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"During the first quarter, we saw double digit growth in ourpharmaceutical product sales compared to the same quarter last year," said Mr.Senshan Yang, Chairman and CEO of the Company. "We are very pleased with thehealthy performance of our sales of prescription and over-the-countermedicines as well as our traditional Chinese medicines. This increase inrevenues was attributed to the expansion of our distribution network to ruralareas in Guangdong Province and the increase in provincial distribution rightsthrough the online bidding system last quarter."
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China Medicine usually experiences seasonality in its business such thatsales are usually strongest during the last three months of each calendaryear, as most pharmaceutical companies and hospitals place purchase orders tostock up their inventory prior to the Chinese New Year holidays. Therefore,sales in the first calendar quarter of each year are typically the lowest.
First Quarter 2008 Results
China Medicine's total revenues in the first quarter were $7.1 million, anincrease of 38.6% over the first quarter of 2007. This was attributed to a40.3% increase in product sales driven by an increase in sales ofpharmaceutical products with exclusive distribution rights in GuangdongProvince. Product sales totaled $6.9 million and accounted for 97% of totalnet revenues. Sales of prescription products and over-the-counter productsaccounted for 58% of total revenues, and TCM accounted for 38% of totalrevenues for the quarter. Medical formula sales accounted for the remaining3% of total revenues, totaling $0.2 million. This represented a decrease of0.1% from the same quarter of 2007.
Gross profit in the first quarter of 2008 was $2.3 million, an increase of37% over the first quarter of 2007. Gross margin remained the same at 33% oftotal revenues for the quarters ended March 31, 2007 and 2008. Gross marginimproved from 29.4% in the fourth quarter of 2007 due to a decrease in salesof lower margin over-the-counter products.
Operating expenses in the first quarter of 2008 were $0.9 million, up21.1% from $0.7 million in the first quarter of 2007. This increase was dueto higher selling, general and administrative expenses, in line with theincrease in revenues in the first quarter of 2008.
Operating expenses represented 12.8% of total revenues in the firstquarter of 2008, down from 14.6% in the first quarter of 2007.
Operating income was $1.4 million in the first quarter of 2008, up 50%from $0.94 million in first quarter of 2007. Operating margin was 20.0%, ascompared to 19% during the same period a year ago.
Net income for the first quarter of 2008 was $1.2 million, or $0.08 perdiluted share, up 54.0% from $0.8 million, or $0.06 per diluted share in thefirst quarter of 2007. Earnings per share reflect an increase of 2.5 milliondiluted average shares compared to the first quarter of 2007, primarily due tothe exercise of warrants and options.
Financial Condition
As of March 31, 2008, China Medicine had approximately $31.5 million inworking capital, an increase of 10.5% from $28.5 million as of December 31,2007. Also as of March 31, 2008, China Medicine had $5.2 million in cash andcash equivalents, a decrease of 11.2% from $5.7 million as of December 31,2007. For the quarter ended March 31, 2008, cash used in operating activitieswas $1.1 million, compared with cash used in operating activities of $0.9mi
