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"In our third quarter, we experienced a temporary delay in the executionof the Guangdong Sunshine Medicine Public Internet Bidding, which adverselyimpacted our revenue during the quarter. However, by managing our product mixto focus more on higher-margin prescription products, and by managingoperating expenses, we improved margins," said Mr. Senshan Yang, CEO andChairman of China Medicine Corporation. "I am happy to report that as ofSeptember 1, 2008, we successfully secured all the products we represented inour distributorship last year. We are confident that we will see strongresults in the fourth quarter of 2008."
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Third Quarter Results
For the quarter ended September 30, 2008, revenues declined 16.5% to $10.5from $12.6 million in the third quarter of 2007. The decrease in revenues wasattributable to the following reasons:
1. A delay in the execution of the Guangdong Sunshine Medicine PublicInternet Bidding System to September 1, 2008, which has resulted in collectiondelays from some hospitals. As a result, the Company has had to allocate itsresources to negotiating with hospitals during the third quarter, which iscrucial to winning bids in the public internet bidding systems. The GuangdongSunshine Medicine Public Internet Bidding System is historically held in May-July every year.
2. A decline in sales of OTC products during the third quarter of 2008,which resulted from the Company's decision to adjust its product portfolio andreduce sales of lower margin OTC products.
3. A decline in medical formula sales caused by stringent governmentregulation on concerns over food and pharmaceutical product safety, which hasmade the R&D process more difficult and has slowed sales.
In addition to these factors, the tightening of China's credit policyresulted in cash flow problems for various suppliers and factories, creating aheadwind for distributors. The Company also faced headwinds tied to adecrease in provincial government spending in many provinces as funds werediverted to help victims of the Sichuan earthquake.
For the quarter ended September 30, 2008, sales of pharmaceutical productswith national and regional level distribution rights made up 85.6 % of totalrevenues, and sales of products with manufacturing license accounted for 9.1%of total revenues. Sales of medical formulas accounted for 5.3% of totalrevenues. Of all the products distributed via China Medicine's distributionnetwork, products obtained through the Guangdong Sunshine Medicine PublicInternet Bidding System contributed to 32.1% of the Company's total revenues.
Product sales in the third of 2008 quarter totaled $10.0 million andaccounted for 94.8% of total net revenues. Sales of Western-styleprescription and over-the-counter products accounted for 66.1% of totalrevenues for the third quarter. Sales of TCM prescription and over-the-counter products accounted for 26.4% of total revenues. Medical formula salesin the third quarter of 2008 accounted for 5.3% of total revenues, dietarysupplements, medical instruments and others accounted for 2.2% of totalrevenues.
Gross profit for the third quarter of 2008 was $3.3 million, a decrease of14.7% over the third quarter of 2007. Gross margin increased slightly from30.3% during the third quarter of 2007 compared to 31.0% in the third quarterof 2008. The increase in gross margin was attributable to the Company'sstrategy to decrease sales of Western and TCM over-the-counter pharmaceuticalproducts in its product portfolio.
Operating expenses for the third quarter of 2008 were $0.93 million, down20.2% from $1.2 million in the third quarter of 2007. The decrease was due tolower advertising and marketing expenses. Operating expenses represented 8.9%of total revenues in the third quarter of 2008, down from 9.3% in the thirdquarter of 2007.
Operating income was $2.3 million in the third quarter of 2008, down 12.3%from $2.7 million in third quarter of 2007. Operating margin for the thirdquarter of 2008 was 22.1% compared to 21.1% for the third quarter of 2007.
Net income for the third quarter of 2008 was $2.0 million or $0.13 perdiluted share, compared to $2.2 million, or $0.14 per diluted share in thethird quarter of 2007.
Nine Month Results
For the nine months ended September 30, 2008, revenues increased to $29.2million, up 12.6% from $25.9 million in first nine months of 2007. Grossprofit increased 22.9% to $9.7 million in the first nine months of 2008,versus $7.9 million in the first nine month of 2007. Gross margin was 33.3%in the first nine months of 2008 compared to 30.5% during the first ninemonths of 2007. Operating income in the first nine months of 2008 grew 33.4%to $6.7 million compared to $5.0 million in the first nine months of 2007.Net income for the first nine months of 2008 was $5.6 million or $0.36 perdiluted share, up 36.9% from $4.1 million, or $0.30 per diluted share in thefirst nine months of 2007.
Financial Condition
As of September 30, 2008, China Medicine had $2.7 million in cash and cashequivalents, approximately $34.1 million in working capital, and totalliabilities of $0.5 million. Stockholders' equity as of September 30, 2008was $39.1 million, an increase of 26.6% over the $30.9 million recorded as ofDecember 31, 2007.
For the nine months ended September 30, 2008, cash used in operatingactivities was $0.7 million, compared to $1.8 million for the nine monthsended 2007. The Company intends to fund its working capital and capitalexpenditure requirements over the next 12 months from cash on hand and byaccelerating accounts receivable collections efforts.
Business Outlook
China Medicine is actively pursuing its expansion into overseas markets,including the United States and Hong Kong. The Company has established asubsidiary-Konzern U.S. Holding Corporation-and began sales of its "Bethin"weight loss supplement in July. In addition, the Company showcased Bethin atthe Natural Food Expo East Trade Show in Boston in October, 2008, and met withdistributors from the U.S. and other countries to explore commercialopportunities for the product worldwide. The Company has obtained trademarksfor both the Konzern and Bethin brands from the government of Hong Kong and isseeking potential distributors in Hong Kong through the Hong Kong Trade andDevelopment Council's business partner matching program.
The Company also plans to launch a self-branded dietary food supplement inChina in the first half of 2009. "Although the 'dietary supplement' categoryis a major health care category that is not included in China's health careplan, we have seen a 40% increase of dietary supplement sales in Chinaannually tied to the rising incomes of Chinese workers and the rise of China'smiddle class," commented Mr. Senshan Yang, Chairman and CEO of China Medicine."We have been actively engaging in R&D for dietary food supplement productsand we are confident that the launch of our self-branded dietary foodsupplement will be well received by the market and will allow us to promoteour brand name that will increase our profitability over time."
China Medicine resumed testing of recombinant aflatoxin detoxifizyme(rADTZ), a product that has the potential to remove toxic compounds in foodand feed, with the Feed Research Institute of the Chinese Academy ofAgricultural Sciences in October. rADTZ testing is focused on the improvementof the Company's zymosis technology and the enhancement of rADTZ as an agentto detoxify animal feed. The Company is satisfied with the progress it hasmade on testing rADTZ and plans to lease a manufacturing facility for rADTZtrial production. Simultaneously, the Company will also apply for aproduction permit, which will facilitate the commercialization of rADTZ in thefirst quarter of 2009. The Company has applied for rADTZ patents in overtwenty countries and has received the patents from China, Australia, SouthAfrica and South Korea.
"In terms of our existing business, we do not expect the global economiccrisis to have a substantial impact on our growth strategy going forward,"said Mr. Yang. We have taken measures to increase sales of certainpharmaceutical products and adjust the product mix to maintain profitability.Based on our financial performance in the first nine months of 2008 and ouranticipated strong results in the fourth quarter, we expect to achieve 10-15%in revenue growth and achieve gross margin estimate of 28%-31%. We also feelconfident that we will meet our net income growth guidance of 20%-22% for 2008.
Conference Call
China Medicine will hold its third quarter conference call for allinterested persons at 9:00 a.m. Eastern Time on November 13, 2008, to discussits results. To participate in the live conference call, please dial thefollowing number five to ten minutes prior to the scheduled conference calltime: 888.482.0024. International callers should dial 617.801.9702 whenprompted by the operator, mention conference passcode 501 582 39. If you areunable to participate in the call at its scheduled time, a replay will beavailable for seven days starting on Thursday, November 13 at 11:00 a.m.Eastern Time. To access the replay, dial 888-286-8010 (international callersdial 617-801-6888, and enter the passcode 11677443.
About China Medicine Corporation
China Medicine Corporation is a leading pharmaceutical company thatdiscovers and develops medical formulations and distributes over 2,200pharmaceutical products in China including prescription and over-the-counterdrugs, traditional Chinese medicine products, herbs and dietary supplements.The Company distributes the products to wholesale distributors in 28 provincesand to more than 300 hospitals, 500 medicine companies, and 1,788 drug storesthroughout China. The Company actively develops a number of proprietaryproducts for many uses including oncology, high blood pressure and the removalof toxins from food and animal feeds. For more information visit theCompany's website at http://www.chinamedicinecorp.com
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.Third Quarter Highlights -- Revenues totaled $10.5 million, down 16.5% year-over-year -- Gross profit was $3.3 million compared with $3.8 million a year ago -- Gross margin improved to 31.0% from 30.3% a year ago -- Operating income was $2.3 million, compared with $2.7 million a year ago -- Operating margin improved to 22.1% from 21.1% a year ago -- Net income was $2.0 million or $0.13 per diluted share
SOURCE China Medicine Corporation
