheet dates. The resulting exchange differences are recorded as other income/expense in the consolidated statements of income and comprehensive income.

Assets and liabilities of the Company are translated into RMB using the exchange rate on the balance sheet date. Income and expenses are translated at average exchange rates prevailing during the year. The gains and
losses resulting from translation of financial statements of the Company are recorded as a separate component of accumulated other comprehensive income/(loss) within shareholders equity.

RMB is not a fully convertible currency. All foreign exchange transactions involving RMB must take place either through the PBOC or other institutions authorized to buy
and sell foreign exchange. Commencing from July 21, 2005, the PRC government moved the RMB into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. The exchange rate has continued
to fluctuate since the initial adjustment.

For the convenience of the readers, certain 2008 RMB amounts included in the accompanying consolidated
financial statements have been translated into U.S. dollars at the rate of US$1.00 = RMB6.8225, being the noon buying rate for U.S. dollars in effect on December 31, 2008 for cable transfers in RMB per U.S. dollar as certified for custom
purposes by the Federal Reserve Bank of New York. No representation is made that the RMB amounts could have been, or could be, converted into U.S. dollars at that rate or at any other rate on December 31, 2008 or on any other date.



F-15



---

##### Table of Contents

2. Summary of significant accounting policies and practices (continued)



| | (c) | Use of estimates
| | --- | ----------------

The preparation of the consolidated
financial statements in accordance with U.S. GAAP requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities on
the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, management reviews its estimates and assumptions
including, but not limited to, those related to the recoverability of the carrying amount and estimated useful lives of long-lived assets; valuation and other-than-temporary impairment of investment securities; realizability of inventories;
allowance for doubtful accounts receivables; valuation allowance for deferred tax assets; and the fair value of share-based compensation. Changes in facts and circumstances may result in revised estimates.



| | (d) | Cash, cash equivalents and time deposits
| | --- | ----------------------------------------

Cash and cash
equivalents consist of cash on hand, interest-bearing deposits placed with banks and short-term, highly liquid investments with original maturities of three months or less. Interest-bearing time deposits with financial institutions with original
maturities in excess of three months are excluded from cash and cash equivalents. The interest rates of the time deposits ranged from 2.1% to 4.6% per annum with a weighted-average original maturity of six months. None of the Groups cash
is restricted as to withdrawal.

As of December 31, 2007 and 2008, the amount of cash and cash equivalents and time deposits with original maturities
over three months held in financial institutions by geographic location is analyzed as follows:



|                                    |  |              |  |         |  |        
|----------------------------------- |  | ------------ |  | ------- |  | -------
|                                    |  | December 31,
|                                    |  | 2007         |  | 2008    |  | 2008   
|                                    |  | RMB000      |  | RMB000 |  | US$000
|                                    |  |              | 
|- the PRC                           |  | 95,548       |  | 320,795 |  | 47,020 
|- Hong Kong                         |  | 715,478      |  | 411,224 |  | 60,274 
|- United States of America (U.S.) |  |             |  | 1,027   |  | 151    
|                                    |  |              |  |         |  |        
|                                    |  | 811,026      |  | 733,046 |  | 107,445
|                                    |  |              |  |         |  |        



F-16



---

##### Table of Contents

2. Summary of significant accounting policies and practices (continued)



| | (d) | Cash, cash equivalents and time deposits (continued)
| | --- | ----------------------------------------------------

As of
December 31, 2007 and 2008, the Groups cash and cash equivalents and time deposits with original maturities over three months denominated in U.S. dollars and Renminbi are as follows:



|              |  |              |  |        
|------------- |  | ------------ |  | -------
|              |  | December 31,
|              |  | 2007         |  | 2008   
|              |  | 000         |  | 000   
|              |  |             
|- U.S dollars |  | 104,390      |  | 89,523 
|- Renminbi    |  | 47,743       |  | 118,144
|              |  |              |  |        

The group holds its cash, cash equivalents, and time deposits in major financial institutions that management
believes are of high credit quality.



| | (e) | Accounts receivable
| | --- | -------------------

Accounts receivable are stated at the
invoiced amount after deduction of trade discounts and allowances, if any, and do not bear interest. The allowance for doubtful accounts is the Groups best estimate of the amount of credit losses in the Groups existing accounts
receivable. The Group determines the allowance based on historical write-off experience, customer specific facts and economic conditions.

Outstanding
account balances are reviewed individually for collectibility. Account balances are written off after all means of collection have been exhausted and the potential for recovery is considered remote. Shenyang Sunshine and its consolidated entities
are required to comply with local tax requirements on the write-offs of doubtful accounts, which allow for such write-offs only when the related account balances are aged over three years and sufficient evidence is available to prove the
debtors inability to make payments. For financial reporting purposes, Shenyang Sunshine and its consolidated entities generally record write-offs of doubtful account at the same time the local tax requirements for the write-offs are met. As a
result, there are generally time lags between the time when a provision for doubtful accounts is recorded and the time the doubtful accounts are written off against the related allowance. The Group does not have any off-balance-sheet credit exposure
related to its customers.



F-17



---

##### Table of Contents

2. Summary of significant accounting policies and practices (continued)



| | (f) | Inventories
| | --- | -----------

Inventories are stated at the lower of cost or
market. Cost is determined using the weighted average cost method. Cost of work-in-progress and finished goods comprises direct materials, direct production cost and an allocated proportion of production overheads based on normal operating capacity.



| | (g) | Investment securities
| | --- | ---------------------

Investment securities consist of debt
securities, including structured notes, which have been classified as available-for-sale securities or structured deposits on the accompanying balance sheets.

Available-for-sale debt securities, including certain structured notes, are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, if any, are reported as a separate component of accumulated other
comprehensive income/loss until realized.

Structured deposits, which contain an embedded derivative that is considered not closely related to the debt
security host contract, are measured as a single financial instrument at fair value. Any unrealized gains or losses arising from the re-measurement of structured deposits to fair value are recognized in the statements of income and comprehensive
income/(loss).

Realized gains and losses from the sale or disposal of available-for-sale securities are determined on a specific-identification basis.

A decline in the market value of any available-for-sale security that is deemed to be other-than-temporary results in an impairment to reduce the carrying
amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. To determine whether an impairment is other-than-temporary, the Company considers whether it has the ability and intent to hold the
investment until a market price recovery and considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for the impairment, the
severity and duration of the impairment, changes in value subsequent to year-end, forecasted performance of the investee, and the general market condition in the geographic area or industry the investee operates in.

Interest income from debt securities is recognized in other income when earned. Interest income from structure notes classified as available-for-sale securities is
recognized in other income using the retrospective interest method. Under the retrospective interest method, income for the current period is measured as the difference between the amortized cost at the end of the period and the amortized cost at
the beginning of the period, plus any cash received during the period.



F-18



---

##### Table of Contents

2. Summary of significant accounting policies and practices (continued)



| | (h) | Property, plant and equipment
| | --- | -----------------------------

Property, plant and equipment
are stated at cost less accumulated depreciation.

Depreciation on property, plant and equipment is calculated based on the straight-line method (after
taking into account their respective estimated residual values) over the estimated useful lives of the assets as follows:



|                                           |  |            
|------------------------------------------ |  | -----------
|Buildings                                  |  | 20 years   
|Plant and machinery                        |  | 5 -10 years
|Motor vehicles                             |  | 5 years    
|Furniture, fixtures and computer equipment |  | 5 -10 years

Interest expense, share-based compensation expenses and other direct staff costs incurred related to the
construction of property, plant and equipment are capitalized. The capitalization of expenses as part of the costs of a qualifying asset commences when expenditures for the asset have been made, activities that are necessary to get the asset ready
for its intended use are in progress and costs are being incurred. The capitalization period ends when the asset is substantially complete and ready for its intended use.

No depreciation is provided in respect of construction-in-progress.

Depreciation of property, plant and equipment
attributable to manufacturing activities is capitalized as part of inventory, and expensed to cost of revenues when inventory is sold.



| | (i) | Lease prepayments
| | --- | -----------------

Lease prepayments represent the cost of
land use rights in the PRC. Land use rights are carried at cost and recognized as expense on a straight-line basis over the respective periods of the rights of 30 years.

The current portion of lease prepayments represents the amount expected to be recognized as expense within one year from the balance sheet date, which has been included in prepaid expenses and other receivables in the
consolidated balance sheets.



| | (j) | Intangible assets
| | --- | -----------------

Acquired technical know-how for the
production of a pharmaceutical product is carried at cost less accumulated amortization. Amortization expense was recognized based on the straight-line method over the estimated useful life of 5 years ending in 2013.



F-19



---

##### Table of Contents

2. Summary of significant accounting policies and practices (continued)



| | (k) | Impairment of long-lived assets
| | --- | -------------------------------

Long-lived assets,
including property, plant and equipment and intangible assets with finite useful lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the
asset. Fair value is measured by the assets discounted cash flows or market value, if readily determinable.



| | (l) | Revenue recognition
| | --- | -------------------

Sales of pharmaceutical products
represent the invoiced value of goods, net of value added taxes (VAT), sales returns, trade discounts and allowances. The Group recognizes revenue when products are delivered and the customer takes ownership and assumes risk of loss,
collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable.

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



| | (m) | Government grants
| | --- | -----------------

An unconditional government grant is
recognized in the consolidated statements of income and comprehensive income when the grant becomes receivable. The government grants received by the Group were lump sum payments for which approval is at the sole discretion of the government and are
subject to availability of the government funds. The amount and timing of the grants cannot be directly attributable to specific expenditures incurred and the timing of incurrence of such expenditures. As such, grant income is recognized as other
income in the consolidated statements of income and comprehensive income/(loss) rather than as part of the Companys operating income.

Government
grants relating to the acquisition of property, plant and equipment are recognized in the consolidated balance sheets as deferred income when there is reasonable assurance that it will be received and amortized as other income over the weighted
average useful life of the assets purchased under the related subsidized capital project. Grants that compensate the Group for expenses incurred on research and development activities are recognized as other income in the consolidated statements of
income and comprehensive income/(loss) upon the later of the award of the grant or in the same period in which the related expenses are incurred.



F-20



---

##### Table of Contents

2. Summary of significant accounting policies and practices (continued)



| | (n) | Retirement and other postretirement benefits
| | --- | --------------------------------------------

Contributions
to retirement schemes (which are defined contribution plans) are charged to the consolidated statements of income and comprehensive income as and when the related employee service is provided.



| | (o) | Income taxes
| | --- | ------------

Income taxes are accounted for under the asset
and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases
and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion or all of the deferred tax assets will not be realized. The effect on deferred tax assets and liabilities of a
change in tax rate is recognized in the consolidated statements of income and comprehensive income/(loss) in the period that includes the enactment date.

On January 1, 2007, the Group adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of Statement of Financial Accounting Standards No. 109 (FIN 48). FIN 48
clarifies the accounting for uncertain tax positions. This interpretation requires that an entity recognizes in the consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained upon
examination, based on the technical merits of the position. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in
which the change in judgement occurs. The Group has elected to classify interest and penalties related to unrecognized tax benefits, if and when required, as part of income tax expense in the consolidated statements of income and comprehensive
income/(loss).



| | (p) | Advertising and research and development costs
| | --- | ----------------------------------------------

Advertising
and research and development costs are expensed as incurred. Advertising costs included in sales, marketing and distribution expenses amounted to RMB2,022,000, RMB3,028,000 and RMB4,631,000 (US$679,000) for the years ended December 31, 2006,
2007 and 2008 respectively. Research and development costs consist primarily of the remuneration of research and development staff, depreciation and material costs. Upfront and milestone payments made to third parties in connection with research and
development collaborations prior to regulatory approval are expensed as incurred. Payments made to third parties subsequent to regulatory approval are capitalized and amortized over the shorter of the remaining license period or product patent life
(note 17).



F-21



---

##### Table of Contents

2. Summary of significant accounting policies and practices (continued)



| | (q) | Commitments and contingencies
| | --- | -----------------------------

In the normal course of
business, the Group is subject to contingencies, including legal proceedings and claims arising out of the business that relate to a wide range of matters, including among others, product liability. The Group records accruals for such contingency
based upon the assessment of the probability of occurrence and, where determinable, an estimate of the liability. The Group may consider many factors in making these assessments including past history and the specifics of each matter. As the Group
has not become aware of any product liability claim since operations commenced, the Group has not recognized a liability for product liability claims.



| | (r) | Income per share
| | --- | ----------------

In accordance with Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings per Share, basic net income per share is computed by dividing net income by the weighted average number of ordinary shares outstanding. For the year ended December 31, 2006,
basic net income per share is computed by dividing net income by the number of shares outstanding of 100,000,998 as if the Reorganization as described in note 1(b) had occurred at the beginning of the earliest period presented and such shares had
been outstanding for all periods through the date of the Reorganization. Diluted net income per share is calculated by dividing net income by the weighted average number of ordinary and dilutive potential ordinary shares outstanding during the
period.



F-22



---

##### Table of Contents

| | 2. | Summary of significant accounting policies and practices (continued)
| | -- | --------------------------------------------------------------------



| | (r) | Income per share (continued)
| | --- | ----------------------------



The following table sets forth the computation of basic and diluted net income per share:



|                                                      |  |                         |  |             |  |             |  |            
|----------------------------------------------------- |  | ----------------------- |  | ----------- |  | ----------- |  | -----------
|                                                      |  | Year ended December 31,
|                                                      |  | 2006                    |  | 2007        |  | 2008        |  | 2008       
|                                                      |  | RMB000                 |  | RMB000     |  | RMB000     |  | US$000    
|Numerator for basic and diluted net income per share: |  |                         |  |             |  |             |  |            
|- Net income                                          |  | 30,489                  |  | 81,513      |  | 39,542      |  | 5,795      
|                                                      |  |                         |  |             |  |             |  |            
|                                                      |  |                         |  |            
|Denominator:                                          |  |                         |  |             |  |             |  |            
|- Basic weighted average Shares                       |  | 100,000,998             |  | 146,646,049 |  | 151,655,631 |  | 151,655,631
|- Effect of dilutive potential Shares                 |  | 3,722                   |  | 68,993      |  | 57,118      |  | 57,118     
|                                                      |  |                         |  |             |  |             |  |            
|                                                      |  |                         |  |            
|Diluted weighted average Shares                       |  | 100,004,720             |  | 146,715,042 |  | 151,712,749 |  | 151,712,749
|                                                      |  |                         |  |             |  |             |  |            
|                                                      |  |                         |  |            
|Basic net income per share                            |  | 0.30                    |  | 0.56        |  | 0.26        |  | 0.04       
|                                                      |  |                         |  |             |  |             |  |            
|                                                      |  |                         |  |            
|Diluted net income per share                          |  | 0.30                    |  | 0.56        |  | 0.26        |  | 0.04       
|                                                      |  |                         |  |             |  |             |  |            

The diluted net income per share calculation for the years ended December 31, 2006, 2007 and 2008 did not
include the effect of share options to purchase a total of 1,060,000, 100,000 and 1,897,650 ordinary shares, respectively because to do so would have been anti-dilutive.



| | (s) | Share-based payments
| | --- | --------------------

SFAS No. 123 (revised 2004),
Share-Based Payment (SFAS No. 123R), requires that all compensation cost related to employee share options or similar equity instruments be measured at the fair value of the award and recognized on a straight-line basis over
the requisite service period, which is generally the same as the vesting period. Compensation cost for share options granted is measured based on the estimated grant date fair value using the Black-Scholes option-pricing model.



F-23



---

##### Table of Contents

| | 2. | Summary of significant accounting policies and practices (continued)
| | -- | --------------------------------------------------------------------



| | (t) | Segment reporting
| | --- | -----------------



The Group uses the management approach in determining operating segments. The management approach considers the
internal organization and reporting used by the Groups chief operating decision maker for making operating decisions, allocating resources and assessing performance as the source of determining the Groups reportable segments. Management,
including the chief operating decision maker, reviews operating results solely by monthly revenue and operating results of the Group and, as such, the Group has determined that the Group has a single operating segment as defined by SFAS
No. 131, Disclosure about Segments of an Enterprise and Related Information, which is the research, development, manufacture and distribution of pharmaceutical products in the PRC.



| | (u) | Fair Value Measurements
| | --- | -----------------------

On January 1, 2008, the Group
adopted the provisions SFAS No. 157, Fair Value Measurements(SFAS No. 157), for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are
recognized or disclosed at fair value in the financial statements on a recurring basis. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. SFAS No. 157 also establishes a framework for measuring fair value and expands disclosures about fair value measurements (Note 22). FASB Staff Position FAS 157-2, Effective Date of FASB
Statement No. 157, delays the effective date of Statement 157 until fiscal years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the
financial statements on a nonrecurring basis. Effective January 1, 2009, the Group will be required to apply the provisions of SFAS No. 157 to fair value measurements of nonfinancial assets and nonfinancial liabilities that are recognized
or disclosed at fair value in the financial statements on a nonrecurring basis. The Group is in the process of evaluating the impact, if any, of applying these provisions on its consolidated financial statements.

In October 2008, the FASB issued FASB Staff Position FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active,
(FSP FAS 157-3) which was effective immediately. FSP FAS 157-3 clarifies the application of SFAS No. 157 in cases where the market for a financial instrument is not active and provides an example to illustrate key considerations in
determining fair value in those circumstances. The Group has considered the guidance provided by FSP FAS 157-3 in its determination of estimated fair values during 2008.



F-24



---

##### Table of Contents

| | 2. | Summary of significant accounting policies and practices (continued)
| | -- | --------------------------------------------------------------------



| | (v) | Recently issued accounting standards
| | --- | ------------------------------------



SFAS No. 159

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities  Including on Amendment of FASB Statement No. 115 (SFAS No. 159). SFAS No. 159
permits an entity to elect fair value as the initial and subsequent measurement attribute for many financial assets and liabilities. Entities electing the fair value option would be required to recognize changes in fair value in earnings. Entities
electing the fair value option are required to distinguish, on the face of the balance sheet, the fair value of assets and liabilities for which the fair value option has been elected and similar assets and liabilities measured using another
measurement attribute. The Group adopted SFAS No. 159 on January 1, 2008. The adjustment to reflect the difference between the fair value and the carrying amount would be accounted for as a cumulative-effect adjustment to retained earnings
as of the date of initial adoption. The Group has determined not to adopt the fair value option under SFAS No. 159.

SFAS No. 160

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statementsan Amendment of ARB
No. 51. SFAS No. 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Among other requirements, the new standard will result in the presentation
of what are currently considered minority interests to be classified as equity. In addition, SFAS No.160 requires that losses be attributed to both the parent and the noncontrolling interest even if the noncontrolling interests equity balance
becomes negative. The guidance will become effective for the fiscal year beginning after December 15, 2008. The Group is required to adopt SFAS No. 160 beginning on January 1, 2009. As of December 31, 2008, the Group has
unrecognized negative balance of noncontrolling interest of RMB152,000 (US$22,000). The adoption of SFAS No. 160 is not expected to have a material impact on the Groups consolidated financial statements.

SFAS No. 161

In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No. 133 (SFAS No. 161). SFAS No. 161 requires entities that utilize derivative instruments to provide qualitative
disclosures about their objectives and strategies for using such instruments, as well as any details of credit-risk-related contingent features contained within derivatives. SFAS No. 161 also requires entities to disclose additional information
about the amounts and location of derivatives located within the financial statements, how the provisions of Statement 133 have been applied, and the impact that hedges have on an entitys balance sheet, statements of income and statements of
cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Group is currently evaluating the impact of SFAS No. 161 on the disclosures of derivatives.



F-25



---

##### Table of Contents

| | 2. | Summary of significant accounting policies and practices (continued)
| | -- | --------------------------------------------------------------------



| | (v) | Recently issued accounting standards (continued)
| | --- | ------------------------------------------------



FSP 142-3

In April
2008, the FASB issued FASB Staff Position No. FAS 142-3, Determination of the Useful Life of Intangible Assets(FSP FAS 142-3). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets, and requires enhanced disclosures relating to: (a) the entitys accounting
policy on the treatment of costs incurred to renew or extend the term of a recognized intangible asset; (b) in the period of acquisition or renewal, the weighted-average period prior to the next renewal or extension (both explicit and
implicit), by major intangible asset class; and (c) for an entity that capitalizes renewal or extension costs, the total amount of costs incurred in the period to renew or extend the term of a recognized intangible asset for each period for
which a statement of financial position is presented, by major intangible asset class. FSP FAS 142-3 must be applied prospectively to all intangible assets acquired as of and subsequent to fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. Early adoption is prohibited. The Group is currently evaluating the impact that FSP FAS 142-3 will have on the consolidated financial statements.

FSP FAS 157-4

In April 2009, the FASB issued Staff Position No. FAS
157-4,Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4). FSP FAS 157-4 relates to determining
fair values when there is no active market or where the price inputs being used represent distressed sales. It reaffirms what SFAS No. 157 states is the objective of fair value measurementto reflect how much an asset would be sold for in
an orderly transaction (as opposed to a distressed or forced transaction) at the date of the financial statements under current market conditions. Specifically, it reaffirms the need to use judgment to ascertain if a formerly active market has
become inactive and in determining fair values when markets have become inactive. This guidance is effective for interim and annual periods ending after June 15, 2009, but entities may early adopt this guidance for the interim and annual
periods ending after March 15, 2009. The Group is currently evaluating the impact that FSP FAS 157-4 will have on the consolidated financial statements.



F-26



---

##### Table of Contents

| | 2. | Summary of significant accounting policies and practices (continued)
| | -- | --------------------------------------------------------------------



| | (v) | Recently issued accounting standards (continued)
| | --- | ------------------------------------------------



FSP FAS 115-2 and FAS 124-2

In April 2009, the FASB issued Staff Position No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments(FSP FAS 115-2 and FAS 124-2).FSP FAS 115-2 and
FAS 124-2 on other-than-temporary impairments is intended to bring greater consistency to the timing of impairment recognition, and provide greater clarity to investors about the credit and noncredit components of impaired debt securities that are
not expected to be sold. The measure of impairment in comprehensive income remains fair value. The FSP also requires increased and more timely disclosures sought by investors regarding expected cash flows, credit losses, and an aging of securities
with unrealized losses. This guidance is effective for interim and annual periods ending after June 15, 2009, but entities may early adopt this guidance for the interim and annual periods ending after March 15, 2009. The Group is currently
evaluating the impact that FSP FAS 157-4 will have on the consolidated financial statements.



F-27



---

##### Table of Contents

| | 3. | Accounts receivable, net
| | -- | ------------------------

Accounts receivable consist of the
following:



|                                      |  |              |   |  |         |   |  |         |  
|------------------------------------- |  | ------------ | - |  | ------- | - |  | ------- | -
|                                      |  | December 31, |  
|                                      |  | 2007         |   |  | 2008    |   |  | 2008    |  
|                                      |  | RMB000      |   |  | RMB000 |   |  | US$000 |  
|Accounts receivable                   |  | 46,871       |   |  | 53,430  |   |  | 7,831   |  
|Bills receivable                      |  | 13,572       |   |  | 24,840  |   |  | 3,641   |  
|                                      |  |              |   |  |         |   |  |         |  
|                                      |  |              |  
|                                      |  | 60,443       |   |  | 78,270  |   |  | 11,472  |  
|Less: Allowance for doubtful accounts |  | (5,257       | ) |  | (4,503  | ) |  | (660    | )
|                                      |  |              |   |  |         |   |  |         |  
|                                      |  |              |  
|Total accounts receivable             |  | 55,186       |   |  | 73,767  |   |  | 10,812  |  
|                                      |  |              |   |  |         |   |  |         |  

An analysis of the allowance for doubtful accounts is as follows:



|                                        |  |                         |   |  |         |  |         |   |  |         |  
|--------------------------------------- |  | ----------------------- | - |  | ------- |  | ------- | - |  | ------- | -
|                                        |  | Year ended December 31, |  
|                                        |  | 2006                    |   |  | 2007    |  | 2008    |   |  | 2008    |  
|                                        |  | RMB000                 |   |  | RMB000 |  | RMB000 |   |  | US$000 |  
|Balance at beginning of year            |  | 5,892                   |   |  | 4,871   |  | 5,257   |   |  | 771     |  
|(Credited)/charged to income            |  | (294                    | ) |  | 386     |  | 777     |   |  | 113     |  
|Written off against accounts receivable |  | (727                    | ) |  |        |  | (1,531  | ) |  | (224    | )
|                                        |  |                         |   |  |         |  |         |   |  |         |  
|                                        |  |                         |   | 
|Balance at end of year                  |  | 4,871                   |   |  | 5,257   |  | 4,503   |   |  | 660     |  
|                                        |  |                         |   |  |         |  |         |   |  |         |  

The Group has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Credit
evaluations are performed on all customers requiring credit over a certain amount. These receivables are normally due within 60 to 180 days from the date of billing. Normally, the Group does not obtain collateral from customers.



| | 4. | Inventories
| | -- | -----------

Inventories consist of the following:



|                                    |  |              |  |         |  |        
|----------------------------------- |  | ------------ |  | ------- |  | -------
|                                    |  | December 31,
|                                    |  | 2007         |  | 2008    |  | 2008   
|                                    |  | RMB000      |  | RMB000 |  | US$000
|Raw materials                       |  | 1,145        |  | 1,887   |  | 277    
|Work-in-progress                    |  | 3,767        |  | 3,743   |  | 549    
|Finished goods                      |  | 1,374        |  | 1,323   |  | 194    
|Consumables and packaging materials |  | 596          |  | 795     |  | 116    
|                                    |  |              |  |         |  |        
|                                    |  |              | 
|Total inventories                   |  | 6,882        |  | 7,748   |  | 1,136  
|                                    |  |              |  |         |  |        



F-28



---

##### Table of Contents

| | 5. | Prepaid expenses and other receivables
| | -- | --------------------------------------

Prepaid expenses and other
receivables consist of the following:



|                                             |  |              |  |         |  |        
|-------------------------------------------- |  | ------------ |  | ------- |  | -------
|                                             |  | December 31,
|                                             |  | 2007         |  | 2008    |  | 2008   
|                                             |  | RMB000      |  | RMB000 |  | US$000
|Prepayments and other deposits               |  | 1,549        |  | 1,112   |  | 163    
|Other receivables                            |  | 10,525       |  | 7,137   |  | 1,046  
|                                             |  |              |  |         |  |        
|                                             |  |              | 
|Total prepaid expenses and other receivables |  | 12,074       |  | 8,249   |  | 1,209  
|                                             |  |              |  |         |  |        

Prepayments as of December 31, 2007 and 2008 include an amount of RMB353,000 and RMB353,000 (US$52,000)
respectively, representing the current portion of lease prepayments (note 9).

Other receivables mainly include staff advances, interest receivable and
other miscellaneous receivables.



| | 6. | Structured deposits
| | -- | -------------------

During the year ended December 31, 2007,
the Group acquired zero coupon equity-linked notes (ELNs) issued by a financial institution that were expected to mature in June 2008. The ELNs include an embedded derivative with the characteristics similar to a written-put option of
shares, which entitles the Group to a higher fixed rate of return from the deposit but in return would require the Group to purchase the share of an entity listed in the Hong Kong Stock Exchange at a pre-determined price in the event the market
price is lower than the pre-determined price of the share at maturity date. The embedded derivative is considered not closely related to the host contract. The Company has elected to measure the ELNs as a single financial instrument, rather than as
a debt security host and separate derivative instrument. Accordingly, the ELNs are stated at fair value with remeasurements to fair value recognized as other income/loss. Unrealized loss of RMB10,000 was charged to income for the year ended
December 31, 2007.

The ELNs were disposed of in May 2008 with a gain of RMB138,000 (US$20,000).



F-29



---

##### Table of Contents

| | 7. | Available-for-sale securities
| | -- | -----------------------------



|                                    |  |              |  |         |  |        
|----------------------------------- |  | ------------ |  | ------- |  | -------
|                                    |  | December 31,
|                                    |  | 2007         |  | 2008    |  | 2008   
|                                    |  | RMB000      |  | RMB000 |  | US$000
|Corporate debt securities           |  | 11,688       |  | 23,289  |  | 3,414  
|Structured notes                    |  | 3,508        |  | 3,411   |  | 500    
|                                    |  |              |  |         |  |        
|                                    |  |              | 
|Total available-for-sale securities |  | 15,196       |  | 26,700  |  | 3,914  
|                                    |  |              |  |         |  |        

The corporate debt securities are interest-bearing at 5-8% per annum and are publicly traded outside the PRC.
Structured notes represent callable range accrual notes issued by a financial institution at par which have a ten-year term and carry interest at 7%, if the market interest rate, 3-month US$ LIBOR, is lower than 7%. The interest rate will be nil if
the 3-month US$ LIBOR is higher than 7%. Interest income is measured and paid quarterly. The issuer of the structured notes has an option to redeem the structured notes at par at the end of each quarter through the maturity date of the notes. The
embedded derivative included in the structured notes is considered clearly and closely related to the debt host and as such the structured notes are measured at fair value with interest income being recognized using the retrospective interest
method.

The fair value of available-for-sale securities is based on quoted market prices at the reporting date.



| | (a) | Net realized loss on available-for-sale securities
| | --- | --------------------------------------------------

During
the year ended December 31, 2008, the Company acquired Floating Rate Credit Linked Notes of US$3,000,000 (the CLNs). The CLNs, which were issued by UBS AG, Jersey Branch (the Issuer), were linked to credit events, as
defined, of Lehman Brothers Holdings Inc. (Lehman Brothers) and were due to mature on January 21, 2009, subject to certain conditions. In September 2008, a credit event occurred, representing Lehman Brothers Chapter 11 filing
for bankruptcy protection under the U.S. Bankruptcy Code. In accordance with the terms of the CLNs, the Issuer redeemed the CLNs by delivering Lehman Brothers corporate debt securities with a face value equivalent to principal amount of
US$3,000,000 to the Company. The redemption was settled in November 2008 and the fair value of the Lehman Brothers corporate debt securities at the settlement date was US$254,000 (equivalent to RMB1,765,000), determined based on quoted market
prices. Realized loss of US$2,746,000 (equivalent to RMB19,144,000) was recognized at the settlement date.

During the year, the Company also recognized a
realized gain of RMB149,000 (US$22,000) from disposals of other available-for-sale securities with sale proceeds of RMB43,421,000 (US$6,364,000).



F-30



---

##### Table of Contents

| | 7. | Available-for-sale securities (continued)
| | -- | -----------------------------------------



| | (b) | Impairment loss on available-for-sale securities
| | --- | ------------------------------------------------

The
Company evaluates whether unrealized losses on investment securities indicate other-than-temporary impairment. Based on this evaluation, the Company recognized other-than-temporary impairment losses of RMB4,391,000 (US$644,000) on investments in
corporate debt securities in 2008. No other-than-temporary impairment losses were recognized in 2007. The corporate debt securities for which an other-than-temporary impairment was recognized in 2008 are comprised of Fixed Rate Perpetual Capital
Securities (the Perpetual Securities) issued by Lloyds TSB Bank plc (Lloyds).

During the year ended December 31, 2008, the
Company acquired the Perpetual Securities issued by Lloyds totalling US$2,000,000. The Perpetual Securities, bearing interest at 7.875% per annum, have no maturity date and are not redeemable at the option of the Company at any time. The
Perpetual Securities may be redeemed at the option of Lloyds on or after the five years of the issue date at their principal amount together with any interest payments which are outstanding. Lloyds may at any time elect to exchange the Perpetual
Securities for Qualifying Tier 1 Securities as specified in the terms of the Perpetual Securities.

On December 16, 2008, Lloyds gave a
notice to the holders of Perpetual Securities that on January 19, 2009, the Perpetual Securities would be exchanged for corresponding non-cumulative preference shares totalling US$2,000,000 in the share capital of Lloyds TSB Group plc (the
Preference Shares), the parent company of Lloyds, in accordance with the terms of the Perpetual Securities. The holder of the Preference Shares has a right to a preferential dividend at a rate of 7.875% per annum. Under the terms of
the Preference Shares, the dividends are discretionary and non-cumulative.

As of December 31, 2008, the fair value of Perpetual Securities was
RMB9,254,000 (US$1,356,000) based on quoted market price. Since the Perpetual Securities were exchanged for Preference Shares in January 2009 and the fair value of the Preference Shares at the date of exchange was lower than the fair value as of
December 31, 2008, the Company has recognized an other-than-temporary impairment loss on the Perpetual Securities of RMB4,391,000 (US$644,000) for the year ended December 31, 2008. Other-than-temporary impairment losses are included in
other income/(expense), net on the consolidated statements of income and comprehensive income/(loss).

Subsequent to the year ended
December 31, 2008, in addition to the impairment losses recognized as of December 31, 2008, a loss on investment in the Perpetual Securities of RMB4,612,000 (US$676,000) was further recognized in earnings in January 2009. The loss was
based on the fair value of the Preference Shares at the date of exchange.



F-31



---

##### Table of Contents

| | 7. | Available-for-sale securities (continued)
| | -- | -----------------------------------------

Unrealized holding gain
of RMB298,000 and unrealized holding loss of RMB790,000 (US$116,000) on corporate debt securities was recognized in accumulated other comprehensive loss as of December 31, 2007 and 2008 respectively. The Company considers the unrealized holding
losses of the investments recognized in accumulated other comprehensive loss as of December 31, 2008 are not other-than-temporary.

The length of time
that individual corporate debt securities have been in a continuous unrealized loss position, as of December 31, 2008, was less than twelve months. For those investment securities that were not considered to be other-than-temporarily impaired
as of December 31, 2008, the Company considered the decline in fair value of the securities and the unrealized losses were attributable to the volatile market condition resulting from the recent financial crisis rather than any significant
deterioration in the credit quality of the securities. As of December 31, 2008, these corporate debt securities are investment graded securities and mature between the years 2014 to 2018. Since acquisition, there has been no significant
deterioration in the credit rating of the issuers and there is no history of default in interest payments by the issuers. The fair values of these debt securities, based on quoted market prices at December 31, 2008, were approximately 5-10%
lower than the amortized costs of the securities, which management believes the decline is not other-than-temporary in light of the volatile market condition. The Company believes it has the intent and ability to hold these temporarily impaired
securities until maturity or until there has been a recovery in their fair values.

Maturities of corporate debt securities and structured notes classified
as non-current available-for-sale are as follows:



|                                                       |  |              |  |         |  |        
|------------------------------------------------------ |  | ------------ |  | ------- |  | -------
|                                                       |  | December 31,
|                                                       |  | 2007         |  | 2008    |  | 2008   
|                                                       |  | RMB000      |  | RMB000 |  | US$000
|Due after one year through five years                  |  | 3,125        |  |        |  |       
|Due after five years through ten years                 |  | 12,071       |  | 15,681  |  | 2,299  
|Due upon the redeemable option exercised by the issuer |  |             |  | 9,254   |  | 1,356  
|Due upon settlement of liquidation of The issuer       |  |             |  | 1,765   |  | 259    
|                                                       |  |              |  |         |  |        
|                                                       |  |              | 
|                                                       |  | 15,196       |  | 26,700  |  | 3,914  
|                                                       |  |              |  |         |  |        



F-32



---

##### Table of Contents

| | 8. | Property, plant and equipment, net
| | -- | ----------------------------------

Property, plant and equipment
consist of the following:



|                                           |  |              |   |  |         |   |  |         |  
|------------------------------------------ |  | ------------ | - |  | ------- | - |  | ------- | -
|                                           |  | December 31, |  
|                                           |  | 2007         |   |  | 2008    |   |  | 2008    |  
|                                           |  | RMB000      |   |  | RMB000 |   |  | US$000 |  
|Buildings                                  |  | 43,919       |   |  | 49,156  |   |  | 7,205   |  
|Plant and machinery                        |  | 26,888       |   |  | 27,675  |   |  | 4,056   |  
|Motor vehicles                             |  | 5,110        |   |  | 6,892   |   |  | 1,010   |  
|Furniture, fixtures and computer equipment |  | 24,269       |   |  | 26,389  |   |  | 3,868   |  
|Construction-in-progress                   |  | 5,346        |   |  | 25,096  |   |  | 3,678   |  
|                                           |  |              |   |  |         |   |  |         |  
|                                           |  |              |  
|                                           |  | 105,532      |   |  | 135,208 |   |  | 19,817  |  
|Less: Accumulated depreciation             |  | (56,067      | ) |  | (57,023 | ) |  | (8,358  | )
|                                           |  |              |   |  |         |   |  |         |  
|                                           |  |              |  
|Total property, plant and equipment        |  | 49,465       |   |  | 78,185  |   |  | 11,459  |  
|                                           |  |              |   |  |         |   |  |         |  

All of the Groups buildings are located in the PRC.



| | 9. | Lease prepayments
| | -- | -----------------

Lease prepayments represent the land use rights
of the Group and are analyzed as follows:



|                                                           |  |              |  |         |  |        
|---------------------------------------------------------- |  | ------------ |  | ------- |  | -------
|                                                           |  | December 31,
|                                                           |  | 2007         |  | 2008    |  | 2008   
|                                                           |  | RMB000      |  | RMB000 |  | US$000
|Non-current portion                                        |  | 9,247        |  | 8,894   |  | 1,304  
|Current portion - amount to be expensed next year (note 5) |  | 353          |  | 353     |  | 52     
|                                                           |  |              |  |         |  |        
|                                                           |  |              | 
|Total lease prepayments                                    |  | 9,600        |  | 9,247   |  | 1,356  
|                                                           |  |              |  |         |  |        

In 2005, the Group paid RMB9,924,000 for land use rights for a term of 30 years in respect of land located beside
the land on which the existing plant of the Group was constructed. A new plant is being constructed on the newly acquired land to expand the production capacity of the Group. The prepayment is charged to expense on a straight line basis over the
term of the arrangement.

Land lease expense for the years ended December 31, 2006, 2007 and 2008 were RMB353,000, RMB353,000 and RMB353,000
(US$52,000) respectively.



F-33



---

##### Table of Contents

| | 10. | Non-current deposits
| | --- | --------------------

Included in non-current deposits as of
December 31, 2007 and 2008 are deposits for the acquisition of property, plant and equipment of RMB5,471,000 and RMB7,264,000 (US$1,065,000) respectively, and other deposits which are not expected to be utilized or recovered within 1 year.



| | 11. | Intangible assets, net
| | --- | ----------------------



|                               |  |              |  |         |   |  |         |  
|------------------------------ |  | ------------ |  | ------- | - |  | ------- | -
|                               |  | December 31, | 
|                               |  | 2007         |  | 2008    |   |  | 2008    |  
|                               |  | RMB000      |  | RMB000 |   |  | US$000 |  
|Technical know-how             |  |             |  | 5,500   |   |  | 806     |  
|Less: Accumulated amortization |  |             |  | (275    | ) |  | (40     | )
|                               |  |              |  |         |   |  |         |  
|                               |  |              | 
|Total intangible assets        |  |             |  | 5,225   |   |  | 766     |  
|                               |  |              |  |         |   |  |         |  

Intangible assets represent technical know-how used in the manufacture of a pharmaceutical product acquired from
an unrelated third party in 2008. The technical know-how represents the production technology, skills and exclusive distribution right of a pharmaceutical product in the PRC.

Amortization expense for the year ended December 31, 2008 of RMB275,000 (US$40,000) was charged to the cost of revenues.

The estimated amortization expense of intangible assets for the next five years is as follows:



|     |  |         |  |        
|---- |  | ------- |  | -------
|     |  | RMB000 |  | US$000
|2009 |  | 1,100   |  | 161    
|2010 |  | 1,100   |  | 161    
|2011 |  | 1,100   |  | 161    
|2012 |  | 1,100   |  | 161    
|2013 |  | 825     |  | 122    
|     |  |         |  |        
|     |  |        
|     |  | 5,225   |  | 766    
|     |  |         |  |        



| | 12. | Deferred grant income
| | --- | ---------------------

Deferred grant income represents the
unamortized portion of the government grant approved by the State Development Planning Committee of the PRC in August 1999, totalling RMB15,000,000, for the purchase of plant and equipment costing a total of RMB45,029,000. The grant is amortized on
a straight-line basis over the weighted average expected useful life of the plant and equipment acquired.



F-34



---

##### Table of Contents

| | 12. | Deferred grant income (Continued)
| | --- | ---------------------------------

Deferred grant income as of
December 31, 2008 is expected to be amortized as follows:



|                    |  |         |  |        
|------------------- |  | ------- |  | -------
|                    |  | RMB000 |  | US$000
|2009                |  | 374     |  | 55     
|2010                |  | 374     |  | 55     
|2011                |  | 374     |  | 55     
|2012                |  | 374     |  | 55     
|2013 and thereafter |  | 2,030   |  | 297    
|                    |  |         |  |        
|                    |  |        
|                    |  | 3,526   |  | 517    
|                    |  |         |  |        



| | 13. | Accrued expenses and other payables
| | --- | -----------------------------------

Accrued expenses and other
payables consist of the following:



|                                             |  |              |  |         |  |        
|-------------------------------------------- |  | ------------ |  | ------- |  | -------
|                                             |  | December 31,
|                                             |  | 2007         |  | 2008    |  | 2008   
|                                             |  | RMB000      |  | RMB000 |  | US$000
|Receipts in advance from customers           |  | 198          |  | 219     |  | 32     
|VAT payable                                  |  | 3,208        |  | 4,084   |  | 599    
|Accrued salaries, bonus and welfare expenses |  | 7,146        |  | 6,901   |  | 1,012  
|Accrued selling and marketing expenses       |  | 7,439        |  | 8,316   |  | 1,219  
|Other accrued expenses                       |  | 4,635        |  | 5,753   |  | 843    
|                                             |  |              |  |         |  |        
|                                             |  |              | 
|Total accrued expenses and other payables    |  | 22,626       |  | 25,273  |  | 3,705  
|                                             |  |              |  |         |  |        

Other accrued expenses mainly include accrued professional fees, payables for purchase of plant and equipment and
miscellaneous deposits received.



F-35



---

##### Table of Contents

| | 14. | Shareholders equity
| | --- | --------------------



| | (a) | Share capital
| | --- | -------------

Prior to the Reorganization, the registered
capital of Shenyang Sunshine was RMB62,974,000.

On August 9, 2006, the Company issued 1 ordinary share at par value of US$1 upon incorporation and
had an authorized share capital of 50,000 ordinary shares at par value of US$1 each. Pursuant to an ordinary resolution passed on September 5, 2006, the authorized share capital of US$50,000 was divided into 500,000,000 ordinary shares at par
value of US$0.0001 each and accordingly, the issued share capital of US$1 was divided into 10,000 ordinary shares at par value of US$0.0001. In connection with the Reorganization described in note 1(b), on September 5, 2006, the Company issued
99,990,998 ordinary shares at par on a pro-rata basis to the ultimate beneficial shareholders of Collected Mind or their nominees as consideration for the acquisition of Collected Mind. The issue of the 99,990,998 ordinary shares at par resulted in
a capital contribution of approximately RMB80,000 by the shareholders.

During the year ended December 31, 2007, the Company issued 52,083,157 new
ordinary shares in connection with the IPO (note 1(a)).

On August 9, 2006, the Company granted 15,000 shares to a senior executive of the Company for
her on-going services rendered to the Company. During the year ended December 31, 2007, 15,000 ordinary shares were issued to the executive when the granted shares were vested on July 31, 2007 (note 19(a)).

During the year ended December 31, 2008, the Company repurchased a total of 217,600 ADSs (equivalent to 1,523,200 ordinary shares) from the open market at a cash
consideration of RMB14,467,000 (US$2,120,000). The repurchased shares were subsequently retired during the year.



| | (b) | Statutory reserves
| | --- | ------------------

Shenyang Sunshine and its consolidated
entities are required under PRC rules and regulations and their respective Articles of Association to make appropriations from retained earnings to statutory reserves. Such appropriations are approved by the respective boards of directors.



F-36



---

##### Table of Contents

| | 14. | Shareholders equity (continued)
| | --- | --------------------------------



| | (b) | Statutory reserves (continued)
| | --- | ------------------------------



Details of the statutory reserves are set out as follows:

Statutory surplus reserve

According to PRC rules and regulations and
their Articles of Association, Shenyang Sunshine and its consolidated entities are required to transfer 10% of the net income, as determined in accordance with PRC GAAP, to a statutory surplus reserve until the reserve balance reaches 50% of their
respective registered capital. The transfer to this reserve must be made before distribution of dividends to equity holders can be made.

The statutory
surplus reserve is non-distributable but can be used to make good previous years losses, if any, and may be converted into issued capital in proportion to the respective equity holding of the equity holders, provided that the balance of the
reserve after such conversion is not less than 25% of the registered capital.

No transfer was made for the years ended December 31, 2006, 2007 and
2008 by Shenyang Sunshines consolidated entities as they had accumulated losses in the local statutory financial statements, prepared in accordance with PRC GAAP, as of December 31, 2006, 2007 and 2008. Transfers of RMB1,751,000,
RMB3,962,000 and RMB6,297,000 (US$923,000) have been made to the statutory surplus reserve by Shenyang Sunshine for the years ended December 31, 2006, 2007 and 2008, respectively. As the requirement to transfer net income to the statutory
surplus reserve applies only to Shenyang Sunshine and its consolidated entities but not the Company, statutory surplus reserve of Shenyang Sunshine has been reclassified and included in retained earnings upon the Reorganization described in note
1(b).

The accumulated balances of this statutory surplus reserve maintained by the Companys PRC consolidated entities as of December 31, 2007
and 2008 were RMB7,979,000 and RMB14,276,000 (US$2,092,000) respectively.



F-37



---

##### Table of Contents

| | 15. | Revenues
| | --- | --------

The Groups revenues are primarily derived from the
distribution of self-manufactured pharmaceutical products.

In view of the fact that the Group operates and manages its business solely in the PRC and
sales were predominately made to customers located in the PRC, no geographical segment information is provided.

The Groups products are subject to
price control by the PRC government. The maximum prices of the products are published by the price administration authorities from time to time.

The
Groups revenues are analyzed as follows:



|                         |  |                         |  |             |  |             |  |            
|------------------------ |  | ----------------------- |  | ----------- |  | ----------- |  | -----------
|                         |  | Year ended December 31,
|                         |  | 2006RMB000             |  | 2007RMB000 |  | 2008RMB000 |  | 2008US$000
|Domestic sales:          |  |                         |  |             |  |             |  |            
|- EPIAO                  |  | 98,836                  |  | 121,220     |  | 154,570     |  | 22,656     
|- TPIAO                  |  | 16,056                  |  | 43,074      |  | 67,585      |  | 9,906      
|- Intefen                |  | 4,995                   |  | 4,123       |  | 4,989       |  | 731        
|- Inleusin               |  | 1,132                   |  | 1,027       |  | 773         |  | 113        
|- Iron Sucrose Injection |  | 413                     |  | 3,206       |  | 6,984       |  | 1,024      
|Export sales             |  | 5,878                   |  | 6,784       |  | 8,289       |  | 1,215      
|Others                   |  | 470                     |  | 739         |  | 55          |  | 8          
|                         |  |                         |  |             |  |             |  |            
|                         |  |                         |  |            
|Total revenues           |  | 127,780                 |  | 180,173     |  | 243,245     |  | 35,653     
|                         |  |                         |  |             |  |             |  |            



| | 16. | Depreciation
| | --- | ------------

Depreciation expense on property, plant and equipment
is recorded as follows:



|                                           |  |                         |  |             |  |             |  |            
|------------------------------------------ |  | ----------------------- |  | ----------- |  | ----------- |  | -----------
|                                           |  | Year ended December 31,
|                                           |  | 2006RMB000             |  | 2007RMB000 |  | 2008RMB000 |  | 2008US$000
|Cost of revenues                           |  | 3,431                   |  | 2,350       |  | 2,594       |  | 380        
|Research and development costs             |  | 283                     |  | 299         |  | 596         |  | 87         
|Sales, marketing and distribution expenses |  | 160                     |  | 146         |  | 141         |  | 21         
|General and administrative expenses        |  | 1,626                   |  | 2,093       |  | 2,412       |  | 354        
|                                           |  |                         |  |             |  |             |  |            
|                                           |  |                         |  |            
|Total depreciation expenses                |  | 5,500                   |  | 4,888       |  | 5,743       |  | 842        
|                                           |  |                         |  |             |  |             |  |            



F-38



---

##### Table of Contents

| | 17. | Collaborations
| | --- | --------------

During the year ended December 31, 2008, the
Company entered into a development and commercialization agreement with a pharmaceutical company (the pharmaceutical company), for ferumoxytol, an intravenous iron replacement therapeutic agent being developed to treat iron deficiency
anemia in chronic kidney disease (CKD) patients. The product, ferumoxytol, has not received regulatory approval in either U.S. or the PRC as of December 31, 2008.

Under the terms of the agreement, the pharmaceutical company granted the Company exclusive rights to develop and commercialize ferumoxytol in the PRC, initially for CKD, and with an option to expand into additional
indications. The Company will be responsible for the clinical development, registration, and commercialization of ferumoxytol in the PRC. The agreement has an initial duration of thirteen years and will be automatically renewed for a set term if
minimum sales thresholds are achieved. The pharmaceutical company will retain all manufacturing rights for ferumoxytol and will provide, under a separate agreement, commercial supply to the Company at a predetermined supply price.

In accordance with the agreement, during the year, the Company paid a non-refundable upfront payment of US$1,000,000 (equivalent to approximately RMB6,948,000 at the
transaction date) to the pharmaceutical company and is required to pay additional milestone payments upon regulatory approval of ferumoxytol in the PRC for CKD and for each of any other specified indications developed in the PRC . The Company is
also required to pay a royalty determined based on a percentage of Companys sales derived from the future sales of ferumoxytol.

The upfront payment
paid by the Company was expensed when incurred and charged to the research and development costs for the year ended December 31, 2008.



F-39



---

##### Table of Contents

| | 18. | Income tax expense
| | --- | ------------------

Cayman Islands and
British Virgin Islands Taxes

Under the current laws of the Cayman Islands and British Virgin Islands, the Company and Collected Mind are not
subject to tax on income or capital gains. In addition, upon payments of dividends by the Company or Collected Mind, no Cayman Islands or British Virgin Islands withholding tax will be imposed.

PRC Tax

Prior to January 1, 2008,
Shenyang Sunshine, being a foreign-invested manufacturing enterprise in the Shenyang Economic and Technology Development Zone in Liaoning Province, was entitled to a PRC income tax rate of 15%. As a result, the applicable tax rate for 2006 and 2007
was 15%. Other PRC entities were subject to a tax rate of 33% for the years ended December 31, 2006 and 2007.

On March 16, 2007, the National
Peoples Congress passed the new Enterprise Income Tax law (the new EIT law) which imposes a single income tax rate of 25% for most domestic enterprises and foreign investment enterprises. The new EIT law was effective as of
January 1, 2008. The new EIT law provides a five-year transition period from its effective date for those enterprises which were established before March 16, 2007 and which were entitled to a preferential lower tax rate under the then
effective tax laws or regulations. Further, according to the new EIT law, entities that qualify as High and New Technology Enterprise are entitled to the preferential EIT rate of 15%. However, the new recognition criteria and procedures
for High and New Technology Enterprise under the new EIT law were not issued until April 14, 2008 and Shenyang Sunshine had not been recognized as a High and New Technology Enterprise under the new EIT law as of
December 31, 2007. Therefore, Shenyang Sunshine used the five-year transitional tax rates of 18%, 20%, 22%, 24% and 25% in 2008, 2009, 2010, 2011 and 2012 onwards, respectively, in measuring its deferred tax assets and liabilities as of
December 31, 2007.

On December 5, 2008, Shenyang Sunshine obtained the High and New Technology Enterprise certificate that entitles
the preferential EIT rate of 15%, which was effective retroactively from January 1, 2008, to December 31, 2010. Other PRC entities are subject to EIT rate of 25% effective from January 1, 2008.



F-40



---

##### Table of Contents

| | 18. | Income tax expense (continued)
| | --- | ------------------------------



| | PRC | Tax (continued)
| | --- | ---------------



The new EIT law also imposes a 10% withholding tax for dividends distributed by a foreign-invested enterprise to its
immediate holding company outside the PRC beginning on January 1, 2008. Undistributed earnings generated prior to January 1, 2008 are exempted from such withholding tax. Under the previous income tax laws and rules, no withholding tax was
required. Since the Companys PRC entities are invested directly or indirectly by an immediate foreign holding company, the Group is subject to the withholding tax for earnings accumulated beginning on January 1, 2008. As of
December 31, 2008, the undistributed earnings that the Company intends to reinvest indefinitely, and for which no deferred tax liability was recognized, were RMB57,013,000 (US$8,357,000). As of December 31, 2008, the unrecognized deferred
tax liability related to the undistributed earnings subject to withholding tax was RMB5,701,000 (US$836,000).

Income tax expense/(benefit) represents PRC
income tax as follows:



|                                       |  |                |  |                 |   |  |             
|-------------------------------------- |  | -------------- |  | --------------- | - |  | ------------
|                                       |  | CurrentRMB000 |  | DeferredRMB000 |   |  | TotalRMB000
|Year ended December 31, 2006           |  | 3,920          |  | 1,297           |   |  | 5,217       
|                                       |  |                |  |                 |   |  |             
|                                       |  |                | 
|Year ended December 31, 2007           |  | 3,968          |  | (549            | ) |  | 3,419       
|                                       |  |                |  |                 |   |  |             
|                                       |  |                | 
|Year ended December 31, 2008           |  | 10,040         |  | 1,609           |   |  | 11,649      
|                                       |  |                |  |                 |   |  |             
|                                       |  |                | 
|Year ended December 31, 2008 (US$000) |  | 1,471          |  | 236             |   |  | 1,707       
|                                       |  |                |  |                 |   |  |             

The components of income before income tax expense are as follows:



|                |  |                         |   |  |             |  |             |   |  |             |  
|--------------- |  | ----------------------- | - |  | ----------- |  | ----------- | - |  | ----------- | -
|                |  | Year ended December 31, |  
|                |  | 2006RMB000             |   |  | 2007RMB000 |  | 2008RMB000 |   |  | 2008US$000 |  
|PRC             |  | 35,887                  |   |  | 54,196      |  | 73,429      |   |  | 10,763      |  
|Other countries |  | (209                    | ) |  | 30,811      |  | (22,787     | ) |  | (3,341      | )
|                |  |                         |   |  |             |  |             |   |  |             |  
|                |  |                         |   | 
|                |  | 35,678                  |   |  | 85,007      |  | 50,642      |   |  | 7,422       |  
|                |  |                         |   |  |             |  |             |   |  |             |  



F-41



---

##### Table of Contents

| | 18. | Income tax expense (continued)
| | --- | ------------------------------



| | PRC | Tax (continued)
| | --- | ---------------



Income tax expense reported in the consolidated statements of income and comprehensive income/(loss) differ from the
amounts computed by applying the PRC income tax rate of 15% for the years ended December 31, 2006 and 2007, and 25% for the year ended December 31, 2008 for the following reasons:



|                                                                                |  |                         |   |  |             |   |  |             |   |  |             |  
|------------------------------------------------------------------------------- |  | ----------------------- | - |  | ----------- | - |  | ----------- | - |  | ----------- | -
|                                                                                |  | Year ended December 31, |  
|                                                                                |  | 2006RMB000             |   |  | 2007RMB000 |   |  | 2008RMB000 |   |  | 2008US$000 |  
|Income before income tax Expense                                                |  | 35,678                  |   |  | 85,007      |   |  | 50,642      |   |  | 7,422       |  
|                                                                                |  |                         |   |  |             |   |  |             |   |  |             |  
|Computed expected tax expense                                                 |  | 5,352                   |   |  | 12,751      |   |  | 12,661      |   |  | 1,856       |  
|Foreign entities not subject to income taxes                                    |  |                        |   |  | (4,700      | ) |  | 5,687       |   |  | 834         |  
|Preferential tax rate (note)                                                    |  |                        |   |  |            |   |  | (6,770      | ) |  | (993        | )
|Tax rate differential of entities not subject to PRC preferential tax treatment |  | 142                     |   |  | 121         |   |  |            |   |  |            |  
|Non-deductible expenses                                                         |  | 561                     |   |  | 130         |   |  | 456         |   |  | 67          |  
|Non-taxable income                                                              |  | (139                    | ) |  | (92         | ) |  | (56         | ) |  | (8          | )
|Change in valuation allowance on deferred tax assets                            |  | (282                    | ) |  | (234        | ) |  | 535         |   |  | 79          |  
|Reinvestment tax refund                                                         |  |                        |   |  | (2,739      | ) |  |            |   |  |            |  
|Tax concession for research and development expenses                            |  | (454                    | ) |  | (802        | ) |  | (800        | ) |  | (118        | )
|Tax credit for purchase of domestic equipment                                   |  |                        |   |  | (349        | ) |  |            |   |  |            |  
|Change in tax rate on deferred tax assets                                       |  |                        |   |  | (756        | ) |  |            |   |  |            |  
|Others                                                                          |  | 37                      |   |  | 89          |   |  | (64         | ) |  | (10         | )
|                                                                                |  |                         |   |  |             |   |  |             |   |  |             |  
|                                                                                |  |                         |   | 
|Actual income tax expense                                                       |  | 5,217                   |   |  | 3,419       |   |  | 11,649      |   |  | 1,707       |  
|                                                                                |  |                         |   |  |             |   |  |             |   |  |             |  

Note: Basic and diluted net income per share effect of preferential tax rate for the year ended
December 31, 2008 was RMB0.04 (US$0.01).



F-42



---

##### Table of Contents

| | 18. | Income tax expense (continued)
| | --- | ------------------------------



PRC Tax (continued)



As of December 31, 2008, the Group has unused tax losses of RMB1,736,000 (US$254,000). The tax losses will
expire as follows if unutilized by:



|     |  |         |  |        
|---- |  | ------- |  | -------
|     |  | RMB000 |  | US$000
|2012 |  | 512     |  | 75     
|2013 |  | 1,224   |  | 179    
|     |  |         |  |        
|     |  |        
|     |  | 1,736   |  | 254    
|     |  |         |  |        

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets are
presented below:



|                                                            |  |              |   |  |             |   |  |             |  
|----------------------------------------------------------- |  | ------------ | - |  | ----------- | - |  | ----------- | -
|                                                            |  | December 31, |  
|                                                            |  | 2007RMB000  |   |  | 2008RMB000 |   |  | 2008US$000 |  
|Property, plant and equipment                               |  | 589          |   |  | 105         |   |  | 15          |  
|Accounts receivable                                         |  | 970          |   |  | 756         |   |  | 111         |  
|Inventories                                                 |  | 172          |   |  | 137         |   |  | 20          |  
|Accrued expenses                                            |  | 2,071        |   |  | 1,596       |   |  | 233         |  
|Deferred grant income                                       |  | 915          |   |  | 529         |   |  | 78          |  
|Deferral of research and development costs for tax purposes |  | 509          |   |  | 278         |   |  | 41          |  
|Tax loss carryforwards                                      |  | 519          |   |  | 434         |   |  | 64          |  
|                                                            |  |              |   |  |             |   |  |             |  
|                                                            |  |              |  
|                                                            |  | 5,745        |   |  | 3,835       |   |  | 562         |  
|Less: Valuation allowance                                   |  | (1,553       | ) |  | (1,252      | ) |  | (184        | )
|                                                            |  |              |   |  |             |   |  |             |  
|                                                            |  |              |  
|Net deferred tax asset                                      |  | 4,192        |   |  | 2,583       |   |  | 378         |  
|                                                            |  |              |   |  |             |   |  |             |  
|Consolidated balance sheet classification:                  |  |              |   |  |             |   |  |             |  
|                                                            |  |              |  
|Current                                                     |  | 2,335        |   |  | 1,802       |   |  | 264         |  
|Non-current                                                 |  | 1,857        |   |  | 781         |   |  | 114         |  
|                                                            |  |              |   |  |             |   |  |             |  
|                                                            |  |              |  
|                                                            |  | 4,192        |   |  | 2,583       |   |  | 378         |  
|                                                            |  |              |   |  |             |   |  |             |  



F-43



---

##### Table of Contents

| | 18. | Income tax expense (continued)
| | --- | ------------------------------



PRC Tax (continued)



An analysis of the valuation allowance is as follows:



|                                   |  |                         |   |  |             |   |  |             |   |  |             |  
|---------------------------------- |  | ----------------------- | - |  | ----------- | - |  | ----------- | - |  | ----------- | -
|                                   |  | Year ended December 31, |  
|                                   |  | 2006RMB000             |   |  | 2007RMB000 |   |  | 2008RMB000 |   |  | 2008US$000 |  
|Balance at beginning of year       |  | 2,663                   |   |  | 2,381       |   |  | 1,553       |   |  | 228         |  
|(Credited)/charged to income       |  | (282                    | ) |  | (234        | ) |  | 535         |   |  | 79          |  
|Tax losses expired during the year |  |                        |   |  | (191        | ) |  | (836        | ) |  | (123        | )
|Change in enacted tax rates        |  |                        |   |  | (403        | ) |  |            |   |  |            |  
|                                   |  |                         |   |  |             |   |  |             |   |  |             |  
|                                   |  |                         |   | 
|Balance at end of year             |  | 2,381                   |   |  | 1,553       |   |  | 1,252       |   |  | 184         |  
|                                   |  |                         |   |  |             |   |  |             |   |  |             |  

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become
deductible or tax loss carryforwards are utilized. Management considers projected future taxable income and tax planning strategies in making this assessment. Based upon an assessment of the level of historical taxable income and projections for
future taxable income over the periods in which the deferred tax assets are deductible or can be utilized, management provided valuation allowances of RMB1,553,000 and RMB1,252,000 (US$184,000) as of December 31, 2007 and 2008 respectively.
Full valuation allowances are provided for loss making entities of the Company since it is more likely than not that the deferred tax assets would not be realized. Management believes that the deferred tax assets, net of the valuation allowances as
of December 31, 2007 and 2008, are more likely than not to be realized. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced.



F-44



---

##### Table of Contents

| | 18. | Income tax expense (continued)
| | --- | ------------------------------



PRC Tax (continued)



As of January 1, 2007, the date of adoption of FIN 48, and for the years ended December 31, 2007 and 2008,
the Group did not have any unrecognized tax benefits and thus, no interest and penalties related to unrecognized tax benefits were recorded. In addition, it does not expect that the amount of unrecognized tax benefits will change significantly
within the next twelve months.

According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment
of taxes is due to computational errors made by the taxpayer or the withholding agent. The statute of limitations extends to five years under special circumstances where the underpayment of taxes is more than RMB100,000. In the case of transfer
pricing issues, the statute of limitation is ten years. There is no statute of limitation in the case of tax evasion. Accordingly, the income tax returns of the Groups operating entities in the PRC for the years ended December 31, 2003
through 2008 are open to examination by the PRC state and local tax authorities.



| | 19. | Share-based compensation
| | --- | ------------------------

(a) Shares granted
to executives

On June 1, 2006, Shenyang Keweier committed to grant shares of the Company to a director and a senior executive of the Company
as compensation for their on-going services rendered to the Company. The Companys intent was to provide compensation to each grantee in a predetermined amount based on US$277,778 per award to be paid in the form of the Companys shares.
The shares vest upon the earlier of (1) 18 months from June 1, 2006 or (2) on the date of the Companys IPO. Should the date of the IPO fall within 18 months from June 1, 2006, the number of vested shares to be granted to
each of the grantees would be calculated by dividing a predetermined monetary amount of US$277,778 by the fair value per share on the IPO date. The number of vested shares to be granted was calculated based on a revised monetary amount that was
adjusted proportionately to reflect the excess of the market capitalization at the IPO date of the Company over US$222 million. In the event that the IPO did not occur within 18 months from June 1, 2006, a total number of 312,504 vested shares
of the Company would be granted. Subsequent to the Reorganization described in note 1(b), the ultimate shareholders of the Shenyang Keweier held shares of the Company via Achieve Well International Limited (Achieve Well), and Achieve
Well transferred shares of the Company to the director and executive upon vesting.



F-45



---

##### Table of Contents

| | 19. | Share-based compensation (continued)
| | --- | ------------------------------------



| | (a) | Shares granted to executives (continued)
| | --- | ----------------------------------------



In accordance with SFAS No. 123R, since the share awards contained vesting and exercisability conditions other
than those based on service, performance or market criteria, the awards were classified as a liability and were initially measured at the estimated fair value of the shares expected to vest at the grant date and were subject to remeasurement at each
reporting date.

On October 15, 2006, the stock awards were modified and settled, with Achieve Well granting an aggregate of 312,504 fully vested
ordinary shares of the Company to the two individuals. The stock awards ceased to be liability-classified and were reclassified as equity upon settlement. The fair value of the modified awards as of the settlement date of approximately RMB1,877,000
was charged to the consolidated statements of income and comprehensive income for the year ended December 31, 2006 with a corresponding increase in additional paid-in capital. The fair value of the awards as of the settlement date was estimated
based on the transaction price of a recent private sale of shares by a shareholder of the Company to unrelated third parties.

On August 9, 2006, the
Company granted 15,000 shares to a senior executive of the Company for her on-going services rendered to the Company. The fair value of the shares at grant date was RMB90,000. The shares vested on July 31, 2007 and were issued to the employee
during the year ended December 31, 2007.

On January 18, 2008, the Company granted 10,500 shares to a director of the Company. The fair value of
the shares at grant date was RMB121,000 (US$17,000). The shares vested on December 31, 2008 and new shares were issued in January 2009.

The Company
recognized compensation expense of RMB1,915,000, RMB52,000 and RMB121,000 (US$17,000), respectively, for the years ended December 31, 2006, 2007 and 2008 in respect of shares granted to executives.



| | (b) | Share options granted to executives
| | --- | -----------------------------------

On September 5,
2006, the Company adopted the 2006 stock incentive plan (the Plan) pursuant to which the share options and shares of the Company can be granted to directors and employees upon the approval by the Board of Directors. Under the plan,
shares and options to purchase shares up to 10% of the issued shares of the Company can be granted. The Plan will remain in effect for five years from the date of adoption.



F-46



---

##### Table of Contents

3SBio Inc.

Consolidated financial statements

For the years ended December 31, 2006, 2007 and 2008



| | 19. | Share-based compensation (continued)
| | --- | ------------------------------------



| | (b) | Share options granted to executives (continued)
| | --- | -----------------------------------------------



On October 1, 2006, the Company granted several directors and employees options (October 2006
options) to purchase a total of 1,060,000 ordinary shares of the Company at an exercise price of US$1.60 per share. The vesting dates of the options granted are as follows:



|                   |  |                 
|------------------ |  | ----------------
|Vesting date       |  | Numberof options
|August 1, 2007     |  | 15,000          
|September 30, 2007 |  | 333,333         
|December 31, 2007  |  | 45,000          
|September 30, 2008 |  | 333,333         
|September 30, 2009 |  | 333,334         
|                   |  |                 
|                   | 
|                   |  | 1,060,000       
|                   |  |                 

All the above options granted are exercisable by the grantees upon vesting and will expire on October 1,
2009.

On July 23, 2007, the Company granted options to a senior executive (July 2007 options) for the purchase of a total of 100,000
ordinary shares of the Company at an exercise price of US$1.6 per share. The July 2007 options become exercisable on May 31, 2008 and expire on June 1, 2010.

On January 31, 2008 and March 17, 2008, the Company granted options to two directors for the purchase of a total of 17,500 (January 2008 options) and 122,500 (March 17, 2008 options)
ordinary shares of the Company at an exercise price of US$1.65 and US$1.10 per share respectively. Both of the share options became exercisable on December 31, 2008. The January 2008 options and the March 17, 2008 options will expire on
December 31, 2011 and March 16, 2011 respectively.

On March 7, 2008, the Company granted options to several directors and employees to
purchase a total of 1,400,000 ordinary shares of the Company (March 7, 2008 options) at an exercise price of US$1.15 per share. The vesting dates of the options granted are as follows:



|                |  |                 
|--------------- |  | ----------------
|Vesting date    |  | Numberof options
|October 1, 2008 |  | 466,200         
|October 1, 2009 |  | 466,200         
|October 1, 2010 |  | 467,600         
|                |  |                 
|                | 
|                |  | 1,400,000       
|                |  |                 



F-47



---

##### Table of Contents

3SBio Inc.

Consolidated financial statements

For the years ended December 31, 2006, 2007 and 2008



| | 19. | Share-based compensation (continued)
| | --- | ------------------------------------



| | (b) | Share options granted to executives (continued)
| | --- | -----------------------------------------------



All the above options granted are exercisable by the grantees upon vesting and will expire on October 1, 2011.

Share option activity during the periods indicated is as follows:



|                                 |  |                  |   |  |                              |   |  |                                         |  |                        
|-------------------------------- |  | ---------------- | - |  | ---------------------------- | - |  | --------------------------------------- |  | -----------------------
|                                 |  | Number ofoptions |   |  | Weightedaverageexerciseprice |   |  | Weightedaverageremainingcontractuallife |  | Aggregateintrinsicvalue
|                                 |  |                  |   |  | US$                          |   |  | Years                                   |  | US$                    
|Balance at January 1, 2006       |  |                 |   |  |                             |   |  |                                         |  |                        
|Granted                          |  | 1,060,000        |   |  | 1.60                         |   |  |                                         |  |                        
|                                 |  |                  |   |  |                              |   |  |                                         |  |                        
|Balance at December 31, 2006     |  | 1,060,000        |   |  | 1.60                         |   |  |                                         |  |                        
|Granted                          |  | 100,000          |   |  | 1.60                         |   |  |                                         |  |                        
|                                 |  |                  |   |  |                              |   |  |                                         |  |                        
|                                 |  |                  |   | 
|Balance at December 31, 2007     |  | 1,160,000        |   |  | 1.60                         |   |  |                                         |  |                        
|Granted                          |  | 1,540,000        |   |  | 1.15                         |   |  |                                         |  |                        
|Forfeited                        |  | (213,650         | ) |  | (1.55                        | ) |  |                                         |  |                        
|                                 |  |                  |   |  |                              |   |  |                                         |  |                        
|                                 |  |                  |   | 
|Balance at December 31, 2008     |  | 2,486,350        |   |  | 1.33                         |   |  | 1.97                                    |  | 2,000                  
|                                 |  |                  |   |  |                              |   |  |                                         |  |                        
|                                 |  |                  |   | 
|Exercisable at December 31, 2008 |  | 1,297,783        |   |  | 1.39                         |   |  | 1.68                                    |  | 2,000                  
|                                 |  |                  |   |  |                              |   |  |                                         |  |                        

The aggregate intrinsic value in the table above represents the value of the Companys closing stock price on
the last trading day in 2008 in excess of the exercise price of share options.

The fair value of each option award is estimated on the date of grant using
the Black-Scholes option pricing model based on the following assumptions:



|                                   |  |                     |   |  |                  |   |  |                     |   |  |                       |   |  |                      |  
|---------------------------------- |  | ------------------- | - |  | ---------------- | - |  | ------------------- | - |  | --------------------- | - |  | -------------------- | -
|                                   |  | October 2006options |   |  | July 2007options |   |  | January 2008options |   |  | March 17, 2008options |   |  | March 7, 2008options |  
|Fair value of shares on grant date |  | RMB6per share       |   |  | US$1.50per share |   |  | US$1.59per share    |   |  | US$1.15per share      |   |  | US$1.05per share     |  
|Expected volatility                |  | 62                  | % |  | 55               | % |  | 74                  | % |  | 83                    | % |  | 83                   | %
|Expected dividends                 |  | Nil                 |   |  | Nil              |   |  | Nil                 |   |  | Nil                   |   |  | Nil                  |  
|Expected term (in years)           |  | 3.0                 |   |  | 2.9              |   |  | 3.9                 |   |  | 3.0                   |   |  | 3.6                  |  
|Risk-free rate                     |  | 4.6                 | % |  | 5.0              | % |  | 4.3                 | % |  | 4.8                   | % |  | 4.8                  | %



F-48



---

##### Table of Contents

3SBio Inc.

Consolidated financial statements

For the years ended December 31, 2006, 2007 and 2008



| | 19. | Share-based compensation (continued)
| | --- | ------------------------------------



| | (b) | Share options granted to executives (continued)
| | --- | -----------------------------------------------



Up to the date of grant of the October 2006 option, the Companys shares were not publicly traded and did not
have a quoted market price. As a result, for the purpose of share option valuation, the fair value of the Companys shares was estimated based on the transaction price of a recent private placement of shares by a shareholder of the Company with
unrelated third parties valued at RMB6 per share.

For other share options, for the purpose of share option valuation, the fair values of the
Companys shares were estimated based on the quoted market prices of the Companys ADSs listed on The Nasdaq Global Market at the respective grant dates.

The historical volatility of the Companys shares and volatility of a combination of peer companies of similar nature and size were used to estimate the volatility of the Companys shares. The Company uses historical data to
estimate employee termination within the valuation model. The risk-free rate for periods within the expected term of the options is based on the U.S. government bond in effect at the time of grant. Expected dividend yields are based on historical
dividends. Changes in these subjective input assumptions could materially affect the fair value estimates.

The share options that were outstanding as of
December 31, 2008 have a weighted-average remaining contractual term of 1.97 years. The grant-date fair values of options granted during the years ended December 31, 2006, 2007 and 2008 were RMB1,606,000, RMB346,000 and RMB7,481,000
(US$1,097,000) respectively.

The share-based compensation for the share options granted included in the additional paid-in capital of the Company is
recognized in the following captions:



|                                             |  |                         |  |             |  |             |  |            
|-------------------------------------------- |  | ----------------------- |  | ----------- |  | ----------- |  | -----------
|                                             |  | Year ended December 31,
|                                             |  | 2006RMB000             |  | 2007RMB000 |  | 2008RMB000 |  | 2008US$000
|Cost of revenues                             |  |                        |  |            |  | 370         |  | 54         
|Research and development costs               |  |                        |  |            |  | 521         |  | 76         
|Sales, marketing and distribution expenses   |  |                        |  |            |  | 1,000       |  | 147        
|General and administrative expenses          |  | 230                     |  | 943         |  | 2,976       |  | 437        
|                                             |  |                         |  |             |  |             |  |            
|Charged to income                            |  | 230                     |  | 943         |  | 4,867       |  | 714        
|Capitalized as property, plant and equipment |  |                        |  |            |  | 328         |  | 48         
|                                             |  |                         |  |             |  |             |  |            
|Total share-based compensation expenses      |  | 230                     |  | 943         |  | 5,195       |  | 762        
|                                             |  |                         |  |             |  |             |  |            



F-49



---

##### Table of Contents

3SBio Inc.

Consolidated financial statements

For the years ended December 31, 2006, 2007 and 2008



| | 19. | Share-based compensation (continued)
| | --- | ------------------------------------



| | (b) | Share options granted to executives (continued)
| | --- | -----------------------------------------------



As of December 31, 2008, total unrecognized compensation cost related to unvested share options amounted to
RMB2,938,000 (US$431,000), which is expected to be recognized over a weighted-average period of 1.3 years.



| | 20. | Related party transactions
| | --- | --------------------------



|                                                                  |  |                                                                                                                   
|----------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------
|Name of party                                                     |  | Relationship                                                                                                      
|China Transport Resources Northeast Co., Ltd. (China Transport) |  | Shareholder (6.67%) of Shenyang Sunshine prior to the Reorganization                                              
|                                                                  | 
|Epitomics Inc.                                                    |  | Chief Executive Officer of Epitomics Inc. is an immediate family member of Chief Scientific Officer of the Company

The principal related party transactions are as follows:



|                                                                         |  |                         |  |             |  |             |  |            
|------------------------------------------------------------------------ |  | ----------------------- |  | ----------- |  | ----------- |  | -----------
|                                                                         |  | Year ended December 31,
|                                                                         |  | 2006RMB000             |  | 2007RMB000 |  | 2008RMB000 |  | 2008US$000
|Bank loans guaranteed by China Transport (note (i))                      |  | 5,000                   |  |            |  |            |  |            
|Bank loans of China Transport guaranteed by Shenyang Sunshine (note (i)) |  | 10,000                  |  |            |  |            |  |            
|Research and development costs to Epitomics Inc. (note (ii))             |  | 390                     |  | 589         |  |            |  |            
|                                                                         |  |                         |  |             |  |             |  |            



Notes:



|(i) | As of December 31, 2006, bank loans of the Group totaling RMB5,000,000 respectively, were guaranteed by China Transport.
|--- | ------------------------------------------------------------------------------------------------------------------------

In return, Shenyang Sunshine guaranteed bank loans of China Transport totaling RMB10,000,000 as of December 31, 2006 respectively. The guarantees
cover the repayment of loan principal and the related interest payments. If China Transport defaults on debt payments, Shenyang Sunshine is required to perform under the guarantee. No amounts have been accrued for any estimated obligations under the
guarantees, as it is probable that China Transport will be able to make all scheduled payments.



F-50



---

##### Table of Contents

3SBio Inc.

Consolidated financial statements

For the years ended December 31, 2006, 2007 and 2008



| | 20. | Related party transactions (continued)
| | --- | --------------------------------------



Notes: (continued)



|(ii) | During the year ended December 31, 2006, the Group signed an agreement with Epitomics Inc. for research and development of a product candidate. Research and development fees
totaling RMB390,000 and RMB589,000 were incurred during the years ended December 31, 2006 and 2007, respectively. No such fees were incurred during the year ended December 31, 2008. The Group is required to pay a royalty determined based
on a percentage of sales derived from the future sales of such product. Sales of the product have not yet commenced as of December 31, 2008.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

There were no amounts due from/to the above related parties as of December 31, 2007 and 2008.



| | 21. | Pension and other postretirement benefits
| | --- | -----------------------------------------

Pursuant to the relevant
PRC regulations, the Companys PRC consolidated entities is required to make contributions for each employee at a rate of approximately 20% on a standard salary base as determined by the local Social Security Bureau, to a defined contribution
retirement scheme organized by the local Social Security Bureau in respect of the retirement benefits for the Groups employees in the PRC. The total amount of contributions of RMB1,330,000, RMB1,475,000 and RMB2,102,000 (US$308,000) for the
years ended December 31, 2006, 2007 and 2008 respectively, was charged to expense in the consolidated statements of income and comprehensive income. The Group has no other obligation to make payments in respect of retirement benefits of the
employees.



| | 22. | Fair value measurements
| | --- | -----------------------



| | (a) | Fair value of financial instruments
| | --- | -----------------------------------

The fair value of a
financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying amount of financial assets, such as cash and cash equivalents, time deposits with financial institutions,
accounts receivable, other receivables, accounts payable and other payables, approximates their fair values because of the short maturity of these instruments. The fair values of the structured deposits and available-for-sale securities are
determined based on quoted market value.



F-51



---

##### Table of Contents

3SBio Inc.

Consolidated financial statements

For the years ended December 31, 2006, 2007 and 2008



| | 22. | Fair value measurements (continued)
| | --- | -----------------------------------



| | (b) | Fair Value Hierarchy
| | --- | --------------------



The Group adopted SFAS No. 157 on January 1, 2008 for fair value measurements of financial assets and
financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements on a recurring basis. SFAS No. 157 establishes a fair value hierarchy that prioritizes the
inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements
involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:



| |  | Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement
date.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Level 3 inputs are unobservable inputs for the asset or liability.
|- |  | ------------------------------------------------------------------

The level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

The following table presents assets that are measured at fair value on a recurring basis at December 31, 2008:



|                              |  |                  |  |                                                                                                      
|----------------------------- |  | ---------------- |  | -----------------------------------------------------------------------------------------------------
|                              |  | December 31,2008 |  | Fair valuemeasurementsat reportingdate usingquoted pricesin activemarkets
foridenticalassets(Level 1)
|Available-for-sale securities |  |                  |  |                                                                                                      
|- RMB                         |  | 26,700           |  | 26,700                                                                                               
|                              |  |                  |  |                                                                                                      
|- US$                         |  | 3,914            |  | 3,914                                                                                                
|                              |  |                  |  |                                                                                                      



F-52



---

##### Table of Contents

3SBio Inc.

Consolidated financial statements

for the years ended December 31, 2006, 2007 and 2008



| | 22. | Fair value measurements (continued)
| | --- | -----------------------------------



| | (b) | Fair Value Hierarchy (continued)
| | --- | --------------------------------



The consolidated financial statements as of and for the year ended December 31, 2008 do not include any
nonrecurring fair value measurements relating to assets or liabilities for which the Company has adopted the provisions of SFAS No. 157. All nonrecurring fair value measurements for 2008 involved nonfinancial assets and the Company will not
adopt the provisions of SFAS No.157 for nonrecurring fair value measurements involving nonfinancial assets and nonfinancial liabilities until January 1, 2009 as discussed in Note 1(u).



| | 23. | Business and credit concentrations
| | --- | ----------------------------------

Almost all of the Groups
customers are located in the PRC. The following are sales to customers that individually comprise 10% or more of gross revenue:



|                                            |  |                         |  |      |  |         |  |      |  |         |  |    |  |         |  |   
|------------------------------------------- |  | ----------------------- |  | ---- |  | ------- |  | ---- |  | ------- |  | -- |  | ------- |  | --
|                                            |  | Year ended December 31,
|                                            |  | 2006                    |  | 2007 |  | 2008    |  | 2008
|                                            |  | RMB000                 |  | %    |  | RMB000 |  | %    |  | RMB000 |  | %  |  | US$000 |  | % 
|Beijing Tianxingpuxin Bio-Medical Co., Ltd. |  | 15,212                  |  | 12   |  | 17,931  |  | 10   |  | 26,267  |  | 11 |  | 3,850   |  | 11
|                                            |  |                         |  |      |  |         |  |      |  |         |  |    |  |         |  |   

No individual consumer made up 10% or more of the outstanding accounts receivable as of December 31, 2007 and
2008.



| | 24. | Commitments and contingencies
| | --- | -----------------------------



| | (a) | Operating lease commitments
| | --- | ---------------------------

The Group leases land from the
PRC government under operating leases. Operating lease charges are prepaid in full at the inception of the lease (note 9). The Group also leases staff quarters and motor vehicles under operating leases. The leases typically run for a period of one
year. None of the leases includes contingent rentals.

For the years ended December 31, 2006, 2007 and 2008, total rental expenses for operating
leases, including land lease expense, were RMB1,783,000, RMB1,837,000 and RMB1,761,000 (US$258,000), respectively.



| | (b) | Capital commitments
| | --- | -------------------

Capital commitments for purchase,
installation and construction of property, plant and equipment as of December 31, 2007 and 2008 were RMB2,755,000 and RMB19,579,000 (US$2,870,000) respectively.