SEC Info

Home

Search

My Interests

Help

Sign In

Please Sign In

  As Of               Filer                 Filing     As/For/On Docs:Pgs              Issuer               Agent

 1/29/07  3SBio Inc                         F-1/A                  2:323                                    RR Donnelley/FA

Document/Exhibit                   Description                      Pages   Size 

 1: F-1/A       Amendment No.1 to Form F-1                          HTML  2,023K 
 2: EX-23.1     Consent of Kpmg                                     HTML      5K 

Table of Contents

As filed with the Securities and Exchange Commission on January 29, 2007

Registration No. 333-140099

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 1 to

Form F-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

3SBio Inc.

(Exact Name of Registrant as Specified in its Charter)

No. 3 A1, Road 10

Shenyang Economy & Technology Development Zone

Shenyang 110027

The People’s Republic of China

Tel: (86-24) 2581-1820

(Address, including zip code, and telephone number, including area code of registrant’s principal executive offices)

CT Corporation System,

111 Eighth Avenue,

New York, NY 10011

Tel: (212) 894-8940

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

CALCULATION OF REGISTRATION FEE

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

Table of Contents

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

7,700,000 American Depositary Shares

3SBio Inc.

Representing 53,900,000 Ordinary Shares

This is the initial public offering of our American Depositary Shares, or ADSs. Each ADS represents seven of our ordinary shares. We are offering 7,187,817 ADSs, representing 50,314,719 ordinary shares, and our selling shareholders are offering 512,183 ADSs, representing 3,585,281 ordinary shares. No public market currently exists for our ADSs or our ordinary shares. We expect the public offering price of our ADSs to be between US$12.00 and US$14.00 per ADS.

We have applied to list our ADSs on The Nasdaq Global Market under the symbol “SSRX.”

Investing in our ADSs involves a high degree of risk. Before buying any ADSs, you should carefully read the discussion of material risks of investing in our ADSs in “ Risk factors” beginning on page 12 of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters may also purchase up to an additional 1,155,000 ADSs from us and the selling shareholders at the public offering price, less the underwriting discounts and commissions payable by us and the selling shareholders, to cover over-allotments, if any, within 30 days from the date of this prospectus. If the underwriters exercise this option in full, the total underwriting discounts and commissions will be US$             and our total proceeds before expenses, will be US$            . We will not receive any proceeds from the sale of ADSs by the selling shareholders.

The underwriters are offering the ADSs as set forth under “Underwriting.” Delivery of the ADSs will be made on or about                     , 2007.

UBS Investment Bank

Table of Contents

You should rely only on the information contained in this prospectus. Neither we nor the selling shareholders have authorized anyone to provide you with information different from that contained in this prospectus. We and the selling shareholders are offering to sell, and seeking offers to buy, ADSs only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of ADSs.

 TABLE OF CONTENTS

EPIAO, , TPIAO, , INTEFEN, , INLEUSIN, and are our registered trademarks. All other trademarks or tradenames referred to in this prospectus are the property of their respective owners.

Through and including             , 2007, federal securities law requires all dealers that effect transactions in our ADSs, whether or not participating in this offering, to deliver a prospectus. This requirement is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

i

Table of Contents

 Prospectus summary

This summary highlights selected information appearing elsewhere in this prospectus. You should read this entire prospectus, including the “Risk factors” and “Forward-looking statements” sections, and our consolidated financial statements and the notes appearing elsewhere in this prospectus. Unless otherwise indicated, references in this prospectus to “our company,” “we,” “us,” or “our,” or any like terms, are to 3SBio Inc. and its subsidiaries. References to “China” or “PRC” are to the People’s Republic of China, excluding Hong Kong, Taiwan and Macau, and references to “provinces” of China are to the provinces and provincial-level municipalities and autonomous regions of China. All references to “RMB” or “Renminbi” are to the legal currency of China, and all references to “U.S. dollars” or “US$” are to the legal currency of the United States of America.

OVERVIEW

We are a leading, fully integrated, profitable biotechnology company focused on researching, developing, manufacturing and marketing biopharmaceutical products primarily in China. Our recombinant, or genetically engineered, protein-based products and product candidates are designed to address large markets with significant unmet medical needs in nephrology, oncology, supportive cancer care, inflammation and infectious diseases. Our principal products are EPIAO ( ) and TPIAO ( ), and our legacy products are Intefen ( ) and Inleusin ( ).

Our predecessor and PRC operating subsidiary, Shenyang Sunshine Pharmaceutical Company Limited, or Shenyang Sunshine, began operations in 1993. We believe we are now one of the leading biopharmaceutical companies in China in terms of growth and profitability. Our net revenues were RMB72.8 million in 2003, RMB77.2 million in 2004, and RMB102.0 million in 2005, representing an increase of 32.1% from 2004 to 2005. Our net income was RMB0.5 million in 2003, RMB6.6 million in 2004 and RMB16.1 million in 2005, representing an increase of 142.9% from 2004 to 2005. For the nine months ended September 30, 2006, our net revenues were RMB92.6 million and our net income was RMB23.4 million, compared to net revenues of RMB76.1 million and net income of RMB12.9 million for the nine months ended September 30, 2005. In addition to domestic sales, we also export a small portion of our products to certain developing countries, consisting of Egypt, Pakistan, Thailand, Brazil, Mexico and Trinidad and Tobago.

Our principal marketed products

EPIAO ( )

EPIAO, our flagship product, 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 Brewery Company Limited’s ESPO.

According to IMS Health, an independent research firm, revenues from all EPO drug sales in China were estimated at over RMB300 million (US$37.5 million) in 2005, representing a 20% compound annual growth rate 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. We have sold over 6.9 million vials of EPIAO since 1999.

EPIAO is approved by the PRC State Food and Drug Administration, or the SFDA, for three distinct indications: anemia associated with chronic renal failure; red blood cell mobilization, which is the

1

Table of Contents

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. We believe we are the only pharmaceutical company in China that has obtained approval from the SFDA for three indications of EPO drugs. We have exclusivity for the manufacturing and marketing of EPIAO for anemia associated with chemotherapy in cancer patients with non-myeloid malignancies under an administrative protection period through September 2007, during which other pharmaceutical companies are prohibited from manufacturing EPO drugs for the same indication pursuant to the relevant Chinese regulations.

We plan to initiate in 2008 clinical trials for NuPIAO, our second-generation EPIAO product candidate. NuPIAO is designed to have a longer half-life relative to first-generation EPIAO. In addition, we are in late-stage clinical trials for a concentrated high dose (36,000 IU/vial) formulation of EPIAO, which is designed to allow for less frequent administration, benefiting both patients and doctors. We expect to apply for marketing approval of high-dose EPIAO in 2007. If approved, we believe it will be the highest EPO dosage formulation available in the Chinese market.

TPIAO ( )

We launched TPIAO, our newest internally developed protein-based therapeutic product, in January 2006. This product is a recombinant human thrombopoietin, or TPO, indicated for the treatment of chemotherapy-induced thrombocytopenia, a deficiency of platelets. Platelets are disc-shaped cells in the blood that assist in coagulation and the arrest of bleeding by repairing the walls of blood vessels. TPIAO represents the first TPO-based therapeutic approved by the SFDA for thrombocytopenia in China. We believe TPIAO is the only TPO-based therapeutic available in the Chinese market to date. In addition, the SFDA has granted us a five year monitoring period for TPIAO through 2010, during which other pharmaceutical companies are prohibited from manufacturing or importing a similar drug, except those whose applications for clinical trials were approved by the relevant Chinese authority prior to May 2005 at the commencement of TPIAO’s monitoring period. We are aware of at least one other Chinese pharmaceutical manufacturer whose application for clinical trials may have been approved by May 2005 and who may be in clinical trials for a TPO-based therapeutic. For the nine months ended September 30, 2006, our total revenues from TPIAO sales were RMB10.2 million, accounting for 11.0% of our overall revenues for this period. We are also conducting a late-stage clinical trial of TPIAO for the treatment of idiopathic thrombocytopenic purpura, or ITP, an immune system disorder in which the body perceives platelets as foreign and destroys them.

Our legacy products

In addition to EPIAO and TPIAO, we market two 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 and hematopoietic systems, 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.

2

Table of Contents

Our in-licensed products

Tietai Iron Sucrose Supplement ( ).    Tietai Iron Sucrose Supplement, an intravenously administered prescription drug that is designed to treat anemia associated with iron deficiency, is indicated for patients with end-stage renal disease requiring iron replacement therapy. We in-licensed five-year exclusive PRC distribution rights for this product from Shenyang Borui Pharmaceutical Company Limited in May 2006. Tietai Iron Sucrose Supplement was launched in China in 2005, and we believe it will be complementary to our EPIAO franchise.

Baolijin ( ).    Baolijin is our in-licensed recombinant granulocyte colony-stimulating factor, or G-CSF, product. G-CSF is a protein that stimulates production of white blood cells. For cancer patients undergoing chemotherapy, the ability to produce red blood cells, white blood cells and platelets is severely compromised. Baolijin is indicated for the treatment of neutropenia, a condition associated with chemotherapy and characterized by low levels of neutrophils, a type of white blood cell important for fighting infections. In August 2006, we in-licensed exclusive PRC distribution rights for Baolijin from Chengdu Biological Institute for a period of five years. We believe that the addition of Baolijin to our product portfolio will complement the marketing of EPIAO and TPIAO for treatment of cancer patients receiving chemotherapy.

Licenses to the Tietai Iron Sucrose Supplement and to Baolijin are held by Liaoning Bio-Pharmaceutical Company Limited, or Liaoning Sunshine, our variable interest entity.

Our product pipeline

We focus our research and development efforts on both novel and validated protein-based therapeutics for the treatment of diseases in the areas of nephrology, oncology, supportive cancer care, inflammation and infectious diseases. Our product pipeline, which we expect will be a key contributor to our future growth, consists of six product candidates in various stages of development. We employ a market-driven approach to our research and development efforts, and our team utilizes the latest molecular biology and biochemical techniques and technologies to develop promising product candidates. Our diversified product pipeline includes a number of next-generation protein-based therapeutics including NuPIAO, our second-generation EPIAO product candidate; NuLeusin, our next-generation Inleusin product candidate; TPIAO for the treatment of ITP; a human papilloma virus, or HPV, vaccine for the prevention of cervical cancer; and an anti-TNF humanized monoclonal antibody product candidate for the treatment of rheumatoid arthritis and other autoimmune diseases. We believe that each of these product candidates, if successfully developed and approved, would address significant market opportunities.

Our sales and marketing team

We maintain a sales and marketing force in 18 provinces and major cities in China, including the municipalities of Beijing and Shanghai and the city of Guangzhou. Our principal products are marketed by our 143 sales and marketing professionals and sold by our network of approximately 80 distributors to healthcare providers including, based on our internal estimates, approximately 800 hospitals, clinics and dialysis centers. Our internal sales and marketing staff details our principal 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 principal products to physicians and hospitals. In addition, our legacy products Intefen and Inleusin are marketed, as well as sold, by distributors. Our sales force in China benefits from over ten years of experience in marketing protein-based therapeutics. As a result of our history as a provider of therapeutics to the Chinese market, we believe our Shenyang Sunshine brand is widely recognized throughout the PRC for quality and reliability.

3

Table of Contents

Our manufacturing operations

We conduct on-site bulk manufacturing activities for EPIAO, TPIAO, Intefen and Inleusin at our 3,000 square meter Shenyang, China facility. 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 Shenyang and the rest is shipped overseas in bulk format as concentrated solutions of recombinant human erythropoietin, interferon alpha-2a or interleukin-2 for packaging. Our Shenyang facility was re-certified in 2005 in accordance with Chinese current Good Manufacturing Practices, or cGMP, and our cGMP certificate is valid for five years, until 2010. We plan to expand our plant in Shenyang to increase our manufacturing capacity, improve our production yields and take further advantage of our relatively low cost of labor and raw materials.

OUR COMPETITIVE STRENGTHS

We believe that our principal competitive strengths include the following:

OUR STRATEGY

Our goal is to become the leader in the research, development, manufacture and commercialization of protein-based therapeutics in China and to continue to advance our drugs into international markets. The key elements of our strategy are to:

RISK FACTORS

Our business is subject to numerous risks, including:

4

Table of Contents

You should refer to “Risk factors,” beginning on page 12, for a more detailed discussion of the risks involved in investing in our ADSs.

OUR CORPORATE STRUCTURE AND OTHER CORPORATE INFORMATION

3SBio Inc. was incorporated in the Cayman Islands in August 2006 as an exempted company with limited liability. We conduct our manufacturing and marketing activities through Shenyang Sunshine, a PRC wholly foreign owned enterprise. Shenyang Sunshine commenced business operations in 1993 and became our wholly owned subsidiary in September 2006. We conduct our distribution and logistics activities primarily through Liaoning Bio-Pharmaceutical Company Limited, or Liaoning Sunshine, and Beijing Sunshine Bio-product Sales Company, or Beijing Sunshine, both of which are variable interest entities, or VIEs, whose results are consolidated in our financial statements. Liaoning Sunshine and Beijing Sunshine are considered our VIEs because we, through contractual arrangements, bear the economic risks with respect to, and derive the economic benefits normally associated with, ownership of these entities. While we maintain contractual relationships with both Liaoning Sunshine and Beijing Sunshine, we do not hold any ownership stake in either of the entities. Please refer to “Our corporate structure—Our contractual arrangements with Liaoning Sunshine and Beijing Sunshine” for a more detailed description of our relationships with Liaoning Sunshine and Beijing Sunshine.

Our principal executive offices are located at No. 3 A1, Road 10, Shenyang Economy & Technology Development Zone, Shenyang 110027, the People’s Republic of China, and our telephone number at that address is (86-24) 2581-1820.

Investor inquiries should be directed to us at the address and telephone number of our principal executive offices set forth above. Our website is www.3sbio.com. The information on our website is not a part of this prospectus. Our agent for service of process in the United States is CT Corporation System located at 111 Eighth Avenue, New York, New York 10011.

RECENT PRC REGULATORY DEVELOPMENTS

On September 8, 2006, a new PRC regulation jointly promulgated by six PRC regulatory agencies became effective. See “Risk factors—The approval of the China Securities Regulatory Commission, or the CSRC, may be required in connection with this offering under a recently adopted PRC regulation; any requirement to obtain CSRC approval could significantly delay this offering or could have a material adverse effect on our business, operating results, reputation and trading price of our ADSs, and may also create uncertainties for this offering. The regulation also establishes more complex procedures for acquisitions by foreign investors, which could make it more difficult to pursue growth through acquisitions” and “Regulations—Regulation on overseas listings” for more information regarding this new PRC regulation.

5

Table of Contents

RESTATEMENT OF FINANCIAL STATEMENTS

Our consolidated financial statements as of and for the nine months ended September 30, 2006 have been restated to correct an error in the recognition of share-based compensation expenses. The error resulted in an understatement of our net income previously reported in our financial statements for the nine months ended September 30, 2006 by RMB 1,951,000 (US$247,000) and a corresponding overstatement of RMB 1,951,000 (US$247,000) in accrued expenses and other payables in our consolidated balance sheet as of September 30, 2006. For more details, please see Note 2 to our consolidated financial statements included elsewhere in this prospectus.

CERTAIN CONVENTIONS THAT APPLY TO THIS PROSPECTUS

Unless otherwise indicated, all translations from Renminbi to US dollars for financial data have been made at a rate of RMB7.904 to US$1.00, the noon buying rate as certified for customs purposes by the Federal Reserve Bank of New York on September 29, 2006, the last business day in September 2006.

6

Table of Contents

The offering

To better understand the terms of the ADSs, you should carefully read the section in this prospectus entitled “Description of American Depositary Shares.” We also encourage you to read the deposit agreement, which is filed as an exhibit to the registration statement of which this prospectus is a part.

7

Table of Contents

The number of ordinary shares outstanding after this offering is based on the 100,000,998 shares outstanding as of January 29, 2007 and does not include:

Depending on market conditions at the time of pricing of this offering and other considerations, we may sell fewer or more ADSs than the number set forth on the cover page of this prospectus. We will inform investors at or prior to the time of pricing of any change in the number of ADSs being sold.

8

Table of Contents

 Summary consolidated financial data

The following summary consolidated financial data should be read in conjunction with “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements and related notes included elsewhere in this prospectus. The summary consolidated financial data presented below for the years ended December 31, 2003, 2004 and 2005 and the nine months ended September 30, 2005 and 2006, other than the net income per ADS data, are derived from our audited consolidated financial statements included elsewhere in this prospectus, which are prepared in accordance with U.S. GAAP. Results for the nine months ended September 30, 2006 are not necessarily indicative of the results that may be expected for the full year. The historical results presented below are not necessarily indicative of results to be expected in any future period.

Our consolidated financial statements as of and for the nine months ended September 30, 2006 have been restated to correct an error in the recognition of share-based compensation expenses. The error resulted in an understatement of our net income previously reported in our financial statements for the nine months ended September 30, 2006 by RMB1,951,000 (US$247,000) and a corresponding overstatement of RMB1,951,000 (US$247,000) in accrued expenses and other payables in our consolidated balance sheet as of September 30, 2006. For more details, please see Note 2 to our consolidated financial statements included elsewhere in this prospectus.

9

Table of Contents

10

Table of Contents

The table below sets forth revenues from the sales of our products expressed as a percentage of our net revenues for the periods indicated:

11

Table of Contents

 Risk factors

Investment in our ADSs involves a high degree of risk. You should carefully consider the risks described below and the other information in this prospectus, including our consolidated financial statements and related notes, before you decide to buy our ADSs. In particular, because we conduct our operations principally in China, there are risks associated with investing in our ADSs that are not typical with investments in shares of U.S. issuers. If any of the following risks actually occurs, our business, financial condition and results of operations would likely suffer. In such case, the trading price of our ADSs may decline, and you could lose all or part of your investment.

RISKS RELATED TO OUR COMPANY

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

We are largely dependent on sales of our erythropoietin, or EPO, product, which we market under the name of EPIAO. We began marketing and selling EPIAO in 1998, and it has been our top-selling product since 2002. Revenues from sales of EPIAO accounted for 83.1% of our total revenues for the year ended December 31, 2005 and 78.7% for the nine months ended September 30, 2006. We plan to expand our EPO franchise to include a higher dosage form of EPIAO and a second-generation version with enhanced half life. If developed and commercially launched, these products would increase our reliance on EPO-based products. We expect that sales of EPIAO will continue to comprise a substantial portion of our revenues in the future.

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

Due to our relative lack of product diversification, an investment in our company may entail more risk than investments in companies that offer a wider variety of products or services. Despite our efforts, we may be unable to develop or acquire new products that would enable us to diversify our business and reduce our dependence on EPIAO products.

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

The commercial success of our products depends upon the degree of market acceptance they achieve among the PRC medical community, particularly physicians and hospitals. Physicians may not prescribe

12

Table of Contents

Risk factors

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:

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. For example, from 2004 to 2005 the average selling price of Intefen declined by 20%. Historically we have sought to mitigate downward pricing pressure by introducing new products or enhanced versions of existing products with higher margins. For example, in 2006 we launched TPIAO, which has quickly become our second largest revenue generator and accounted for approximately 11.0% of our total revenues for the nine months ended September 30, 2006.

We must therefore constantly identify product candidates that can be developed into cost-effective therapeutic products. We plan to devote substantial resources to our research and development efforts; 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 suffer.

Our products face substantial competition. Other companies may discover, develop, acquire or commercialize products before or more successfully than we do.

We operate in a highly competitive environment. Our products compete with other products or treatments for diseases for which our products may be indicated. EPIAO competes with both existing EPO drugs and potential new drug candidates. In China, EPO drugs are offered by established international companies such as Kirin Brewery Company Limited, or Kirin, and F. Hoffmann-La Roche, Ltd., or Roche, and domestic pharmaceutical companies such as Di’ao Group Chengdu Diao Jiuhong Pharmaceutical Factory. Competitors for interferon alpha-2 drugs include Schering-Plough (Brinny) Co. and Beijing Tri-Prime Genetic Engineering Co., Ltd., and competitors for interleukin-2 include Beijing SL Pharmaceutical Co., Ltd. and Beijing Four Rings Biopharmaceutical Co., Ltd. Competitors for Tietai Iron Sucrose Supplement include Beijing Novartis Pharmaceutical Co., Ltd. and Nanjing Hencer Pharmaceutical Co., Ltd. and competitors for Baolijin include Kirin, Hangzhou Jiuyuan Gene Engineering Co., Ltd. and Qilu Pharmaceutical Co., Ltd. In addition, while we believe TPIAO is the only TPO-based therapeutic available in the Chinese market to date, we are aware of another Chinese

13

Table of Contents

Risk factors

pharmaceutical company, Shanghai CP Guojian Pharmaceutical Company Limited, or CP Guojian, which we believe may be conducting clinical trials for a TPO-based therapeutic in China. If CP Guojian obtained the approval for any clinical trials prior to the commencement of the monitoring period for TPIAO, CP Guojian may not be prohibited from manufacturing and marketing its TPO product during TPIAO’s monitoring period. We have no information on when CP Guojian plans to bring their product to market, nor are we aware of any other company that is developing a similar product. 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 have patents of any commercial significance covering EPIAO, our legacy products, or many 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.

Certain of our competitors, including biotechnology and pharmaceutical companies, market products or 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. 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. If less invasive or less expensive alternatives to our products are dispensed or prescribed to patients, our sales could be negatively impacted. An increasing number of foreign pharmaceutical companies have introduced their pharmaceutical products into the Chinese market.

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

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, alliances may develop among competitors and these alliances may rapidly acquire significant market share.

Furthermore, in order to gain market share in China, competitors may significantly increase their advertising expenditures and promotional activities or engage in irrational or predatory pricing behavior. In addition, our competitors may engage in illegal acts, such as bribery. Third parties may actively engage in activities designed to undermine our brand name and product quality or to influence customer confidence in our products. Increased competition may result in price reductions, reduced margins and loss of market share, any of which could materially adversely affect our profit margins. We may not be able to compete effectively against current and future competitors.

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

Our ability to compete against our competitors is, to a significant extent, dependent upon our ability to distinguish our products from those of our competitors by providing high quality products at reasonable

14

Table of Contents

Risk factors

prices that appeal to our consumers. Many of our competitors may have been in business longer than we have, may have substantially greater financial and other resources than we have and may be better established in our markets. Our competitors in any particular market may also benefit from raw material

sources or production facilities that are closer to such markets, which may provide them with competitive advantages in terms of cost and proximity to consumers.

We have exclusivity for the manufacturing and marketing of one indication of EPIAO under an administrative protection period through 2007. We also have a monitoring period for TPIAO through May 2010. Upon expiration of the protection period or the monitoring period, other manufacturers in China may apply for approval by the State Food and Drug Administration, or the SFDA, to manufacture such products using similar formulae or production techniques. If other manufacturers introduce the same products or products substantially similar to ours, we will face more competitive pressure in the market and our sales and profit margin may be adversely affected.

The approval of the China Securities Regulatory Commission, or the CSRC, may be required in connection with this offering under a recently adopted PRC regulation; any requirement to obtain CSRC approval could significantly delay this offering or could have a material adverse effect on our business, operating results, reputation and trading price of our ADSs, and may also create uncertainties for this offering. The regulation also establishes more complex procedures for acquisitions by foreign investors, which could make it more difficult to pursue growth through acquisitions.

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

Our PRC counsel, Jingtian & Gongcheng, has advised us that, based on their understanding of the current PRC laws, regulations and rules, it is not necessary for us to obtain the CSRC’s approval for this offering because we obtained approval from the Shenyang branch of MOFCOM for the acquisition of Shenyang Sunshine, our wholly owned subsidiary in the PRC, before September 8, 2006, the effective date of the new regulation.

A copy of Jingtian & Gongcheng’s legal opinion regarding this new PRC regulation is filed as an exhibit to our registration statement on Form F-1.

However, we cannot assure you that the relevant PRC government agency, including the CSRC, would reach the same conclusion as our PRC counsel. If the CSRC or another PRC regulatory body subsequently determines that we need to obtain the CSRC’s approval for this offering, we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of the proceeds from this offering into the PRC or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ADSs. The CSRC or other PRC

regulatory agencies also may take actions requiring us, or making it advisable for us, to halt this offering

15

Table of Contents

Risk factors

before settlement and delivery of the ADSs offered hereby. Consequently, if you engage in market trading or other activities in anticipation of and prior to settlement and delivery, you do so at the risk that

settlement and delivery may not occur.

Also, if the CSRC later requires that we obtain its approval, we may be unable to obtain a waiver of the CSRC approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding this CSRC approval requirement could have a material adverse effect on the trading price of our ADSs.

The New M&A Rule also established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex, including requirements in some instances that the MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. In the future, we may grow our business in part by acquiring complementary businesses, although we do not have any plans to do so at this time. Complying with the requirements of the New M&A Rule to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

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

We believe that market awareness of our Shenyang Sunshine and EPIAO brands has contributed significantly to the success of our business. We also believe that maintaining and enhancing the Shenyang Sunshine and EPIAO brands is critical to maintaining our competitive advantage. In order to further penetrate our markets and launch new products, we must expand our manufacturing and sales and marketing efforts. Maintaining quality and cost-effectiveness may be more difficult to achieve.

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

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., the GIBCO cell culture medium by Invitrogen Inc., the 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 “Business—Manufacturing.” Certain of these raw materials, medical devices, and components are the proprietary products of these unaffiliated third-party suppliers.

We would be unable to obtain these raw materials, medical devices, or components for an indeterminate period of time if these third-party single-source suppliers were to cease or interrupt production or otherwise fail to supply these materials or products to us for any reason, including due to regulatory requirements or action, due to adverse financial developments at or affecting the supplier, and/or due to unexpected demand, labor shortages or disputes. We would also be unable to obtain these materials, devices and components for an indeterminate period of time if such supply was subsequently found to

16

Table of Contents

Risk factors

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 adversely affect our product sales and operating results materially.

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 the 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 approximately 80 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 an increasing number of distributors. If our distribution network in China suffers a disruption, our financial condition and results of operations may be adversely affected.

While we have long-standing business relationships with most of our distributors and we have not, in the past three years, lost any significant distributors, we do not have long-term contracts with any distributor. Moreover, a significant amount of our revenue is generated by product sales to relatively few distributors, whose mix changes from year to year. The tables below set forth the aggregate sales to our top five distributors, expressed in RMB and as a percentage of our total sales, for the periods indicated.

17

Table of Contents

Risk factors

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

If we fail to achieve specified sales goals with respect to an in-licensed product, the license agreement relating to that product may be terminated and our results of operations may suffer.

We have recently begun to distribute third-party products pursuant to in-licensing agreements with domestic pharmaceutical corporations. For example, we currently in-license Tietai Iron Sucrose Supplement and Baolijin. We anticipate that an increasing portion of our revenues during the next several years will be generated from in-licensed products. However, if we fail to achieve certain sales targets, our licensing agreement in relation to Tietai Iron Sucrose Supplement with Shenyang Borui Pharmaceutical Company Limited will become terminable on short notice and our deposit in the amount of RMB1 million will be partially or fully forfeited. Given these risks, there is a great deal of uncertainty regarding the success of our current and future collaborative efforts.

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

We are highly dependent on our senior management to manage our business and operations and our key research and development personnel for the development of new technologies and applications and the enhancement of our existing products. In particular, we rely substantially on our chief executive officer, Dr. Jing Lou, to manage our operations. We also depend on our key research personnel such as Ms. Dongmei Su. 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

18

Table of Contents

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. Although Dr. Lou and Ms. Su have each signed a non-competition agreement with us, we cannot assure you that we will be able to successfully enforce these provisions in the event of a dispute.

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

Our future capital needs are uncertain. As a result, we may need to raise additional funds in the future.

We may require additional cash resources in the future. Our future cash needs will depend upon:

Our revenues may not be sufficient to meet our operational needs and capital requirements, and needed financing may not be available in amounts or on terms acceptable to us, if at all. Our future capital needs and other business reasons could require us to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity or equity-linked securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations or our ability to pay dividends to our shareholders. Moreover, credit arrangements in the PRC subject to government restrictions and may not be available to us on commercially reasonable terms or at all.

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

We set goals for, and made disclosures in this prospectus 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 U.S.-listed company, we anticipate that we will make additional announcements in our public reports and in press releases regarding these events. 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 milestones as planned, the price of our shares could decline.

19

Risk factors

Table of Contents

Risk factors

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, relying on trade secrets or pharmaceutical regulatory protection 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 “Business—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. Our patent applications may be challenged, invalidated or circumvented in the future. For more details on the process for applying for and obtaining intellectual property protection in the PRC, see “Regulations—Patent and trademark protection.”

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 trade secrets.

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 such claims. The cost to us of any patent litigation or similar proceeding could be substantial, and it may absorb significant management time. We do not maintain insurance to cover intellectual property infringement.

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

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

Prior to the 1990s, Chinese pharmaceutical companies were not capable of producing innovative drugs due to financial and technical obstacles. Under China’s first patent law enacted in March 1984, drugs were not eligible for patent protection. This law, however, provided patent protection for the manufacturing methods of pharmaceuticals. The Drug Administration Law of 1984 specified that

20

Table of Contents

Risk factors

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

We have administrative protection for one indication of EPIAO through 2007 under a six-year protection period pursuant to the 1999 Regulations, during which other pharmaceutical companies are prohibited from manufacturing EPO drugs for the same indication. We also have administrative protection for TPIAO through 2010 under a five-year monitoring period pursuant to the 2002 Regulations, during which other pharmaceutical companies are prohibited from manufacturing or importing similar drugs, except those whose applications for clinical trials were approved by the SFDA prior to May 2005, the commencement of TPIAO’s monitoring period. For a detailed discussion of the mechanism for administrative protection under the relevant Chinese regulations, please refer to “Regulations—Administrative protection and monitoring periods for new drugs”.

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

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

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

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

Our commercial success depends significantly on our ability to operate without infringing the patents and other proprietary rights of third parties. Under the PRC Patent Law promulgated by the People’s Congress in March 1984 and later revised in September 1992 and August 2000, patent applications are

21

Table of Contents

Risk factors

maintained in confidence until their publication 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 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, U.S. patent law endorses the first-to-invent system under which whoever makes the first actual discovery will be awarded the patent. Under the first-to-file system, even after reasonable investigation we may not know with certainty whether we have infringed a third party’s patent because such third party may have filed a patent application without our knowledge while we are still developing that product. We are aware of intellectual property rights held by third parties that relate to products or technologies we are developing. For example, we are aware of a patent held by a third party that may relate to our TPIAO product. We believe, as to each claim in this patent, that we either do not infringe the claim of the patent or that the claim is invalid. While the validity of issued patents, patentability of pending patent applications and applicability of any of them to our programs are uncertain, if asserted against us, any related patent rights could adversely affect our ability to commercialize our products.

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

Although to date we have not experienced any of the circumstances listed above, if any of these events occurs, our business will suffer and the market price of our ADSs could decline.

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

In order to achieve our internal forecasts, we must successfully implement our growth and expansion strategy. To do so, we must:

22

Table of Contents

Risk factors

If we do not successfully implement this strategy, we may not be able to maintain our growth in revenues and profitability, and the market price for our ADSs will suffer.

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

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

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

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

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

We typically generate higher levels of revenues during the third and fourth quarters of the year, primarily because of the tendency of hospitals to place more orders prior to the year-end holiday season and the fact that more people visit hospitals in the second half of the year, resulting in more prescriptions by physicians during this period. We may in the future experience significant period-to-period fluctuations in our revenues and operating results. Upon the consummation of this offering, it is possible that 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. Our quarterly and annual operating results are affected by a number of factors, such as:

23

Table of Contents

Risk factors

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

We have previously operated as a private Chinese company and have no experience in complying with U.S. public company requirements. In addition, we only recently began to prepare our financial statements in accordance with U.S. GAAP. Attempting to comply with these requirements will increase our costs and require additional management resources, and we still may fail to comply.

As a private PRC company, we have maintained a small finance and accounting staff. In addition, in the past we have only prepared unaudited financial statements in accordance with PRC GAAP for the purpose of tax reporting and determining the level of statutory reserves. Only our CFO has significant prior experience applying U.S. GAAP. While we plan to expand our staff if we become public, we expect to encounter substantial difficulty attracting qualified staff with requisite experience due to the high level of competition for experienced financial professionals. In the short term, we are providing training for our current staff with respect to U.S. GAAP. Our training may not be sufficient or effective.

We will face increased legal, accounting, administrative and other costs and expenses as a public company that we did not incur as a private company. Compliance with the U.S. Sarbanes-Oxley Act of 2002, as well as other rules of the SEC, the Public Company Accounting Oversight Board and The Nasdaq Global Market, will result in a significant initial cost to us as well as an ongoing increase in our legal, audit and financial compliance costs. As a public company, we will be required by Section 404 of the Sarbanes-Oxley Act of 2002 to include a report of management on the company’s internal controls over financial reporting that contains our management’s assessment of the effectiveness of the company’s internal controls and an auditor’s attestation report on our internal control over financial reporting in our Annual Report on Form 20-F for the fiscal year ending December 31, 2008. We have begun to implement certain measures to make overall improvements to our financial reporting system, such as rolling out a computerized management information system for inventories to ensure simultaneous recording of inventory movements in both the warehouse and finance department records. Such a system would also allow up-to-date inventory ageing information to be automatically generated on a continuous basis. If we cannot successfully implement these measures in a timely manner, our ability to issue timely and accurate financial reports may be adversely affected. We have only recently begun a formal process to evaluate our internal controls for purposes of Section 404, and we cannot be sure that our internal control over financial reporting will prove to be effective.

24

Table of Contents

Risk factors

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, stockholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our ADSs.

Effective internal control over financial reporting is necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Deficiencies in our internal controls may adversely affect our management’s ability to record, process, summarize, and report financial data on a timely basis, and to prevent fraud. As a public company, we will be required by Section 404 of the Sarbanes-Oxley Act of 2002 to include a report of management on our internal control over financial reporting that contains our management’s assessment of the effectiveness of the company’s internal controls and an auditor’s attestation report on our internal control over financial reporting in our annual report on Form 20-F for the fiscal year ending December 31, 2008. We have only recently begun a formal process to evaluate our internal control over financial reporting. Given the status of our efforts, coupled with the fact that guidance from regulatory authorities in the area of internal controls continues to evolve, substantial uncertainty exists regarding our ability to comply by applicable deadlines. Delay in meeting these deadlines or failure to implement required new or improved controls, or difficulties encountered in their implementation, could cause us to fail to meet our reporting obligations, and result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price of our ADSs, or limit or suspend our continued listing on, or cause us to delist from, The Nasdaq Global Market. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our ADSs.

Our business benefits from certain tax and other government incentives. Expiration of, or changes to, these incentives could have a material adverse effect on our operating results.

The PRC government has provided various incentives to high technology companies in order to encourage development of the high technology industry and investments by foreigners. Such incentives include reduced tax rates and other measures. For example, as a high technology company operating in an approved economic-technological development area, Shenyang Sunshine Pharmaceutical Company Limited, or Shenyang Sunshine, our main PRC operating subsidiary, is entitled to an enterprise income tax, or EIT, rate of 15%, compared to an EIT rate of 33% applicable to most domestically owned PRC companies. As a “foreign-invested advanced technology enterprise” certified by the relevant Chinese authorities, Shenyang Sunshine was entitled to a reduced EIT rate of 10% for the year ended December 31, 2005. The 10% EIT rate expired after the taxable year ended December 31, 2005 and Shenyang Sunshine’s EIT was 15% for the year ended December 31, 2006.

Additionally, certain changes to the PRC’s Corporate Income Tax Law are in discussion and could, if passed into law, adversely affect the taxation of Shenyang Sunshine and/or remittances by Shenyang Sunshine to us. To date, the PRC government has not disclosed any details as to the changes in the tax law slated for consideration. However, it is believed that among the possible changes are elimination of tax holidays and other incentives, increases in tax rates and imposition of a dividend withholding tax.

Historically, we have benefited from tax holidays and incentives. The extent and timing of any such changes in the PRC’s tax laws is uncertain. It is not known whether any transitional or other relief will be granted to companies such as Shenyang Sunshine that have already established operations in China. If adopted, these changes could significantly increase our tax expense.

In addition, we have historically received various government grants for our research and development programs. We recorded grant income of RMB2.5 million in 2003, RMB6.4 million in 2004 and RMB3.8 million in 2005. The grants in 2003 and 2004 primarily relate to our research and development efforts

25

Table of Contents

Risk factors

on EPIAO and TPIAO. Even though we plan to continue to apply for grants and subsidies from the PRC government for our ongoing and future research and development programs, there is no assurance that we will successfully obtain any level of grants and subsidies in future periods.

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

We may be classified as a passive foreign investment company, or a PFIC, for United States federal income tax purposes for the current or any future taxable year.

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

If we were to be or become classified as a PFIC, United States investors in our ADSs or ordinary shares may incur a significantly increased United States income tax liability on gain recognized on the sale or other disposition of our ADSs or ordinary shares and on the receipt of distributions on our ADSs or ordinary shares. See the section entitled “Taxation—United States Federal Income Tax Considerations—PFIC Considerations”.

We have guaranteed certain loans from banks in China to a shareholder. Should the borrower default on its loans, we would be entirely responsible for this outstanding debt. Given our limited resources, such a default would have a severe adverse impact on our company.

In 2006, in connection with our loans from the Industrial and Commercial Bank of China, we were obligated to enter into an arrangement by which we and our then shareholder, China Transport Resources Northeast Co., Ltd. or China Transport, cross guaranteed certain of each other’s loans. We provided a guarantee to China Transport in relation to loans in the aggregate principal amount of RMB10.0 million.

Should China Transport default on its loans, we would be solely responsible to the lending bank for the outstanding principal amount plus accrued interest. Given our limited resources, its default on this loan and our assumption of its debt would adversely affect our financial condition.

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

26

Table of Contents

Risk factors

pharmaceutical products in China, we are required to apply for and obtain a pharmaceutical manufacturing permit from the provincial level food and drug administrative authority. In addition, in order to manufacture and market any drug in China, we are required to apply for and obtain permits and certificates from the SFDA, including the new drug certificate, drug registration certificate (which includes the issuance of a drug approval number) and GMP certificate. We are required to renew the pharmaceutical manufacturing permits, drug registration certificates and GMP certificates permits every five years. If we are unable to obtain or renew such permits or any other permits or licenses required for our operation, we will not be able to engage in the manufacture of our products and our business may be adversely affected.

The regulatory framework regarding the pharmaceutical industry in China is subject to change and amendment from time to time. Any such change or amendment may have an adverse effect on our business. Changes to the regulatory framework could materially and adversely impact our business, financial condition and results of operations.

For further information regarding government regulation in China, see “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:

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

Delays in any part of the development process or our inability to obtain regulatory approval of our products could adversely affect our operating results by restricting or delaying our introduction of new products. Even if we successfully commercialize new products, these products may address markets that are currently being served by the off-label use of others of our mature products and inadvertently result in a reduction in the sales volume of our mature product or vice versa. Failure to develop, obtain necessary regulatory clearances or approvals for or successfully commercialize or market potential new products or technologies could have a material adverse effect on our financial condition and results of operations.

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

Before obtaining regulatory approvals for the manufacturing and sale of our product candidates, we must conduct, at our own expense, extensive preclinical tests and clinical trials to demonstrate the safety

27

Table of Contents

Risk factors

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:

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:

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

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

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

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.

28

Table of Contents

Risk factors

The pharmaceutical industry is extremely competitive.

Our business is subject to competition from other pharmaceutical manufacturers. In China, EPO drugs are offered by established international companies such as Kirin Brewery Company Limited, or Kirin, and F. Hoffmann-La Roche, Ltd., or Roche, and domestic pharmaceutical companies such as Di’ao Group Chengdu Diao Jiuhong Pharmaceutical Factory. Competitors for interferon alpha-2 drugs in China include Schering-Plough (Brinny) Co. and Beijing Tri-Prime Genetic Engineering Co., Ltd., and competitors for interleukin-2 in China include Beijing SL Pharmaceutical Co., Ltd. and Beijing Four Rings Biopharmaceutical Co., Ltd. Competitors for Tietai Iron Sucrose Supplement in China include Beijing Novartis Pharmaceutical Co., Ltd and Nanjing Hencer Pharmaceutical Co., Ltd. and competitors for Baolijin in China include Kirin, Hangzhou Jiuyuan Gene Engineering Co., Ltd. and Qilu Pharmaceutical Co., Ltd. Local and overseas pharmaceutical manufacturers engaged in the manufacture and sale of similar products to ours in China may have more capital resources, better research and development capabilities and more experience in manufacturing and marketing their products. Many of our competitors, including large pharmaceutical companies and other generic drug manufacturers, have employed various strategies intended to maximize their market share for previously-patented products. Competition is likely to intensify if:

If any of the above occurs, our profitability may be adversely affected.

There have been recent incidents in which patients have experienced severe adverse reactions following the use of pharmaceutical products manufactured in China.

There have been recent incidents reported in the Chinese media of a significant number of patients experiencing severe adverse health consequences following their use of pharmaceutical products manufactured by certain pharmaceutical companies in China. A number of patients have become ill and a number of fatalities have been reported. For example, several deaths were caused by drugs sold by the Second Pharmaceutical Factory of Qiqihaér, a PRC drug manufacturer, in May 2006. Concerns over the safety of pharmaceutical products manufactured in China could have an adverse effect on the sale of such products, including products manufactured by us.

We have not, to date, experienced any significant quality control or safety problems. If in the future we become involved in incidents of the type described above, such problems could severely and adversely impact our product sales and reputation.

Anti-corruption measures taken by the government to correct corruptive practices in the pharmaceutical industry could adversely affect our sales and reputation.

The government has recently taken anti-corruption measures to correct corrupt practices. In the pharmaceutical industry, such practices include, among others, acceptance of kickbacks, bribery or other illegal gains or benefits by the hospitals and medical practitioners from pharmaceutical distributors in connection with the prescription of a certain drug. Substantially all of our sales to our ultimate customers are conducted through third-party distributors. We have no control over our third-party distributors, who may engage in corrupt practices to promote our products. While we maintain strict anti-corruption policies applicable to our internal sales force and third-party distributors, these policies may not be effective. If 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.

29

Table of Contents

Risk factors

In addition, government-sponsored anti-corruption campaigns from time to time could have a chilling effect on our efforts to reach new hospital customers. Our sales representatives primarily rely on hospital visits to better educate physicians on our products and promote our brand awareness. Recently, 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.

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 adversely affect our business, financial condition and results of operations.

The government may take steps towards 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 offset our reputation and our financial results.

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

Existing PRC laws and regulations do not require us to nor do we maintain liability insurance to cover product liability claims. The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products. As a result, we do not have business liability, or in particular, product liability, or disruption insurance coverage for our operations. Any business disruption, litigation or natural disaster might result in substantial costs and diversion of resources. When and if we attempt to obtain product liability insurance for clinical trials, this insurance may be prohibitively expensive, or may not fully cover our potential liabilities. 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.

30

Table of Contents

Risk factors

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

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

China’s accession to the WTO may intensify competition in the pharmaceutical industry in China.

China acceded to the WTO in December 2001. Following the accession, China lowered tariffs on certain imported pharmaceutical products as part of its obligation under the WTO framework. The reduction or removal of tariffs on imported pharmaceutical products had made such products more competitive with domestic pharmaceutical products. In addition, an increasing number of foreign-invested pharmaceutical manufacturers may establish operations to engage in the manufacture or distribution of pharmaceutical products in China, which would increase the number of suppliers of pharmaceutical products in the market and intensify the competition with domestic manufacturers. If the domestic pharmaceutical manufacturers are unable to distinguish their products from imported products or products produced domestically by foreign-invested pharmaceutical manufacturers, they may lose market share to imported products or products produced domestically by foreign-invested pharmaceutical manufacturers which may be of higher quality and are sold at competitive prices. Furthermore, due to the lack of capital for the research and development of new medicines, most of the domestic pharmaceuticals are imitations of foreign products. Following China’s accession to the WTO, many more companies in Europe and the U.S. have applied for patents in the PRC, thereby increasing the likelihood of litigation for Chinese domestic pharmaceutical companies.

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 materially and adversely affect our competitive position.

All of our operations are located in China, and substantially all of our sales are made in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. The Chinese economy differs from the economies of most developed countries in many respects, including:

31

Table of Contents

Risk factors

While the Chinese economy has experienced significant growth in the past 20 years, growth has been uneven, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures, including potential investments in competing biopharmaceutical companies, may benefit the overall Chinese economy, but may also have a negative effect on us. Although we do not currently expect such measures to directly affect our use of proceeds from this offering, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. Further, any adverse change in the economic conditions or government policies in China could have a material adverse effect on overall economic growth and the level of healthcare investments and expenditures in China, which in turn could lead to a reduction in demand for our products and consequently have a material adverse effect on our businesses.

The Chinese economy has been transitioning from a planned economy to a more market-oriented economy. Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of the productive assets in China is still owned by the Chinese government. The continued control of these assets and other aspects of the national economy by the Chinese government could materially and adversely affect our business. The Chinese government also exercises significant control over Chinese economic growth through the allocation of resources, controlling payment of foreign currency- denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. One recent example is certain measures implemented by the Chinese government in 2006 to restrict foreign investment and speculation in the real estate sector. Although the government policies have in recent years been encouraging of the growth of the healthcare sector, future attempts by the Chinese government to slow the pace of growth of the healthcare sector or the overall Chinese economy could result in decreased capital expenditure by hospitals, which in turn could reduce demand for our products.

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

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 and adverse effect on us and the market price of our ADSs. In addition, 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, damage to our reputation and decline in the price of our ADSs.

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

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

32

Table of Contents

Risk factors

certain procedural requirements. However, the PRC government may take measures to restrict access to foreign currencies for current account transactions.

Our ability to obtain foreign exchange is subject to significant foreign exchange controls and, in the case of amounts under the capital account, requires the approval of and/or registration with PRC government authorities, including the SAFE. In particular, if Shenyang Sunshine, our wholly-owned PRC subsidiary, borrows 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.

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

Our business could be adversely affected by the effects of avian influenza, SARS or other epidemics or outbreaks of contagious diseases. There have been recent reports of outbreaks of a highly pathogenic avian influenza, or avian flu, caused by the H5N1 virus in certain regions of Asia and Europe. In 2005 and 2006, there have been reports on the occurrences of avian flu in various parts of China, including some confirmed human cases. A major outbreak of avian flu in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, particularly in Asia. Additionally, a recurrence of SARS, a highly contagious form of atypical pneumonia, similar to the occurrence in 2003 which affected China, Hong Kong, Taiwan, Singapore, Vietnam and certain other countries, would also have similar adverse effects. Since all of our operations and substantially all of our customers and suppliers are based in Asia, an outbreak of avian flu, SARS or other contagious diseases in China, other places in Asia or elsewhere, or the perception that such outbreak could occur, and the measures taken by the governments of countries affected, would adversely affect our business, financial condition or results of operations. We have not adopted any written preventive measures or contingency plans to combat any future outbreaks of avian flu, SARS or any other epidemics.

Our revenues are denominated in Renminbi, which is not freely convertible for capital account transactions and may be subject to exchange rate volatility.

We require foreign currency to purchase imported equipment and raw materials and pay dividends to our shareholders. However, we generate revenues in Renminbi. Under PRC foreign exchange rules and regulations, payments of current account items, including profit distributions and operation-related expenditures, may be made in foreign currencies without prior approval but are subject to procedural requirements. Strict foreign exchange control continues to apply to capital account transactions. These transactions must be approved by and/or registered with SAFE, and repayment of loan principal, distribution of return on direct capital investment and investments in negotiable instruments are also subject to restrictions. There is no assurance that we will be able to meet all of our foreign currency obligations or to remit profits out of China.

Prior to 1994, the Renminbi experienced a significant net devaluation against most major currencies, and there was significant volatility in the market-based exchange rate during certain periods. Since 1994, the Renminbi to U.S. dollar exchange rate has largely stabilized. On July 21, 2005, People’s Bank of China, or PBOC, announced that the exchange rate of U.S. dollar to Renminbi would be adjusted from US$1 to RMB8.27 to US$1 to RMB8.11, and it ceased to peg the Renminbi to the U.S. dollar. Instead, the Renminbi will be pegged to a basket of currencies, which components will be adjusted based on changes in market demand and supply under a set of systematic principles. On September 23, 2005, the Chinese government widened the daily trading band for Renminbi against non-US dollar currencies from 1.5% to 3.0% to improve the flexibility of the new foreign exchange system. The Renminbi may be revalued further against the U.S. dollar or other currencies, or may be permitted to enter into a full or limited free float, which may result in an appreciation or depreciation in the value of the Renminbi against the U.S.

33

Table of Contents

Risk factors

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

Our operations are subject to the uncertainty associated with the legal system in China which could limit the legal protection available to potential investors.

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

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

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

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

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

34

Table of Contents

Risk factors

According to the latest version of this Catalogue, which became effective on January 1, 2005, our business does not belong to the prohibited or the restricted category. As this Catalogue is updated every few years, there can be no assurance that the PRC government will not change its policies in a manner that would cause part or all of our businesses to fall within the restricted or prohibited categories. If any of our businesses becomes prohibited or if we cannot obtain approval from relevant approval authorities to engage in businesses which become restricted for foreign investors, we may be forced to sell or restructure our businesses which have become restricted or prohibited for foreign investment. If we are forced to adjust our corporate structure or business line as a result of changes in government policy on foreign investment, our business, financial condition and results of operations may be materially adversely affected.

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

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

PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC operating subsidiaries and affiliated entities, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

In utilizing the proceeds of this offering in the manner described in “Use of proceeds,” as an offshore holding company of our PRC operating subsidiaries we may make loans to our PRC subsidiaries or we may make additional capital contributions to our PRC subsidiaries. Any loans to our PRC subsidiaries are subject to PRC regulations and approvals. For example, loans by us to Shenyang Sunshine to finance its activities cannot exceed statutory limits and must be approved by the PRC State Administration of Foreign Exchange, or SAFE, or its local counterpart.

We may also decide to finance our wholly owned subsidiaries by means of capital contributions. These capital contributions must be approved by the Ministry of Commerce, or MOFCOM, or its local counterpart. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all, with respect to future loans or capital contributions by us to our subsidiaries. If we fail to receive such registrations or approvals, our ability to use the proceeds of this