---

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C.
20549

FORM 20-F

(Mark One)

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

or

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

For the fiscal year ended December 31, 2012

or

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

For the transition period from ______to______

or

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

Date of event requiring this shell company report

Commission file number 001-33295

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

Cayman Islands(Jurisdiction of Incorporation or
Organization)

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

Bo Tan, Chief Financial OfficerNo. 3 A1, Road
10Shenyang Economy & Technology Development
ZoneShenyang 110027Peoples Republic of Chinawww.3sbio.com

Telephone (China): 8624-25811820Email:
ir@3sbio.com(Name, Telephone, E-mail and/or Facsimile number and
Address of Company Contact Person)

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

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

---

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

None

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

None

Indicate the number of outstanding ordinary shares of each of
the Issuers classes of capital or common stock as of the close of the period
covered by the annual report.

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

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

Yes [ 
 ]                                                                   No
[X]

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

Yes [  
]                                                                   No
[X]

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

Yes
[X]                                                                 
No [   ]

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

|Large accelerated filer [   ] | Accelerated filer [X] | Non-accelerated filer [   ]
|----------------------------- | --------------------- | ---------------------------

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

|U.S. GAAP [X] | International Financial Reporting Standards as issued by
    the International Accounting Standards Board [  ] | Other [  ]
|------------- | -------------------------------------------------------------------------------------------------------------- | ----------

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

|Item 17 [   ] | Item 18 [   ]
|------------- | -------------

If this is an annual report, indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Securities
Exchange Act of 1934).

Yes[ 
]                                                                    
No [X]

---

3SBIO INC.

FORM 20-F ANNUAL REPORT

FISCAL YEAR ENDED DECEMBER 31, 2012

TABLE OF CONTENTS

|                |                                                                                    |   
|--------------- | ---------------------------------------------------------------------------------- | --
|INTRODUCTION    |                                                                                   
|PART I          |                                                                                    | 1 
|ITEM 1.         | IDENTITY OF
      DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                        | 1 
|ITEM 2.         | OFFER STATISTICS AND EXPECTED
      TIMETABLE                                      | 1 
|ITEM 3.         | KEY
      INFORMATION                                                              | 1 
|ITEM
      4.   | INFORMATION ON THE COMPANY                                                         | 21
|ITEM 4A.        | UNRESOLVED
      STAFF COMMENTS                                                    | 51
|ITEM 5.         | OPERATING AND FINANCIAL
      REVIEW AND PROSPECTS                                 | 52
|ITEM 6.         | DIRECTORS,
      SENIOR MANAGEMENT AND EMPLOYEES                                   | 65
|ITEM
      7.   | MAJOR SHAREHOLDERS AND
      RELATED PARTY TRANSACTIONS                            | 72
|ITEM 8.         | FINANCIAL
      INFORMATION                                                        | 76
|ITEM
      9.   | THE OFFER AND LISTING                                                              | 77
|ITEM 10.        | ADDITIONAL
      INFORMATION                                                       | 79
|ITEM
      11.  | QUANTITATIVE AND QUALITATIVE
      DISCLOSURES ABOUT MARKET RISK                   | 86
|ITEM 12.        | DESCRIPTION
      OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 87
|PART II         |                                                                                    | 89
|ITEM 13.        | DEFAULTS,
      DIVIDEND ARREARAGES AND DELINQUENCIES                              | 89
|ITEM 14.        | MATERIAL MODIFICATIONS TO
      THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 89
|ITEM 15.        | CONTROLS AND
      PROCEDURES                                                      | 89
|ITEM 16A.       | AUDIT COMMITTEE FINANCIAL
      EXPERT                                             | 90
|ITEM 16B.       | CODE OF
      ETHICS                                                               | 90
|ITEM
      16C. | PRINCIPAL ACCOUNTANT FEES
      AND SERVICES                                       | 90
|ITEM 16D.       | EXEMPTIONS
      FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                   | 90
|ITEM 16E.       | PURCHASES OF EQUITY
      SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS       | 91
|ITEM 16F.       | CHANGE IN
      REGISTRANTS CERTIFYING ACCOUNTANT                                 | 91
|ITEM 16G.       | CORPORATE
      GOVERNANCE                                                         | 91
|ITEM 16H.       | MINE SAFETY
      DISCLOSURE                                                       | 91
|PART III        |                                                                                    | 92
|ITEM 17.        | FINANCIAL
      STATEMENTS                                                         | 92
|ITEM 18.        | FINANCIAL
      STATEMENTS                                                         | 92
|ITEM 19.        | EXHIBITS                                                                           | 92

---

INTRODUCTION

Conventions

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

- The term our company, the Company, we,
      us, or our, or any like terms, refer to 3SBio Inc. and its
      subsidiaries and consolidated variable interest entity, unless the context
      requires otherwise;
- Share(s)or ordinary share(s) refer to our
      ordinary share(s), with par value US$0.0001 per share;
- ADS(s) refer to our American depositary
      share(s), each of which represents seven ordinary shares;
- ADR(s) refer to our American depositary
      receipt(s) that evidence our ADSs;
- References to China or PRC are to the
      Peoples Republic of China, excluding for the purposes of this annual
      report Hong Kong, Taiwan and Macau;
- References to province(s) of China are to one
      or more, as applicable, of the provinces and provincial-level
      municipalities and autonomous regions of China;
- All references to RMB or Renminbi are to
      the legal currency of China;
- All references to U.S. dollars, USD or
      US$ are to the legal currency of the United States of America;
- U.S. GAAP refer to the generally accepted
      accounting principles in the United States of America;
- SFDA refers to the State Food and Drug
      Administration of PRC;
- The Commission or SEC refers to the
      Securities and Exchange Commission of the United States;

In addition,

- Heading, titles, or numbering, or presentation
      aids of similar nature, other than required captions and numbering
      applicable to each Item of Form 20-F, are only for convenience of
      reference, for the benefit of readers, and shall be with no
  substance;
- Any website addresses are not intended to
      function as hyperlinks, and the information contained in such websites is
      not a part of this filing;
- We do not incorporate into this annual report
      by reference, and disclaim any responsibility or liability, to any
      materials, statements or information that are authored or supplied by
      third parties, other than as specifically and expressly indicated;
- To the extent available and not at unreasonable
      costs to us, if determined to facilitate better shareholder
      communications, at our sole discretion, we may from time to time choose to
      discuss certain events, developments, or issues after the end of the
      subject year, or choose to disclose certain information not required to
      disclose, in the annual report on Form 20-F, and may not do so with
      respect to other than such selected information or in any future periods;
      and
- All descriptions of any document in this annual
      report on Form 20−F are subject to and qualified in the entirety by
      reference to the full text of such document.

Cautionary Statement concerning Forward-looking
Statements:

Statutory Safe Harbor

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

What are Forward-looking Statements

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

i

---

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

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

Subject to Risks, Uncertainties, and Assumptions

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

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

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

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

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

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

Date of Relevance; No Update

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

Applicable to other Disclosures

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

ii

---

PART I

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

Not applicable.

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

Not applicable.

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

A. Selected Financial Data

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

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

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


1

---

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


|(1) | Net revenue consists of the invoiced value of goods sold,
      net of: value-added taxes, or VAT; discretionary sales returns; and trade
      discounts and allowances.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Exchange Rate Information

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

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

Noon Buying RatePeriod End
    
    
    Average(1)
    
    
    High
    
    
    Low(RMB per US$1.00)Period2008
    
    6.8225
    
    
    6.9477
    
    
    6.7800
    
    
    7.29462009
    
    6.8259
    
    
    6.8295
    
    
    6.8176
    
    
    6.84702010
    
    6.6000
    
    
    6.7689
    
    
    6.8330
    
    
    6.60002011
    
    6.2939
    
    
    6.4630
    
    
    6.6364
    
    
    6.29392012October
    
    6.2372
    
    
    6.2627
    
    
    6.2877
    
    
    6.2372November
    
    6.2265
    
    
    6.2338
    
    
    6.2454
    
    
    6.2221December
    
    6.2301
    
    
    6.2328
    
    
    6.2502
    
    
    6.22512013January
    
    6.2186
    
    
    6.2215
    
    
    6.2303
    
    
    6.2134February
    
    6.2213
    
    
    6.2323
    
    
    6.2438
    
    
    6.2213March
    
    6.2108
    
    
    6.2154
    
    
    6.2246
    
    
    6.2105


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

2

---

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

B. Capitalization and Indebtedness

Not applicable.

C. Reasons for the Offer and Use of Proceeds

Not applicable.

D. Risk Factors

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

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

3.D.1 Risks Related To Our Company

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

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

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

- increased competition;
- pricing pressure caused by competition, government policies, or otherwise;
- new product introductions;
- the inability to market effectively our products;
- intellectual property issues;
- problems with raw materials supply;
- disruptions in manufacturing or distribution;

3

---

- newly discovered safety, side effects or other product issues; and
- negative perception or insufficient recognition of EPIAO and TPIAO by the
  medical community or other key parties such as third party payers.

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

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

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

- the safety and effectiveness of the product;
- the effectiveness of our efforts to market our products to hospitals and
  physicians;
- the products cost effectiveness;
- the prevalence and severity of side effects; and
- the products perceived advantages and disadvantages relative to competing
  products or treatments.

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

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

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

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

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

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

- EPIAO competes with both existing EPO drugs and new drug
candidates. In China, EPO drugs are offered by established international
companies such as Kirin Brewery Company Limited, or Kirin, and F. Hoffmann-La
Roche, Ltd., or Roche, and domestic pharmaceutical companies such as Shanghai
Kelong, Beijing Sihuan, Chengdu Diao, Shenzheng Saiboer, Shandong Ahua,
Shandong Kexing, and others.
- Competitors for Iron Sucrose Supplement include Beijing Novartis Pharmaceutical Co., Ltd., Nanjing Hencer Pharmaceutical Co., Ltd. and
others.
- While we believe TPIAO is the only TPO-based therapeutic
available in the China market to date, other pharmaceutical companies may enter
this market and manufacture and market their TPO products.

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

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

4

---

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

5

---

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

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

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

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

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

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

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

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

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

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

6

---

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

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

We depend on our distributors for sales of our products.

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

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

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

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

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

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

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

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

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

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

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

7

---

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

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

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

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

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

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

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

- we may become involved in time-consuming and expensive litigation, even if
  the claim is without merit;
- we may become liable for substantial damages for past infringement if a
  court decides that our technology infringes a third partys patent;
- a court may prohibit us from selling or licensing our product without a
  license from the patent holder, which may not be available on commercially
  acceptable terms, if at all, or which may require us to pay substantial
  royalties or grant cross licenses to our patents; or
- we may have to reformulate our product so that it does not infringe patent
  rights of others, which may not be possible or could be very expensive and
  time-consuming.

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

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

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

8

---

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

Other risks and uncertainties may include: particular local
forms of products liabilities and regulations with respect to pharmaceutical
products that are burdensome or unfavorable to us; obligations to comply with a
wide variety of foreign laws and other regulatory requirements; political
instability; economic instability and recessions; changes in tariffs;
difficulties of managing foreign operations generally; increased risk of
exposure to terrorist activities; issues related to the financial condition,
expertise and performance of our international distributors; export license
requirements; unauthorized re-export of our products; potentially adverse tax
consequences; and inability to effectively enforce contractual or legal rights;
and language and cultural conflicts.

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

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

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

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

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

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

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

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

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

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

9

---

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

- seasonal spending patterns of Chinese consumers, including hospitals,
  dialysis centers and clinics;
- changes in pricing policies by us, our competitors or the government;
- the timing and market acceptance of new products and product enhancements
  by us or our competitors;
- the loss of key sales personnel or distributors;
- changes in government policies or regulations;
- increase in our research and development expenses as we focus on bringing
  new products to market; and
- fluctuations in general economic conditions in China.

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

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

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

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

3.D.2 Risks Related To Our Industry

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

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

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

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

For more information, please refer to 4.B.11Regulations.

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

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

10

---

- the failure to demonstrate safety and efficacy in preclinical and clinical
  trials;
- the failure to obtain approvals for intended use from relevant regulatory
  bodies, such as the SFDA;
- our inability to manufacture and commercialize sufficient quantities of
  the product economically; and
- proprietary rights, such as patent rights, held by others related to our
  product candidate and their refusal to sell or license such rights to us on
  reasonable terms, or at all.

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

- our new product research and development efforts will be successfully and
  timely completed;
- the SFDA or other regulatory bodies will grant necessary regulatory
  clearances or approvals on a timely basis, or at all; or
- any product we develop will be commercialized or achieve market
  acceptance.

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

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

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

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

| |  | 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;
- 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.

11

---

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

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

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

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

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

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

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

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

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

- improve our existing products;
- diversify our product portfolio; and
- develop new and competitively priced products which meet the requirements
  of the constantly changing market.

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

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

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

12

---

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

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

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

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

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

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

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

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

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

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

13

---

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

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

- the extent of government involvement;
- the level of development;
- the growth rate;
- the control of foreign exchange;
- the allocation of resources;
- an evolving regulatory system; and
- the level of transparency in the regulatory process.

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

The Chinese government implements various measures intended to
encourage economic growth and guide the allocation of resources. These measures
may include differential policies towards specific groups of pharmaceutical
companies, such as promotion of traditional medicines or state-owned companies,
or investments in biopharmaceutical companies competing against us, which may
have an adverse effect on us. Our financial condition and results of operations
may be adversely affected by government control over capital investments or
changes in tax regulations that are applicable to us. Further, any adverse
change in the economic conditions or government policies in China could have a
material adverse effect on overall economic growth and the level of healthcare
investments and expenditures in China, which in turn could lead to a reduction
in demand for our products and consequently have a material adverse effect on
our businesses.

The Chinese economy has been transitioning from a planned
economy to a more market-oriented economy. Although the Chinese government has
implemented reform measures allowing more free play of market forces, the
reduction of state ownership of productive assets and the establishment of sound
corporate governance in business enterprises, a substantial portion of the
productive assets in China is still owned by the Chinese government. The
continued control of these assets and other aspects of the national economy by
the Chinese government could materially and adversely affect our business. The
Chinese government also exercises significant control over Chinese economic
growth through the allocation of resources, controlling payment of foreign
currency- denominated obligations, setting monetary policy and providing
preferential treatment to particular industries or companies.

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

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

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

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

14

---

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

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

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

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

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

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

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

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

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

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

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

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

15

---

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

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

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

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

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

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

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

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

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

16

---

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

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

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

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

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

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

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

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

17

---

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

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

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

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

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

The market price for our ADSs may be
volatile.

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

- actual or anticipated fluctuations in our quarterly operating results and
  changes or revisions of our expected results;
- changes in financial estimates by securities research analysts;
- economic, regulatory or political developments in China;
- announcements of studies and reports relating to the effectiveness or
  safety of our products or those of our competitors;
- announcements of technological or competitive developments;
- any litigation, governmental investigation or enforcement proceedings
  brought against us by authorities and industry regulators in China or
  elsewhere;
- announcements regarding patent litigation or the issuance of patents to us
  or our competitors;
- addition or departure of our senior management and key research and
  development personnel;
- changes in the economic performance or market valuations of other
  pharmaceutical or health care companies; and
- sales of additional ordinary shares or ADSs, or increased supplies of
  ordinary shares or ADS, or the perception that such sales or supplies might
  occur.

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

18

---

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

19

---

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

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

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

There is uncertainty regarding whether Cayman Islands courts
would:

| |  | recognize or enforce against us or our directors or officers judgments of
  courts of the United States predicated upon certain civil liability provisions
  of United States securities laws; or         
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | impose liability against us, in original actions brought in the Cayman
  Islands, based on certain civil liability provisions of United States
  securities laws or laws of any state in the United States

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

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

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

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

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

20

---

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

4.A. History and Development of the Company

4.A.1 Corporate Information

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

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

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

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

| |  | Collected Mind acquired 100% of the equity interests of Shenyang Sunshine,
  which was reorganized as a wholly foreign owned enterprise, or WFOE, in July
  2006; and
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We incorporated 3SBio Inc., a Cayman Islands company, in August 2006,
  which acquired 100% equity interest in Collected Mind in September 2006.                     

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

4.A.2 Going-private Transaction

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

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

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

21

---

4.A.3 Principal Capital Expenditures and Divestures

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

4.B Business Overview

Overview

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

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

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

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

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

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

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

22

---

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

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

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

4.B.1 Products

4.B.1.1 Principal Marketed Products

EPIAO

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

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

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

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

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

TPIAO

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

23

---

4.B.1.2 Legacy Products

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

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

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

4.B.1.3 In-Licensed Products

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

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

4.B.1.4 Dialysis Business and DaVita Collaboration

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

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

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

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

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

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

24

---

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


4.B.1.6 Product Pipeline

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

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

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

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

25

---





|*  | Developed by Ascentage Shanghai Pharmaceutical Co.,
      Ltd                                                                                                    
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|** | The development and commercialization of our product
      candidates are subject to numerous risks and uncertainties, as noted in
      Item 3.D Risk Factors.

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

4.B.1.7 Expanded Discussion of Products

Our Principal Products

EPIAO

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

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

26

---

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

| |  | In 1998, we received approval for the first indication, anemia associated with chronic renal failure;                                                                                                                                      
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In 2000, we received approval for the use of EPIAO to mobilize red blood cell in patients before, during and after surgery to facilitate a quicker recovery and reduce the need for blood transfusion; and                                 
| |  | In 2001, we received approval for anemia associated with chemotherapy in cancer patients with non-myeloid malignancies. These patients become anemic as a side effect of chemotherapy and as a general complication associated with cancer.

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

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

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

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

Competitive Advantages:

We believe EPIAO’s competitive advantages include:

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

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

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

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

Clinical Trials:

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

27

---

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

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

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

TPIAO

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

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

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

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

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

28

---

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

TPIAO for the treatment of ITP

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

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

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

Legacy Products

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

Intefen

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

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

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

Inleusin

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

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

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

29

---

In-Licensed Products

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

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

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

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

Our Product Candidates

Ferumoxytol (Feraheme® )

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

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

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

Voclosporin

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

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

30

---

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

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

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

Apoptosis Collaboration Program

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

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

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

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

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

Pegsiticase

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

31

---

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

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

NuPIAO

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

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

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

SSS08 (HPV Vaccine)

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

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

SSS07 (Rheumatoid arthritis and other autoimmune diseases)

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

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

32

---

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

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

4.B.2 Competition and Principal Markets

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

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

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

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

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

4.B.2.1 Export Sales

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

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

33

---

|                      |  | For the Years ended December 31, | 
|--------------------- |  | -------------------------------- | 
|                      |  | 2010                             | 
|                      |  | (in thousands, RMB)              | 
|Revenues by geography |  |                                  | 
|Egypt                 |  | 1,611                            | 
|South Korea           |  | 1,542                            | 
|Brazil                |  | 568                              | 
|Pakistan              |  | 1,699                            | 
|Thailand              |  | 3,842                            | 
|Bangladesh            |  | 1,403                            | 
|Rest of World         |  | 1,546                            | 
|Total revenues        |  | 12,211                           | 

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

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

4.B.3 Seasonality of Business

Not applicable.

4.B.4 Supply of Raw Materials

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

4.B.5 Marketing, Sales and Distribution

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

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

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

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

34

---

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

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

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

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

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

4.B.6 Research and Development

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

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

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

4.B.7 Intellectual Property

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

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

We currently own eight PRC-issued patents relating to:

- the composition of matter of TPIAO, expiring in 2015;
- a method of manufacturing TPIAO, expiring in 2020;
- a method and application thereof relating to our manufacturing processes, expiring in 2021;
- the composition of matter of pegylated-uricase expiring in 2022;
- a formulation of EPIAO, expiring in 2023;
- a patent related to certain protein, expiring in 2015;
- a method of manufacturing interleukin analogue, expiring in 2026; and
- a novel erythropoiesis stimulating protein analogue, expiring in 2027.

35

---

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

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

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

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

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

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

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

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

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

4.B.8 Manufacturing

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

36

---

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

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

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

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

4.B.8.1 Quality Control and Assurance

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

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

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

4.B.9 Facilities

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

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

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

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

37

---

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

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

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

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

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

4.B.10 Employees

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

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

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

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

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

4.B.11 Regulations

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

38

---

4.B.11-a Regulatory Authorities

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

The primary responsibilities of the SFDA include:

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

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

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

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

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

Drug administration laws and regulations

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

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

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

Examination and approval of new medicines

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

| | Upon completion of the pre-clinical research of the new medicine, application for registration of the new medicine shall be submitted to the drug regulatory authorities at the provincial level for review. After completion of their review, such drug
regulatory authorities shall submit their opinion and report to the SFDA for review;
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If all the requirements are complied with, the provincial FDA will issue a notice of acceptance of application and proceed with its assessment on whether or not to grant the approval for conducting the clinical research on the new medicine;                                                                                             
| | After obtaining the SFDA’s approval for conducting the clinical research, the applicant may proceed with the
relevant clinical research (which is generally conducted in three phases for a new medicine, with Phase IV post-marketing study applicable in certain instances) at institutions with appropriate qualification:                

39

---

| |                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                           | Phase I refers to the preliminary clinical trial for clinical pharmacology and body safety. It is conducted to observe the human body tolerance for new medicine and pharmacokinetics, so as to provide a basis for determining the
prescription plan;                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                           | Phase II refers to the stage of preliminary evaluation of clinical effectiveness. The purpose is to preliminarily evaluate the clinical effectiveness and safety of the medicine used on patients with targeted indication, as well as
to provide a basis for determining the Phase III clinical trial research plan and the dosage under the prescription plan; and
| |                                                                                                                                                                                                                                                                                                                                           | Phase III is a clinical trial stage to verify the clinical effectiveness. The purpose is to test and determine the clinical effectiveness and safety of the medicine used on patients with targeted indication, to evaluate the
benefits and risks thereof, and, eventually, to provide sufficient basis for review of the medicine registration application.       
| |                                                                                                                                                                                                                                                                                                                                           | Phase IV is the clinical study after the new medicine is approved and enters into the market, targeting to investigate the efficacy and any adverse reactions of the drug under the conditions of mass use, and to evaluate the
benefits and risks of its use among common and special patient groups and to improve drug dosage.                                   
| | After completion of the relevant clinical research, the applicant shall submit its clinical research report together with the relevant supporting documents to the drug regulatory authorities at the provincial level and shall
provide raw materials of the standard products to the PRC National Institutes for Food and Drug Control;
| | The drug regulatory authorities at the provincial level shall then review the relevant documents, conduct site inspections and sample examinations and thereafter submit their opinion, inspection report and other application
materials to the SFDA for review;                                                                        
| | The PRC National Institutes for Food and Drug Control will arrange for the examination of the sample new drug supplied by the relevant medicine examination institutes and will then issue the examination result report to the SFDA;
and                                                                                                
| | If all the regulatory requirements are satisfied, the SFDA will grant a new drug certificate and a pharmaceutical approval number (assuming the applicant has a valid pharmaceutical manufacturing permit and satisfies the requisite
production conditions for the new medicine).                                                       

Permits and licenses for manufacturing and registration of drugs

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

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

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

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

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

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

40

---

4.B.11-b.3 Distribution

Distribution of pharmaceutical products

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

- wholesalers and retailers holding pharmaceutical trading permits;
- other holders of pharmaceutical manufacturing permits; or
- medical practitioners holding medical institution practice permits.

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

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

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

- retain qualified personnel with pharmaceutical expertise as required by the law;
- operate in business sites, facilities, warehouses with sanitary environments compatible to the distributed pharmaceutical products;
- engage quality management system and personnel compatible to the distributed pharmaceutical products; and
- comply with relevant rules and regulations to ensure the quality of the distributed pharmaceutical products.

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

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

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

Restrictions on foreign ownership in pharmaceutical wholesale and retail businesses

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

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

Price control

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

41

---

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

Competitive bidding

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

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

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

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

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

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

Product liability

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

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

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

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

42

---

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

Government Medical Insurance Coverage

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

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

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

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

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

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

Urban personnel basic medical insurance program

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

43

---

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

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

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

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

National Essential Drugs Registry

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

Prescription regulations

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

4.B.11-c Intellectual Property

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

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

Patent prosecution

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

44

---

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

Patent enforcement

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

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

Compulsory license

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

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

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

International patent treaties

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

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

4.B.11-c.2 Trademarks

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

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

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

| |  | use of a trademark that is identical with or similar to a registered trademark
in respect of the same or similar commodities without the authorization of the
trademark registrant;                                          
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | sale of commodities infringing upon the exclusive right to use the trademark;                                                                                                                                                
| |  | counterfeiting or making, without authorization, representations of a registered trademark of another person, or sale of such representations of a registered trademark as were counterfeited, or made without authorization;
| |  | altering a registered trademark and putting commodities on which the altered registered trademark is used into the
market without the consent of the trademark registrant; and                                               
| |  | otherwise infringing upon the exclusive right of another person to use a registered trademark.                                                                                                                               

45

---

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:                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | The amount of compensation is calculated according to either the gains earned by the infringer from the infringement or the loss suffered by the trademark owner, including expenses incurred by the trademark holder to deter such
infringement. If it is difficult to determine the gains earned by the infringer from the infringement, or the loss suffered by the trademark owner, the court may elect to award compensation of up to RMB500,000.                                                                                         
| |  | If the case is so serious as to constitute a crime, the trademark owner may lodge a complaint with the relevant public security organ.                                                                                                                                                                                                                                                                                                                                                                                                         

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

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

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

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

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

4.B.11-d PRC Enterprise Income Tax

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

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

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

46

---

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

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

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

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

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

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

Risk and uncertainties as to tax residency

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

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

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

47

---

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

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

Foreign currency exchange

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

- the Foreign Currency Administration Rules (1996), as amended, or the Exchange Rules; and
- the Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules.

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

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

Dividend distribution

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

- the Wholly Foreign Owned Enterprise Law (1986), as amended; and
- the Wholly Foreign Owned Enterprise Law Implementation Rules (1990), as amended.

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

Regulation of foreign exchange in certain onshore and offshore transactions

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

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

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

48

---

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

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

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

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

4.C Organizational Structure

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

Name
    Time of
      Formation
    Place of
      Formation
    RelationshipCollected Mind Limited
    July 2006
    British Virgin Islands
    Wholly-owned
      subsidiary of 3SBio Inc.--- China Sansheng Medical Limited*
    November 2009
    Hong Kong
    Wholly-owned subsidiary of
      Collected Mind--- Shenyang Sunshine
      Pharmaceutical Co., Limited
    January 1993
    PRC
    Wholly-owned
      subsidiary of Collected Mind--- Jiangsu Sunshine Pharmaceutical
      Technology Company Limited
    December 2010
    PRC
    95% owned by Shenyang Sunshine
      and 5% owned by Liaoning Sunshine--- Taizhou Huan Sheng
      Investment Management Company Limited
    December 2010
    PRC
    Wholly-owned
      subsidiary of Shenyang Sunshine---80% Limited Partner interest in Taizhou
      Huan Sheng Healthcare Industry Investment Center, LLP ("3SBio Ventures")
    May 2011
    PRC
    80% Limited Partner interest
      owned by Shenyang Sunshine3SBio, LLC*
    November 2010
    USA
    Wholly-owned
      subsidiary of 3SBio Inc.Liaoning Sunshine Bio-Pharmaceutical Company
      Limited (Liaoning Sunshine)
    February 2000
    PRC
    Consolidated affiliated entity--- Liaoning Sunshine Science
      and Technology Development Co. Limited
    December 2009
    PRC
    Wholly-owned
      subsidiary of Liaoning Sunshine, consolidated affiliated entity


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

4.C.1 Affiliated Entities

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

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

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

49

---

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

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

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

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

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

| |  | our current ownership structure does not violate, breach, contravene or conflict with any applicable PRC Laws;                                                                                                                                                                                                     
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the agreements among our subsidiaries, affiliated entities, VIE and its subsidiary and their respective shareholders constitutes a legal, valid and binding obligation of the parties thereto, enforceable against such parties in accordance with its
terms and does not violate any requirements of the PRC Laws.

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

4.C.2 3SBio Ventures

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

4.D. Property, Plant and Equipment

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

50

---

ITEM 4A. UNRESOLVED STAFF COMMENTS

Not applicable.





51

---

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

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

5.A Operating Results

5.A.1 Significant Trends, Factors and Developments

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

Significant Market Potential and Government Policies

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

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

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

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

Continuing Pricing Pressure

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

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

__________________________

|1 | 2012 Government Report: III. 2012 Priority Objectives 
      (6) Provision, Protection and Improvement for the Life of People: ...
      promote the support and security on a comprehensive basis for CKD and
      other 7 catastrophic diseases; ...                                                                                                                                                                                                                                                
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2 | See 2012 Government Report, delivered by Premier Jiabao
      Wen to the 2012 (5th) Session, 11thNational
      People's Congress on March 5th, 2012:  III. 2012 Priority
      Objectives  (6) Provision, Protection and Improvement for the Life of
      People: ... encourage and direct social capital to invest in and operate
      hospitals, and speed up the forming of a medical service industry set-up
      with participation of multiple actors that opens up internationally
      ...

52

---

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

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

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

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

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

Government Insurance Reimbursement and Competitive Bidding

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

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

53

---

International Expansion

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

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

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

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

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

5.A.2 Significant Components of Revenue and Expenses

Net revenues

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

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

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

Allowance for doubtful accounts

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

54

---

VAT

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

Cost of revenue

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

Operating expenses

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

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

- Direct and allocated salaries and related expenses for research and
  development personnel;
- Fees paid to consultants and clinical research organizations in
  conjunction with their monitoring our clinical trials and acquiring and
  evaluating data in conjunction with our clinical trials;
- Direct cost of materials used in research and development;
- Direct cost of equipment that lacks an alternative future use;
- Fees paid to independent research organizations in conjunction with
  preclinical animal studies;
- Allocated depreciation of research equipment and laboratory facilities;
- Manufacturing costs of our clinical trial supply quantities for our
  product candidates;
- Non-refundable upfront payments paid and/or milestone payments related to
  our in-licensing agreements;
- Costs associated with other clinical development such as seminar hosting
  and process optimization; and
- Costs for seeking regulatory approval so that we may enter international
  markets for our products.

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

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

|                                                |  | Year ended December 31, | 
|----------------------------------------------- |  | ----------------------- | 
|                                                |  | 2010                    | 
|                                                |  | RMB                     | 
|                                                |  | (in thousands)          | 
|Research and development costs by
      product |  |                         | 
|EPIAO                                           |  | 6,004                   | 
|TPIAO                                           |  | 1,700                   | 
|Others                                          |  | 31,705                  | 
|                                                |  | 39,409                  | 

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

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

55

---

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

5.A.3 Critical Accounting Policies and Estimates

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

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

Consolidation

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

Revenue recognition

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

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

Determination of other-than-temporary impairment of investment securities

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

Research and development costs

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

56

---

Estimated useful lives and impairment of long-lived assets

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

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

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

Allowance for doubtful accounts

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

Inventories

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

Share-based compensation

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

57

---

Deferred tax assets and valuation allowance

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

Uncertain tax positions

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

5.A.4 Results of Operations

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

|                                                        |  | Year ended December 31, |  
|------------------------------------------------------- |  | ----------------------- | -
|                                                        |  | 2010                    |  
|                                                        |  | %                       |  
|Selected Statement of Income Data:                      |  |                         |  
|Net revenue:                                            |  |                         |  
|EPIAO                                                   |  | 59.9                    |  
|TPIAO                                                   |  | 30.7                    |  
|Intefen                                                 |  | 1.3                     |  
|Inleusin                                                |  | 0.5                     |  
|Iron Sucrose Supplement                                 |  | 4.1                     |  
|Export                                                  |  | 2.9                     |  
|Others                                                  |  | 0.6                     |  
|Total net revenue                                       |  | 100                     |  
|Cost of revenue                                         |  | (10.0                   | )
|Gross margin                                            |  | 90.0                    |  
|Operating expenses:                                     |  |                         |  
|Research and development                                |  | (9.4                    | )
|Sales, marketing and
      distribution                 |  | (46.6                   | )
|General and administrative                              |  | (13.3                   | )
|Grant income                                            |  | 0.3                     |  
|Income from operations                                  |  | 21.0                    |  
|Other income/(expense),net Interest income              |  | 3.0                     |  
|                                                        |  |                         |  
|Impairment loss on
      available-for-sale securities  |  | -                       |  
|Others                                                  |  | 0.6                     |  
|Total other income, net                                 |  | 3.6                     |  
|Income before income tax expense                        |  | 24.6                    |  
|Income tax expense                                      |  | (5.2                    | )
|Net income                                              |  | 19.4                    |  
|Net loss attributable to non-controlling
      interest |  | -                       |  
|Net income attributable to 3SBio Inc.                   |  | 19.4                    |  

58

---

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

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

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

- Research and development costs. R&D costs
increased by 70.4% to RMB71.2 million (US$11.4 million) in 2012 from RMB41.8
million in 2011. The increase in R&D expenses was primarily attributable to
NuPIAO, a second generation version of EPIAO and an anti-TNF compound that
targets rheumatoid arthritis, psoriasis and other inflammatory disorders;
- Sales, marketing and distribution (SMD) expenses. Our
SMD expenses increased by 24.9% to RMB318.2 million (US$51.1 million) in 2012
from RMB254.8 million in 2011. The increase in SMD is broadly in line with
overall sales growth. SMD expenses as a percentage of net revenue increased
slightly from 47.0% in 2011 to 47.5% in 2012. The increase was primarily
attributable to the intensified market competition and the uncertainties related
to the tendering process;
- General and administrative expenses.Our general and
administrative expenses increased by 22.7% from RMB66.9 million in 2011 to
RMB82.1 million (US$13.2 million) in 2012. The increase was primarily
attributable to legal and consulting expenses.

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

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

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

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

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

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

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

59

---

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

- Research and development costs. R&D costs
increased by 6.1% to RMB41.8 million (US$6.6 million) in 2011 from RMB39.4
million in 2010, which was in line with the R&D progress of current pipeline
products;
- Sales, marketing and distribution (SMD) expenses. Our
SMD expenses increased by 30.7% to RMB254.8 million (US$40.5 million) in 2011
from RMB194.9 million in 2010. The increase in SMD is broadly in line with
overall sales growth. SMD expenses as a percentage of net revenue increased
slightly from 46.6% in 2010 to 47.0% in 2011. The increase was primarily
attributable to the expanded sales and marketing activities, including new
product launch initiatives for TPIAO for ITP as well as the municipal
construction tax and education surcharges levied as a result of the change in
the China tax regulation effective from December 2010.
- General and administrative expenses.Our general and
administrative expenses increased by 19.8% from RMB55.9 million in 2010 to
RMB66.9 million (US$10.6 million) in 2011. The increase was primarily
attributable to employee compensation.

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

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

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

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

5.B Liquidity and Capital Resources

Overview

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

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

|                                                 |  | Year ended December 31, |  
|------------------------------------------------ |  | ----------------------- | -
|                                                 |  | 2010                    |  
|                                                 |  | RMB                     |  
|                                                 |  | (in thousands)          |  
|Net cash provided by operating activities        |  | 58,133                  |  
|Net cash provided/(used in) investing activities |  | (165,234                | )
|Net cash provided by financing activities        |  | 6,763                   |  

60

---

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

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

Net cash provided/used in investing activities

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

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

Net cash provided by financing activities

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

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

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

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

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

61

---

Capital Expenditures

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

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

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

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

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

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

5.A-B.1 Recently Issued Accounting Pronouncements

ASU 2012-02

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

ASU 2013-02

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

62

---

5.A-B.2 Inflation

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

5.C Research and Development

See 4.B.6 Research and Development

5.D Trend Information

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

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

5.E Off-Balance Sheet Arrangements

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

5.F Tabular Disclosure of Contractual Obligations

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

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


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

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

63

---

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

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

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

Cautionary Statement:

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

64

---

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

6.A Executive Officers and Directors

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

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

|(1) | Member of the audit committee       
|--- | ------------------------------------
|(2) | Member of the nominating committee  
|(3) | Member of the compensation
committee

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

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

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

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

65

---

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

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

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

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

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

6.B Compensation

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

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

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

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

66

---

6.C Board Practices

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

6.C.1 Audit Committee

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

6.C.2 Compensation Committee

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

6.C.3 Nominating Committee

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

6.C.4 Investment Committee

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

6.C.5 Terms of Directors and Executive Officers

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

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

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

67

---

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

6.C.6 Employment and Management Agreements

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

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

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

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

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

6.D Employees

See 4.B.10 Employees.

6.E Share Ownership

Directors and Senior Officers Share Ownership

Please refer to the applicable part under Item 7.A Major
Shareholders.

Employee Participation in the Company Capital: 2006 Stock
Plan

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

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

68

---

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

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

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

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

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

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

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

Employee Participation in the Company Capital: 2010
Equity Incentive Plan

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

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

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

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

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

69

---

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

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

Equity Grants to Directors and Senior Officers

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



70

---

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

____________________________________________________________

|*    | Upon exercise, vesting or settlement of all equity grants
      exercisable or vesting within 60 days of April 12, 2013, such person would
      beneficially own less than 1% of our outstanding ordinary
shares.                                                                   
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|**   | RSU grant: RSUs granted in 2009 have a four-year graded
      vesting period. The RSUs cannot be settled in cash and one RSU will be
      settled with one ADS upon vesting. There is no other transferability
      restriction to the RSUs except for the graded vesting schedule.
|***  | Restricted stock grant: All restricted stock granted in
      2010 and 2011 vest at the end of a four-year vesting period.                                                                                                                                                           
|**** | Restricted stock grant: All restricted stock granted in 2012 vest at the
      end of a seven-year vesting period.                                                                                                                                                                   

71

---

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

A. Major Shareholders

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

- each of our directors and executive officers;
- our directors and executive officers as a group; and
- each person known to us to beneficially own more than 5% or more of the
  total outstanding ordinary shares.

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

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

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

72

---

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

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

Changes in the Ownership of Major Shareholders:

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

|                               |  | Percentage Ownership (as of the date of the column) | 
|------------------------------ |  | --------------------------------------------------- | 
|Major Shareholders             |  | 12/31/2010                                          | 
|FMR LLC                        |  | 11.9%                                               | 
|Samuel D. Isaly                |  | 5.1%*                                               | 
|Dan Lou                        |  | 6.8%                                                | 
|Happyview Finance Ltd.         |  | 5.5%                                                | 
|Sectoral Asset Management Inc. |  | Not reported                                        | 

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

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

B. Related Party Transactions

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

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

73

---

Going-private Transaction

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

Transactions with Liaoning Sunshine

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

|(1) | Business cooperation agreement (Exhibit 4.12; Exhibit 16)
|--- | ---------------------------------------------------------

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

|(2) | Equity interest acquisition agreement (Exhibit 4.13; Exhibits 17, 18 and 19)
|--- | ----------------------------------------------------------------------------

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

|(3) | Voting rights agreement (Exhibit 4.14; Exhibit 20)
|--- | --------------------------------------------------

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

74

---

|    |                                                   
|--- | --------------------------------------------------
|(4) | Equity pledge agreement (Exhibit 4.15; Exhibit 21)

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

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

Transactions with Liaoning Sunshine Science and Technology Development Co. Limited

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

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

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

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

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

Transactions with APGC and Ascentage SH

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

Management and Compensatory Contracts

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

Equity Grants to Directors and Officers

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

C. Interests of Experts and Counsel

Not Applicable.

75

---

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

A. Consolidated Statements and Other Financial
Information

Consolidated Financial Statements

See Item18. Financial Statements.

Legal Proceedings

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

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

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

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

Dividend Policy

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

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

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

B. Significant Changes

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

76

---

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

A.Offer and Listing Details

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

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

Closing PricePer ADSHighest
    LowestUS$
    US$Annual2008
    14.63
    4.972009
    14.20
    4.512010
    16.25
    10.012011
    19.99
    9.602012
    15.03
    9.47QuarterlyFirst Quarter of
      2011
    17.29
    14.78Second Quarter of 2011
    19.99
    15.14Third Quarter of
      2011
    18.69
    11.93Fourth Quarter of 2011
    13.24
    9.60First Quarter of
      2012
    15.03
    9.47Second Quarter of 2012
    14.56
    11.89Third Quarter of
      2012
    13.63
    10.95Fourth Quarter of 2012
    14.02
    12.91First Quarter of
      2013
    15.24
    12.94Most recent six monthsOctober 2012
    14.02
    13.16November 2012
    13.43
    12.91December 2012
    13.88
    13.26January 2013
    13.7
    12.94February 2013
    14.9
    13.66March 2013
    15.24
    14.75


_________________________________Source: Bloomberg

77

---

B.Plan of Distribution

Not applicable.

C.Markets

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

D.Selling Shareholder

Not applicable.

E.Dilution

Not applicable.

F.Expenses of The Issue

Not applicable.







78

---

|ITEM 10. | ADDITIONAL INFORMATION
|-------- | ----------------------

A. Share Capital

Not applicable.

B. Memorandum and Articles of Association

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

Cayman Islands Law - Mergers and Similar
Arrangements

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

(1) Merger and Consolidation

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

Shareholders approval is not required in a merger between a
Cayman Islands parent company and a Cayman Islands subsidiary with at least 90%
of its issued shares entitled to vote owned by the parent company.

The consent of each holder of a fixed or floating security
interest over a constituent company is required unless this requirement is
waived by a court in the Cayman Islands.

The Plan must be filed with the Registrar of Companies together
with supporting documents including certain declarations.

A dissenting shareholder of a Cayman Islands constituent
company is, following the specified procedures, entitled to payment of the fair
value of his shares, as mutually agreed upon or determined by the Cayman Islands
court, upon dissenting to a merger or consolidation, except, generally, where
such person's shares are listed on a recognized stock exchange or such qualified
trading market or the transaction consideration consists of securities of such
nature. The exercise of appraisal rights will preclude the exercise of any other
rights save for the right to seek relief on the grounds that the merger or
consolidation is void or unlawful.

Court approval is not required for a merger or consolidation
effected in compliance with these statutory procedures.

(2) Reconstruction and Amalgamation and Takeover Offer

In addition, there are statutory provisions that facilitate the
reconstruction and amalgamation of companies, provided that the arrangement is
approved by a majority in number of each class of shareholders and creditors
with whom the arrangement is to be made, and who must in addition represent
three-fourths in value of each such class of shareholders or creditors, as the
case may be, that are present and voting either in person or by proxy at a
meeting, or meetings, convened for that purpose. The convening of the meetings
and subsequently the arrangement must be sanctioned by the Grand Court of the
Cayman Islands. While a dissenting shareholder has the right to express to the
court the view that the transaction ought not to be approved, the court can be
expected to approve the arrangement if it determines that:

- the statutory provisions as to the required vote have been met;
- the shareholders have been fairly represented at the meeting in question
  and the statutory majority are acting bona fide without coercion of the
  minority to promote interests adverse to those of the class;
- the arrangement is such that may be reasonably approved by an intelligent
  and honest man of that class acting
in respect of his interest; and
- the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law.

79

---

When a take-over offer is made and accepted by holders of 90.0% of the shares within four months, the offeror may, within a two month period commencing on the expiration of such four month period, require the holders of the remaining shares to
transfer such shares on the terms of the offer. An objection can be made to the Grand Court of the Cayman Islands but this is unlikely to succeed in the case of an offer which has been so approved unless there is evidence of fraud, bad faith or
breach of the Companies Law.

If an arrangement and reconstruction or take-over offer is approved or accepted, the dissenting shareholder(s) are unlikely to have any rights comparable to appraisal rights, which would otherwise ordinarily be available to dissenting shareholders
of United States corporations, providing rights to receive payment in cash for the judicially determined value of the shares.

C. Material Contracts

We have not entered into any material contracts to which we or any of our subsidiaries or affiliated entities is a party for the two years immediately preceding publication of this annual report, other than in the ordinary course of business, or
other than those listed in the Exhibits hereto or discussed elsewhere in this annual report.

D. Exchange Controls

There are no exchange control regulations or currency restrictions in the Cayman Islands.

For exchange control in China, please refer to “4.B.11-e Regulation of foreign currency exchange, dividend distribution, and overseas listing”.

E. Taxation

The following summary of certain material Cayman Islands, PRC, and U.S. federal income tax matters with respect to an investment in our ADSs or ordinary shares is based upon laws and relevant interpretations thereof in effect as of the date of this
annual report, all of which are subject to change, possibly with retroactive effect. This summary does not deal with all possible tax consequences relating to an investment in our ADSs or ordinary shares, such as the tax consequences under laws of
any jurisdictions other than the jurisdictions addressed herein, as well as any provincial, state and local tax laws.

We urge any prospective purchaser or current holder of our ADSs or ordinary shares to consult your own tax advisor regarding your particular circumstances and the U.S. federal income and estate tax consequences to you of acquiring, owning and
disposing of ADSs or ordinary shares, as well as any tax consequences arising under the laws of PRC, any state, local or foreign or other tax jurisdiction and the possible effects of changes in U.S. federal or other tax laws.

Cayman Islands Taxation

The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to
us levied by the Government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after execution brought within the jurisdiction of the Cayman Islands.

The Cayman Islands is not party to any double tax treaties that are applicable to any payments made to or by our company.

PRC Taxation

If the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, a withholding tax of 10% for certain U.S. shareholder and ADS holders that are enterprises, and, an individual income tax of
20% for individual U.S. shareholders and ADS holders, may be imposed on dividends they receive from us and on gains realized on their sale or other disposition of shares or ADSs that are deemed income derived from sources within the PRC. You may be
able to obtain a reduced rate of PRC withholding taxes under the income tax treaty between the United States and the PRC if certain requirements are met.

80

---

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

United States Federal Income Tax Considerations for U.S. Persons

The following is a summary of the material United States federal income tax considerations relating to the acquisition, ownership, and disposition of ADSs or ordinary shares by U.S. Holders (as defined below) that will hold their ADSs or ordinary
shares as “capital assets” (generally, property held for investment) under the United States Internal Revenue Code (the “Code”). This summary is based upon existing United States federal income tax law, which is subject to
differing interpretations or change, possibly with retroactive effect. You should note that no rulings have been or are expected to be sought from the U.S. Internal Revenue Service (the “IRS”), nor have we sought an opinion of
counsel, with respect to any U.S. federal income tax matters described below, and we cannot assure you that the IRS or a court will not take contrary positions, which may result in material adverse tax consequences to U.S. Holders.

This summary does not discuss all aspects of United States federal income taxation that may be important to particular investors in light of their individual circumstances, and does not deal with the tax consequences to investors who may be subject
to special tax rules (for example, financial institutions, insurance companies, broker-dealers, regulated investment companies, real estate investment trusts, certain U.S. expatriates, and tax-exempt organizations (including private foundations),
traders that elect to mark to market, persons liable for alternative minimum tax, governments or agencies or instrumentalities thereof, holders who are not U.S. Holders as defined below, holders who own (directly, indirectly, or constructively) 10%
or more of our voting stock, investors that will hold ADSs or ordinary shares as part of a straddle, hedge, conversion, constructive sale, or other integrated transaction for United States federal income tax purposes, retirement plans, individual
retirement accounts, or other tax-deferred accounts, or U.S. Holders that have a functional currency other than the United States dollar).

Please note this description does not address (i) alternative minimum tax consequences or (ii) any other U.S. federal tax (such as estate or gift tax) consequences.

This discussion is not a comprehensive description of all of the U.S. federal tax consequences that may be relevant with respect to the acquisition, ownership and disposition of ADSs or ordinary shares.

The discussion below assumes that the representations contained in the deposit agreement are true and that the obligations in the deposit agreement and any related agreement have been and will be complied with in accordance with the terms. If you
hold ADSs, you should be treated as the holder of the underlying ordinary shares represented by those ADSs for U.S. federal income tax purposes.

We urge you to consult your own tax advisor regarding your particular circumstances and the U.S. federal income and estate tax consequences to you of owning and disposing of ADSs or ordinary shares, as well as any tax consequences arising
under the laws of any state, local or foreign or other tax jurisdiction and the possible effects of changes in U.S. federal or other tax laws.

U.S. Holder

For purposes of this summary, a “U.S. Holder” is a beneficial owner of ADSs or ordinary shares that is, for United States federal income tax purposes, (i) an individual who is a citizen or resident of the United States; (ii) a
corporation or other entity taxable as a corporation for United States federal income tax purposes, created in, or organized under the law of, the United States or any state thereof or the District of Columbia; (iii) an estate, the income of which
is includible in gross income for United States federal income tax purposes regardless of its source; or (iv) a trust (A) the administration of which is subject to the primary supervision of a United States court and which has one or more United
States persons who have the authority to control all substantial decisions of the trust or (B) that has otherwise validly elected to be treated as a United States person under the Code.

If a partnership or other entity or arrangement classified as a partnership for United States federal income tax purposes is a beneficial owner of our ADSs or ordinary shares, the United States federal income tax treatment of a partner in the
partnership will generally depend upon the status of the partner and the activities of the partnership. This summary does not address the tax consequences of any such partner. If you are a partner of a partnership holding shares or ADSs, you should
consult your tax advisors.

For United States federal income tax purposes, U.S. Holders of ADSs will be treated as the beneficial owners of the underlying shares represented by the ADSs. Accordingly, deposits or withdrawal of shares for ADSs will not be subject to United
States federal income tax.

The U.S. Treasury has expressed concerns that parties to whom American depositary shares are pre-released before share are delivered to the depositary, or intermediaries in the chain of ownership between holders of American depositary shares and the
issuer of the security underlying the American depositary shares, may be taking actions that are inconsistent with the claiming of foreign tax credits by holders of American depositary shares. These actions would also be inconsistent with the
claiming of the reduced rate of tax, described below, applicable to dividends received by certain  non-corporate holders. Accordingly, the creditability of any
PRC taxes, and the availability of the reduced tax rate for dividends received
by certain non-corporate U.S. Holders, each described below, could be affected
by actions taken by such parties or intermediaries.

81

---

Threshold PFIC Classification Matters

A non-United States corporation, such as the company, will be
treated as a passive foreign investment company (a PFIC), for United States
federal income tax purposes, if 75% or more of its gross income consists of
certain types of passive income (the income test) or 50% or more of its
assets (based on an average of the quarterly values during a taxable year) are
classified as assets that either produce passive income or are held for the
production of passive income (the asset test). Passive income includes, for
example, dividends, interest, certain rents and royalties, certain gains from
the sale of stock and securities, and certain gains from commodities
transactions.

Certain look through rules apply for purposes of the income
and asset tests described above. If we own, directly or indirectly, 25% or more
of the total value of the outstanding share of another foreign corporation, we
will be treated as if we held directly a proportionate share of the other
corporations assets and received directly a proportionate share of the other
corporations income. In applying this rule, however, it is not clear whether
the contractual arrangements between us and our affiliated VIE entities will be
treated as ownership of stock.

The determination of whether we are, or will become, classified
as a PFIC is a fact intensive determination that is made annually based on the
composition and amounts of income that we earn and the composition and valuation
of our assets, all of which are subject to change. For this purpose, cash is
categorized as a passive asset and the companys unbooked intangibles are taken
into account.

We believe we were not a PFIC for U.S. federal income tax
purposes for our taxable year ended December 31, 2012. Based on our current
income and assets, it is uncertain whether we will be classified as a PFIC for
United States federal income tax purposes for our current taxable year ending
December 31, 2013, a determination that can only be made after the close of the
taxable year, or for any of our future taxable years. The overall level of our
passive assets will be significantly affected by the amount and time-frame
within which we deploy the cash raised in our initial public offering, other
liquid assets that we presently hold, and the operation cash inflow.

Because the PFIC determination is highly fact intensive,
there can be no assurance that we will not be classified as a PFIC for any
particular taxable year or that the Internal Revenue Service will not challenge
any determination concerning our PFIC status for any particular taxable year.
With respect to prior years, the financial market disruptions from late 2008 and
early 2009 may have materially depressed our market valuation for the 2008 and
2009 taxable years, and, to our knowledge, there is a lack of guidance from
United States authorities regarding how such disruptions should be taken into
account in applying the asset test. In particular, it is possible that the
disruptions could lead to our being classified as a PFIC under the asset test
for the 2008 and 2009 taxable years.

If we are classified as a PFIC for any year during which
a U.S. Holder holds our ADSs or ordinary shares, we generally will continue to
be treated as a PFIC for all succeeding years during which such U.S. Holder
holds our ADSs or ordinary shares.

Furthermore, because PFIC status is a fact intensive
determination made on an annual basis, no assurance can be given that we are not
or will not become classified as a PFIC and the determination will depend upon,
in great measure, the timing of our capital expenditures and the value of our
unbooked intangibles.

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

The discussion below under Distributions on ADSs or Ordinary
shares and Disposition of ADSs or Ordinary shares is written on the basis
that we will not be classified as a PFIC for United States federal income tax
purposes. The discussion further below under Passive Foreign Investment
Company summarizes the PFIC rules that would be applicable to an investment in
our ADSs or ordinary shares if we were to be or become classified as a PFIC.

Distributions on ADSs or Ordinary
shares

We do not currently intend to pay dividends in the foreseeable
future. Subject to the PFIC rules discussed below, the gross amount of all our
distributions to you with respect to the ADSs or ordinary shares will be
included in your gross income as dividend income on the date of receipt by the
depositary, in the case of ADSs, or by you, in the case of ordinary shares, but
only to the extent that the distribution is paid out of our current or
accumulated earnings and profits (computed under U.S. federal income tax principles). The
dividends will not be eligible for the dividends-received deduction allowed to
corporations in respect of dividends received from U.S. corporations.

82

---

With respect to non-corporate U.S. Holders (including
individual U.S. Holders), dividends may be taxed at the lower applicable capital
gains rate provided that (i) the ADSs or ordinary shares are readily tradable on
an established securities market in the United States or we are eligible for the
benefit of any applicable income tax treaty with the United States, (ii) we are
not a passive foreign investment company (as discussed below) for either our
taxable year in which the dividend was paid or the preceding taxable year, (iii)
certain holding period requirements are met, and (iv) such non-corporate U.S.
Holders are not under an obligation to make related payments with respect to
positions in substantially similar or related property. For this purpose, ADSs
listed with the Nasdaq Stock Market LLC will generally be considered to be
readily tradable on an established securities market in the United States. You
should consult your tax advisor regarding the availability of the lower rate for
dividends paid with respect to our ADSs or ordinary shares.

Dividends will constitute foreign source income for foreign tax
credit limitation purposes. If PRC withholding taxes apply to dividends paid to
you with respect to the ADSs or ordinary shares, you may be able to obtain a
reduced rate of PRC withholding taxes under the income tax treaty between the
United States and the PRC if certain requirements are met. In addition, subject
to certain conditions and limitations, PRC withholding taxes on dividends may be
treated as foreign taxes eligible for credit against your U.S. federal income
tax liability. U.S. Holders should consult their own tax advisors regarding the
creditability of any PRC tax. The limitation on foreign taxes eligible for
credit is calculated separately with respect to specific classes of income. For
this purpose, dividends distributed by us with respect to ADSs or ordinary
shares will generally constitute passive category income but could, in the
case of certain U.S. Holders, constitute general category income.

To the extent that the amount of the distribution exceeds our
current and accumulated earnings and profits, it will be treated first as a
tax-free return of your tax basis in your ADSs or ordinary shares, and to the
extent the amount of the distribution exceeds your tax basis, the excess will be
taxed as capital gain. We do not intend to calculate our earnings and profits
for U.S. federal income tax purposes. Therefore, a U.S. Holder should expect
that a distribution will be reported as a dividend.

Dispositions of ADSs or Ordinary
shares

Subject to the PFIC rules discussed below, upon the sale,
exchange or other taxable disposition of ADSs or ordinary shares, a U.S. Holder
generally will recognize capital gain or loss equal to the difference between
the amount realized upon the sale, exchange or other disposition and the
adjusted tax basis of the U.S. Holder in the ADSs or ordinary shares. A U.S.
Holders tax basis in an ADS or a ordinary share will be, in general, the price
it paid for that ADS or ordinary share. The capital gain or loss generally will
be long-term capital gain or loss if, at the time of sale, exchange or other
disposition, the U.S. Holder has held the ADS or ordinary share for more than
one year. Net long-term capital gains of non-corporate U.S. Holders, including
individuals, are eligible for reduced rates of taxation. The deductibility of
capital losses is subject to limitations. Any gain or loss that a U.S. Holder
recognizes generally will be treated as gain or loss from sources within the
United States for U.S. foreign tax credit limitation purposes. However, in the
event that we are deemed to be a PRC resident enterprise under the PRC tax
law, we may be eligible for the benefits of the income tax treaty between the
United States and the PRC. If any PRC tax was to be imposed on any gain from the
sale, exchange or other disposition of the ADSs or ordinary shares, a U.S.
Holder eligible for the benefits of the income tax treaty between the United
States and the PRC may be able to elect to treat such gain as PRC-source income.
U.S. Holders are urged to consult their own tax advisors regarding the tax
consequences if a foreign withholding tax is imposed on a disposition of ADSs or
ordinary shares, including the availability of the foreign tax credit under
their particular circumstances.

Passive Foreign Investment Company

If we are or were to become classified as a PFIC for any
taxable year during which you hold our ADSs or ordinary shares, unless you make
a mark-to-market election (as described below), you would be subject to
special rules with respect to (i) any gain realized on the sale or other
disposition of ADSs or ordinary shares, and (ii) any excess distribution made
by us on ADSs or ordinary shares (generally, any distributions paid to you in
respect of ADSs or ordinary shares during a single taxable year that are greater
than 125% of the average annual distributions received by you during the three
preceding taxable years or, if shorter, your holding period for such ADSs or
ordinary shares).

Under the PFIC rules:

- the gain or excess distribution would be allocated ratably over your
  holding period for ADSs or ordinary shares;
- the amount allocated to the taxable year in which the gain or excess
  distribution was realized, and any taxable year prior to the first taxable
  year that you held ADSs or ordinary shares in which we are classified as a
  PFIC (a pre-PFIC year), would be taxable as ordinary income; and
- the amount allocated to each prior year, other than
  the current year and any pre-PFIC year, would be subject to tax at the highest tax
rate in effect for that year, and an interest charge generally applicable to
underpayments of tax would be imposed on the resulting tax for each such year
for the period it had been deferred.

83

---

In addition, notwithstanding any election you may make,
dividends that you receive from us will not be eligible for the lower applicable
capital gains rate (as discussed above in Distributions on ADSs or Ordinary
shares).

As an alternative to the foregoing rules, a holder of
marketable stock in a PFIC may make a mark-to-market election, provided that
the share are regularly traded on a qualified exchange, such as the NASDAQ
Stock Market LLC. Stock is regularly traded for any calendar year if such
stock is traded in other than de minimis quantities on at least 15 days
during each calendar quarter. While the company anticipates that the ADSs will
qualify as being regularly traded on the NASDAQ Stock Market LLC, no
assurances may be given that the ADSs will qualify as being regularly traded on
such exchange. If you make a valid mark-to-market election, you will generally
(i) include as ordinary income for each taxable year the excess, if any, of the
fair market value of your ADSs as determined at the end of the taxable year over
the adjusted tax basis of such ADSs and (ii) deduct as an ordinary loss the
excess, if any, of the adjusted tax basis of your ADSs over the fair market
value of such ADSs as determined at the end of the taxable year, but only to the
extent of any net mark-to-market gains on the ADSs or ordinary shares included
in your income for prior taxable years. Your adjusted tax basis in your ADSs
would be adjusted to reflect any income or loss resulting from the
mark-to-market election.

Alternatively, if you make an election to treat the company as
a qualified electing fund (QEF Election) you generally will not be subject
to the special rules discussed above. However, you can make a QEF Election only
if we agree to furnish you annually with certain tax information and we
currently do not intend to prepare or provide such information.

If you hold ADSs or ordinary shares in any year in which we are
a PFIC, you will be required to file an annual information report containing
such information as the U.S. Treasury may require. You are urged to consult your
own tax advisor regarding any reporting requirements related to PFIC status that
may apply.

You are urged to consult your tax advisor concerning the
United States federal income tax consequences of acquiring, holding, and
disposing of ADSs or ordinary shares if we are or become classified as a PFIC,
including the possibility of making a mark-to-market election.

Additional Tax on Investment Income

For taxable years beginning after December 31, 2012, if you are
an individual, estate or trust whose income exceeds certain thresholds, you will
be subject to a 3.8% Medicare contribution tax on unearned income, including,
among other things, dividends on, and capital gains from, the sale or other
taxable disposition of, your ordinary shares or ADSs, subject to certain
limitations and exceptions.

Information Reporting and Backup Withholding

Dividend payments with respect to ADSs or ordinary shares and
proceeds from the sale, exchange or redemption of ADSs or ordinary shares may be
subject to information reporting to the IRS and possible U.S. backup
withholding. Backup withholding will not apply, however, to a U.S. Holder that
furnishes a correct taxpayer identification number and makes any other required
certification or that is otherwise exempt from backup withholding. U.S. Holders
that are required to establish their exempt status generally must provide such
certification on IRS Form W-9. U.S. Holders should consult their tax advisors
regarding the application of the U.S. information reporting and backup
withholding rules.

Backup withholding is not an additional tax. Amounts withheld
as backup withholding can be credited against your U.S. federal income tax
liability, and you may obtain a refund of any excess amounts withheld under the
backup withholding rules by timely filing the appropriate claim for refund with
the IRS and furnishing any required information in a timely manner.

Pursuant to the Hiring Incentives to Restore Employment Act of
2010 and final regulations thereunder, individual U.S. Holders and certain
entities may be required to submit to the IRS certain information with respect
to his or her beneficial ownership of the ADSs or ordinary shares, if such ADSs
or ordinary shares are not held on his or her behalf by a financial institution.
This law also imposes penalties if an individual U.S. Holder is required to
submit such information to the IRS and fails to do so.

F. Dividends and Paying Agents

Not applicable.

84

---

G. Statement by Experts

Not applicable.

H. Documents on Display

We have previously filed with the Commission our registration statement on Form F-1, as amended.

We are subject to the periodic reporting and other informational requirements of the Exchange Act. Under the Exchange Act, we are required to file reports and other information with the Securities and Exchange Commission. Specifically, we are
required to file annually a report on Form 20-F no later than four months after the close of our fiscal year, which is December 31. Copies of reports and other information, when so filed, may be inspected without charge and may be obtained at
prescribed rates at the public reference facilities maintained by the Securities and Exchange Commission at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information regarding the Public Reference Room by calling the Commission
at 1-800-SEC-0330 or (202) 551-8090. The Securities and Exchange Commission also maintains a web site at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants like us that make electronic
filings with the Securities and Exchange Commission using its EDGAR system.

As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and our officers, directors and principal shareholders are exempt from the reporting
and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.

As permitted under NASDAQ Stock Market Rule 5250(d)(1)(C), we post our annual reports filed with the SEC on our web site at http://www.3sbio.com. We will not furnish hard copies of our annual reports to holders of our ordinary shares and ADSs
unless we receive a request in writing by a holder. Upon receipt of such a request in writing, we will provide hard copies of our annual reports to the requesting holder free of charge.

85

---

|ITEM 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES
      ABOUT MARKET RISK
|-------- | ----------------------------------------------------------------

Cautionary Statement:

Not to affect the general applicability of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 to
this or other parts of this annual report, as more fully discussed in
Cautionary Statement concerning Forward-looking Statements at the beginning of
this annual report, all the information contained under this Item, as provided
under Form 20-F Item 11(d), constitutes forward looking statement within the
meaning of those laws and are subject to various risks and uncertainties, except
for information regarding how our primary market risk exposures are managed and
certain historical facts.

Interest Rate Risk

Interest-earning instruments carry a degree of interest rate
risk. Our exposure to interest rate risk primarily relates to the interest
income generated by cash invested in demand and time deposits from our initial
public offering proceeds and cash inflow from our operations. We have not used
any derivative financial instruments to manage our interest risk exposure. If
market interest rates for such deposits decrease in the near future, such
decrease may cause the amount of our interest income to fall. A hypothetical 10%
decrease in the annual average applicable interest rate in fiscal year 2013
would result in a decrease of approximately RMB2.6 million in interest income on
our balance of such demand and time deposits as of December 31, 2012. In
comparison, a hypothetical 10% decrease in the annual average applicable
interest rate in fiscal year 2012 would have resulted in a decrease of
approximately RMB1.9 million in interest income on our balance of such demand
and time deposits as of December 31, 2011.

Foreign Currency Risk

On July 21, 2005, the PRC government changed its decade-old
policy of pegging the value of the RMB to the U.S. dollar. Under the current
policy, the RMB is permitted to fluctuate within a narrow and managed band
against a basket of certain foreign currencies. This change in policy has
resulted in substantial appreciation of the RMB against the U.S. dollar since
then. While the international reaction to the RMB revaluation has generally been
positive, there remains significant international pressure on the PRC government
to adopt an even more flexible currency policy, which could result in a further
and more significant appreciation of the RMB against the U.S. dollar.

Substantially all of our revenue and costs are denominated in
RMB, while a significant portion of our financial assets are denominated in U.S.
dollars, to which our exposure to foreign exchange risk principally relates. We
have not hedged exposures denominated in foreign currencies.

To the extent that we need to convert the balance of U.S.
dollars we hold into Renminbi for our operations, fluctuation in the exchange
rate between the Renminbi and U.S. dollar would impact on the Renminbi amount we
receive from the conversion. Our cash, cash equivalents, restricted cash and
time deposits with original maturities over three months denominated in U.S.
dollars was US$21.1 million as of December 31, 2012, compared to US$24.5 million
as of December 31, 2011. If we had converted such balance from US dollar to RMB
at December 31, 2012, the converted amount would have been RMB131.5 million. If
RMB were to appreciate by 5% against U.S. dollar over the December 31, 2012
exchange rate, the converted amount would be RMB124.9 million. Please also see
3.D.3 - Exchange rate volatility may adversely affect our competitive position,
financial position, operations, or otherwise.

86

---

|ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY
      SECURITIES
|-------- | ------------------------------------------------------------

Fees and Charges Payable by ADS Holders

The table below summarizes the fees and charges that a holder
of our ADSs may have to pay, directly or indirectly, to our ADS depositary,
JPMorgan Chase Bank, or JPMorgan, pursuant to the Deposit Agreement, which was
filed as Exhibit 99.A to our Registration Statement on Form F-6 filed with the
SEC on January 22, 2007, and the types of services and the amount of the fees or
charges paid therefor. The contents under this heading Fees and Charges Payable
by ADS Holders are subject to and qualified in its entirety by reference to the
full text of the Deposit Agreement.

Category
    Depositary actions
    Associated FeeDepositing or substituting underlying share
    Issuances against or in respect to or pursuant to:
      Deposits of shareShare distributions, rights and other
      distributions Stock dividend or split declared by usMerger,
      exchange of securities or any other transaction or event or other
      distribution affecting the ADSs or the deposited share
    $5.00 for each 100 ADSs (or portion thereof) issued
      or delivered (The Depositary may sell, by public or private
      sale, **sufficient securities and property received in respect
      of** **share distributions, rights and other distributions
      prior** to such deposit to pay such charge.)Withdrawing underlying share
    ADSs surrendered for withdrawal of deposited share
      or ADS cancelled or reduced for any other reason
    $5.00 for each 100 ADSs (or portion thereof) reduced,
      cancelled or surrenderedTransferring, splitting or grouping receipts
    Transfers
    $1.50 per ADRGeneral depositary services
     Services performed by the Depositary in
      administering the ADRs  Such fees and expenses as are incurred by the
      Depositary (including without limitation expenses incurred on behalf of
      ADR holders in connection with compliance with foreign exchange control
      regulations or any law or regulation relating to foreign investment) in
      delivery of deposited securities (*which may include assets associated
      with such securities) or otherwise in connection with the Depositary's or
      its Custodian's compliance with applicable law, rule or
      regulation)Conversion of foreign currency into U.S. dollars
      Any other charge payable by any of the Depositary, any of the
      Depositarys agents, including, without limitation, the Custodian, or the
      agents of the Depositarys agents in connection with the
      servicing of the share or other deposited securities.
     Up to $0.03 per ADS (or portion thereof) in each
      calendar year for services performed by the Depositary in administering
      the ADRs (which fee shall be assessed against ADR holders as of the record
      date or dates set by the Depositary not more than once each calendar year
      and shall be payable at the sole discretion of the Depositary by billing
      such ADR holders or by deducting such charge from one or more
      cash dividends or other cash distributions).  Other fees
      and expenses as incurred Expenses of the Depositary in connection
      with the conversion of foreign currency into U.S. dollars are paid out of
      such foreign currency, any other charge payable by any of the
      Depositary, any of the Depositarys agents, including, without limitation,
      the Custodian, or the agents of the Depositarys agents in connection with
      the servicing of the share or other deposited securities, which charge
      shall be assessed against ADR holders as of the record date or dates set
      by the Depositary and shall be payable at the sole discretion of the
      Depositary by billing such ADR holders or by deducting such
      charge from one or more cash dividends or other cash
      distributions.Receiving or distributing dividends
    Distribution of cash, share, rights, and
      other properties.
    $0.02 or less per ADS for distribution of
      cash or net proceeds of sale. Distribution of share and securities
      (treated as share), the fee being in an amount equal to the fee for the
      execution and delivery of ADSs which would have been charged as a result
      of the deposit of share, $5.00 for each 100 ADSs (or portion thereof).


In addition, an ADS holder may also be liable for: (i) stock
transfer or other taxes and other governmental charges; (ii) cable, telex and
facsimile transmission and delivery charges incurred at the request of persons
depositing, or ADR holders delivering Shares, ADRs or deposited securities;
(iii) transfer or registration fees for the registration or
transfer of deposited securities on any applicable register in connection with the deposit or withdrawal of deposited securities.

87

---

Fees Payable by the Depositary to the Issuer

JPMorgan, as our depositary, has agreed to reimburse us for certain expenses related to our ADS program which we incur each year. For 2012, we received US$0.1 million in reimbursements from JPMorgan, primarily related to accountant fees and
investor relations expenses.









88

---

PART II

|ITEM 13. | DEFAULTS, DIVIDEND ARREARAGES AND
      DELINQUENCIES
|-------- | -----------------------------------------------------

Not Applicable.

|**ITEM 14.** | MATERIAL MODIFICATIONS TO THE RIGHTS OF
      SECURITY HOLDERS AND USE OF PROCEEDS
|------------ | ----------------------------------------------------------------------------------

None.

|ITEM 15. | CONTROLS AND PROCEDURES
|-------- | -----------------------

Evaluation of disclosure controls and procedures

Our management, with the participation of our chief executive
officer and chief financial officer, has performed an evaluation of the
effectiveness of our disclosure controls and procedures (as defined in Rule
13a-15(e) under the Exchange Act) as of the end of the period covered by this
report, as required by Rule 13a-15(b) under the Exchange Act.

Based upon that evaluation, our management has concluded that,
as of December 31, 2012, our disclosure controls and procedures were effective
in ensuring that the information required to be disclosed by us in the reports
that we file and furnish under the Exchange Act was recorded, processed,
summarized and reported, within the time periods specified in the SECs rules
and forms, and that the information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is accumulated and
communicated to our management, including our chief executive officer and chief
financial officer, to allow timely decisions regarding required disclosure.

Report of Management on Internal Control over Financial
Reporting

Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act, for our company. Our internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of our financial reporting and the
preparation of financial statements for external purposes in accordance with
U.S. GAAP. Included in our internal control over financial reporting are
policies and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of our assets; (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in
accordance with U.S. GAAP, and that our receipts and expenditures are being made
only in accordance with authorizations from our management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of our assets that could have a
material effect on our financial statements.

As required by Section 404 of the Sarbanes-Oxley Act of 2002
and related rules as promulgated by the Securities and Exchange Commission, our
management has assessed the effectiveness of our internal control over financial
reporting as of December 31, 2012 based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, our
management has concluded that our internal control over financial reporting was
effective as of December 31, 2012.

Because of its inherent limitations, a system of internal
control over financial reporting may not prevent or detect all misstatements. In
addition, projections of any evaluation of effectiveness of our internal control
over financial reporting to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.

Our independent registered public accounting firm, Ernst &
Young Hua Ming LLP, has audited the effectiveness of our internal control over
financial reporting as of December 31, 2012 as stated in its report, which
appears on page F-2 of this annual report on Form 20-F.

Changes in Internal Controls

There were no changes in our internal control over financial
reporting identified in connection with the evaluation required by paragraph (d)
of Rules 13a-15 and 15d-15 in the Exchange Act that occurred during the period covered by this annual report that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.

89

---

|          |                                 
|--------- | --------------------------------
|ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT

Our board of directors has determined that Mr. Tianruo Pu
qualifies as an audit committee financial expert as defined in Item 16A of Form
20-F. Each of the members of our Audit Committee is an independent director as
defined under Rule 10A-3 of the Securities Exchange Act of 1934 and Rule 5605 of
the NASDAQ Stock Market Rules.

|ITEM 16B. | CODE OF ETHICS
|--------- | --------------

Our board of directors has adopted a Code of Ethics (See
Exhibit 11.1), which is applicable to all of our directors, officers and
employees, including our principal executive officer, principal financial
officer, principal accounting officer or controller, or persons performing
similar functions.

We have filed our code of ethics as an exhibit to our annual
report on Form 20-F for the year ended December 31, 2006 and have posted the
code on our website www.3sbio.com. We hereby undertake to provide to any person,
without charge, a copy of our code of ethics within ten working days after we
receive such persons written request.

|ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|--------- | --------------------------------------

The following table sets forth the aggregate fees by categories
specified below in connection with certain professional services rendered by our
principal external auditors, for each of the last two fiscal years. We did not
pay any other fees to our principal external auditors during such periods.

|              |  | Year ended December 31, | 
|------------- |  | ----------------------- | 
|              |  | 2011                    | 
|              |  | RMB                     | 
|              |  | (in thousands)          | 
|Audit Fees(1) |  | 4,764                   | 
|              |  |                         | 
|Tax Fees(2)   |  | 260                     | 

|(1) | Audit fees means the aggregate fees billed in
      each of the fiscal years listed for professional services rendered by our
      principal external auditors for the integrated audit, including the
      financial audit and the audit pursuant to Section 404 of the
      Sarbanes-Oxley Act of 2002;
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Tax fees means the aggregate fees billed in
      each of the fiscal years listed for professional services rendered by our
      principal external auditors for tax compliance, tax advice, and tax
      planning.                                                                                       

The pre-approval policy and procedures for accounting fees, as
described in paragraph (c)(7)(i) of Rule 2-01 of Regulation S-X, are contained
in the charter of the audit committee of our board of directors, and summarized
below:

- Prior to formally appointing or re-appointing the principal external
  auditor, our audit committee reviews and assesses the independence of the
  principal external auditor, including but not limited to any relationships
  with us, or any other entity that may impair the principal external auditors
  judgment or independence in respect to us.
- Our audit committee discusses with the principal external auditor the
  overall scope of the external audit, including identified risk areas and any
  additional agreed-upon procedures.
- Our audit committee reviews the principal external auditors compensation
  to ensure that an effective, comprehensive and complete audit can be conducted
  for the agreed compensation level.

All non-audit services were pre-approved by our audit
committee.

|ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR
      AUDIT COMMITTEES
|--------- | ----------------------------------------------------------------

None.

90

---

|**ITEM 16E.** | PURCHASES OF EQUITY SECURITIES BY THE ISSUER
      AND AFFILIATED PURCHASERS
|------------- | ----------------------------------------------------------------------------

None.

|ITEM 16F. | CHANGE IN REGISTRANTS CERTIFYING
      ACCOUNTANT
|--------- | --------------------------------------------------

Not applicable.

|ITEM 16G. | CORPORATE GOVERNANCE
|--------- | --------------------

As permitted by NASDAQ, in lieu of the NASDAQ corporate
governance rules, but subject to certain exceptions, we may follow home country
practice.

Composition of the Nominating Committee

The nominating committee of our board of directors currently
has one member that is not an independent director within the meaning of Rule
5605(a)(2) of the NASDAQ Marketplace Rules, as amended from time to time. This
practice of ours differs from Rule 5605(e) of the NASDAQ Marketplace Rules.
There is no specific requirement under Cayman Islands law on a nominating
committee of the board of directors comprised solely of independent directors.

Shareholder Approval of Equity Compensation Arrangements

We are not required to obtain shareholder approval when a stock
option or purchase plan is to be established or materially amended or other
equity compensation arrangement made or materially amended, pursuant to which
stock may be acquired by officers, directors, employees, or consultants. This
practice of ours differs from Rule 5635(c) of the NASDAQ Marketplace Rules.
There is no specific requirement under Cayman Islands law on shareholder
approval with respect to equity compensation arrangements. The amendment to our
2006 stock plan and the establishment of our 2010 equity incentive plan were
adopted by our board of directors without shareholder approval.

|ITEM 16H. | **MINE SAFETY
      DISCLOSURE**
|--------- | --------------------------------

Not applicable.

91

---

PART III

|ITEM 17. | FINANCIAL STATEMENTS
|-------- | --------------------

The registrant has elected to provide the consolidated
financial statements and related information specified in Item 18 in lieu of
Item 17.

|ITEM 18. | FINANCIAL STATEMENTS
|-------- | --------------------

The audited consolidated financial statements and the reports
of our principal external auditors are included in this annual report beginning
on page F-1.

|ITEM 19. | EXHIBITS
|-------- | --------

|Exhibit Number | Description of Exhibits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1.1            | Amended and Restated Memorandum
      of Association of 3SBio Inc. (incorporated by reference to Exhibit 3.1
      from our F- 1 registration statement (File No. 333-140099), as amended,
      initially filed with the Commission on January 19, 2007)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|1.2            | Amended and Restated Articles of Association of
      3SBio Inc. (incorporated by reference to Exhibit 3.2 from our F-1
      registration statement (File No. 333-140099), as amended, initially filed
      with the Commission on January 19, 2007, except that Article 61(2) shall
      now read:At any general meeting of the Company, two or more Members
      entitled to vote and present in person or by proxy or, in the case of a
      Member being a corporation, by its duly authorised representative
      representing not less than one-third in nominal value of the total issued
      voting share in the Company throughout the meeting shall form a quorum for
      all purposes. The amendment to Article 61(2) was approved at the 2010
      Annual General Meeting by a special resolution on October 29, 2010.)
|2.1            | Form of Share Certificate of 3SBio Inc.
      (incorporated by reference to Exhibit 4.1 from our F-1 registration
      statement (File No. 333-140099), as amended, initially filed with the
      Commission on January 19, 2007)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|2.2            | Form of Deposit Agreement, including Form of
      ADR, of 3SBio Inc. (incorporated by reference to Exhibit 4.2 from our F-1 registration statement
      (File No. 333-140099), as amended, initially filed with the Commission on
      January 19, 2007)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|4.1            | 2006 Stock Plan adopted by 3SBio Inc., dated as of
      September 5, 2006 (incorporated by reference to Exhibit 10.1 from our F-1
      registration statement (File No. 333-140099), as amended, initially filed
      with the Commission on January 19, 2007)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|4.2            | First Amendment to 2006 Stock
      Plan, effective April 8, 2010 (incorporated by reference to Exhibit 4.2
      from our annual report on Form 20-F for the year ended December
      31, 2009, filed with the Commission on June 25, 2010)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|4.3            | 2010 Equity Incentive Plan, effective
      April 8, 2010 (incorporated by reference to Exhibit 4.3 from our annual
      report on Form 20-F for the year ended December 31, 2009, filed with the
      Commission on June 25, 2010)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.4            | Form Purchase Contract for FCS
      between Shenyang Sunshine Pharmaceutical Company Limited and Shanghai
      Weike Biochemical Reagent Co., Ltd. (incorporated by reference to Exhibit
      4.2 from our annual report on Form 20-F for the year ended December 31,
      2008, filed with the Commission on April 21, 2009)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|4.5            | Form Purchase Agreement for BPT-6 culture
      medium between Shenyang Sunshine Pharmaceutical Company Limited and
      Invitrogen Trading (Shanghai) Company Limited (incorporated by reference
      to Exhibit 4.5 from our annual report on Form 20-F for the year ended
      December 31, 2009, filed with the Commission on June 25, 2010)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|4.6            | Form of Distribution Agreement
      (incorporated by reference to Exhibit 10.15 from our F-1 registration
      statement (File No. 333-140099), as amended, initially filed with the
      Commission on January 19, 2007)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|4.7            | Sanitary Piping System Contract between Shenyang Sunshine
      Pharmaceutical Company Limited and Shanghai Macroprocess Technology Co.
      Ltd., dated March30, 2009 (incorporated by reference to Exhibit 4.7 from
      Amendment No. 1 to our annual report on Form 20-F for the year ended
      December 31, 2009, filed with the Commission on November 3, 2011)                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.8            | Installation Contract for the Core
      Cleanroom Area of the New Plant between Shenyang Sunshine Pharmaceutical
      Company Limited, and Suntec Cleanroom & HVAC Engineering Co. Ltd. and
      Suntec (Suzhou) Cleanroom System Co. Ltd., dated July 3, 2009
      (incorporated by reference to Exhibit 4.8 from Amendments No. 2 and No. 3
      to our annual report on Form 20-F for the year ended December 31, 2009,
      filed with the Commission on November 3, 2011 )                                                                                                                                                                                                                                                                                                                                                           
|4.9            | Partnership Agreement among Shenyang Sunshine
      Pharmaceutical Co., Limited, Taizhou Huan Sheng Investment Management Company Limited, and Taizhou
      Oriental CMC Limited, dated April 25, 2011 (incorporated by reference to
      Exhibit 4.9 from our annual report on Form 20-F for the year ended
      December 31, 2011, filed with the Commission on April 30, 2012)                                                                                                                                                                                                                                                                                                                                                                                                                                                            

92

---

|4.10  | Master Agreement among DaVita
      Care PTE. LTD., DaVita China PTE. LTD., 3SBio, Inc., and Liaoning Sunshine
      Science and Technology Development Co. Limited, made as of February 21,
      2012 (incorporated by reference to Exhibit 4.10 from our annual report on
      Form 20-F for the year ended December 31, 2011, filed with the Commission
      on April 30, 2012)       
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.11  | Agreement and Plan of Merger, dated as of
      February 8, 2013, among 3SBio Inc., Decade Sunshine Limited and Decade
      Sunshine Merger Sub (incorporated by reference to Exhibit 99.2 from a
      report on Form 6-K of the Company , filed with the Commission on February
      8, 2013)                                                                                           
|4.12  | Business Cooperation Agreement among 3SBio
      Inc., Shenyang Sunshine Pharmaceutical Company Limited and Liaoning
      Sunshine Pharmaceutical Company Limited (incorporated by reference to
      Exhibit 10.21 from our F-1 registration statement (File No. 333-140099),
      as amended, initially filed with the Commission on January 19, 2007)                                  
|4.13  | Purchase Agreement for the Acquisition of
      Equity Interest in Liaoning Sunshine Pharmaceutical Company Limited
      between Shenyang Sunshine Pharmaceutical Company Limited and Dan Lou
      (incorporated by reference to Exhibit 10.18 from our F-1 registration
      statement (File No. 333-140099), as amended, initially filed with the
      Commission on January 19, 2007)
|4.14  | Voting Rights Agreement between
      Shenyang Sunshine Pharmaceutical Company Limited and Dan Lou (incorporated
      by reference to Exhibit 10.20 from our F-1 registration statement (File
      No. 333-140099), as amended, initially filed with the Commission on
      January 19, 2007)                                                                                            
|4.15  | Pledge Agreement of Equity Interest in Liaoning
      Sunshine Pharmaceutical Company Limited between Shenyang Sunshine
      Pharmaceutical Company Limited and Dan Lou (incorporated by reference to
      Exhibit 10.19 from our F-1 registration statement (File No. 333-140099),
      as amended, initially filed with the Commission on January 19, 2007)                            
|4.16* | Amendment to Business
      Cooperation Agreement among Shenyang Sunshine Pharmaceutical Company
      Limited, Liaoning Sunshine Bio-Pharmaceutical Company Limited,,
      and 3SBio Inc., dated as of December 31, 2012.                                                                                                                                                                 
|4.17* | Supplement No. 1 to Purchase Agreement for
      the Acquisition of Equity Interest in Liaoning Sunshine Pharmaceutical
      Company Limited between Shenyang Sunshine Pharmaceutical Company Limited
      and Dan Lou, effective as of January 1, 2009                                                                                                                                   
|4.18* | Supplement No. 2 to Purchase Agreement for the
      Acquisition of Equity Interest in Liaoning Sunshine Pharmaceutical Company
      Limited between Shenyang Sunshine Pharmaceutical Company Limited and Dan
      Lou, effective as of January 1, 2009                                                                                                                                   
|4.19* | Amendment to Purchase Agreement
      for the Acquisition of Equity Interest in Liaoning Sunshine Pharmaceutical
      Company Limited between Shenyang Sunshine Pharmaceutical Company Limited
      and Dan Lou, dated as of December 31, 2012                                                                                                                                            
|4.20* | Amendment to Voting Rights Agreement between
      Shenyang Sunshine Pharmaceutical Company Limited and Dan Lou, dated as of
      December 31, 2012                                                                                                                                                                                                                                        
|4.21* | Amendment to Equity Pledge Agreement
      between Shenyang Sunshine Pharmaceutical Company Limited and Dan Lou,
      dated as of December 31, 2012                                                                                                                                                                                                                                        
|4.22  | Voting Agreement, dated as of February 8, 2013,
      by and among the Company, Decade Sunshine Limited and the Rollover
      Shareholders, incorporated herein by reference to Exhibit 7.06 to Schedule
      13D filed by certain Rollover Shareholders with the SEC on February 19,
      2013.                                                                                         
|4.23  | Limited Guaranty, dated as of
      February 8, 2013, by Dr. Jing Lou in favor of the Company, incorporated
      herein by reference to Exhibit 7.07 to Schedule 13D filed by certain
      Rollover Shareholders with the SEC on February 19, 2013.                                                                                                                                       
|4.24  | Limited Guaranty, dated as of February 8, 2013,
      by CPEChina Fund, L.P. in favor of the Company, incorporated herein by
      reference to Exhibit 7.08 to Schedule 13D filed by certain Rollover
      Shareholders with the SEC on February 19, 2013.                                                                                                                                
|4.25  | Amendment No. 1 to the
      Agreement and Plan of Merger, dated as of April 24, 2013, by and between
      the Company, Decade Sunshine Limited and Decade Sunshine Merger Sub,
      incorporated herein by reference to Exhibit (d)-(7) to the Schedule 13E3
      Amendment No. 8 filed with the SEC on February 19, 2013                                                               
|8.1*  | List of Subsidiaries of 3SBio Inc.                                                                                                                                                                                                                                                                                                                                                          

93

---

|11.1  | Code of Ethics (incorporated by
      reference to Exhibit 11.1 from our annual report on Form 20-F for the year
      ended December 31, 2006, filed with the Commission on June 29, 2007)
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|12.1* | CEO Certification Pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002                                                                                                          
|12.2* | CFO Certification Pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                          
|13.1* | CEO Certification Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002                                                                                                          
|13.2* | CFO Certification Pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                          
|15.1* | Consent of Ernst & Young Hua Ming LLP                                                                                                                                                      

* Filed herewith.

94

---

SIGNATURES

The registrant hereby certifies that it meets all of the
requirements for filing on Form 20-F and that it has duly caused and authorized
the undersigned to sign this annual report on its behalf.

3SBio Inc.

|By:                 | /s/
      Dr. Jing Lou 
|------------------- | -----------------------
|Name:  Dr. Jing Lou
|Title:              | Chief Executive Officer
|                    |                        
|Date:               | April 30, 2013         

---

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

|Consolidated Financial Statements of 3SBio Inc.                                                            | Page
|---------------------------------------------------------------------------------------------------------- | ----
|Reports of Independent Registered Public
      Accounting Firm                                             | F-1 
|Consolidated Balance Sheets as of December 31, 2011 and
      2012                                         | F-3 
|Consolidated Statements of Income for the
      years ended December 31, 2010, 2011 and 2012               | F-4 
|Consolidated Statements of Comprehensive Income for the
      years ended December 31, 2010, 2011 and 2012 | F-5 
|Consolidated Statements of Shareholders
      Equity for the years ended December 31, 2010, 2011 and 2012 | F-6 
|Consolidated Statements of Cash Flows for the years ended
      December 31, 2010, 2011 and 2012           | F-7 
|Notes to Consolidated Financial Statements                                                                 | F-8 



---

Report of Independent Registered Public Accounting
Firm

The Board of Directors and Shareholders of 3SBio Inc.

We have audited the accompanying consolidated balance sheets of
3SBio Inc. as of December 31, 2012 and 2011, and the related consolidated
statements of income, comprehensive income, shareholders equity, and cash flows
for each of the three years in the period ended December 31, 2012. These
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of 3SBio Inc. at December 31, 2012 and 2011, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2012, in conformity with U.S. generally accepted
accounting principles.

We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), 3SBio Inc.s internal
control over financial reporting as of December 31, 2012, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated April
30, 2013 expressed an unqualified opinion thereon.

/s/ Ernst & Young Hua Ming LLP Beijing, Peoples
Republic of China April 30,2013

F-1

---

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of 3SBio Inc.

We have audited 3SBio Inc.s internal control over financial
reporting as of December 31, 2012, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). 3SBio Inc.s management is
responsible for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Managements Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the
companys internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in
all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.

A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a
material effect on the financial statements.

Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.

In our opinion, 3SBio Inc. maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2012, based on the COSO criteria.

We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the consolidated
balance sheets of 3SBio Inc. as of December 31, 2012 and 2011, and the related
consolidated statements of income, comprehensive income, shareholders equity
and cash flows for each of the three years in the period ended December 31, 2012
of 3SBio Inc. and our report dated April 30, 2013 expressed an unqualified
opinion thereon.

/s/ Ernst & Young Hua Ming LLP Beijing, Peoples
Republic of China

April 30, 2013

F-2

---



|3SBio Inc.                                                    |  | 
|------------------------------------------------------------- |  | 
|Consolidated Balance Sheets                                   | 
|At December 31, 2011 and 2012                                 | 
|(RMB and US$ expressed in thousands, except
      share data)



|                                                                                                                                                                                                                |  |       |  |  | December 31, |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----- |  |  | ------------ | -
|                                                                                                                                                                                                                |  |       |  |  |              |  
|                                                                                                                                                                                                                |  | Note  |  |  | 2011         |  
|                                                                                                                                                                                                                |  |       |  |  | RMB          |  
|ASSETS                                                                                                                                                                                                          |  |       |  |  |              |  
|Current assets                                                                                                                                                                                                  |  |       |  |  |              |  
|Cash and cash equivalents                                                                                                                                                                                       |  |       |  |  | 245,813      |  
|Restricted cash                                                                                                                                                                                                 |  |       |  |  | 665          |  
|Time deposits with financial institutions                                                                                                                                                                       |  |       |  |  | 499,201      |  
|Accounts receivable, less allowance for doubtful accounts:
      December 31, 2011: RMB2,542; December 31,2012: RMB2,208 (US$355)                                                                               |  | 3     |  |  | 113,949      |  
|Notes receivable                                                                                                                                                                                                |  |       |  |  | 47,243       |  
|Inventories                                                                                                                                                                                                     |  | 4     |  |  | 27,604       |  
|Prepaid expenses and other receivables                                                                                                                                                                          |  | 5     |  |  | 26,672       |  
|Available-for-sale securities                                                                                                                                                                                   |  | 6     |  |  | 22,830       |  
|Due from related parties                                                                                                                                                                                        |  | 21    |  |  | 6,000        |  
|Deferred tax assets                                                                                                                                                                                             |  | 17(a) |  |  | 2,750        |  
|Total current assets                                                                                                                                                                                            |  |       |  |  | 992,727      |  
|                                                                                                                                                                                                                |  |       |  |  |              |  
|Time deposits with financial institutions                                                                                                                                                                       |  |       |  |  | 20,000       |  
|Available-for-sale securities                                                                                                                                                                                   |  | 6     |  |  | 10,848       |  
|Investment in non-consolidated affiliates                                                                                                                                                                       |  | 7     |  |  | 2,245        |  
|Property, plant and equipment, net                                                                                                                                                                              |  | 8     |  |  | 198,053      |  
|Prepaid land lease payment                                                                                                                                                                                      |  | 9     |  |  | 17,448       |  
|Prepayment and non-current deposits                                                                                                                                                                             |  | 10    |  |  | 16,801       |  
|Intangible assets, net                                                                                                                                                                                          |  | 11    |  |  | 49,615       |  
|Long-term receivables                                                                                                                                                                                           |  | 19    |  |  | 3,111        |  
|Deferred tax assets                                                                                                                                                                                             |  | 17(a) |  |  | 262          |  
|                                                                                                                                                                                                                |  |       |  |  |              |  
|Total assets                                                                                                                                                                                                    |  |       |  |  | 1,311,110    |  
|                                                                                                                                                                                                                |  |       |  |  |              |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                            |  |       |  |  |              |  
|                                                                                                                                                                                                                |  |       |  |  |              |  
|Current liabilities(including current liabilities of the consolidated VIE without
      recourse to 3SBio Inc. of RMB2,457 and RMB5,800 (US$931) as of December
      31, 2011 and 2012, respectively. Note 1): | 
|                                                                                                                                                                                                                |  |       |  |  |              |  
|Accounts payable                                                                                                                                                                                                |  |       |  |  | 6,218        |  
|Deferred income                                                                                                                                                                                                 |  | 12    |  |  | 374          |  
|Accrued expenses and other payables                                                                                                                                                                             |  | 13    |  |  | 48,389       |  
|Income tax payable                                                                                                                                                                                              |  |       |  |  | 8,894        |  
|                                                                                                                                                                                                                |  |       |  |  |              |  
|Total current liabilities                                                                                                                                                                                       |  |       |  |  | 63,875       |  
|                                                                                                                                                                                                                |  |       |  |  |              |  
|Deferred income                                                                                                                                                                                                 |  | 12    |  |  | 2,029        |  
|                                                                                                                                                                                                                |  |       |  |  |              |  
|Total liabilities                                                                                                                                                                                               |  |       |  |  | 65,904       |  
|Commitments and contingencies                                                                                                                                                                                   |  | 22    |  |  |              |  
|                                                                                                                                                                                                                |  |       |  |  |              |  
|Shareholders equity                                                                                                                                                                                            |  |       |  |  |              |  
|Share capital  ordinary shares US$0.0001 par value,
      500,000,000 shares authorized, 154,473,159 and 155,635,016 issued and
      outstanding as of December 31, 2011 and 2012 respectively                |  | 14    |  |  | 124          |  
|Additional paid-in capital                                                                                                                                                                                      |  |       |  |  | 973,218      |  
|Accumulated other comprehensive loss                                                                                                                                                                            |  | 23    |  |  | (126,290     | )
|Retained earnings                                                                                                                                                                                               |  |       |  |  | 387,317      |  
|Total shareholders equity attributable to 3SBio
      Inc.                                                                                                                                                     |  |       |  |  | 1,234,369    |  
|                                                                                                                                                                                                                |  |       |  |  |              |  
|Non-controlling interest                                                                                                                                                                                        |  |       |  |  | 10,837       |  
|Total shareholders equity                                                                                                                                                                                      |  |       |  |  | 1,245,206    |  
|                                                                                                                                                                                                                |  |       |  |  |              |  
|Total liabilities and shareholders
      equity                                                                                                                                                                |  |       |  |  | 1,311,110    |  

The accompanying notes are an integral part of these
consolidated financial statements.

F-3

---



|3SBio Inc.                                                    | 
|------------------------------------------------------------- | 
|Consolidated Statements of Income                            
|For the years ended December 31, 2010, 2011
      and 2012   
|(RMB and US$ expressed in thousands, except
      share data)



Year ended December 31,Note
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2012RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Net revenue
    
    15
    
    
    418,628
    
    
    541,614
    
    
    669,948
    
    
    107,534Cost of revenue
    
    
    
    
    (41,650
    )
    
    (58,073
    )
    
    (70,504
    )
    
    (11,317
    )Gross profit
    
    
    
    
    376,978
    
    
    483,541
    
    
    599,444
    
    
    96,217Operating expensesResearch and development costs
    
    
    
    
    (39,409
    )
    
    (41,805
    )
    
    (71,228
    )
    
    (11,433
    )Sales, marketing and distribution expenses
    
    
    
    
    (194,877
    )
    
    (254,767
    )
    
    (318,223
    )
    
    (51,078
    )General and administrative expenses
    
    
    
    
    (55,850
    )
    
    (66,908
    )
    
    (82,070
    )
    
    (13,173
    )Grant income
    
    12
    
    
    1,256
    
    
    1,585
    
    
    898
    
    
    144Income from operations
    
    
    
    
    88,098
    
    
    121,646
    
    
    128,821
    
    
    20,677Interest income
    
    
    
    
    12,950
    
    
    18,499
    
    
    25,708
    
    
    4,126Impairment loss on available-for-sale securities
    
    6(a)
    
    
    -
    
    
    (1,334
    )
    
    (20,427
    )
    
    (3,279
    )Share of gain/(loss) in non-consolidated
      affiliates
    
    7
    
    
    704
    
    
    (1,590
    )
    
    (655
    )
    
    (105
    )Other income/(loss), net
    
    20
    
    
    1,306
    
    
    (851
    )
    
    (994
    )
    
    (160
    )Total other income, net
    
    
    
    
    14,960
    
    
    14,724
    
    
    3,632
    
    
    582Income before income tax expense
    
    
    
    
    103,058
    
    
    136,370
    
    
    132,453
    
    
    21,259Income tax expense
    
    17(a)
    
    
    (21,772
    )
    
    (28,210
    )
    
    (29,878
    )
    
    (4,796
    )Net income
    
    
    
    
    81,286
    
    
    108,160
    
    
    102,575
    
    
    16,463Less: net profit/(loss) attributable to non- controlling
      interest, net of tax
    
    
    
    
    -
    
    
    (413
    )
    
    221
    
    
    35Net income attributable to 3SBio Inc.
    
    
    
    
    81,286
    
    
    108,573
    
    
    102,354
    
    
    16,428Net income attributable to 3SBio Inc. per
      share:- Basic
    
    
    
    
    0.54
    
    
    0.71
    
    
    0.66
    
    
    0.11- Diluted
    
    
    
    
    0.53
    
    
    0.69
    
    
    0.64
    
    
    0.10Weighted average shares:- Basic
    
    
    
    
    151,241,036
    
    
    153,310,128
    
    
    154,726,537
    
    
    154,726,537- Diluted
    
    
    
    
    154,131,768
    
    
    157,148,685
    
    
    158,971,682
    
    
    158,971,682


The accompanying notes are an integral part of these
consolidated financial statements.

F-4

---



|3SBio Inc.                                                   
|-------------------------------------------------------------
|Consolidated Statements of Comprehensive Income              
|For the years ended December 31, 2010, 2011 and 2012         
|(RMB and US$ expressed in thousands, except share
      data)



Year ended December 31,Note
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2012RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Net income
    
    
    
    
    81,286
    
    
    108,160
    
    
    102,575
    
    
    16,463Other comprehensive income/(loss), net of tax:Net unrealized gain/(loss) in
      available-for- sale securities, net of nil tax
    
    23
    
    
    21,335
    
    
    (26,545
    )
    
    8,945
    
    
    1,436Foreign currency translation adjustments, net of nil tax
    
    23
    
    
    (10,258
    )
    
    (10,214
    )
    
    (1,974
    )
    
    (317
    )11,077
    
    
    (36,759
    )
    
    6,971
    
    
    1,119Comprehensive income
    
    
    
    
    92,363
    
    
    71,401
    
    
    109,546
    
    
    17,582Less: comprehensive profit/(loss) attributable to
      non-controlling interest
    
    
    
    
    -
    
    
    (413
    )
    
    221
    
    
    35Comprehensive income attributable
      to 3SBio Inc.
    
    
    92,363
    
    
    71,814
    
    
    109,325
    
    
    17,547


The accompanying notes are an integral part of these
consolidated financial statements.

F-5

---



|3SBio Inc.                                                   
|-------------------------------------------------------------
|Consolidated Statements of Shareholders Equity              
|For the years ended December 31, 2010, 2011 and 2012         
|(RMB and US$ expressed in thousands, except share
      data)



|                                                                                                 |  |       |  |  |               |  |  |            |  |  |                 |  |  | Accumulated       |   |  |          |  |  |                  |   |  |           |  
|------------------------------------------------------------------------------------------------ |  | ----- |  |  | ------------- |  |  | ---------- |  |  | --------------- |  |  | ----------------- | - |  | -------- |  |  | ---------------- | - |  | --------- | -
|                                                                                                 |  |       |  |  | Share capital |  |  | Additional |  |  | other           |  |  | Retained          |   |  | **Non-** |  |  | **Total share-** |  
|                                                                                                 |  |       |  |  |               |  |  |            |  |  | paid-in capital |  |  | **comprehensive** |   |  | earnings |  |  | **controlling**  |   |  | holders  |  
|                                                                                                 |  | Note  |  |  | No. of shares |  |  | Amount     |  |  |                 |  |  | loss              |   |  |          |  |  | interest         |   |  | equity    |  
|                                                                                                 |  |       |  |  |               |  |  | RMB        |  |  | RMB             |  |  | RMB               |   |  | RMB      |  |  | RMB              |   |  | RMB       |  
|                                                                                                 |  |       |  |  |               |  |  |            |  |  |                 |  |  |                   |   |  |          |  |  |                  |   |  |           |  
|Balance as of January 1, 2010                                                                    |  |       |  |  | 150,641,461   |  |  | 121        |  |  | 915,267         |  |  | (100,608          | ) |  | 197,458  |  |  | -                |   |  | 1,012,238 |  
|Share-based compensation, net of nil tax                                                         |  |       |  |  |               |  |  |            |  |  |                 |  |  |                   |   |  |          |  |  |                  |   |  |           |  
|-Shares issued upon
      vesting of shares/RSUs granted to independent directors and executives |  | 18(a) |  |  | 1,103,499     |  |  | 1          |  |  | 22,538          |  |  | -                 |   |  | -        |  |  | -                |   |  | 22,539    |  
|-Share options granted to executives and
      employees                                         |  | 18(b) |  |  | -             |  |  | -          |  |  | 2,149           |  |  | -                 |   |  | -        |  |  | -                |   |  | 2,149     |  
|-Shares issued pursuant to
      exercise of vested options                                      |  | 18(b) |  |  | 909,188       |  |  | 1          |  |  | 6,763           |  |  | -                 |   |  | -        |  |  | -                |   |  | 6,764     |  
|Net income                                                                                       |  |       |  |  | -             |  |  | -          |  |  | -               |  |  | -                 |   |  | 81,286   |  |  | -                |   |  | 81,286    |  
|Net unrealized gain on available-for-sale
      securities, net of nil tax                       |  | 6(a)  |  |  | -             |  |  | -          |  |  | -               |  |  | 21,335            |   |  | -        |  |  | -                |   |  | 21,335    |  
|Foreign currency translation adjustments, net of nil tax                                         |  |       |  |  | -             |  |  | -          |  |  | -               |  |  | (10,258           | ) |  | -        |  |  | -                |   |  | (10,258   | )
|Balance as of December 31, 2010                                                                  |  |       |  |  | 152,654,148   |  |  | 123        |  |  | 946,717         |  |  | (89,531           | ) |  | 278,744  |  |  | -                |   |  | 1,136,053 |  
|Share-based compensation, net of nil tax                                                         |  |       |  |  |               |  |  |            |  |  |                 |  |  |                   |   |  |          |  |  |                  |   |  |           |  
|-Shares issued upon
      vesting of shares/RSUs granted to independent directors and executives |  | 18(a) |  |  | 1,062,220     |  |  | 1          |  |  | 21,128          |  |  | -                 |   |  | -        |  |  | -                |   |  | 21,129    |  
|-Share options granted to executives and
      employees                                         |  | 18(b) |  |  | -             |  |  | -          |  |  | 660             |  |  | -                 |   |  | -        |  |  | -                |   |  | 660       |  
|-Shares issued pursuant to
      exercise of vested options                                      |  | 18(b) |  |  | 756,791       |  |  | -          |  |  | 4,713           |  |  | -                 |   |  | -        |  |  | -                |   |  | 4,713     |  
|Capital injection from non-controlling interest shareholder                                      |  |       |  |  | -             |  |  | -          |  |  | -               |  |  | -                 |   |  | -        |  |  | 11,250           |   |  | 11,250    |  
|Net income attributable to 3SBio Inc.                                                            |  |       |  |  | -             |  |  | -          |  |  | -               |  |  | -                 |   |  | 108,573  |  |  | -                |   |  | 108,573   |  
|Net income attributable to non-controlling interest                                              |  |       |  |  | -             |  |  | -          |  |  | -               |  |  | -                 |   |  | -        |  |  | (413             | ) |  | (413      | )
|Net unrealized loss on available-for-sale
      securities, net of nil tax                       |  | 6(a)  |  |  | -             |  |  | -          |  |  | -               |  |  | (26,545           | ) |  | -        |  |  | -                |   |  | (26,545   | )
|Foreign currency translation adjustments, net of nil tax                                         |  |       |  |  | -             |  |  | -          |  |  | -               |  |  | (10,214           | ) |  | -        |  |  | -                |   |  | (10,214   | )
|Balance as of December 31, 2011                                                                  |  |       |  |  | 154,473,159   |  |  | 124        |  |  | 973,218         |  |  | (126,290          | ) |  | 387,317  |  |  | 10,837           |   |  | 1,245,206 |  
|Share-based compensation, net of nil tax                                                         |  |       |  |  |               |  |  |            |  |  |                 |  |  |                   |   |  |          |  |  |                  |   |  |           |  
|-Shares issued upon
      vesting of shares/RSUs granted to independent directors and executives |  | 18(a) |  |  | 1,062,849     |  |  | 1          |  |  | 23,231          |  |  | -                 |   |  | -        |  |  | -                |   |  | 23,232    |  
|-Share options granted to executives and
      employees                                         |  |       |  |  | -             |  |  | -          |  |  | 153             |  |  | -                 |   |  | -        |  |  | -                |   |  | 153       |  
|-Shares issued pursuant to
      exercise of vested options                                      |  | 18(b) |  |  | 99,008        |  |  | -          |  |  | 486             |  |  | -                 |   |  | -        |  |  | -                |   |  | 486       |  
|Net income attributable to 3SBio Inc.                                                            |  |       |  |  | -             |  |  | -          |  |  | -               |  |  | -                 |   |  | 102,354  |  |  | -                |   |  | 102,354   |  
|Net income attributable to non-controlling
      interest                                        |  |       |  |  | -             |  |  | -          |  |  | -               |  |  | -                 |   |  | -        |  |  | 221              |   |  | 221       |  
|Net unrealized gain on available-for-sale securities, net
      of nil tax                       |  | 6(a)  |  |  | -             |  |  | -          |  |  | -               |  |  | 8,945             |   |  | -        |  |  | -                |   |  | 8,945     |  
|Foreign currency translation adjustments,
      net of nil tax                                   |  |       |  |  | -             |  |  | -          |  |  | -               |  |  | (1,974            | ) |  | -        |  |  | -                |   |  | (1,974    | )
|Balance as of December 31, 2012                                                                  |  |       |  |  | 155,635,016   |  |  | 125        |  |  | 997,088         |  |  | (119,319          | ) |  | 489,671  |  |  | 11,058           |   |  | 1,378,623 |  
|Balance as of December 31, 2012
      (US$)                                                      |  |       |  |  |               |  |  | 20         |  |  | 160,044         |  |  | (19,152           | ) |  | 78,598   |  |  | 1,775            |   |  | 221,285   |  

The accompanying notes are an integral part of these
consolidated financial statements.

F-6

---

|3SBio Inc.                                          
|----------------------------------------------------
|Consolidated Statements of Cash Flows               
|For the years ended December 31, 2010, 2011 and 2012
|(RMB and US$ expressed in thousands)                



Year ended December 31,Note
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2012RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Cash flow from operating activitiesNet income
    
    
    
    
    81,286
    
    
    108,573
    
    
    102,354
    
    
    16,428Adjustments to reconcile net income to
      net cash provided by operating activities:Loss/(gain) on disposal of property,
      plant and equipment
    
    20
    
    
    (371
    )
    
    2,226
    
    
    268
    
    
    43Loss on deconsolidation of
      subsidiaries
    
    20
    
    
    -
    
    
    -
    
    
    7,645
    
    
    1,228Allowance for doubtful accounts
    
    
    
    
    624
    
    
    71
    
    
    103
    
    
    17Depreciation of property,
      plant and equipment
    
    8
    
    
    13,906
    
    
    20,002
    
    
    24,026
    
    
    3,856Amortization of prepaid land lease payment
    
    9
    
    
    353
    
    
    369
    
    
    550
    
    
    88Amortization of intangible
      assets
    
    11
    
    
    1,103
    
    
    2,781
    
    
    3,791
    
    
    608Amortization of deferred income
    
    12
    
    
    (374
    )
    
    (1,374
    )
    
    (1,312
    )
    
    (211
    )Amortization of deferred
      expenses
    
    
    
    
    -
    
    
    16
    
    
    350
    
    
    56Share-based compensation expenses
    
    18(c)
    
    
    24,498
    
    
    21,193
    
    
    22,844
    
    
    3,667Non-controlling interest
    
    
    
    
    -
    
    
    (413
    )
    
    221
    
    
    35Impairment of available-for-sale securities
    
    6(a)
    
    
    -
    
    
    1,334
    
    
    20,427
    
    
    3,279Foreign currency exchange
      (gain)/loss, net
    
    
    
    
    249
    
    
    (176
    )
    
    (179
    )
    
    (29
    )Deferred income tax expense/(benefit)
    
    17(a)
    
    
    1,075
    
    
    (441
    )
    
    (599
    )
    
    (96
    )Share of (gain)/loss in
      non-consolidated affiliates
    
    7
    
    
    (704
    )
    
    1,590
    
    
    655
    
    
    105Changes in operating assets and liabilities:Accounts receivable
    
    
    
    
    (23,605
    )
    
    (35,560
    )
    
    (1,280
    )
    
    (205
    )Notes receivable
    
    
    
    
    (24,381
    )
    
    8,403
    
    
    (11,774
    )
    
    (1,890
    )Inventories
    
    
    
    
    (6,312
    )
    
    (5,609
    )
    
    (7,701
    )
    
    (1,236
    )Prepaid expenses and other receivables
    
    
    
    
    (17,265
    )
    
    (5,529
    )
    
    (1,231
    )
    
    (197
    )Accounts payable
    
    
    
    
    2,294
    
    
    1,188
    
    
    (2,453
    )
    
    (394
    )Accrued expenses and other payables
    
    
    
    
    4,026
    
    
    12,072
    
    
    20,180
    
    
    3,239Income tax payable
    
    
    
    
    72
    
    
    6,908
    
    
    (5,169
    )
    
    (830
    )Long-term receivables
    
    
    
    
    659
    
    
    (513
    )
    
    756
    
    
    121Deferred income
    
    
    
    
    1,000
    
    
    -
    
    
    13,494
    
    
    2,166Net cash provided by operating
      activities
    
    
    
    
    58,133
    
    
    137,111
    
    
    185,966
    
    
    29,848Cash flow from investing activitiesPurchase of property, plant and equipment
    
    
    
    
    (40,821
    )
    
    (34,883
    )
    
    (46,102
    )
    
    (7,400
    )Proceeds from disposal of
      property, plant and equipment
    
    
    
    
    -
    
    
    14
    
    
    425
    
    
    69Purchase of available-for-sale securities
    
    
    
    
    (31,951
    )
    
    -
    
    
    -
    
    
    -Issuance of short-term loan
    
    
    
    
    (26,400
    )
    
    (2,000
    )
    
    (1,263
    )
    
    (203
    )Repayment of short-term loan
    
    
    
    
    -
    
    
    26,400
    
    
    2,000
    
    
    321Purchase of intangible assets
    
    
    
    
    (41,277
    )
    
    (8,097
    )
    
    (8,357
    )
    
    (1,341
    )Prepaid land lease payment
    
    9
    
    
    -
    
    
    (9,826
    )
    
    -
    
    
    -Purchase of time deposits
    
    
    
    
    (463,405
    )
    
    (399,201
    )
    
    (421,294
    )
    
    (67,622
    )Proceeds from maturity of time deposits
    
    
    
    
    433,451
    
    
    378,405
    
    
    499,201
    
    
    80,127Restricted cash for investment
      in a subsidiary
    
    
    
    
    (1,000
    )
    
    -
    
    
    -
    
    
    -Release of restricted cash for investment
      in subsidiary
    
    
    
    
    9,300
    
    
    1,000
    
    
    -
    
    
    -Investment in non-consolidated
      affiliates
    
    
    
    
    (3,131
    )
    
    -
    
    
    (4,911
    )
    
    (788
    )Prepayment for investment
    
    
    
    
    -
    
    
    (4,134
    )
    
    -
    
    
    -**Net cash (used
      in) provided by investing** activities
    
    
    
    
    (165,234
    )
    
    (52,322
    )
    
    19,699
    
    
    3,163Cash flow from financing activitiesGross proceeds from exercise
      of stock options
    
    
    
    
    6,763
    
    
    4,713
    
    
    486
    
    
    78Proceeds from investment by
      non-controlling interest
    
    
    -
    
    
    11,250
    
    
    -
    
    
    -Net cash provided by
      financing activities
    
    
    
    
    6, 763
    
    
    15,963
    
    
    486
    
    
    78Effect of foreign currency exchange rate
      change on cash
    
    
    
    
    (9,179
    )
    
    (8,189
    )
    
    (1,407
    )
    
    (226
    )Net (decrease)/ increase in cash and
      cash equivalents
    
    
    
    
    (109,517
    )
    
    92,563
    
    
    204,744
    
    
    32,863Cash and cash equivalents, at beginning of year
    
    
    
    
    262,767
    
    
    153,250
    
    
    245,813
    
    
    39,456Cash and cash equivalents, at end of
      year
    
    
    
    
    153,250
    
    
    245,813
    
    
    450,557
    
    
    72,319Supplemental disclosures of cash flow
      information:Cash paid during the year for:Income taxes paid
    
    
    
    
    (20,279
    )
    
    (21,264
    )
    
    (35,645
    )
    
    (5,721
    )Non-cash transactions:Acquisition of property, plant and
      equipment included in accrued expenses and other payables
    
    
    
    
    (6,923
    )
    
    (3,680
    )
    
    (4,442
    )
    
    (713
    )


The accompanying notes are an integral part of these
consolidated financial statements

F-7

---

3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012

1. Principal activities, organization and basis of
presentation

Principal activities

3SBio Inc. (the Company) and subsidiaries (collectively the
Group) are principally engaged in the research, development, manufacture and
distribution of pharmaceutical products in the Peoples Republic of China (the
PRC). The Group currently manufactures and/or distributes five types of
biopharmaceutical products, which include the following:

- EPIAO, an injectable recombinant human erythropoietin that is used to
  stimulate the production of red blood cells in patients with anemia and to
  reduce the need for blood transfusions;
- TPIAO, a recombinant human thrombopoietin indicated for the treatment of
  chemotherapy-induced thrombocytopenia;
- Two legacy products, including Intefen, a recombinant interferon alpha-2a
  product indicated for the treatment of carcinoma of the lymphatic or
  hematopoietic system and viral infectious diseases; and Inleusin, a
  recombinant human IL-2 product indicated for the treatment of renal cell
  carcinoma, metastatic melanoma, thoratic fluid build-up caused by cancer and
  tuberculosis; and
- Iron Sucrose Supplement (Iron), an intravenously administered
  prescription drug that is designed to treat anemia associated with iron
  deficiency, is indicated for patients with end-stage renal disease requiring
  iron replacement therapy.

Organization

The Company was incorporated in the Cayman Islands in August
2006 under the Cayman Islands Companies Law as an exempted company with limited
liability.

On February 7, 2007, the Companys shares were listed on the
Nasdaq Global Market following the completion of its initial public offering
(IPO). The Company does not conduct any substantive operations of its own but
conducts its primary business operations through its subsidiaries and variable
interest entity (VIE).

The Company was incorporated as part of the reorganization of
Shenyang Sunshine Pharmaceutical Company Limited (Shenyang Sunshine) and its
consolidated entities (the Reorganization) in preparation of the Companys
IPO. In connection with the Reorganization, and pursuant to a shareholders
agreement amongst the existing beneficial shareholders of Shenyang Sunshine, an
ultimate beneficial shareholder of Shenyang Sunshine established Collected Mind
Limited (Collected Mind) in July 2006 in the British Virgin Islands and held
the interest in Collected Mind on behalf of all the ultimate beneficial
shareholders of Shenyang Sunshine or their nominees, in proportion to their
respective effective share ownership in Shenyang Sunshine. Collected Mind
acquired all of the equity interest in Shenyang Sunshine in August 2006. Shortly
after this acquisition, the Company was established as the ultimate holding
company. In September 2006, in consideration of the Companys issuance of shares
to the ultimate beneficial shareholders of Collected Mind or their nominees in
proportion to each of their beneficial interest in Collected Mind, the entire
equity interest in Collected Mind was acquired by the Company. Upon completion
of the Reorganization, Collected Mind and the Company became Shenyang Sunshines
immediate and ultimate holding companies, respectively. The proportionate
ownership of the Company immediately after the Reorganization is substantially
the same.

F-8

---

3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012

Shenyang Sunshine was established in the PRC in January 1993 as
a Sino-foreign joint stock limited company. In connection with the
Reorganization, Shenyang Sunshine became a wholly foreign-owned enterprise in
the PRC.

Prior to the Reorganization, Shenyang Sunshine consolidated
Liaoning Bio-Pharmaceutical Company Limited (Liaoning Sunshine) as it held a
90% controlling interest in Liaoning Sunshine. Liaoning Sunshine is primarily
engaged in the distribution of the Groups in-licensed products, currently
comprising Iron.

In connection with the Reorganization and for purposes of
compliance with certain PRC rules and regulations related to the distribution of
pharmaceutical products, Shenyang Sunshine transferred its 90% equity interest
in Liaoning Sunshine to Mr. Dan Lou, a director of the Company, in November
2006. In January 2007, Shenyang Sunshine entered into a series of contractual
arrangements (Contractual Agreements) with Liaoning Sunshine and its
shareholder including a business cooperation agreement, equity interest
acquisition agreement, voting rights agreement and equity pledge agreement. The
principal terms of the Contractual Agreements entered into between Shenyang
Sunshine, Liaoning Sunshine (the VIE) and its shareholder are further
described below:

Business cooperation agreement

Under the business cooperation agreement between Shenyang
Sunshine and Liaoning Sunshine, as amended in December 2012, Shenyang Sunshine,
as an exclusive service provider, provides technology support services and
market development and consulting services to Liaoning Sunshine, and, as
consideration, receives 70% of Liaoning Sunshines net profit before tax as
service fees. Shenyang Sunshine may adjust the percentage of the service fee at
its sole discretion unilaterally. In addition, Liaoning Sunshine has agreed
that, without the prior written consent of a majority of the Companys
independent directors, it will not increase or decrease its registered capital,
declare dividends or make similar payments, make any investment, incur any
indebtedness, mortgage or dispose of its material assets, or consolidate or
merge with any other entity. This agreement has an initial term of 10 years,
and, thereafter, renewable at Shenyang Sunshines option. Shenyang Sunshine may
unilaterally revoke or terminate the agreement with prior notice to but not
consent of Liaoning Sunshine and Liaoning Sunshine may not revoke or terminate
the agreement.

Equity interest acquisition agreement

Shenyang Sunshine and Mr. Dan Lou entered into a purchase
agreement for the acquisition of equity interest in Liaoning Sunshine in
December 2006, as supplemented in January 2009 and amended in December 2012
respectively. Pursuant to this agreement, Mr. Dan Lou granted Shenyang Sunshine
an irrevocable and exclusive right to purchase, to the extent permissible under
PRC law, the equity interest in Liaoning Sunshine for a purchase price of
RMB13.5 million, immediately after Shenyang Sunshine obtains the requisite PRC
government approval(s). The purchase price of RMB13.5 million was prepaid by
Shenyang Sunshine to Mr. Dan Lou shortly after the signing of this agreement in
December 2006. In addition, under this agreement, Shenyang Sunshine may appoint
the president, chief financial officer and other senior management of Liaoning
Sunshine; and may unilaterally adjust the service fees charged under the
business cooperation agreement. Shenyang Sunshine commits to provide financial
support to Liaoning Sunshine including but not limit to absorbing its operating
losses, which financial support Shenyang Sunshine may not require Liaoning
Sunshine to repay. This agreement remains in effect until all of the equity
interest in Liaoning Sunshine is acquired by Shenyang Sunshine. Shenyang
Sunshine may unilaterally revoke or terminate the agreement with prior notice to
but not consent of Mr. Dan Lou and Mr. Dan Lou may not revoke or terminate the agreement. Liaoning Sunshine must
obtain Shenyang Sunshines approval prior to executing any contracts over
RMB100,000 except in the ordinary course of business.

F-9

---

3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012

Voting rights agreement

Shenyang Sunshine and Mr. Dan Lou entered into a voting rights
agreement in December 2006, which was amended in December 2012. Pursuant to this
agreement, Mr. Dan Lou grants to Shenyang Sunshine a power of attorney that
appoints Shenyang Sunshine as his legal representative with full authority to
vote on all matters concerning Liaoning Sunshine; and to exercise all
shareholder rights, with respect to all the equity interests of Liaoning
Sunshine owned by him, with such grant to be in effect henceforth for all the
periods where Mr. Dan Lou is a shareholder of Liaoning Sunshine. Shenyang
Sunshine may unilaterally revoke or terminate the agreement with prior notice to
but not consent of Mr. Dan Lou and Mr. Dan Lou may not revoke or terminate the
agreement.

Equity pledge agreement

Shenyang Sunshine and Mr. Dan Lou entered into an equity pledge
agreement in January 2007, which was amended in December 2012. Pursuant to the
equity pledge agreement between Shenyang Sunshine and Mr. Dan Lou, Mr. Dan Lou
pledged all of his equity interest in Liaoning Sunshine to Shenyang Sunshine to
guarantee his obligations under the equity interest acquisition agreement and
the voting rights agreement. Shenyang Sunshine is entitled to collect all
dividends and other distributions if and when declared and paid by Liaoning
Sunshine, during the term of this agreement. The equity pledge agreement remains
in effect until Mr. Dan Lou fulfills all of his respective obligations under the
equity interest acquisition agreement and the voting rights agreement. Shenyang
Sunshine may unilaterally revoke or terminate the agreement with prior notice to
but not consent of Mr. Dan Lou and Mr. Dan Lou may not revoke or terminate the
agreement.

As a result of these Contractual Agreements, the Company
consolidates Liaoning Sunshine in accordance with Securities and Exchange
Commission (SEC) Rule SX-3A-02 and Accounting Standards Codification (ASC)
subtopic 810-10 Consolidation: Overall, because Shenyang Sunshine (the
Primary Beneficiary) has the power to direct the activities that most
significantly impact the economic performance of Liaoning Sunshine and is
obligated to absorb substantially all of the expected losses of the VIE.

However, uncertainties in the PRC legal system could cause the
Groups current ownership structure to be found in violation of future PRC laws
or regulations and could limit the Companys ability, through Shenyang Sunshine,
the Primary Beneficiary, to enforce its rights under these Contractual
Agreements. Furthermore, the shareholder of the VIE may have interests that are
different than those of the Company, which could potentially increase the risk
that they would seek to act contrary to the terms of the Contractual Agreements.
In such case, the Company may not be able to operate or control the VIE, or do
so to the extent the business requires, which may result in deconsolidation of
the VIE and its subsidiary.

The following table sets forth the assets and liabilities of
the VIE and its subsidiary included in the Companys consolidated balance
sheets:

F-10

---

3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012

|                    |  | December 31, | 
|------------------- |  | ------------ | 
|                    |  | 2011         | 
|                    |  | RMB000      | 
|Current assets      |  | 21,465       | 
|Non-current assets  |  | 25,364       | 
|Total assets        |  | 46,829       | 
|                    |  |              | 
|Current liabilities |  | 2,457        | 
|Total liabilities   |  | 2,457        | 

The financial performance and cash flows of the VIE and its
subsidiary is as follows:

Year ended December 31,2010
    
    
    2011
    
    
    2012
    
    
    2012RMB000
    
    
    RMB000
    
    
    RMB000
    
    
    US$000Net revenues
    
    23,169
    
    
    31,374
    
    
    42,714
    
    
    6,856Net income /(loss)
    
    (1,864
    )
    
    2,344
    
    
    (6,608
    )
    
    (1,061
    )Net cash used in operating activities
    
    (5,409
    )
    
    (3,540
    )
    
    (6,181
    )
    
    (992
    )Net cash provided by/(used in) investing
      activities
    
    5,424
    
    
    (16,424
    )
    
    (53,811
    )
    
    (8,637
    )Net cash provided by financing activities
    
    -
    
    
    -
    
    
    -
    
    
    -


As of December 31, 2012, there was no pledge or
collateralization of the VIEs assets and the Primary Beneficiary has not
provided any financial support that it was not previously contractually required
to. Creditors of the VIE and its subsidiary have no recourse to the general
credit of Shenyang Sunshine or the Company. The amount of the net assets of the
VIE, which are restricted under PRC laws and regulations, was RMB93,550,000
(US$15,020,000) as of December 31, 2012.

China Sansheng Medical Limited (HK Sunshine) was established
in Hong Kong in November 2009. HK Sunshine was established as a wholly-owned
subsidiary of Collected Mind and engages in merger and acquisition efforts, as
well as import and export transactions. As of December 31, 2012, HK Sunshine has
not had any significant business activities.

Liaoning Sunshine Technology & Development Co., Ltd.
(Sunshine Tech) was established as a wholly-owned subsidiary of Liaoning
Sunshine in December 2009 and engages in medical technology development,
transfer of technology and technical consulting activities.

Pursuant to the strategic alliance entered between the Group
and Ascentage Pharma Group Corporation, Ltd. (APGC) in February 2010, the
Group acquired a 40% equity interest in both APGC and Ascentage Shanghai
Pharmaceutical Co., Ltd. (Ascentage SH, a PRC domestic company under common
control with APGC), in December 2010 and June 2010, respectively. APGC and
Ascentage SH engage in research and development (R&D) activities and hold
and maintain certain pharmaceutical products intellectual property (IP)
rights. Refer to Note 7 and Note 16(b) for details of this arrangement.

On November 4, 2010, the Group entered into an assets
acquisition agreement with EnzymeRX LLC (EnzymeRX) to purchase certain R&D
related assets. Related to the assets acquisition arrangement, the Group formed 3SBio, LLC, a
limited liability company in Delaware, USA, on November 30, 2010. Two LLC series
under 3SBio, LLC, 3SBio IP Assets Series (IP Series) and 3SBio US Assets
Series (Assets Series), were established to hold the assets acquired from
EnzymeRX. Each assets series is a segregated assets series with liabilities
insulation between the distinct series, as provided under the Delaware Limited
Liability Company Act. The members of IP Series and Assets Series are Shenyang
Sunshine and the Company, respectively. IP Series was dissolved in July 2012. As
of December 31, 2012, Assets Series has not been involved in any business
activities.

F-11

---

3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012

In December 2010, Jiangsu Sunshine Pharmaceutical Technology
Company Limited (Jiangsu Sunshine) was established as a wholly-owned
subsidiary of the Company in the PRC, with paid-in capital of RMB30,000,000.
Jiangsu Sunshine is engaged in seeking medical technology development and other
R&D opportunities in the southern part of the PRC. As of December 31, 2012,
Jiangsu Sunshine has not had any significant business activities.

In December 2010, Taizhou Huan Sheng Investment Management
Company Limited (Taizhou Huan Sheng) was established as a wholly-owned
subsidiary of the Company in the PRC, with paid-in capital of RMB1,000,000.
Taizhou Huan Sheng was established to cooperate with other investors to invest
in local R&D projects.

In May 2011, Taizhou Huan Sheng Healthcare Industry Investment
Center, LLP (3SBio Ventures) was established in the PRC with a total
investment amount of RMB250,000,000. Shenyang Sunshine and Taizhou China
Medicine City Company (CMC) own 80% and 20% limited partner interest in 3SBio
Ventures, respectively. As of December 31, 2012, an investment of RMB56,300,000
(US$9,037,000) has been made by the two parties, of which RMB45,040,000
(US$7,229,600) was made by Shenyang Sunshine. The investment partnership is
managed by Taizhou Huan Sheng, the general partner of 3SBio Ventures. 3SBio
Ventures is engaged in seeking investments in the life sciences sector that
support the Groups strategic development. 3SBio Ventures will have an
investment horizon of eight years with an option to extend. As of December 31,
2012, 3SBio Ventures has not had any significant business activities.

In February 2012, the Company entered into a collaboration
agreement with DaVita Inc. (NYSE: DVA, "DaVita"), a leading provider of kidney
care services for those diagnosed with chronic kidney disease, to provide kidney
care services in Jilin and Liaoning, two provinces in north eastern China. The
total committed investment to be made is US$20,000,000 with DaVita and the
Company contributing 70% and 30%, respectively. In June 2012, Sunshine Tech
formed a joint venture, Davita-3SBio Healthcare Management (Liaoning) Co., Ltd.
(JV ManageCo) in Benxi with DaVita China PTE. LTD (DaVita China), a
corporation organized under the laws of the Republic of Singapore, a
wholly-owned subsidiary of DaVita, to provide dialysis services in Jilin and
Liaoning province. DaVita China and Sunshine Tech hold 70% and 30% equity
interest in the joint venture, respectively. As of December 31, 2012, an
investment of RMB11.2 million (US$1.8 million) has been made by the two parties,
of which RMB3.4 million (US$0.5 million) was made by Sunshine Tech. Pursuant to
the collaboration agreement, in August 2012, the Group transferred the control
of the clinical centers, each a separate PRC legal entity, owned by Sunshine
Tech (collectively Clinical Centers), to JV ManageCo and as a result, the
Group deconsolidated the assets and liabilities of the Clinical Centers. Refer
to note 16(d).

Basis of presentation

F-12

---

3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012

The accompanying consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles (U.S.
GAAP).

2. Summary of significant accounting policies and practices

Principles of consolidation

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

Currency translation for financial statement presentation

Solely for the convenience of the readers, certain 2012 RMB
amounts included in the accompanying consolidated financial statements have been
translated into U.S. dollars at the rate of US$1.00 = RMB6.2301, being the noon
buying rate for U.S. dollars in effect on December 31, 2012 for cable transfers
in RMB per U.S. dollar as certified for custom purposes by the Federal Reserve
Bank of New York. No representation is made that the RMB amounts could have
been, or could be, converted into U.S. dollars at that rate or at any other rate
on December 31, 2012, or on any other date.

Foreign currency transactions

The reporting currency of the Group is Renminbi (RMB).The
functional currency of the Companys PRC-based subsidiaries and consolidated VIE
is RMB, whereas the functional currency of the Company and its non-PRC-based
subsidiaries is the U.S. dollar (US$).

Transactions of the PRC-based subsidiaries and VIE denominated
in currencies other than RMB are re-measured into RMB at the exchange rates
quoted by the Peoples Bank of China (the PBOC) prevailing at the dates of the
transactions. Monetary assets and liabilities denominated in foreign currencies
are re-measured into RMB using the applicable exchange rates quoted by the PBOC
at the balance sheet dates. The resulting exchange differences are recorded in
other income, net in the consolidated statements of income.

Assets and liabilities of the Company and non-PRC-based
subsidiaries are translated into RMB using the exchange rate on the balance
sheet dates. Income and expenses are translated at average exchange rates
prevailing during the year. The gains and losses resulting from translation of
financial statements of the Company and the Companys non-PRC-based subsidiaries
are recorded as foreign currency translation adjustments, a separate component
of accumulated other comprehensive loss within shareholders equity.

Comparative figures

Certain items in prior years consolidated financial statements
have been reclassified to conform to the current years presentation.

Use of estimates

The preparation of the consolidated financial statements in
accordance with U.S. GAAP requires management of the Company to make a number of
estimates and assumptions relating to the reported amount of assets and
liabilities and the disclosure of contingent assets and liabilities on the date
of the consolidated financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual financial results could differ significantly from those estimates. On an ongoing
basis, management reviews its estimates and assumptions including, but not
limited to, those related to the recoverability of the carrying amount and
estimated useful lives of long-lived assets; valuation and other-than-temporary
impairment of investments; realizability of inventories; allowance for doubtful
accounts receivables; provision for sales rebates; valuation allowance for
deferred tax assets; and share-based compensation. Changes in facts and
circumstances may result in revised estimates.

F-13

---

3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012

Concentrations of risks

Concentration of credit risk

Cash and cash equivalents, restricted cash, time deposits,
accounts receivable and notes receivable are potentially subject to
concentration of credit risk. Cash and cash equivalents, restricted cash and
time deposits are placed with financial institutions that management believes
are of high credit quality. Accounts receivable are derived from revenue earned
from customers located primarily in the PRC. The Company maintains an allowance
for doubtful accounts based upon historical experience and the age of
receivables, as well as taking into consideration economic and regulatory
conditions. Determining appropriate allowances for these losses is an inherently
uncertain process, and ultimate losses may vary from the current estimates,
resulting in a material impact to future statements of income or cash flows. Due
to the relatively small dollar amount of individual accounts receivable, the
Company generally does not require collateral on these balances. The allowance
for doubtful accounts was RMB2,542,000 and RMB2,208,000 (US$355,000) as of
December 31, 2011 and 2012, respectively.

As of December 31, 2012 and 2011, no single customer accounted
for more than 10% of outstanding net accounts receivable.

Currency convertibility risk

RMB is not a fully convertible currency. The PRC State
Administration for Foreign Exchange, under the authority of the Peoples Bank of
China (PBOC), controls the conversion of RMB into foreign currencies. The
value of the RMB is subject to changes in central government policies and to
international economic and political developments affecting supply and demand in
the PRC foreign exchange trading system market. All foreign exchange
transactions involving RMB must take place either through the PBOC or other
institutions authorized to buy and sell foreign exchange. Commencing from July
21, 2005, the PRC government moved the RMB into a managed floating exchange rate
regime based on market supply and demand with reference to a basket of
currencies. The exchange rate has continued to fluctuate since that time.

Business and economic risks

The Company participates in a fast-growing and highly
competitive industry. The Company believes that changes in any of the following
areas could have a material adverse effect on the Companys future financial
position, results of operations or cash flows: government regulations and
policies; product pricing pressures; government sponsored insurance programs and
government medical procurement; competition; demand for our major products;
marketing and distribution network; product development; operation enhancement;
and outside collaboration. There are other risks and uncertainties that could
materiality affect the Company.

Sales to the Companys top five distributors accounted for 30%
to 40% of total net revenue for the years ended December 31, 2010, 2011 and
2012. The following is sales to a customer that individually comprised 10% or
more of net revenues:

F-14

---

3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012

|                                            |  | Year ended December 31, | 
|------------------------------------------- |  | ----------------------- | 
|                                            |  | 2010                    | 
|                                            |  | RMB000                 | 
|Beijing Tianxingpuxin Bio-Medical Co., Ltd. |  | 46,762                  | 

Purchases from the Companys top five suppliers accounted for
30% to 40% of total inventories purchased for the years ended December 31, 2010,
2011 and 2012. The following are inventory purchases from suppliers that
individually comprised 10% or more of total inventories purchased in any of the
years ended December 31, 2010, 2011 and 2012:

Year ended December 31,2010
    
    
    2011
    
    
    2012
    
    
    2012RMB000
    
    
    %
    
    
    RMB000
    
    
    %
    
    
    RMB000
    
    
    %
    
    
    US$000
    
    
    %Chengdu Tiantaishan Pharmaceutial Co., Ltd.
    
    1,622
    
    
    7%
    
    
    3,553
    
    
    11%
    
    
    3,984
    
    
    10%
    
    
    639
    
    
    10%Nanjing Lifenergy R&D Co., Ltd.
    
    2,426
    
    
    10%
    
    
    2,156
    
    
    6%
    
    
    1,686
    
    
    4%
    
    
    271
    
    
    4%


The Companys operations could be adversely affected by
significant political, economic and social uncertainties in the PRC.

Foreign currency exchange rate risk

The Companys exposure to foreign currency exchange rate risk
primarily relates to cash and cash equivalents, time deposits and accounts
receivable denominated in US$, Australian Dollar (AUD) and Hong Kong Dollar
(HKD). The functional currency of the Company is US$, and the reporting currency
is RMB. Since July 21, 2005, the RMB has been permitted to fluctuate within a
narrow and managed band against a basket of certain foreign currencies. The
depreciation of the US$ against RMB was approximately 1.0% in 2012. Any
significant revaluation of RMB may materially and adversely affect the cash
flows, revenues, earnings and financial position, and the value of, and any
dividends payable on, the American Depository Shares ("ADSs") in U.S. dollars.
As a result, an appreciation of RMB against the U.S. dollar would result in
foreign currency translation losses when translating the net assets of the
Company from the U.S. dollar into RMB.

Fair value measurements of financial instruments

The carrying amounts of the Groups cash and cash equivalents,
restricted cash, time deposits, accounts receivable, notes receivable and
accounts payable approximate their fair value as of the balance sheet dates
because of their short maturity. Fair values for investment securities that are
classified as available-for-sale securities are determined by using quoted
market prices and valuation methodologies, primarily discounted cash flow
analysis.

Cash and cash equivalents, time deposits and restricted cash

Cash and cash equivalents consist of cash on hand,
interest-bearing deposits placed with banks and short-term, highly liquid
investments with original maturities of three months or less. Interest-bearing
time deposits with financial institutions with original maturities in excess of three months are excluded from cash and cash
equivalents and classified as time deposits. Time deposits with remaining
maturities longer than one year are classified as non-current assets. The
interest rates of the time deposits ranged from 0.77% to 5.1% per annum with a
weighted-average original maturity of 1.2 years.

F-15

---

3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012

Restricted cash as of December 31, 2012 comprises RMB668,000
(US$107,000) housing maintenance enhancement fund. The maintenance enhancement
fund can only be used upon employees application and the related government
authoritys approval.

As of December 31, 2011 and 2012, the amount of cash and cash
equivalents, restricted cash and time deposits with original maturities over
three months held in financial institutions by geographic location is as
follows:

|            |  | December 31, | 
|----------- |  | ------------ | 
|            |  | 2011         | 
|            |  | RMB000      | 
|            |  |              | 
|- the PRC   |  | 675,083      | 
|- Hong Kong |  | 90,596       | 
|            |  |              | 
|            |  | 765,679      | 

As of December 31, 2011 and 2012, the Groups cash and cash
equivalents, restricted cash and time deposits with original maturities over
three months denominated in U.S. dollars, Renminbi and other foreign currencies
are as follows:

|             |  | December 31, | 
|------------ |  | ------------ | 
|             |  | 2011         | 
|             |  | 000         | 
|U.S. dollars |  | 24,516       | 
|Renminbi     |  | 598,810      | 
|HKD          |  | 7,752        | 
|AUD          |  | 974          | 

The group holds its cash, cash equivalents, restricted cash and
time deposits in major financial institutions that management believes are of
high credit quality.

Accounts receivable and notes receivable

Accounts receivable are stated at the invoiced amount after
deduction of trade discounts and allowances, if any, and is non-interest
bearing. The allowance for doubtful accounts is the Groups best estimate of the
amount of credit losses in the Groups existing accounts receivable. The Group
determines the allowance based on historical write-off experience, customer
specific facts and economic conditions.

Outstanding account balances are reviewed individually for
collectability. Account balances are written off after all means of collection
have been exhausted and the potential for recovery is considered remote.
Shenyang Sunshine and its consolidated entities are required to comply with
local tax requirements on the write-offs of doubtful accounts, which allow for
such write-offs only when sufficient evidence is available to prove the debtors inability to make payments. The Group does
not have any off-balance-sheet credit exposure related to its customers.

F-16

---

3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012

No notes receivable provision is considered necessary as the
notes are issued by reputable commercial banks in the PRC, where risk of
non-payment by customers rests with the banks.

Inventories

Inventories are stated at the lower of cost or market. Cost is
determined using the weighted average cost method. Cost of work-in-progress and
finished goods comprise of direct materials, direct production cost and an
allocated proportion of production overheads based on normal operating capacity.
Adjustments are made to write down excess or obsolete inventories to their
estimated realizable values.

Available-for-sale securities

Available-for-sale securities consist of debt and equity
marketable securities and a convertible promissory note. Available-for-sale
securities considered available for use in current operations are classified as
current assets.

Available-for-sale securities are recorded at fair value.
Unrealized holding gains and losses, net of the related tax effect, if any, are
reported as a separate component of accumulated other comprehensive loss until
realized. Realized gains and losses from the sale or disposal of
available-for-sale securities are determined on a specific-identification basis.

A decline in the market value of any available-for-sale
security that is deemed to be other-than-temporary results in an impairment to
the carrying amount to fair value. The impairment is charged to earnings and a
new cost basis for the security is established. To determine whether impairment
is other-than-temporary, the Group considers whether it has the ability and
intent to hold the investment until a market price recovery and considers
whether 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 available-for-sale securities is
recognized in other income when earned.

Investments in non-consolidated affiliates

Pursuant to ASC 323-10: Investments  Equity Method and
Joint Ventures  Overall, investments in companies in which the Group can
exercise significant influence but does not own a majority equity interest or
control are accounted for using the equity method of accounting. Significant
influence is generally presumed to exist when the Group owns between 20% and 50%
of the investee.

Under the equity method of accounting, only the Groups
investment in and amounts due to and from the equity investee are included in
the consolidated balance sheets. The Group initially records its investment at
cost and adjusts the carrying amount of the investment to recognize the Groups
proportionate share of each equity investees net income or loss in the
consolidated statements of income after the date of acquisition. The difference
between the cost of the equity investee and the amount of the underlying equity
in the net assets of the equity investee is recognized as equity method goodwill
included in the equity method investment on the consolidated balance sheets.

F-17

---

3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012

Impairment of investments in non-consolidated
affiliates

For investments accounted for using the equity method of
accounting, the Group determines impairment by assessing whether an
other-than-temporary decline in value of the investment has been sustained. If
it has been determined that an investment has sustained an other-than-temporary
decline in its value, the investment is written down to its fair value by a
charge to earnings. This evaluation is dependent on the specific facts and
circumstances. The Group evaluates information such as the investees budgets,
business plans and financial statements in addition to quoted market prices, if
any, in determining whether an other-than-temporary decline in value exists.
Factors indicative of an other-than-temporary decline include recurring
operating losses, credit defaults and subsequent rounds of financing at an
amount below the cost basis of the Groups investment. This list is not
all-inclusive and the Group weighs all known quantitative and qualitative
factors.

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
    10 - 20 yearsPlant and machinery
    5 - 10 yearsMotor vehicles
    4 - 5 yearsFurniture and fixtures
    3 - 10 yearsComputer equipment
    3 years


The Company constructs certain of its fixed assets. All direct
and indirect costs that are related to the construction of fixed assets and
incurred before the assets are ready for their intended use are capitalized as
construction-in-progress. No depreciation is provided in respect of
construction-in-progress. Construction in progress is transferred to specific
fixed asset items and depreciation of these assets commences when they are ready
for their intended use.

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.

Expenditures for maintenance and repairs are expensed as
incurred.

The gain or loss on the disposal of property, plant and
equipment is the difference between the net sales proceeds and the carrying
amount of the relevant assets and is recognized in the consolidated statements
of income as other income/(loss).

Intangible assets

Intangible assets mainly include an exclusive distribution
right of Iron in the PRC, a patent acquired from an unrelated third party, as
well as acquired Pegsiticase related global IP rights and related in-progress
R&D (IPR&D), which were determined to have alternative future use.
Intangible assets other than IPR&D held by the Group have finite lives, are
amortized over their estimated useful lives, ranging from 3.7 to 20 years
(weighted average life of 7.8 years) and are carried at cost less accumulated
amortization with no residual value. Amortization expense is recognized based on
the straight-line method over the estimated useful lives. IPR&D is identified
as having an indefinite useful life, which is not subject to amortization.

F-18

---

3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012

If intangible assets with indefinite use lives are subsequently
determined to have finite useful lives, amortization will be provided
prospectively over their estimated remaining useful lives and will be accounted
for in the same manner as other intangible assets that are subject to
amortization.

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, in managements judgement, 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.

Intangible assets with indefinite useful lives are tested for
impairment annually or more frequently if events or changes in circumstances
indicate that they might be impaired.

Prepaid land lease payment

Prepaid land lease payment represents the cost of land use
rights in the PRC. Land lease payment is carried at cost and recognized as
expense on a straight-line basis over the respective periods of the rights of 30
to 50 years.

The current portion of prepaid land lease payment 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.

Revenue recognition

Sales of pharmaceutical products represent the invoiced value
of goods, net of value added taxes (VAT), sales returns, trade discounts and
allowances. In accordance with ASC 605-10: Revenue recognition  Overall,
the Group recognizes revenue when products are delivered and the customer takes
ownership and assumes risk of loss, collection of the relevant receivable is
reasonably assured, persuasive evidence of an arrangement exists and the sales
price is fixed or determinable. Shipping and handling costs paid by the Group
and recovered from customers are included in revenue and sales, marketing and
distribution expenses.

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

Government grants

Government grants received from PRC government agencies are
recognized as deferred grant income and recognized in the consolidated
statements of income as and when they are incurred for the specific research and development projects
or general operation purpose for which these grants are received.

F-19

---

3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012

Government grants relating to the domestic 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.

Retirement and other post-retirement benefits

Contributions to retirement schemes (which are defined
contribution plans) are charged to the consolidated statements of income as and
when the related employee service is provided.

Pursuant to the relevant PRC regulations, the Companys
consolidated PRC subsidiaries and VIE are 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 RMB3,367,000, RMB5,046,000 and RMB6,228,000 (US$1,000,000)
for the years ended December 31, 2010, 2011 and 2012, respectively, was charged
to expense in the consolidated statements of income. The Group has no other
obligation to make payments in respect of retirement benefits of the
employees.

Income taxes

Income taxes are accounted for under the liability method.
Under this 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, as well as operating loss and tax credit carry forwards.
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 in the period that
includes the enactment date.

The Group applies ASC 740-10: Income Taxes: Overall
(ASC 740-10) to account for uncertainty in income taxes. ASC 740-10 requires
that an entity recognizes in the consolidated financial statements the impact of
a tax position, if that position is not more likely than not to be 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 on a cumulative probability basis. 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. As of and for the years
ended December 31, 2010, 2011 and 2012, no unrecognized tax benefits or interest
and penalties associated with uncertainty in income taxes have been recognized.

Advertising costs

Advertising costs are expensed as incurred. Advertising costs
included in sales, marketing and distribution expenses were RMB1,204,000,
RMB858,000 and RMB2,549,000 (US$409,000) for the years ended December 31,
2010, 2011 and 2012, respectively.

F-20

---

3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012

R&D costs

R&D costs are expensed as incurred. R&D costs consist
primarily of the remuneration of R&D staff, depreciation, material, clinical
trial costs as well as amortization of acquired technology and know-how used in
R&D with alternative future uses. R&D costs also include costs
associated with collaborative R&D and in-licensing arrangements, including
upfront fees paid to collaboration partners in connection with technologies
which have not reached technological feasibility and did not have an alternative
future use. Reimbursement of R&D costs for arrangements with collaboration
partners is recognized when the obligations are incurred.

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.

Earnings per share (EPS)

In accordance with ASC 260-10: Earnings Per Share:
Overall, basic net income attributable to 3SBio Inc. per share is computed
by dividing net income attributable to 3SBio Inc. by the weighted average number
of ordinary shares outstanding. Diluted net income attributable to 3SBio Inc.
per share is calculated by dividing net income attributable to 3SBio Inc. by the
weighted average number of ordinary and dilutive potential ordinary shares
outstanding during the period. Potential ordinary shares consist of the
incremental ordinary shares issuable upon the exercise of stock options, as well
as vesting of nonvested shares and restricted share units (RSUs) that will be
settled in the Companys stock. The dilutive effect of outstanding stock
options, nonvested shares and RSUs are reflected in diluted earnings
attributable to 3SBio Inc. per share by application of the treasury stock
method. The calculation of diluted net income attributable to 3SBio Inc. per
share excludes all anti-dilutive shares.

The following table sets forth the computation of basic and
diluted net income attributable to 3SBio Inc. per share:

|                                                                                       |  | Year ended December 31, | 
|-------------------------------------------------------------------------------------- |  | ----------------------- | 
|                                                                                       |  | 2010                    | 
|                                                                                       |  | RMB000                 | 
|Numerator for basic and diluted net income
      attributable to 3SBio Inc. per share: |  |                         | 
|- Net income attributable to 3SBio Inc.                                                |  | 81,286                  | 
|Denominator:                                                                           |  |                         | 
|- Basic weighted average shares                                                        |  | 151,241,036             | 
|- Effect of dilutive potential ordinary
      shares                                   |  |                         | 
|RSUs                                                                                   |  | 1,183,002               | 
|Nonvested shares                                                                       |  | 543,719                 | 
|Options                                                                                |  | 1,164,011               | 
|                                                                                       |  |                         | 
|                                                                                       |  | 2,890,732               | 
|Diluted weighted average shares                                                        |  | 154,131,768             | 
|Basic net income attributable to 3SBio Inc. per share                                  |  | 0.54                    | 
|                                                                                       |  |                         | 
|Diluted net income attributable to 3SBio Inc. per share                                |  | 0.53                    | 

F-21

---

3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012

Comprehensive Income

Comprehensive income is defined to include all changes in
equity except those resulting from investment by owners and distributions to
owners. The Groups components of comprehensive income during the years ended
December 31, 2010, 2011 and 2012 were net unrealized gains and losses on
available-for-sale securities and foreign currency translation adjustments.

Share-based payments

The Group adopts ASC 718-10: Compensation  Stock
Compensation: Overall (ASC 718-10) for all share-based payments made by
the Group. ASC 718-10 requires that all compensation cost related to employee
share options or similar equity instruments be measured at grant date fair
values of the awards. The Group recognizes compensation cost on a straight-line
basis over the requisite service period, which is generally the same as the
vesting period, for all awards with graded vesting. The Group adopts a lattice
option-pricing model to determine the fair value of share options granted and
forfeitures are estimated based on historical experience and are periodically
reviewed.

The Group accounts for equity instruments issued to each member
of the board of directors who is not an employee of the Group in accordance with
the provisions of ASC 718-10. As those non-employee directors were all appointed
to a board position that will be filled by shareholder election when the
existing term expires and the awards granted to these directors are only for
their services as directors, awards granted to these non-employee directors are
treated in the same way as share-based payment to employees.

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 ASC 280-10: Segment Reporting: Overall,
which is the research, development, manufacture and distribution of
pharmaceutical products in the PRC.

F-22

---

3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012

Recently issued accounting standards

In July 2012, the Financial Accounting Standards Board (FASB)
issued ASU 2012-02,

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

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

3. Accounts receivable, net

Accounts receivable, net, consists of the following:

|                                      |  | December 31, |  
|------------------------------------- |  | ------------ | -
|                                      |  | 2011         |  
|                                      |  | RMB000      |  
|                                      |  |              |  
|Accounts receivable                   |  | 116,491      |  
|                                      |  |              |  
|Less: Allowance for doubtful accounts |  | (2,542       | )
|Total accounts receivable, net        |  | 113,949      |  

An analysis of the allowance for doubtful accounts is as
follows:

F-23

---

3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012

|                                  | December 31, |        
|--------------------------------- | ------------ | -------
|                                  |              | 2010   
|                                  |              | RMB000
|                                  |              |        
|Balance at beginning of year      |              | 2,915  
|Charged to income                 |              | -      
|Credited to income                |              | (234   
|Written off against the allowance |              | (18    
|                                  |              |        
|Balance at end of year            |              | 2,663  

The Groups accounts receivable balances are all related to
third-party customers. The Group has a credit policy in place and the exposure
to credit risk is monitored on an ongoing basis. The Group does not obtain
collateral from customers.

4. Inventories

Inventories consist of the following:

|                                    |  | December 31, | 
|----------------------------------- |  | ------------ | 
|                                    |  | 2011         | 
|                                    |  | RMB000      | 
|                                    |  |              | 
|Raw materials                       |  | 3,391        | 
|Work-in-progress                    |  | 15,223       | 
|Finished goods                      |  | 6,682        | 
|Consumables and packaging materials |  | 2,308        | 
|                                    |  |              | 
|Total inventories                   |  | 27,604       | 

5. Prepaid expenses and other receivables

Prepaid expenses and other receivables consist of the
following:

|                                                   |  | December 31, | 
|-------------------------------------------------- |  | ------------ | 
|                                                   |  | 2011         | 
|                                                   |  | RMB000      | 
|                                                   |  |              | 
|Prepayments and other deposits                     |  | 7,444        | 
|Loan receivable                                    |  | 2,000        | 
|Other receivables                                  |  | 17,228       | 
|                                                   |  |              | 
|Total prepaid expenses and other
      receivables |  | 26,672       | 

Prepayments and other deposits as of December 31, 2011 and 2012
include RMB 550,000 and RMB550,000 (US$88,000), respectively, of the current
portion of prepaid land lease payment (Note 9), and RMB3,245,000 and
RMB5,951,000 (US$955,000) of advances to employees, respectively. Prepayments
and other deposits as of December

F-24

---

3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012

31, 2012 include RMB6,000,000 (US$963,000) prepayment to
Shandong Qidu Pharmaceutical Co., Ltd. to acquire the manufacturing technology,
trademark and exclusive distribution rights of Metadoxine.

Loan receivable as of December 31, 2011 was a short-term loan
of RMB2,000,000 made to a third party. It was an uncollateralized three-month
loan with interest rate mirrored to prevailing market rate. The loan was fully
repaid in March 2012.

Other receivables mainly include interest receivable and other
miscellaneous receivables.

6. Available-for-sale securities

At December 31, 2011 and 2012, the fair values of
available-for-sale securities held by the Group are as follows:

December 31, 2011Foreigncurrency
    
    
    Grosstranslation
    
    
    unrealized
    
    
    ImpairmentCost
    
    
    adjustment
    
    
    gain/(loss)
    
    
    loss
    
    
    Fair valueRMB000
    
    
    RMB000
    
    
    RMB000
    
    
    RMB000
    
    
    RMB000Current portion:Equity securities
    
    30,192
    
    
    (1,869
    )
    
    (5,493
    )
    
    -
    
    
    22,830Non-current portion:Convertible promissory note
    
    1,334
    
    
    -
    
    
    -
    
    
    (1,334
    )
    
    -Corporate debt securities
    
    11,360
    
    
    (1,395
    )
    
    883
    
    
    -
    
    
    10,84812,694
    
    
    (1,395
    )
    
    883
    
    
    (1,334
    )
    
    10,848Total available-for-sale securities
    
    42,886
    
    
    (3,264
    )
    
    (4,610
    )
    
    (1,334
    )
    
    33,678




December 31, 2012Foreigncurrency
    
    
    Grosstranslation
    
    
    unrealized
    
    
    Impairment
    
    
    Fair
    
    
    FairCost
    
    
    adjustment
    
    
    gain
    
    
    loss
    
    
    value
    
    
    valueRMB000
    
    
    RMB000
    
    
    RMB000
    
    
    RMB000
    
    
    RMB000
    
    
    US$000Current portion:Equity securities
    
    30,192
    
    
    (2,156
    )
    
    2,967
    
    
    (20,427
    )
    
    10,576
    
    
    1,698Non-current portion:Corporate debt securities
    
    11,360
    
    
    (1,496
    )
    
    1,368
    
    
    -
    
    
    11,232
    
    
    1,803Total available-for-sale securities
    
    41,552
    
    
    (3,652
    )
    
    4,335
    
    
    (20,427
    )
    
    21,808
    
    
    3,501 F-25   3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012 The fair values of equity securities and corporate debt
securities are based on quoted market prices at each reporting date. The fair
value of the convertible promissory note was determined using the income
approach. The corporate debt securities held by the Group as of December
31, 2012 are interest-bearing at 4.625 - 7.5% per annum and are publicly traded
outside the PRC. On August 23, 2010, the Group purchased a US$4,500,000
(RMB29,700,000) convertible debenture from Isotechnika Pharma Inc.
(Isotechnika) with interest rate of 7% per annum. The convertible debenture
carries a three-year maturity from issuance and the Group can convert the
debenture into Isotechnikas common shares anytime before maturity at a fixed
rate of Canadian Dollar (CAD) 0.155 per share. During the year ended December
31, 2010, the Group converted the entire debenture into 30,734,877 common shares
and recorded the converted shares as equity securities in available-for-sale
securities. The Group holds a 16.1% equity investment in Isotechnika and has
appointed one member to Isotechnikas six-member board of directors. The share price of Isotechnikas common shares decreased from
CAD0.155 as of the conversion date to CAD0.04 as of September 30, 2012. Since
the investment cost exceeded its fair value for more than 12 months as of
September 30, 2012, the Group recognised an impairment loss of US$3,279,000
(RMB20,427,000) in September 2012. The share price recovered to CAD0.055 as of
December 31, 2012, resulting in an unrealized gain of US$437,000 (RMB2,721,000)
being recognized in other comprehensive income for the year ended December 31,
2012. Refer to Note 24 for details. On November 30, 2010, the Group purchased a convertible
promissory note (the Note) with par value of US$200,000 (RMB1,334,000) and an
annual interest rate of 7.5% compounded on a quarterly basis. The Group
determined that there was other-than-temporary impairment in the Note and
recorded an impairment loss of US$200,000 (RMB1,334,000) in the year ended
December 31, 2011. Refer to Note 24 for details. (a) Impairment loss on available-for-sale securities The Group evaluates whether unrealized losses on
available-for-sale securities indicate other-than-temporary impairment. Other than the impairment loss recorded for the investment in
Isotechnika, there were no indicators of other-than-temporary impairment of the
Groups available-for-sale securities held as of December 31, 2012. An unrealized holding gain of RMB21,335,000, unrealized holding
loss of RMB26,545,000 and unrealized holding gain of RMB8,945,000 (US$1,436,000)
on available-for-sale securities was recognized in accumulated other
comprehensive income for the years ended December 31, 2010, 2011 and 2012,
respectively. Other-than-temporary impairment of available-for-sale
securities is analyzed as follows: Year ended December 31,2010
    
    
    2011
    
    
    2012
    
    
    2012RMB000
    
    
    RMB000
    
    
    RMB000
    
    
    US$000Balance at beginning of year
    
    -
    
    
    -
    
    
    1,334
    
    
    214Addition during the year
    
    -
    
    
    1,334
    
    
    20,427
    
    
    3,279Balance at end of year
    
    -
    
    
    1,334
    
    
    21,761
    
    
    3,493 F-26   3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012 (b) Maturity information of available-for-sale securities at
year-end Maturities of the Groups corporate debt securities classified
as non-current available-for-sale are as follows: Year ended December 31,2012
    
    
    2012RMB000
    
    
    US$000Due in one through five years
    
    7,514
    
    
    1,206Due after five years through ten years
    
    3,718
    
    
    597Total
    
    11,232
    
    
    1,803 7. Investment in non-consolidated affiliates Year ended December 31,Ownership
    
    
    2011
    
    
    2012
    
    
    2012Name of Company
    
    percentage
    
    
    RMB000
    
    
    RMB000
    
    
    US$000- Ascentage SH
    
    40%
    
    
    2,245
    
    
    3,159
    
    
    507- APGC
    
    40%
    
    
    -
    
    
    -
    
    
    -- JV ManageCo
    
    30%
    
    
    -
    
    
    5,135
    
    
    824Total
    
    
    
    
    2,245
    
    
    8,294
    
    
    1,331 The Group acquired a 40% equity interest in APGC and Ascentage
SH at a cost of RMB1,131,000 and RMB2,000,000 in December 2010 and June 2010,
respectively. APGC and Ascentage SH are controlled by the same group of
shareholders. APGC was incorporated in Hong Kong in June 2009, while Ascentage
SH was incorporated in the PRC in June 2009. APGC and Ascentage SH engage in
R&D activities and hold and maintain certain pharmaceutical products IP
rights. The Group invested RMB6,704,000 (US$1,076,000) to form JV ManageCo with
DaVita China in June 2012. The Group and DaVita China hold 30% and 70% equity
interest in JV ManageCo, respectively. JV ManageCo engages in providing dialysis
services in Jilin and Liaoning province. The Group accounts for their investment
in APGC, Ascentage SH and JV ManageCo under the equity method. For the year ended December 31, 2010, the Group recognized its
share of equity-method investment loss from APGC of RMB337,000, and its share of
equity-method investment gain from Ascentage SH of RMB1,041,000, respectively. For the year ended December 31, 2011, the Group recognized its
share of equity-method investment loss from APGC of RMB794,000, and its share of
equity-method investment loss from Ascentage SH of RMB796,000, respectively. For the year ended December 31, 2012, the Group recognized its
share of equity-method investment loss from APGC of nil, its share of
equity-method investment gain from F-27   3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012 Ascentage SH of RMB914,000 (US$147,000) and its share of
equity-method investment loss from JV ManageCo of RMB1,569,000 (US$252,000),
respectively. 8. Property, plant and equipment, net Property, plant and equipment consist of the following: December 31,2011
    
    
    2012
    
    
    2012RMB000
    
    
    RMB000
    
    
    US$000Buildings
    
    102,864
    
    
    111,875
    
    
    17,957Plant and machinery
    
    118,923
    
    
    124,410
    
    
    19,969Motor vehicles
    
    5,953
    
    
    4,959
    
    
    796Furniture, fixtures and computer equipment
    
    45,588
    
    
    45,529
    
    
    7,308Construction-in-progress
    
    10,919
    
    
    41,003
    
    
    6,581284,247
    
    
    327,776
    
    
    52,611Less: Accumulated depreciation
    
    (86,194
    )
    
    (103,531
    )
    
    (16,617
    )Total property, plant and equipment
    
    198,053
    
    
    224,245
    
    
    35,994 Construction-in-progress as of December 31, 2012 included
machinery and equipment not ready for intended use, renovation of old facilities
and construction of a new facility in Benxi City, Liaoning Province, the PRC. The depreciation of all types of property, plant and equipment
is calculated using the straight-line method over their respective estimated
useful life. Depreciation expense was RMB13,906,000, RMB20,002,000 and
RMB24,026,000 (US$3,856,000) for the years ended December 31, 2010, 2011 and
2012, respectively. All of the Groups buildings are located in the PRC. 9. Prepaid land lease payment Prepaid land lease payment represents the cost of land use
rights of the Group and are analyzed as follows: December 31,2011
    
    
    2012
    
    
    2012RMB000
    
    
    RMB000
    
    
    US$000Prepaid land lease payment
    
    20,419
    
    
    20,419
    
    
    3,277Less: Accumulated amortization
    
    (2,421
    )
    
    (2,971
    )
    
    (477
    )Balance as of December 31, 2012
    
    17,998
    
    
    17,448
    
    
    2,800Including:Non-current portion
    
    17,448
    
    
    16,898
    
    
    2,712Current portion
    
    550
    
    
    550
    
    
    88 F-28   3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012 The estimated amortization expense of prepaid land lease
payment for the next five years and thereafter is as follows: RMB000
    
    
    US$0002013
    
    550
    
    
    882014
    
    550
    
    
    882015
    
    550
    
    
    882016
    
    550
    
    
    882017 and thereafter
    
    15,248
    
    
    2,448Total
    
    17,448
    
    
    2,800 In 2005, the Group paid RMB9,924,000 for a land use right for a
term of 30 years in respect of land located beside the existing plant of the
Group. In 2011, the Group paid RMB9,826,000 for a land use right for a term of
50 years in respect of land located in Taizhou City, Jiangsu Province, the PRC
and the certificate has not been issued at the balance sheet date due to
administrative processing reasons. These prepayments are charged to expense on a straight line
basis over the lease term of 30 and 50 years respectively. Land lease expense
for the years ended December 31, 2010, 2011 and 2012 was RMB353,000, RMB369,000
and RMB550,000 (US$88,000), respectively. 10. Prepayment and non-current deposits Included in prepayment and non-current deposits as of December
31, 2011 and 2012 are prepayment for the acquisition of property, plant and
equipment and other deposits of RMB16,801,000 and RMB7,469,000 (US$1,199,000),
respectively, which are not expected to be utilized or recovered within one
year. 11. Intangible assets, net December 31,2011
    
    
    2012
    
    
    2012RMB000
    
    
    RMB000
    
    
    US$000Cost:Exclusive distribution right
    
    5,500
    
    
    5,500
    
    
    883China IP rights
    
    1,782
    
    
    1,782
    
    
    286U.S. IP rights
    
    4,047
    
    
    4,047
    
    
    650Patent
    
    8,097
    
    
    8,097
    
    
    1,300Others
    
    219
    
    
    219
    
    
    3519,645
    
    
    19,645
    
    
    3,154Accumulated amortization:Exclusive distribution right
    
    3,575
    
    
    4,675
    
    
    751China IP rights
    
    89
    
    
    178
    
    
    29U.S. IP rights
    
    289
    
    
    578
    
    
    93Patent
    
    1,288
    
    
    3,496
    
    
    561Others
    
    18
    
    
    33
    
    
    5(5,259
    )
    
    (8,960
    )
    
    (1,439
    )Intangible assets subject to amortization, net
    
    14,386
    
    
    10,685
    
    
    1,715IPR&D
    
    35,229
    
    
    35,229
    
    
    5,655Total intangible assets, net
    
    49,615
    
    
    45,914
    
    
    7,370 F-29   3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012 The exclusive distribution right is for distributing Iron in
the PRC. The Group purchased the 5-year right from an unrelated third party in
2008, based on which the useful life was determined. The China and U.S. IP rights and IPR&D were acquired in an
assets acquisition. The initial carrying values for these assets were determined
by allocating the total cost of the acquisition to the individual assets on a
relative fair value basis. Useful lives of the China and U.S. IP rights were
determined based on the estimated period for which the IP rights are expected to
generate future cash flows for the Group. IPR&D represents the acquisition
cost of the test results and data related to the pre-clinical and phase-I
clinical trials and were capitalized because they have alternative future uses.
IPR&D will not be subject to amortization until the R&D project is
substantially completed. The Group acquired a patent from an unrelated third party in
2011 with a period of validity of 20 years from February 1995. This is
capitalized and amortized over the remaining period of the patent. Amortization expense of RMB1,103,000, RMB2,781,000 and
RMB3,791,000 (US$608,000) for the years ended December 31, 2010, 2011 and 2012,
respectively, was included in cost of revenue. The estimated amortization expense of intangible assets for the
next five years and thereafter is as follows: RMB000
    
    
    US$0002013
    
    3,426
    
    
    5502014
    
    2,601
    
    
    4172015
    
    577
    
    
    932016
    
    393
    
    
    632017 and thereafter
    
    3,688
    
    
    592Total
    
    10,685
    
    
    1,715 12. Deferred income The Groups deferred income includes deferred income relating
to government grants and the unrecognized portion of the consulting service fees
paid up front by DaVita China. In August 1999, the Group received a government grant of
RMB15,000,000, approved by the State Development Planning Committee of the PRC,
for the purchase of plant and equipment costing a total of RMB45,029,000. In December 2010, the Group received a government grant of
RMB1,000,000 for a hemodialysis project, approved by a PRC provincial
government. The grant was recorded in deferred grant income as at December 31,
2010. In April 2012, the Group received a government grant of
RMB8,672,000 (US$1,392,000) from Commission of Taizhou Pharmaceutical High-tech
Industrial Park (Taizhou Industrial Park), for the construction of facilities
in Taizhou Industrial Park. As the construction of facilities had not been started as of December
31, 2012, no amortization had been recorded as of December 31, 2012. F-30   3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012 In August 2012, the Group received consulting service fee of
RMB4,822,000 (US$774,000) from DaVita China for consulting services to be
provided by the Group to JV ManageCo for a three year period. The consulting
service income is recognized on a straight-line basis over three years. Amortization of deferred income was RMB374,000, RMB1,374,000,
and RMB1,312,000 (US$211,000) for the years ended December 31, 2010, 2011 and
2012, respectively. Deferred income as of December 31, 2012 is expected to be
amortized as follows: RMB000
    
    
    US$0002013
    
    1,981
    
    
    3182014
    
    1,981
    
    
    3182015
    
    1,044
    
    
    1682016
    
    374
    
    
    602017 and thereafter
    
    9,205
    
    
    1,477Total
    
    14,585
    
    
    2,341 The Groups grant income is analyzed as follows: Year ended December 31,2010
    
    
    2011
    
    
    2012
    
    
    2012RMB000
    
    
    RMB000
    
    
    RMB000
    
    
    US$000R&D activities support
    
    882
    
    
    211
    
    
    524
    
    
    84Amortization of deferred income
    
    374
    
    
    1,374
    
    
    374
    
    
    60Total grant income
    
    1,256
    
    
    1,585
    
    
    898
    
    
    144 13. Accrued expenses and other payables Accrued expenses and other payables consist of the following: December 31,2011
    
    
    2012
    
    
    2012RMB000
    
    
    RMB000
    
    
    US$000Accrued selling and marketing expenses
    
    19,069
    
    
    33,176
    
    
    5,325Accrued salaries, bonus and welfare expenses
    
    11,391
    
    
    13,193
    
    
    2,118Other taxes payable
    
    10,422
    
    
    8,190
    
    
    1,315Payable to plant, property and equipment vendors
    
    3,680
    
    
    4,442
    
    
    713Payable to R&D service contractors
    
    1,535
    
    
    -
    
    
    -Advances from customers
    
    733
    
    
    1,114
    
    
    179Other accrued expenses
    
    1,559
    
    
    9,216
    
    
    1,478Total accrued expenses and other payables
    
    48,389
    
    
    69,331
    
    
    11,128 F-31   3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012 14. Shareholders equity (a) Share capital The Company is authorized to issue up to 500 million shares
with par value of $0.0001 per share, of which 154,473,159 and 155,635,016 shares
were issued and outstanding as of December 31, 2011 and 2012, respectively. As
of December 31, 2011 and 2012, no preferred shares have been issued, nor does
the Company have current plans to issue preferred shares. During the year ended December 31, 2010, a total of 909,188
ordinary shares were issued when vested options were exercised, which are
related to three different grants of options. Among the newly issued shares
pursuant to the exercises, 99,995 shares were issued at a consideration of
US$1.60 per share (US$11.20 per ADS), 563,213 shares at US$1.15 per share
(US$8.05 per ADS), and the remaining 245,980 shares at US$0.78 per share
(US$5.45 per ADS). In addition, 1,103,499 shares were issued upon vesting of
nonvested shares and RSUs. During the year ended December 31, 2011, a total of 756,791
ordinary shares were issued when vested options were exercised, which are
related to three different grants of options. Among the newly issued shares
pursuant to the exercises, 376,978 shares were issued at US$1.15 per share
(US$8.05 per ADS), and the remaining 379,813 shares were issued at US$0.78 per
share (US$5.45 per ADS). In addition, 1,062,220 shares were issued upon vesting
of nonvested shares and RSUs. During the year ended December 31, 2012, 99,008 ordinary shares
were issued when vested options were exercised. All shares were issued at US$
0.78 per share (US$ 5.45 per ADS). In addition, 1,062,849 shares were issued
upon the fulfilment of the vesting period of nonvested shares and RSUs. (b) Retained earnings The Companys PRC-based subsidiaries and the consolidated VIE
are either foreign invested enterprises established in the PRC, or PRC domestic
companies. Therefore, these PRC-based consolidated entities are required under
PRC rules and regulations, as well as their respective Articles of Association,
to make appropriations from retained earnings to statutory reserves. The
appropriation requires transferring 10% of after-tax profits, as determined in
accordance with PRC GAAP, to a statutory surplus reserve until the reserve
balance reaches 50% of these PRC-based consolidated entities respective
registered capital. The transfer to this reserve must be made before
distribution of dividends to the equity holders can be made, and such
appropriations are required to be approved by these PRC-based consolidated
entities respective boards of directors. Transfers of RMB11,587,000, RMB15,613,000 and RMB20,070,000
(US$3,221,000) have been made to the statutory surplus reserve for the years
ended December 31, 2010, 2011 and 2012, respectively. The accumulated balances of this statutory surplus reserve
maintained by the Companys PRC consolidated entities as of December 31, 2010,
2011 and 2012 were RMB35,329,000, RMB50,942,000 and RMB71,012,000
(US$11,398,000), respectively. The statutory surplus reserve is non-distributable but may be
used to offset against 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. F-32   3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012 Under PRC laws and regulations, there are restrictions on these
PRC-based consolidated entities with respect to transferring certain of their
net assets to the Company either in the form of dividends, loans, or advances.
Amounts restricted include paid-up capital and statutory reserve funds of the
Companys PRC-based subsidiaries, and the net assets of the consolidated VIE and
its subsidiary in which the Company has no legal ownership, totalling
RMB258,057,000 (US$41,421,000) as of December 31, 2012. 15. Revenues The Groups revenues are primarily derived from the
distribution of self-manufactured pharmaceutical products and one franchised
product. The Group operates and manages its business solely in the PRC
and sales were predominately made to customers located in the PRC. 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 31,2010
    
    
    2011
    
    
    2012
    
    
    2012RMB000
    
    
    RMB000
    
    
    RMB000
    
    
    US$000Domestic sales:- EPIAO
    
    250,854
    
    
    317,889
    
    
    372,912
    
    
    59,857- TPIAO
    
    128,717
    
    
    164,839
    
    
    210,391
    
    
    33,770- Intefen
    
    5,358
    
    
    5,229
    
    
    4,649
    
    
    746- Inleusin
    
    2,041
    
    
    2,788
    
    
    2,963
    
    
    476- Iron
    
    17,187
    
    
    24,859
    
    
    34,268
    
    
    5,500Export sales
    
    12,211
    
    
    23,890
    
    
    40,040
    
    
    6,427Others
    
    2,260
    
    
    2,120
    
    
    4,725
    
    
    758Total revenues
    
    418,628
    
    
    541,614
    
    
    669,948
    
    
    107,534 16. Collaborations (a) AMAG Pharmaceuticals, Inc. (AMAG) During the year ended December 31, 2008, the Company entered
into a development and commercialization agreement with AMAG for ferumoxytol, an
intravenous iron replacement therapeutic agent being developed to treat iron
deficiency anemia in chronic kidney disease (CKD) patients. Under the terms of the agreement, AMAG grants the Company
exclusive rights to develop and commercialize ferumoxytol in the PRC, initially
for CKD, and with an option to explore into further co-development indications.
The Company is 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. AMAG will retain all manufacturing rights for ferumoxytol and will provide, under a separate
agreement, commercial supply to the Company at a predetermined supply price. F-33   3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012 In 2008, the Company paid a non-refundable payment of
US$1,000,000 to AMAG for the licensing right to commercialize and market
ferumoxytolin the PRC which was immediately expensed as it had no other
alternative use.The Company is required to make milestone payments of
US$1,500,000 upon obtaining the regulatory approval from the China State Food
and Drug Administration (SFDA) for the commercialization and marketing of
ferumoxytol within the PRC and upon any other co-developed indications being
approved by the SFDA for their commercialization and marketing within the PRC.
The Company is also required to pay a royalty fee based on the future sales of
ferumoxytol. As of January 2010, the Company submitted an application for a
registration clinical trial to SFDA in the PRC for ferumoxytol. (b) APGC In March 2010, the Group entered into a strategic alliance with
APGC, a Hong Kong based therapeutic research company, to research, develop and
commercialize best-in-class targeted cancer therapeutics focusing on programmed
cell death, or apoptosis. Apoptosis targeted small molecules have the potential
to play a key role in the next generation of highly effective targeted cancer
drugs. The arrangement also involves Ascentage SH, a PRC domestic company under
common control with APGC (Note 7). Under the terms of the agreements between the Group and APGC,
and the Group and Ascentage SH, the Group paid consideration of RMB17,000,000 in
funding APGC apoptosis related R&D programs (APGC R&D programs). A
joint steering committee with members from the Group and APGC is responsible for
monitoring the progress of the APGC R&D programs. In return, the Group has
been granted the exclusive right in mainland China to develop and commercialize
the cancer therapeutics that are developed through APGC R&D programs, while
APGC will retain the rights in Hong Kong, Taiwan and Macau. RMB5,000,000,
RMB6,000,000 and RMB6,000,000 (US$963,000) of the RMB17,000,000 prepayment has
been utilized and expensed as R&D costs in the years ended December 31,
2010, 2011 and 2012, respectively. The Group may be required to pay future
milestone payments and royalty payments to APGC after the commercialization of
apoptosis. Such terms are still under negotiation. As of December 31, 2012, the Group has determined that APGC and
Ascentage SH are VIEs but the Group is not the primary beneficiary as the Group
does not have the power to direct or control the operational activities that
most significantly impact the economic performance of these VIEs. As such, the
Group accounts for their investment in APGC and Ascentage SH as equity method
investments. As required by ASC 810-10, the Group continually assesses whether
it is the primary beneficiary of APGC and Ascentage SH. A tabular comparison of the carrying amount of the Groups
investment in both APGC and Ascentage SH, by category, as at December 31, 2012
and the maximum exposure to loss, is presented below: Carrying value of investment in VIE
    
    
    MaximumEquity
    
    
    R&D
    
    
    
    
    
    exposureinvestment
    
    
    prepayment
    
    
    Total
    
    
    to lossRMB 000
    
    
    RMB 000
    
    
    RMB 000
    
    
    RMB 000APGC
    
    -
    
    
    -
    
    
    -
    
    
    -Ascentage SH
    
    3,159
    
    
    -
    
    
    3,159
    
    
    3,159 F-34   3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012 As APGC and Ascentage SH are both incorporated as limited
liability companies, the Groups maximum loss is limited to its investment cost
as the Group is not obligated to fund losses of APGC and Ascentage SH. (c) Isotechnika In August 2010, the Group entered into a licensing, development
and commercialization agreement with Isotechnika, a Canada-based company focused
on the discovery and development of immune modulating therapeutics, for
voclosporin, a next generation calcineurin inhibitor being developed for use in
the prevention of organ rejection following transplantation and the treatment of
autoimmune diseases. Under the terms of the agreement, the Group obtained exclusive
rights to all transplant and autoimmune indications of voclosporin, exclusive of
ophthalmic indications and medical devices which were previously licensed to
others, in the greater PRC, including Hong Kong and Taiwan. Under a separate
commercial supply agreement, Isotechnika will provide supply to the Group on a
cost-plus basis. The Group made an upfront non-refundable licensing payment of
US$1,500,000 in December 2010 and may be required to pay milestone payments when
certain criteria are met, as well as ongoing royalties based on sales of
voclosporin. The upfront licensing payment was expensed as R&D costs in the
year ended December 31, 2010 as it was determined that it had no alternative
use. (d) DaVita In February 2012, the Group entered into a collaboration
agreement with DaVita, a leading provider of kidney care services for those
diagnosed with chronic kidney disease, to provide kidney care services in Jilin
and Liaoning, two provinces in northeastern China. A total investment of
US$20,000,000 is expected to be made with DaVita and the Group contributing 70%
and 30%, respectively. Pursuant to the collaboration agreement, the Group is to
transfer the control of the Clinical Centers owned by Sunshine Tech to JV
ManageCo, a newly formed joint venture established in June 2012 for the purpose
of providing dialysis services in Jilin and Liaoning province. Davita China and
the Group hold 70% and 30% of equity interest in JV ManageCo, respectively. In
addition, the Group and DaVita have agreed to enter into a supply agreement for
the Group to provide DaVita with anemia management drugs in China. On July 18,
2012, DaVita China and Shenyang Sunshine entered into a Consulting Service
Agreement (CSA) whereby DaVita China engaged Shenyang Sunshine to provide
consulting services. Total consideration of USD760,000 was prepaid by DaVita
China for a service term of three years. Service income of RMB938,000
(US$151,000) has been recorded in other income/(loss). Refer to Note 20 for
details. On August 1, 2012, JV ManageCo entered into Management Service
Agreements (the MSAs) with each of the Clinical Centers. Pursuant to the MSAs,
the Clinical Centers engage and appoint JV ManageCo to be the exclusive provider
of the services as defined in the MSAs. Without the prior consent of JV
ManageCo, Sunshine Tech cannot transfer its equity interest or assets in the
Clinical Centers to any third party. Sunshine Tech has the right to appoint two
members to the six-member Board of Directors while DaVita China appoints the
majority of the members such that DaVita China can unilaterally make all
decisions related to the operations of the Clinical Centers and JV ManageCo. The
services fees payable under the MSAs are based on certain percentage of net
revenue derived by the Clinical Centers. In addition, DaVita China and Sunshine
Tech commits to fund any losses incurred by the Clinical Centers in proportion
to their equity interest in JV ManageCo. F-35   3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012 As a result, the power to direct the activities that most
significantly impact the economic performance of the Clinical Centers and the
obligation to absorb substantially all of the expected losses and receive
substantially all of the economic benefits of the Clinical Centers was
transferred from Sunshine Tech to JV ManageCo and the Group deconsolidated the
assets and liabilities of the Clinical Centers and recognized a loss on
deconsolidation of the Clinical Centers of RMB7,645,000 (US$1,228,000) in other
income/(loss) as Sunshine Tech only retained a 30% equity interest in the
Clinical Centers through their investment in JV ManageCo. Refer to Notes 7 and
20 for details. In October 2012, DaVita China agreed to reimburse Sunshine Tech
for certain expenses related to the development and operation of the Clinical
Centers from January 1, 2012 until the establishment of JV ManageCo. As a
result, the Company recognized a receivable from DaVita China and other income
of US$910,000 (RMB5,692,000) for the year ended December 31, 2012. Refer to Note
20 for details. 17. Taxation (a) Income taxes 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 payment of dividends by the Company or
Collected Mind, no Cayman Islands or British Virgin Islands withholding tax will
be imposed. U.S. Tax IP Series and Assets Series, as part of 3SBio, LLC, are subject
to U.S. taxes. For the year ended December 31, 2011, both IP Series and Assets
Series had no taxable income. For the year ended December 31, 2012, Assets
Series had no taxable income. IP Series was dissolved in July 2012 and had no
U.S. taxable income. Hong Kong Tax Hong Kong profits tax has not been assessed on HK Sunshine as
the Group had no assessable profits arising in Hong Kong during the year ended
December 31, 2011 and 2012. PRC Tax Under the current PRC Enterprise Income Tax (EIT) Law which
has been effective since 2008, domestic enterprises and foreign investment
enterprises (the "FIE") are subject to, with limited exceptions, a unified 25%
enterprise income tax rate, except for certain entities that enjoy tax holidays. According to the EIT Law, entities that qualify as High and New
Technology Enterprise (HNTE) are entitled to the preferential EIT rate of 15%.
Shenyang Sunshine qualified as HNTE from 2009 to 2011. In February 2012,
Shenyang Sunshine successfully renewed the HNTE certificate which was effective
retroactively from January 1, 2011 to December 31, 2013. Other PRC entities are
subject to EIT rate of 25% effective from January 1, 2008. F-36   3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012 Under the EIT Law, an enterprise established outside of the PRC
with effective management located in the PRC may be considered a resident
enterprise and be subject to the EIT on its worldwide income. The Implementation
Regulations of the EIT Law further defines effective management as substantial
and overall management having control over production and business operations,
personnel, accounting and properties of an enterprise. The Company, if
considered a PRC resident enterprise for tax purposes, would be subject to the
applicable PRC EIT rate on its worldwide income. The Company believes the
current administrative practice and interpretation does not apply the concept of
place of effective management to them. The Company has not accrued for PRC tax
on such basis. Management will continue to monitor the related development and
application and its tax position. Furthermore, under the current EIT Law, dividends paid by a
foreign investment enterprise to any of its foreign non-resident enterprise
investors are subject to a 10% withholding tax. A lower tax rate will be applied
if such foreign non-resident enterprise investors jurisdiction of incorporation
has signed a tax treaty or arrangement for the avoidance of double taxation and
the prevention of fiscal evasion with respect to taxes on income with China. The
subsequent circular issued in January 2008 stipulates that no income tax will be
withheld on the distribution of earnings of foreign invested enterprises where
the relevant earnings were generated prior to January 1, 2008 with dividends
distribution declared in 2008 and beyond. However, the income tax withholding
rate will be 10% or the lower treaty rate on earnings generated after December
31, 2007. Shenyang Sunshine is entitled to an extra 50% reduction on
qualified R&D expenditures according to the EIT law. Income tax expense/(benefit) represents PRC income tax as
follows: Year ended December 31,2010
    
    
    2011
    
    
    2012
    
    
    2012RMB000
    
    
    RMB000
    
    
    RMB000
    
    
    US$000Current
    
    20,697
    
    
    28,651
    
    
    30,477
    
    
    4,892Deferred
    
    1,075
    
    
    (441
    )
    
    (599
    )
    
    (96
    )Total
    
    21,772
    
    
    28,210
    
    
    29,878
    
    
    4,796 The components of income/(losses) before income tax expense are
as follows: Year ended December 31,2010
    
    
    2011
    
    
    2012
    
    
    2012RMB000
    
    
    RMB000
    
    
    RMB000
    
    
    US$000PRC
    
    137,141
    
    
    176,302
    
    
    191,774
    
    
    30,781Other Countries
    
    (34,083
    )
    
    (39,932
    )
    
    (59,321
    )
    
    (9,522
    )103,058
    
    
    136,370
    
    
    132,453
    
    
    21,259 The loss before tax expense for Other Countries refers to the
Company and Collected Mind located outside the PRC. F-37   3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012 The following is a reconciliation of total income tax expense
to the amounts computed by applying the PRC income tax rate of 25% for the years
ended December 31, 2010, 2011 and 2012: Year ended December 31,2010
    
    
    2011
    
    
    2012
    
    
    2012RMB000
    
    
    RMB000
    
    
    RMB000
    
    
    US$000Income before income tax
      expense
    
    103,058
    
    
    136,370
    
    
    132,453
    
    
    21,259Computed tax expense at statutory rate of 25%
    
    25,765
    
    
    34,093
    
    
    33,113
    
    
    5,315Increase/(reduction) in income taxes:International rate
      differences
    
    5,277
    
    
    8,613
    
    
    14,830
    
    
    2,380PRC preferential tax rates
    
    (11,523
    )
    
    (18,043
    )
    
    (20,295
    )
    
    (3,258
    )Non-deductible expenses
    
    847
    
    
    2,653
    
    
    5,970
    
    
    958Non-taxable income
    
    (56
    )
    
    (116
    )
    
    (1,708
    )
    
    (274
    )Change in valuation allowance
      on deferred tax assets
    
    1,177
    
    
    1,167
    
    
    1,260
    
    
    202Tax concession for R&D costs
    
    (1,706
    )
    
    (1,743
    )
    
    (3,649
    )
    
    (586
    )Withholding income tax
    
    2,163
    
    
    1,421
    
    
    159
    
    
    26Others
    
    (172
    )
    
    165
    
    
    198
    
    
    33Income tax expense
    
    21,772
    
    
    28,210
    
    
    29,878
    
    
    4,796Effective tax rate %
    
    21.1%
    
    
    20.7%
    
    
    22.6%
    
    
    22.6% As of December 31, 2012 the Group has unused tax losses of
RMB11,888,000 (US$1,907,000). The tax losses will expire as follows if
unutilized by: RMB000
    
    
    US$0002013
    
    233
    
    
    372014
    
    313
    
    
    502015
    
    2,922
    
    
    4692016
    
    6,513
    
    
    1,0452017
    
    1,907
    
    
    30611,888
    
    
    1,907 The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets are presented below: F-38   3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012 December 31,2011
    
    
    2012
    
    
    2012RMB000
    
    
    RMB000
    
    
    US$000Property, plant and equipment
    
    312
    
    
    335
    
    
    53Accounts receivable
    
    525
    
    
    433
    
    
    70Long-term receivable
    
    61
    
    
    91
    
    
    15Inventories
    
    149
    
    
    97
    
    
    16Accrued expenses
    
    2,630
    
    
    3,679
    
    
    590Deferral of R&D costs for tax purposes
    
    56
    
    
    -
    
    
    -Prepayment and other
      receivable
    
    (5
    )
    
    249
    
    
    40Tax loss carry forwards
    
    2,269
    
    
    2,972
    
    
    477Total deferred tax assets
    
    5,997
    
    
    7,856
    
    
    1,261Less: valuation allowance
    
    (2,985
    )
    
    (4,245
    )
    
    (681
    )Net deferred tax assets
    
    3,012
    
    
    3,611
    
    
    580Consolidated balance sheet
      classification:Current
    
    2,750
    
    
    3,276
    
    
    526Non-current
    
    262
    
    
    335
    
    
    54Total
    
    3,012
    
    
    3,611
    
    
    580 An analysis of the valuation allowance is as follows: Year ended December 31,2010
    
    
    2011
    
    
    2012
    
    
    2012RMB000
    
    
    RMB000
    
    
    RMB000
    
    
    US$000Balance at beginning of year
    
    641
    
    
    1,818
    
    
    2,985
    
    
    479Charged to income
    
    1,177
    
    
    1,167
    
    
    1,260
    
    
    202Balance at end of year
    
    1,818
    
    
    2,985
    
    
    4,245
    
    
    681 In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion 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 the temporary differences become deductible or utilized. The
Group 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 RMB2,985,000 and RMB4,245,000 (US$681,000) as
of December 31, 2011 and 2012, respectively. As of December 31, 2012, the Company intends to indefinitely
reinvest the earnings of its foreign subsidiaries. Determination of the amount
of the unrecognized deferred tax liability related to distributing these
earnings is not practicable. Further, the Company has not recorded deferred tax on the outside basis of Liaoning
Sunshine, the VIE of the Group, as Liaoning Sunshine is currently in an
accumulated loss position. F-39   3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012 The Company has evaluated its income tax uncertainty under ASC
740-10. ASC 740-10 clarifies the accounting for uncertainty in income taxes by
prescribing the recognition threshold a tax position is required to meet before
being recognized in the financial statements. The Company has elected to
classify interest and penalties related to an uncertain tax position, if and
when required, as part of income tax expense in the consolidated statements of
income. In accordance with ASC 740-10, the Group did not have any
significant unrecognized tax benefits for the years ended December 31, 2011 and
2012. In addition, the Company does not expect that the amount of unrecognized
tax benefits will change significantly within the next twelve months. The income tax returns of the Groups operating entities in the
PRC for the years from 2011 to 2012 are open to examination by the PRC state and
local tax authorities. (b) PRC value added tax (VAT) According to the value-added tax policy from the relevant tax
authorities, the sale of pharmaceutical equipment and products by the Groups
PRC-based subsidiaries and consolidated VIE are subject to an output VAT of 17%,
while the purchase of products by these entities is subject to an input VAT tax
rate of 17%. VAT payable or receivable is the net difference between periodic
output VAT and deductible input VAT. 18. Share-based compensation On September 5, 2006, the Company adopted the 2006 stock
incentive plan (the 2006 Plan) pursuant to which the shares, share options,
restricted shares and RSUs of the Company can be granted to directors and
employees upon the approval by the board of directors or the compensation
committee of the board of directors. Under the 2006 Plan, the Company is
authorized to issue up to 10,000,000 shares plus a number of shares equal to 10%
of any additional shares of the Company issued following the date of the
adoption of the 2006 Plan by the board of directors. The 2006 Plan will remain
in effect for ten years from the date of adoption, unless otherwise extended.
The term of each option granted under the 2006 Plan may not exceed five years
from the date of grant. On March 31, 2010, the Company adopted the 2010 equity
incentive plan (the 2010 Plan) which provides for the grant of share options,
share appreciation rights, dividend equivalent rights, shares, restricted shares
and restricted share units of the Company to employees, directors and
consultants. Under the 2010 Plan, the Company is authorized to issue up to
22,500,000 ordinary shares, subject to possible adjustments. The 2010 Plan is
administered by the board of directors or the compensation committee of the
board of directors. With respect to the grant of awards to employees or
consultants who are neither directors nor officers, the board of directors may
authorize one or more officers to grant such awards. The purpose of the plan is
to attract and retain the best available personnel, to provide additional
incentives to employees, directors and consultants and to promote the success of
the companys business. The 2010 Plan became effective in April 2010. It will
continue to be in effect for a term of ten years unless terminated sooner. (a) Nonvested Shares and Restricted Share Units In January 2012, the Company granted 69,706 and 2,380,294
shares to independent directors and employees pursuant to the 2010 Plan. The
shares granted to employees will either cliff vest on the seventh anniversary or
vest in four equal tranches on the first, second, third and fourth anniversary from the date of grant.
The shares granted to the independent directors will vest as follows: 50% six
months after the date of grant and another 50% one year after the date of grant. F-40   3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012 In May 2012, the Company granted 1,820,000 shares to executive
management pursuant to the 2010 Plan. There are no transferability restrictions
attached to the shares. Grants to the executive management will vest on the
seventh anniversary of the grant date. A summary of the status of the Companys shares and RSUs as of
December 31, 2011 and the changes during the year ended December 31, 2012, is
presented below: Weighted
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    averageNumber of
    
    
    grant-date
    
    
    
    
    
    grant-datenonvested
    
    
    fair value
    
    
    Number of
    
    
    fair valueshares
    
    
    (per share)
    
    
    RSUs
    
    
    (per RSU)US$
    
    
    
    
    
    US$Nonvested at December 31, 2011
    
    4,916,321
    
    
    1.86
    
    
    1,898,750
    
    
    1.55Awarded
    
    4,270,000
    
    
    1.62
    
    
    -
    
    
    -Vested
    
    (113,474
    )
    
    1.45
    
    
    (949,375
    )
    
    1.55Nonvested at December 31, 2012
    
    9,072,847
    
    
    1.75
    
    
    949,375
    
    
    1.55 As of December 31, 2012, total unrecognized compensation costs
related to shares and RSUs amounted to RMB53,417,000 (US$8,574,000) and
RMB1,651,000 (US$265,000), respectively, which is expected to be recognized over
a weighted-average period of 1 year and 2.77 years, respectively. The
weighted-average grant date fair value of shares and RSUs was US$1.58, US$2.20
and US$1.62 for the years ended December 31, 2010, 2011 and 2012. The total fair
value of vested shares during the years ended December 31, 2010, 2011 and 2012,
was RMB11,024,000, RMB10,341,000 and RMB10,211,000 (US$1,639,000), respectively.
To the extent the actual forfeiture rate is different from the original
estimate, actual share-based compensation costs related to these awards may be
different from the expectation. The aggregate intrinsic value of shares and RSUs
as of December 31, 2012 was RMB121,668,000 (US$19,529,000). (b) Share Options The Company uses a lattice-based model to estimate the fair
value of options awarded. The historical volatility of the Companys shares and the
volatility of a combination of peer companies of similar nature and size were
used to estimate the expected volatility of the Companys shares. 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. No share options were granted from 2010 to 2012. In addition, the Company applies an expected forfeiture rate in
determining the grant date fair value of the share option grants. The estimation
of the forfeiture rate was based primarily upon historical experience of
employee turnover. To the extent the Company revises this estimate in the
future, compensation cost could be materially impacted. F-41   3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012 The following table summarizes the share option activity for
the year ended December 31, 2012: WeightedWeighted
    
    
    averageaverage
    
    
    remaining
    
    
    AggregateNumber of
    
    
    exercise
    
    
    contractual
    
    
    Intrinsicoptions
    
    
    price
    
    
    life
    
    
    ValueUS$
    
    
    Years
    
    
    US$Outstanding, December 31, 2011
    
    1,041,804
    
    
    0.78
    
    
    2.25
    
    
    708,427Forfeited
    
    (3,963
    )
    
    0.78Exercised
    
    (99,008
    )
    
    0.78Outstanding, December 31, 2012
    
    938,833
    
    
    0.78
    
    
    1.25
    
    
    1,097,083Vested and expected to vest at December 31, 2012
    
    938,833
    
    
    0.78
    
    
    1.25
    
    
    1,097,083Exercisable at December 31, 2012
    
    938,833
    
    
    0.78
    
    
    1.25
    
    
    1,097,083 The aggregate intrinsic value in the table above represents the
value of the Companys closing stock price on the last trading day in 2012 in
excess of the exercise price of share options. Total intrinsic value of share
options exercised for the three years ended December 31, 2010, 2011 and 2012 was
US$706,000, US$875,000 and US$101,000 (RMB629,000), respectively. As of December 31, 2012, total unrecognized compensation costs
related to unvested share options amounted to nil. The Company did not grant any share options in the years ended
December 31, 2010, 2011 and 2012. The total fair value of share options vested
during the years ended December 31, 2010, 2011 and 2012 was RMB3,281,000,
RMB1,542,000 and RMB1,558,000 (US$250,000), respectively. (c) Compensation cost Total compensation cost (for shares, RSUs and share options)
recognized is as follows: Year ended December 31,2010
    
    
    2011
    
    
    2012
    
    
    2012RMB000
    
    
    RMB000
    
    
    RMB000
    
    
    US$000Cost of revenues
    
    1,007
    
    
    423
    
    
    872
    
    
    140Research and development costs
    
    6,864
    
    
    7,316
    
    
    8,231
    
    
    1,321Sales, marketing and distribution expenses
    
    907
    
    
    815
    
    
    720
    
    
    116General and administrative expenses
    
    15,720
    
    
    12,639
    
    
    13,021
    
    
    2,090Charged to income statement
    
    24,498
    
    
    21,193
    
    
    22,844
    
    
    3,667Capitalized as property, plant and equipment
    
    189
    
    
    319
    
    
    415
    
    
    67Capitalized as inventory
    
    -
    
    
    277
    
    
    402
    
    
    65Total share-based compensation cost
    
    24,687
    
    
    21,789
    
    
    23,661
    
    
    3,799 F-42   3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012 19. Long-term receivables Long-term receivables, net, consist of the following: December 31,2011
    
    
    2012
    
    
    2012RMB000
    
    
    RMB000
    
    
    US$000Long-term receivables
    
    3,929
    
    
    3,173
    
    
    509Less: Allowance for doubtful accounts
    
    (818
    )
    
    (818
    )
    
    (131
    )Total long-term receivables, net
    
    3,111
    
    
    2,355
    
    
    378 An analysis of the allowance for doubtful accounts is as
follows: December 31,2010
    
    
    2011
    
    
    2012
    
    
    2012RMB000
    
    
    RMB000
    
    
    RMB000
    
    
    US$000Balance at beginning of year
    
    -
    
    
    -
    
    
    818
    
    
    131Charged to income
    
    -
    
    
    818
    
    
    -
    
    
    -Balance at end of year
    
    -
    
    
    818
    
    
    818
    
    
    131 The allowance for doubtful accounts was charged to the
consolidated statements of income during 2011. The Groups long-term receivables
are due from third-party customers, and are to be repaid in monthly instalments
over the next 1.5 to 3.25 years. The Group has a credit policy in place and the
exposure to credit risk is monitored on an ongoing basis. The Group does not
obtain collateral from customers. 20. Other income/(loss), net The Groups other income, net, consists of the following: Year ended December 31,2010
    
    
    2011
    
    
    2012
    
    
    2012RMB000
    
    
    RMB000
    
    
    RMB000
    
    
    US$000Recovery of investor relationship fees
    
    2,065
    
    
    1,895
    
    
    528
    
    
    85Exchange gains/(loss)
    
    (249
    )
    
    176
    
    
    179
    
    
    29Gain/(loss) on disposal of property, plant
      and equipment
    
    371
    
    
    (2,226
    )
    
    (268
    )
    
    (43
    )Withholding business tax
    
    (1,082
    )
    
    (874
    )
    
    -
    
    
    -Loss on deconsolidation of Clinical Centers
      (Note 16)
    
    -
    
    
    -
    
    
    (7,645
    )
    
    (1,228
    )Recovery of expenditures in the Clinical
      Centers (Note 16)
    
    -
    
    
    -
    
    
    5,692
    
    
    910Consulting service income (Note 16)
    
    -
    
    
    -
    
    
    938
    
    
    151Others
    
    201
    
    
    178
    
    
    (418
    )
    
    (67
    )Total other income/(loss), net
    
    1,306
    
    
    (851
    )
    
    (994
    )
    
    (160
    ) F-43   3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012 21. Related party transactions The Companys related party transactions are all incurred in
the normal course of conducting its business, and are with its equity investees,
APGC and its wholly owned subsidiary, Ascentage Jiangsu, Ascentage SH as well as
JV ManageCo. The prepayments of R&D represent the upfront R&D funding
for the APGC R&D programs. Loan receivable represent an uncollateralized
loan with interest of 5.6% to JV ManageCo. A summary of these transactions for the years ended December
31, 2010, 2011 and 2012 is as follows: Year ended December 31,2010
    
    
    2011
    
    
    2012
    
    
    2012RMB000
    
    
    RMB000
    
    
    RMB000
    
    
    US$000R&D costs
    
    5,000
    
    
    6,000
    
    
    6,000
    
    
    963 The due from related parties balance as of December 31, 2011
and 2012 are as follows: As at December 31,2011
    
    
    2012
    
    
    2012RMB000
    
    
    RMB000
    
    
    US$000Prepayment of R&D costs
    
    6,000
    
    
    -
    
    
    -Loan receivable
    
    -
    
    
    1,263
    
    
    203Total
    
    6,000
    
    
    1,263
    
    
    203 22. Commitments and contingencies (a) Operating lease commitments The Group leases land from the PRC government under operating
leases (Note 9). Operating lease charges are prepaid in full at the inception of
the lease. The Group also leases staff quarters and motor vehicles under
operating leases. The leases typically run for a period of one year. For the years ended December 31, 2010, 2011 and 2012, total
rental expenses for operating leases, including land lease expense, were
RMB885,000, RMB2,282,000 and RMB3,470,000 (US$557,000), respectively. F-44   3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012 As of December 31, 2012, total future minimum lease payments
under non-cancellable operating leases are as follows: RMB000
    
    
    US$0002013
    
    712
    
    
    1142014
    
    44
    
    
    72015
    
    -
    
    
    -Total
    
    756
    
    
    121 (b) Capital commitments Capital commitments for purchase, installation and construction
of property, plant and equipment as of December 31, 2012 are RMB38,537,000
(US$6,186,000), among which RMB15,100,000 (US$2,400,000) relates to the
construction of the new facility in Benxi. They are all due within the next
year. 23. Accumulated balances related to each component of other
comprehensive income Net unrealized
    
    
    Foreign
    
    
    Accumulatedgain/(loss) on
    
    
    currency
    
    
    otheravailable-for- sale
    
    
    translation
    
    
    comprehensivesecurities
    
    
    adjustments
    
    
    lossRMB000
    
    
    RMB000
    
    
    RMB000Balance as of January 1, 2010
    
    600
    
    
    (101,208
    )
    
    ( 100,608
    )Other comprehensive income/(loss)
    
    21,335
    
    
    ( 10,258
    )
    
    11,077Balance as of December 31,
      2010
    
    21,935
    
    
    (111,466
    )
    
    ( 89,531
    )Other comprehensive loss
    
    (26,545
    )
    
    ( 10,214
    )
    
    ( 36,759
    )Balance as of December 31, 2011
    
    ( 4,610
    )
    
    (121,680
    )
    
    ( 126,290
    )Other comprehensive
      gain/(loss)
    
    8,945
    
    
    ( 1,974
    )
    
    6,971Balance as of December 31, 2012
    
    4,335
    
    
    (123,654
    )
    
    ( 119,319
    )Balance as of December 31,
      2012 (US$000)
    
    696
    
    
    ( 19,848
    )
    
    ( 19,152
    ) The net unrealized gain/(loss) on available-for-sale securities
arising during the year and the amount of realized gain/(loss) reclassified out
of accumulated other comprehensive income into earnings and recognized in net
income for the years ended December 31, 2010, 2011 and 2012 are as follows: Year ended December 31,2010
    
    
    2011
    
    
    2012
    
    
    2012RMB000
    
    
    RMB000
    
    
    RMB000
    
    
    US$000Net unrealized (loss)/gain in available-
      for-sale securities arising during the year
    
    21,335
    
    
    (27,879
    )
    
    (11,482
    )
    
    (1,843
    )Less: reclassification adjustment for realized loss
      included in net income on providing impairment on available- for-sale
      securities
    
    -
    
    
    ( 1,334
    )
    
    (20,427
    )
    
    (3,279
    )Net unrealized gain/(loss) in available- for-sale
      securities recognized in other comprehensive income
    
    21,335
    
    
    (26,545
    )
    
    8,945
    
    
    1.436 F-45   3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012 24. Fair value measurement ASC 820-10: Fair Value Measurements and Disclosures: Overall(ASC 820-10), establishes a three-tier fair value hierarchy, which
prioritizes the inputs used in measuring fair value as follows: Level 1  Observable inputs that reflect quoted prices
(unadjusted) for identical assets or liabilities in active markets; Level 2  Include other inputs that are directly or indirectly
observable in the marketplace; Level 3  Unobservable inputs which are supported by little or
no market activity. ASC 820-10 describes three main approaches to measuring the
fair value of assets and liabilities: (1) market approach; (2) income approach
and (3) cost approach. The market approach uses prices and other relevant
information generated from market transactions involving identical or comparable
assets or liabilities. The income approach uses valuation techniques to convert
future amounts to a single present value amount. The measurement is based on the
value indicated by current market expectations about those future amounts. The
cost approach is based on the amount that would currently be required to replace
an asset. Assets and liabilities measured at fair value on a recurring
basis In accordance with ASC 820-10, the Group measures cash and cash
equivalents, restricted cash, time deposits with financial institutions and
available-for-sale securities, at fair value. Cash and cash equivalents,
restricted cash, time deposits with financial institutions and
available-for-sale debt and equity securities are valued using quoted market
prices. The convertible promissory note issued by Uricase was initially
recognized at the purchase price. During 2011, the Note was written down to zero
value and an impairment loss of US$200,000 (RMB1,334,000) was recorded. For the
year ended December 31, 2012, the Group recorded an impairment loss of
RMB20,427,000 (US$3,279,000) related to its investment in Isotechnika (Note 6). Assets measured at fair value on a recurring basis are
summarized below: As of December 31, 2011Quoted prices in active
    
    
    Total fair valuemarket for identical assets(Level1
    )(RMB000
    )
    
    (RMB000
    )
    
    (US$000
    )Cash and cash equivalents
    
    245,813
    
    
    245,813
    
    
    39,056Restricted cash
    
    665
    
    
    665
    
    
    106Time deposits with financial institutions
    
    519,201
    
    
    519,201
    
    
    82,492Available-for-sale securities
    
    33,678
    
    
    33,678
    
    
    5,351799,357
    
    
    799,357
    
    
    127,005 F-46   3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012  As of December 31, 2012Quoted prices in active
    
    
    Total fair valuemarket for identical assets(Level1
    )(RMB000
    )
    
    (RMB000
    )
    
    (US$000
    )Cash and cash equivalents
    
    450,557
    
    
    450,557
    
    
    72,319Restricted cash
    
    668
    
    
    668
    
    
    107Time deposits with financial institutions
    
    441,294
    
    
    441,294
    
    
    70,832Available-for-sale securities
    
    21,808
    
    
    21,808
    
    
    3,501914,327
    
    
    914,327
    
    
    146,759 For the year ended December 31, 2012, none of the Groups
assets were measured and recorded at fair value on a recurring basis, using
other inputs (Level 2) and significant unobservable inputs (Level 3). Assets and liabilities measured at fair value on a
nonrecurring basis The Group measures certain financial assets, including equity
method investments, at fair value on a nonrecurring basis only if an impairment
charge were to be recognized. The Groups non-financial assets, such as
intangible assets, including IPR&D, and fixed assets, would be measured at
fair value only if they were determined to be other-than-temporarily impaired.
There was no impairment on such assets as of December 31, 2012. 25. Subsequent events (a) Merger agreement for Going private transaction On February 8, 2013, the Company announced that it has entered
into an agreement and plan of merger (the "Merger Agreement") with Decade
Sunshine Limited, an exempted company with limited liability incorporated under
the laws of the Cayman Islands ("Parent"), and Decade Sunshine Merger Sub, an
exempted company with limited liability incorporated under the laws of the
Cayman Islands and a direct wholly owned subsidiary of Parent ("Merger Sub").
Pursuant to the Merger Agreement, Merger Sub will be merged with and into the
Company, with the Company surviving the merger as a wholly-owned subsidiary of
Parent (the "Merger"). If completed, the Merger would result in the Company
becoming a privately-held company and its ADSs would no longer be listed on the
NASDAQ Global Market ("NASDAQ"). The Companys Board of Directors, acting upon
the unanimous recommendation of an independent committee formed by the Board of
Directors (the "Independent Committee"), approved the Merger Agreement and the
Merger contemplated in the Merger Agreement and resolved to recommend that the
Companys shareholders vote to approve and authorize the Merger Agreement and
the Merger. F-47   3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012 Pursuant to the terms of the Merger Agreement, each of the
Companys ordinary shares (a "Share"), including Shares represented by ADS, each
representing seven Shares, issued and outstanding immediately prior to the
effective time of the Merger will be cancelled in exchange for the right to
receive US$2.20 in cash per Share, or US$15.40 per ADS, without interest, except
for (i) the Shares beneficially owned by Parent, Merger Sub or certain Shares
beneficially owned by certain directors, officers or employees of the Company
(collectively, the "Rollover Shareholders"), and certain restricted shares and
restricted share units issued by the Company to the Rollover Shareholders
(collectively, the "Consortium Shares"), (ii) the Shares beneficially owned by
the Company or any direct or indirect wholly owned Subsidiary of the Company and
(iii) the Shares owned by holders who have validly exercised and not effectively
withdrawn or lost their appraisal rights pursuant to Section 238 of the Cayman
Islands Companies Law, as amended. On March 24, 2013 the Company announced that it has called an
extraordinary general meeting of shareholders (the "EGM"), to be held on April
25, 2013 to consider and vote on the proposal to adopt the Merger Agreement. On April 22, 2013 the Company announced that the Independent
Committee has received a proposal letter (the "Proposal Letter") dated April 22,
2013 from Dr. Lou, and CITIC PE, in connection with the proposed merger under
the agreement and plan of merger dated as of February 8, 2013, by and among the
Company, Parent and Merger Sub. In the Proposal Letter, Dr. Lou and CITIC PE
proposed to increase the merger consideration payable to holders of ordinary
shares, par value $0.0001 per share, of the Company (the "Shares"), and holders
of American Depository Shares of the Company, each representing seven Shares
(the "ADSs"), from $2.20 per Share, or $15.40 per ADS, under the Merger
Agreement to $2.3857 per Share, or $16.70 per ADS, pursuant to a proposed
amendment to the Merger Agreement. On April 24, 2013 the Company announced that it has entered
into an amendment (the "Amendment") to its previously announced agreement and
plan of merger dated as of February 8, 2013, by and among Parent, Merger Sub and
the Company (the "Merger Agreement", and the Merger Agreement as so amended, the
"Amended Merger Agreement"), pursuant to which Merger Sub will be merged with
and into the Company, with the Company surviving the merger as a wholly-owned
subsidiary of Parent. The Amendment follows the revised "going private" proposal
from Dr. Lou, and CITIC PE (and together with Dr. Lou, the "Buyer Consortium")
to increase the merger consideration under the Merger Agreement that was
received and announced by the Company on April 22, 2013. If completed, the
Merger would result in the Company becoming a privately-held company and its
ADSs would no longer be listed on the NASDAQ. Pursuant to the Amendment, the merger consideration payable to
holders of ordinary shares, par value $0.0001 per share, of the Company (the
"Shares"), and holders of ADSs, under the Merger Agreement is increased from
$2.20 per Share, or $15.40 per ADS, to $2.3857 per Share, or $16.70 per ADS.
Parent intends to finance the increase in the merger consideration through a
combination of additional convertible note financing from CITIC PE and
additional cash in the Company. The Companys Board of Directors, acting upon the unanimous
recommendation of the Independent Committee, has approved the Amended Merger
Agreement and the transactions contemplated thereby, including the Merger, and
resolved to recommend that shareholders and ADS holders of the Company vote to
approve and adopt the Amended Merger Agreement and the transactions contemplated
thereby, including the Merger. The Independent Committee, which is composed solely of
independent directors unrelated to Parent, Merger Sub or any of the management
members of the Company, negotiated the terms of the Amended Merger Agreement
with the assistance of its legal and financial advisors. F-48   3SBio Inc. Notes to Consolidated Financial Statements
For the years ended December 31, 2010, 2011 and 2012 The Company will give notice to shareholders of the date on
which the adjourned extraordinary general meeting will be reconvened as soon as
a date is selected. The Merger contemplated in the Amended Merger Agreement, which
is currently expected to close during the second quarter of 2013, is subject to
various closing conditions, including the approval by an affirmative vote of
shareholders representing two-thirds or more of Shares present and voting in
person or by proxy as a single class at the extraordinary general meeting, as
well as certain other customary closing conditions. On April 25, 2013 the Company announced that, at the duly
convened EGM held at 10:00am Beijing time on April 25, 2013, Dr. Lou, as the
chairman of EGM, declared that EGM be adjourned to a later date as soon as
practicable in order to allow additional time for the Company to provide updated
information to the shareholders regarding the Merger Agreement, dated as of
February 8, 2013, by and among Parent, Merger Sub and the Company, as amended by
the Amended Merger Agreement. Apart from the adjournment of the EGM, no other
business was conducted at the EGM. The Company expects to file with the SEC and
send to shareholders promptly a supplement to the definitive proxy statement
dated March 25, 2013 relating to the Amended Merger Agreement. The Company will
give notice to shareholders of the date on which the adjourned EGM will be
reconvened as soon as a date is selected. On April 26, 2013 the Company filed with the SEC a draft
supplement to the definitive Proxy statement dated March 25, 2013 relating to
the Amended Merger Agreement. F-49