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China Medicine Announces Second Quarter 2009 Results

Friday, September 18, 2009 General News J E 4
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GUANGZHOU, China, Aug. 13 China Medicine Corporation(OTC Bulletin Board: CHME) ("China Medicine" or "the Company"), a developerand a leading distributor of prescription and over the counter pharmaceuticals,traditional Chinese medicines (TCM), nutritional and dietary supplements, andmedical devices and medical formulations, today announced its second quarter2009 results.

"We are pleased with our top line growth during the second quarter, duringwhich we expanded regional and provincial distribution sales into rural areasand established trial sales of rADTZ, which has very high profit margins andpromises to increase our profitability going forward. During the secondquarter, our gross profit fell because of lower selling prices tied to severeprice competition, an increase in sales of regional level distribution rightsdrugs, which have lower margins, and increased costs associated withpromotional campaigns to increase sales. However, we believe thatprofitability will improve going forward since the second quarter is typicallythe slowest seasonally, and we have already seen an uptick in sales andprofitability. As a result, we remain confident that our financial profilewill improve and anticipate stronger sales in the second half of the year aswe ramp up new proprietary products," said Mr. Senshan Yang, Chairman and CEOof China Medicine Corporation.

"Our top-selling drugs for the quarter included Iopamidol by injection,which accounted for 13.7% of revenues and is used to help diagnose heart,brain, blood and nervous system disorders in X-rays or CT scans; Kelinao(Cinepazide Maleate Injection), which accounted for 6.7% of revenues and isused for the treatment of cardio-cerebral vascular diseases; and HongjinXiaojie capsules, which accounted for 5.4% of revenues are used to treat painand for blood circulation. Combined gross margins for these products were32.2%. Collectively, our top three selling drugs accounted for approximately25.8% of revenues," said Mr. Yang.

Second Quarter 2009 Results

China Medicine's total revenues in the second quarter were $15.1 million,an increase of 29.4% over the second quarter of 2008. This was attributable toan increase in the Company's provincial and regional distribution sales as theChinese government's implementation of its rural health care reform policypresented new opportunities for expansion of the Company's business in keepingwith its strategic focus in 2008 to lay a solid foundation for a ruraldistribution network.

Product sales in the second quarter totaled $15.1 million and accountedfor 100% of total net revenues. Sales of Western-style prescription productsand over-the-counter products accounted for 73.9% of total revenues in thesecond quarter of 2009. Sales of TCM, prescription and over-the-counterproducts accounted for 22.8% of total revenues. Sales of dietary supplementsand medical equipment accounted for 3.1% of revenues. Sales of rADTZ accountedfor 0.2% of total revenue.

Gross profit in the second quarter of 2009 was $3.5 million, a decrease of15.1% over the second quarter of 2008. Gross margin was 23.4% of totalrevenues for the second quarter, compared to 35.7% in the second quarter of2008, and 27.5% in the first quarter of 2009. The decrease in gross profit wasattributable to overall lower selling prices in the second quarter of 2009 dueto increased sales of lower margin regional distribution products and anincrease in the cost of some of our pharmaceutical products imposed by oursuppliers. In addition, to respond to a trend of lower consumer spending tiedto the global economic slowdown affecting the pharmaceutical industry, theCompany increased its advertising efforts and spent more on promotionalcampaigns to increase sales.

Operating expenses in the second quarter of 2009 were $1.8 million, up49.9% from $1.2 million in the second quarter of 2008. The increase was dueto higher selling, general and administrative expenses related to depreciationof assets and an increase in advertising fees, as well as highertransportation costs that resulted from increased sales during the quarter.Operating expenses represented 11.6% of total revenues in the second quarterof 2009, increase from 10.0% in the second quarter of 2008.

Operating income was $1.8 million in the second quarter of 2009, down40.5% from $3.0 million in second quarter of 2008. Operating margin was 11.8%,as compared to 25.7% during the same period a year ago.

The Company's provision for income taxes was $570,014 for the three monthsended June 30, 2009 compared to $572,176 for the comparable period of 2008.The decrease was due to the decrease in operating income. The decrease wassubject to an effective income tax rate of 25% in 2009, versus a reduced rateof 16.5% in 2008, as tax exemptions enjoyed by the Company's Konzernsubsidiary ended in 2008.

Net income for the second quarter of 2009 was $0.04 million, or $0.003 perdiluted share, which included a $1.2 million non-cash expense related to achange in the fair value of warrants, compared to $2.5 million or $0.16 perdiluted share, in the second quarter of 2008. This is due to the adoption of anew accounting policy that became effective January 1, 2009, which requireschanges in the fair value of warrants to be recognized in earnings eachquarter. Excluding this expense, adjusted net income for the second quarter of2009 was $1.3 million, or $0.08 per fully diluted share, which translates to a49.1% decrease in net income for the second quarter of 2009 compared to thesame period last year.

Six Month Results

For the first half of 2009, revenues increased to $25.2 million, up 34.5%from $18.7 million in first half of 2008. Gross profit decreased 2.5% to $6.3million in the first six months of 2009, versus $6.5 million in the first sixmonth of 2008. Gross margin was 25.1% in the first half of 2008 compared to34.6% during the first half of 2008. Operating income in the first half of2009 decreased 19.4% to $3.5 million compared to $4.4 million in the firsthalf 2008. Net income for the first six months of 2009 was $0.6 million or$0.04 per diluted share, compared to $3.6 million, or $0.23 per diluted sharein the first half of 2008. Adjusted net income, excluding expenses related tofair value of warrants, was $2.6 million in first half 2009, or $0.17 perdiluted share, which translates to a 29.6% decrease in net income for thefirst half of 2009 compared to the same period last year.

Financial Condition

As of June 30, 2009, China Medicine had $1.8 million in cash and cashequivalents. Working capital was approximately $33.0 million, up 1.4% from$32.5 million as of December 31, 2008. Accounts receivable stood at $15.4million as of June 30, 2009, down from $19.2 million as of December 31, 2008,reflecting increased customer collections. China Medicine CorporationStockholders' equity as of June 30, 2009 was $42.9 million compared to $42.8million recorded as of December 31, 2008. For the six months ended June 30,2009, cash from operating activities was $1.5 million. Cash flow used ininvesting activities was $2.6 million for the six months ended June 30, 2009,versus $0.6 million for the six months ended June 30, 2008. The increase isattributable to the purchase of know-how for a non-prescription medicine,Shiwuwei Syrup, which is used to enhance the respiratory system and increasethe amount of hemoglobin in the blood.

Business Outlook

"We continue to make progress on executing our business plan as we entersecond half of 2009 and are excited about the prospects for recombinantAlfatoxin Detoxifizyme (rADTZ), our innovative product that has the potentialto detoxify alfatoxin (AFT), a potential cancer causing agent, in food andfeed when used as an additive. We are pleased to have successfully commencedtrial production and sales for our rADTZ, which have generated RMB 153,000(approximately $22,400), with gross margin of approximately 65.4%. As weproduce the product in greater scale and refine the technology used in theproduction process, we believe gross margin could be improved. We are veryenthusiastic about the prospects for rADTZ and the demand for the product, andbelieve it will become one of the most important contributors to our growth inthe coming years.

"In terms of increasing our product portfolio to include products withexclusive national distribution rights, we added Qinpi Jiegu tablets to ourportfolio in the second quarter, which are used to promote blood circulationto dissipate blood stasis and relieve pain. We also obtained exclusiveprovincial level distribution rights for Alendronate Sodium tablets used fortreatment of osteoporosis. In keeping with our strategy, we plan to increasesales of pharmaceutical products with exclusive distribution rights, whichhave higher margins. Overall, we are confident that our margins will improvegoing forward as sales for these products increase during the year," said Mr.Yang.

"Recently, we have also received Quality Standard certification for ourherbal tea series and expect to launch our self-branded herbal tea series intothe market in August 2009. As we get further into the second half of 2009, wealso expect to receive approval from the State Food and Drug Administration(SFDA) in October to start the production of our self-branded multivitaminseries. We will be launching a comprehensive outdoor advertising campaign topromote our self-branded products, including our proprietary weight losssupplement-Bethin, during the second half of 2009. We remain confident that aswe promote our brand image among Chinese consumers in Guangdong province, wewill able to increase our profitability profile in the quarters ahead."

"2009 is an important, transitional year for China Medicine as we set outto achieve our major goals of bringing the Company up to a higher platform.The increase of higher margin pharmaceutical products to our distributionpipeline and our plan to launch self-branded products will contribute to ourbottom line growth. Furthermore, with our novel rADTZ product currently underreview by the Department of Agriculture for product permit approval, we expectby the end of 2009, we will be able to commercialize this product and competefor a share of the $4.04 billion addressable market for rADTZ in China's feedindustry," said Mr. Yang.

Conference Call

China Medicine will hold its second quarter conference call for allinterested persons at 10:00 a.m. Eastern Time on Thursday, August 13, 2009, todiscuss its results. To participate in the live conference call, please dialthe following number five to ten minutes prior to the scheduled conferencecall time 866.800.8648. International callers should dial 617.614.2702. Whenprompted by the operator, mention conference passcode 175 848 10. If you areunable to participate in the call at its scheduled time, a replay will beavailable for 14 days starting on Thursday, August 13 at 12:00 p.m. EasternTime. To access the replay, dial 888-286-8010 (international callers dial617-801-6888, and enter the passcode 442 846 06.

About China Medicine Corporation

China Medicine Corporation is a developer and leading distributor ofprescription and over the counter ("OTC") drugs, traditional Chinese medicineproducts, herbs and dietary-supplements, medical devices, and medicalformulations in China. China Medicine also has its research and developmentforce for certain products it manufactures through OEM arrangement makes thedistribution. The Company distributes its products to wholesale distributorsincluding more than 300 hospitals and 500 medicine companies that sell to over2,000 drug stores in 28 provinces throughout China. The Company activelydevelops a number of proprietary products for a variety of uses, includingoncology, high blood pressure and the removal of toxins from food and animalfeeds. For more information visit the Company's website athttp://www.chinamedicinecorp.com

Use of Non-GAAP Financial Measures

GAAP results for second quarter 2009 include $1.2 million non cashexpenses related to change in Company's fair value of warrants. Because theexpense is non-cash, and is not related to the Company's operating results,the Company believes that the non-GAAP information is useful to supplement theCompany's condensed consolidated financial statements. A reconciliation of theadjustments to GAAP results appears in the table accompanying this pressrelease. This additional non-GAAP information is not meant to be considered asa substitute for GAAP financials. The non-GAAP financial information that theCompany provides also may differ from the non-GAAP information provided byother companies.

Cautionary Statement

This press release contains forward-looking statements concerning theCompany's business and products. The Company's actual results may differmaterially depending on a number of risk factors including, but not limited to,the following: general economic and business conditions, obtaining regulatoryapproval for new products, the expected contribution of higher margin products,government support for rural health care, competition from existing and newcompetitors, changes in technology, and various other factors beyond itscontrol. All forward-looking statements are expressly qualified in theirentirety by this Cautionary Statement and the risk factors detailed in theCompany's reports filed with the Securities and Exchange Commission. ChinaMedicine Corporation undertakes no duty to revise or update any forward-looking statement to reflect events or circumstances after the date of thisrelease.

Weighted average diluted shares, 15355660 for three months ended June 30,2009 and 15634713 for three months ended June 30, 2008

Weighted average diluted shares, 15248654 for the six months ended June 30,2009 and 15547183 for the six months ended June 30, 2009

Weighted average diluted shares, 15355660 for three months ended June 30,2009 and 15634713 for three months ended June 30, 2008

Weighted average diluted shares, 15248654 for the six months ended June 30,2009 and 15547183 for the six months ended June 30, 2009Second Quarter 2009 Highlights: -- Revenues increased 29.4% from Q2 of 2008 to $15.1 million -- Gross profit decreased 15.1% from Q2 of 2008 to $3.5 million -- Operating income decreased 40.5% from Q2 of 2008 to $1.8 million -- Adjusted net income, which excluded a non-cash expense related to change in fair value of warrants for the second quarter of 2009, was $1.3 million, or $0.08 per diluted share -- Net income was $0.04 million, or $0.01 per diluted share -- Received third party feasibility report on rADTZ from the Feed Research Institute (FRI) of the Chinese Academy of Agricultural Sciences (CAAS) -- Commenced small scale-trial production and sales of rADTZ in June -- Obtained national distribution rights for Qinpi Jiegu tablets in China -- Obtained provincial distribution rights to Alendronate Sodium Tablets -- Received a loan of RMB 20 million (approximately U.S. $2.9 million) pursuant to the loan agreement with the Bank of China, Guangdong Branch

SOURCE China Medicine Corporation
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