Skystar Bio-Pharmaceutical Company (“Skystar” or the “Company”), formerly known as The Cyber Group Network Corporation, was incorporated in Nevada on September 24, 1998. The Company is a holding company that, through its variable interest entity (“VIE”) Xian Tianxing Bio-Pharmaceutical Co., Ltd. (“Xian Tianxing”), researches, develops, manufactures and distributes veterinary health care and medical care products in the People’s Republic of China (“PRC”).
Currently, we have four major product lines:
· Our bio-pharmaceutical veterinary vaccine line currently includes over 10 products and accounted for 4% of our revenue in 2009;
· Our veterinary medicine line for poultry and livestock currently includes over 159 products and accounted for 68% of our revenue in 2009;
· Our feed additives line currently includes over 10 products and accounted for 4% of our revenue in 2009; and
· Our micro-organism products line currently includes over 16 products and accounted for 24% of our revenue in 2009.
Management believes there is significant demand for veterinary medicines and vaccines in China. Statistics from the Chinese Ministry of Agriculture show that China vaccinated six billion poultry and 850 million livestock in the first half of 2006. According to the Chinese Ministry of Agriculture, the addressable market in China in 2004 for veterinary, livestock and poultry vaccines was over 70 billion doses; howeve r the market supply was only 32 billion doses.
We also believe that there is a substantial market for micro-organisms which are fed to animals and result in healthier livestock and reduced feed requirements for our customers. According to the Chinese Minis try of Agriculture, the addressable market in China in 2004 for such micro-organisms was 3 million tons, while the supply output was only 200,000 tons.
As of December 31, 2009, we had over 1,983 customers in 29 provinces in China, including 1,465 distributors and 518direct customers. Of the 1,465 distributors, 350 are physical stores which have outer signage with our logo and sell products from our four product lines exclusively (“Franchise Distributors”). We intend to enter into agreements with additional distributors in order to strengthen our distribution network and convert some of these distributors to Franchise Distributors.
We recognize the importance of branding as well as packaging. All of our products have uniform branding while being specifically designed to differentiate our four product lines.
We conduct promotional marketing activities within the provinces we operate to publicize and enhance our image as well as to reinforce the recognition of our brand name, including:
1. publishing advertisements and articles in national as well as specialized and provincial newspapers, magazines, and in other media, including the Internet;
2. participating in national meetings, seminars, symposiums, exhibitions for bio-pharmaceutical and other related industries;
3. organizing cooperative promotional activities with distributors; and
4. sending direct mail to major farms.
None of our customers accounted for 10% or more of our total revenues in 2009.
We have three major competitors in China: Jielin Bio-Tech Production Co., Ltd., Qilu Animal Health Production Co., Ltd., and Zhongmu Industrial Joint Stock Co., Ltd. These companies have more assets and have a larger market share. Nevertheless, we believe we are able to compete with these competitors because of our location in northwestern China, a full range of product offerings, and lower prices. Other than these three competitors, most of our other competitors produce only one or two products.
Xi ’ an Yanghua Chemical Co., Ltd., Xi ’ an Nanchen Trading Co., Ltd. and Xi ’ an Fandike Chemical Technology Co., Ltd. collectively supplied over forty-eight percent ( 48 %) of the raw materials we used to manufacture our products. We design, create prototypes and manufacture our products at our manufacturing facilities located at Xi ’ an city, Shaanxi Province, China. Our principal raw materials include various chemical com p ounds including dexamethasone sodium phosphate (a glucocorticoid with anti-inflammatory property), stachyose (a tetrasaccharide found naturally in many vegetables) , praziquantel (which treats schistosomiasis) and thiamphenicol (an antibiotic). We also use Chinese herbs such as Huoxiang, Huanglian, and Zhang Red Flowers as raw materials, which are supplied to us by Wan Shou Bei Lu Zhong Kui Cao Yao Xing. None of our current products requires any raw materials that are scarce, and our raw materials generally are readily available from a wide range of sources. Accordingly, we do not have any continuing or long term supply agreements with any of these suppliers, and purchase our raw materials from them on a per purchase order basis. The prices for these raw mat e rials are nevertheless subject to market forces largely beyond our control, including energy costs, organic chemical feedstock, market demand, and freight costs. The prices for these raw materials have varied significantly in the past and may vary signifi c antly in the future.
As a result of our research and development efforts in 2007 in cooperation with research institutes including Shaanxi Microbial Research Institute, Jiangsu Microbial Research Institute, China Northwestern University and China Northwes t A&F University, we now also internally produce microbial strains, which are key components of our micro-organism products. Our ability to produce microbial strains has translated into a significant cost reduction for these raw materials.
We rely on a combination of trademark, copyright and trade secret protection laws in China and other jurisdictions, as well as confidentiality procedures and contractual provisions to protect our intellectual property and our brand.
We intend to seek other licenses or apply for exclusivity as necessary in order to protect our rights, and we also enter into confidentiality, non-compete and invention assignment agreements with our employees and consultants and nondisclosure agreements with third parties. The Chinese characters which transliterate as “Jia Teng Jun”, “Liao Xiao Wang”, “An Jian”, “Hao Shou Yi” and “Xing Ge” are our registered trademarks in China.
Additionally, Xian Tianxing is approved by the Chinese Ministry of Agricult ure for the manufacture and distribution of 100 types of veterinary drugs. Such approvals certify Xian Tianxing ’ s products as conforming to government-mandated standards. The approvals are issued for a period of 5 years and may be renewed 6 months prior to their expiration date. The 100 veterinary drugs and their approval numbers are listed below:
Approval Number Metamizole Sodium Injection
Veterinary Drug (2007) 270261152 Antondine Injection
Veterinary Drug (2007) 270261160 Dexamethasone Sodium Phosphate Injection
Veterinary Drug (2007) 270262530 Enrofloxacin Injection
Veterinary Drug (2007) 270262518 Compoumd Vitamin B Injection
Veterinary Drug (2007) 270264572 Sulfamonomethoxine Sodium Injection
Veterinary Drug (2007) 270261616 Sulfadiazine Sodium Injection
Veterinary Drug (2007) 270261634 Kanamycin Sulfate Injection
Veterinary Drug (2007) 270261211 Gentamycin Sulfate Injection
Veterinary Drug (2007) 270261507 Gentamycin Micronomicin Sulfate Injection (10 ml:100,000 parts)
Veterinary Drug (2007) 270262751 Gentamycin Micronomicin Sulfate Injection (10ml: 200,000 parts)
Veterinary Drug (2007) 270262752 Mequindox Injection (10ml:0.5g)
Veterinary Drug (2007) 270261174 Mequindox Injection (10ml:0.2g)
Veterinary Drug (2007) 270264644 Vitamin C Injection
Veterinary Drug (2007) 270262795 Vitamin B 1 Injection
Veterinary Drug (2007) 270261389 Lincomycin Hydrochloride Injection (10ml:0.3g)
Veterinary Drug (2007) 270262614 Lincomycin Hydrochloride Injection (10ml:1.5g)
Veterinary Drug (2007) 270262616 Danofloxacin Mesylate Powder
Veterinary Drug (2008) 270262036 Ofloxacin Injection
Veterinary Drug (2007) 270262126 Norfloxacin Nicotinate Injection
Veterinary Drug (2007) 270262593 Ciprofloxacin Hydrochloride Injection
Veterinary Drug (2007) 270262160 Pefloxacin Mesylate Granules
Veterinary Drug (2007) 270262042 Praziquantel Tablets
Veterinary Drug (2007) 270261174 Compound Sulfamethoxazole Tablets
Veterinary Drug (2007) 270261612 Ofloxacin Tablets
Veterinary Drug (2007) 270262123 Amoxicillin Soluble Powder
Veterinary Drug (2007) 270261199
Veterinary Drug (2007) 270262066 Diclazuril Premix (0.2%)
Veterinary Drug (2007) 270261140 Diclazuril Premix (5%)
Veterinary Drug (2007) 270262528 Florfenicol Powder
Veterinary Drug (2007) 270262110 Compound Amoxicillin Powder
Veterinary Drug (2007) 270262092 Thiamphenicol Powder
Veterinary Drug (2007) 270262722 Erythromycin Thiocyanate Soluble Powder
Veterinary Drug (2007) 270261492 Apramycin Sulfate Soluble Powder
Veterinary Drug (2007) 270262745 Neomycin Sulfate Soluble Powder
Veterinary Drug (2007) 270262755 Colistin Sulfate Soluble Powder
Veterinary Drug (2007) 270262758 Salinomycin Sodium Premix
Veterinary Drug (2007) 270261379 Ciprofloxacin Hydrochloride Soluble Powder
Veterinary Drug (2007) 270262159 Spectinomycin Hydrochloride and Lincomycin Hydrochloride Soluble Powder
Veterinary Drug (2007) 270262602 Ofloxacin Soluble Powder
Veterinary Drug (2007) 270262124 Baitouweng San
Veterinary Drug (2007) 270265053 Baotai Wuyou San
Veterinary Drug (2007) 270265111 Chulijing
Veterinary Drug (2007) 270265192 Danjibao
Veterinary Drug (2007) 270265171 Feizhucai
Veterinary Drug (2007) 270265100 Fuzheng Jiedu San
Veterinary Drug (2007) 270265076 Gongying San
Veterinary Drug (2007) 270265028 Houyanjing San
Veterinary Drug (2007) 270265179 Huanglian Jiedu San
Veterinary Drug (2007) 270265178 Jianji San
Veterinary Drug (2007) 270265133 Jianwei San
Veterinary Drug (2007) 270265134 Jingfang Baidu San
Veterinary Drug (2007) 270265127 Mubin Xiaohuang San
Veterinary Drug (2007) 270265035 Qingfei Zhike San
Veterinary Drug (2007) 270265157 Qingshu San
Veterinary Drug (2007) 270265162 Qingwen Baidu San
Veterinary Drug (2007) 270265165 Quchong San
Veterinary Drug (2007) 270265089 Tongru San
Veterinary Drug (2007) 270265156 Xiaoji San
Veterinary Drug (2007) 270265146 Yimu Shenghua San
Veterinary Drug (2007) 270265148 Yujin San
Veterinary Drug (2007) 270265102 Zhili San
Veterinary Drug (2007) 270265037 Compound Sulfamethoxydiazine Sodium Injection
Veterinary Drug (2007) 270261608 Lomefloxacin Hydrochloride Soluble Powder
Veterinary Drug (2008) 270262166 Danofloxacin Mesylate Injection
Veterinary Drug (2008) 270262033 Sulfathiazole Sodium Injection
Veterinary Drug (2008) 270261645 Buzhong Yiqi San
Veterinary Drug (2008) 270265082 Fangji San
Veterinary Drug (2008) 270265072 Shenling Baishu San
Veterinary Drug (2008) 270265093 Qibu San
Veterinary Drug (2008) 270265220 Sulfaquinoxaline Sodium Soluble Powder (10%)
Veterinary Drug (2008) 270261624 Sulfaquinoxaline Sodium Soluble Powder (5%)
Veterinary Drug (2008) 270262580 Fenbendazole Powder
Veterinary Drug (2008) 270261189 Sulfachloropyrazin Sodium Soluble Powder
Veterinary Drug (2008) 270262703 Huoxiang Zhengqi San
Veterinary Drug (2008) 270265200 Cuiqing San
Veterinary Drug (2008) 270265188 Longdan Xiegan San
Veterinary Drug (2008) 270265057 Maxing Shigan San
Veterinary Drug (2008) 270265174 Qumai San
Veterinary Drug (2008) 270265067 Shengru San
Veterinary Drug (2008) 270265051 Xiaoshi Pingwei San
Veterinary Drug (2008) 270265145 Xiaochaihu San
Veterinary Drug (2008) 270265018 Yinqiao San
Veterinary Drug (2008) 270265172 Pefloxacin Mesylate Injection
Veterinary Drug (2008) 270262665 Enrofloxacin Injection (10ml:250mg)
Veterinary Drug (2008) 270261295 Florfenicol Injection
Veterinary Drug (2008) 270262546 Lomefloxacin Hydrochloride Injection
Veterinary Drug (2008) 270262169 Berberine Sulfate Injection
Veterinary Drug (2008) 270264595 Gentamycin Sulfate Injection ( 10ml:0.2g )
Veterinary Drug (2008) 270261506 Promethazine Hydrochloride Injection
Veterinary Drug (2008) 270262126 Bailong San
Veterinary Drug (2008) 270265055 Feizhu San
Veterinary Drug (2009) 270265101 Ivermectin Premix
Veterinary Drug (2009) 270263059 Kitasamycin Premix
Veterinary Drug (2008) 270262043 Pefloxacin Mesylate Soluble Powder
Veterinary Drug (2008) 270262040 Ciprofloxacin Lactate Soluble Powder
Veterinary Drug (2008) 270262073 Norfloxacin Nicotinic Soluble Powder
Veterinary Drug (2008) 270262178 Tylosin Tartrate Soluble Powder
Veterinary Drug (2008) 270262731 Lincomycin Hydrochloride Soluble Powder
Veterinary Drug (2008) 270262620 Tilmicosin Premix
Veterinary Drug (2010) 270262263
Bio-pharmaceutical companies are at times involved in litigation based on allegations of infringement or other violations of intellectual property rights. Furthermore, the application of laws governing intellectual property rights in China and ab road is uncertain and evolving and could involve substantial risks to us.
Government approval is required for the production of bio-pharmaceutical products. The Chinese Ministry of Agriculture has granted Xian Tianxing three government permits to produce the following products: Forage Additive Products, Additive and Mixed Forage Products and Veterinary Medicine Products. For the production of the veterinary medicine, there is a national standard known as the Good Manufacturing Practice (“GMP”) standard. A company must establish its facility according to GMP standards, including both the facility and the production process. After establishing such facility, the company files an application to operate the facility with the PRC Ministry of Agriculture, which then sends a team of specialists to conduct an on-site inspection of the facility. A company cannot start production at the facility until it receives approval from the Ministry of Agriculture to begin operations. Xian Tianxing currently has the requisite approval and licenses from the Ministry of Agriculture in order to operate our production facilities.
We place great emphasis on product research and development, and are currently working closely with two research institutes in the veterinary science field. With Shanghai Poultry Verminosis Institution, which is a part of the Chinese Academy of Agricultural Sciences, we have jointly established the Skystar Research and Development Center in Shanghai. We have also established a research and development center, located on our premises in Huxian, with Shaa n xi Microbial Institute, the only microbial research institute in northwest China.
In July 2005, we entered into a cooperation agreement with Shaanxi Microbial Institute pursuant to which we established a R&D center at our Huxian plant to facilitate opportunities for us to develop commercially viable products based on the Institute’s research conducted at our research center. Under the cooperation agreement, we provide for the running and operation of the research center, including research equipment and materials. In exchange, we have exclusive rights to any technology derived from any research project that we solely fund. The cooperation agreement also provides for our mutual staffing of research personnel at, and joint-appointment of the director for, the research center. The Institute, however, is not obligated to us with respect to a specific amount of time or a specific project under the cooperation agreement. Currently, we are undertaking the following projects at this research center:
1. Development of protein technology and enzyme mechanism . Introducing the technology in polypeptides, we are working to develop new products to cure piglet diarrhea. The products are expected to stimulate the release of growth hormones in piglets, improve their ability to produce antibody and excrete stomach acidity, enhance the activity of albumen enzyme and adjust the activity of T.B. cells, thereby improving their all-around disease-resistance ability. We expect these new products will greatly reduce the use of traditional chemical drugs and lead to more environmentally-friendly livestock raising. These products are now in the interim stage of development. We are also developing complex enzyme preparations as new feed additives and aim to use anti-inflammatory enzyme, polyase, and cellulose to form the best combination to effectively dissolve and cause the additive to be absorbed in the feed. Our goal is to drastically improve the absorption rate of the feed, thereby reducing the ratio of usage of feed versus meat, while concurrently reducing the incidence of disease in livestock and poultry. We are looking to outsource certain aspects of these research projects to Shaanxi Jiuzhou Biotechnology Co., Ltd., a member of Shaanxi Jiuzhou Biomedicine Park, although we have not entered into any definitive agreement.
2. Development of non-pathogenic micro-organisms . We are also developing, in cooperation with the Institute, non-pathogenic micro-organisms and, based upon current products of microbe preparations, lactobacillus, bacillus, bifid bacterium baceroid, and combined with the most appropriate oligosaccharide preparations to produce living bacterium which will be applied to cure gastrointestinal tract diseases resulting from the maladjustment of flora. If successful, micro-organism preparations can be effective cure and prevention for livestock disease, and can greatly reduce the use of antibiotic and other drugs.
At the Skystar Research and Development Center in Shanghai, we have an arrangement with Shanghai Poultry Verminosis Institution, which is a part of the Chinese Academy of Agricultural Sciences, that is similar to our agreement with Shaanxi Microbial Institute, although we have not entered into any written agreement with the Institution. Currently, we are undertaking the following projects at this research center:
1. Development of new products for animal immunization by employing new technologies in micro-organism and bacterium . We expect to be placing greater resources into our research and development with the Institution of toxoid, multivalent inactivated vaccines and attenuated live vaccine, which we believe will gradually replace traditional chemical drugs and which will greatly impact the animal vaccination industry.
2. Development of veterinary medicines for pets . We believe that markets for pet-related products, including vaccines have been experiencing growth at a rate reflective of the growth rate for the general economy in China. We believe that this niche market is being overlooked by local manufacturers. To attempt to take advantage of this opportunity, we have over 20 products of veterinary medicines for pets that are in the course of development.
During the first quarter of 2008, Xian Tianxing contracted with Northwestern Agricultural Technology University to jointly work on an R&D project concerning the application of nano-technology in the prevention of major milk cow disease. We expect to obtain veterinary p e rmit for a new product based on the project from government sometime in 2010.
On September 23, 2009 , we purchased an exclusive aquaculture vaccine technology from and signed a collaborative research and development agreement with China ’ s Fourth Military Medical University ( “ FMMU” ) for RMB 8 million (approximately $1.2 million), granting the Company exclusive rights to sell and market the patented aquaculture vaccine through 2020. Under this patented technology, and in collaboration with FMMU, we will produce the first vacci n e in China designed to safely prevent and treat certain bacterial infection and diseases in marine life without causing harmful side effects. Based on its first-to-market status, the Chinese Ministry of Agriculture has issued a Grade I Veterinary Certific a te for our vaccine.
We have also worked with Northwest A&F University in Shaanxi Province and Jiangsu Institute of Microbiology in the past, and we continue to look for opportunities to collaborate with these and other research institutes in the future.
In 2009, we spent $1,167,937, or approximately 3.5%, of our revenue on R&D . In 2008, we spent $549,236, or approximately 2.1%, of our revenue on R&D.
Costs and Effects of Compliance with Environmental Laws
In compliance with Chinese environmental regulations, we spent approximately $25,000 in 2008 and $30,000 in 2009, mainly for the wastewater treatment in connection with our production facilities.
As of December 31, 2009, we have approximately 214 employees, of which 169 are full time employees. As of December 31, 2008, we had 229 employees, of which 226 worked as full time employees. None of these employees are represented by any collective bargaining agreements. We have not experienced a work stoppage. Management believes t hat our relations with our employees are good.