China Medical Technologies Reports Second Fiscal Quarter Financial Results

Thursday, December 18, 2008 General News
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BEIJING, Dec. 18 China Medical Technologies,Inc. (the "Company") (Nasdaq: CMED), a leading China-based medical devicecompany that develops, manufactures and markets advanced in-vitro diagnosticproducts, today announced its full unaudited financial results for the secondfiscal quarter ended September 30, 2008 ("2Q FY2008"). The Company's 2008fiscal year ends on March 31, 2009 ("FY2008").

See "Non-GAAP Measure Disclosures" below, where the impact of certainitems on reported results is discussed.

"We are pleased with the strong results in our second fiscal quarter,"commented Mr. Xiaodong Wu, Chairman and Chief Executive Officer of the Company."Our molecular diagnostic business, FISH, continues to drive the growth of theCompany in generating recurring revenue and high gross margin. The recentacquisition of the HPV-DNA Biosensor Chip and SPR-based Analysis Systemexpands our molecular diagnostic technology platforms and will create a newsource of recurring revenues for us, beginning in the next financial year.After the sale of our HIFU business, we will become a pure advanced IVD playerin China. As such, our resources will be invested solely in developing ouradvanced IVD businesses, especially molecular diagnostic businesses."

2Q FY2008 Financial Results

The Company reported revenues of RMB290.5 million (US$42.8 million) for 2QFY2008, representing a 35.2% increase from the corresponding period of FY2007.

The Company's revenues are currently generated from three product lines,ECLIA diagnostic systems, FISH diagnostic systems and HIFU tumor therapysystems.

ECLIA system sales for 2Q FY2008 were RMB122.2 million (US$18.0 million),representing a 32.0% increase from the corresponding period of FY2007. Thestrong year-over-year growth in the ECLIA system sales was primarily due tothe increasing utilization of the Company's ECLIA analyzers by hospitals aswell as the expanded installed base of the analyzers which resulted inincreased sales of ECLIA reagent kits.

FISH system sales for 2Q FY2008 were RMB71.8 million (US$10.6 million),representing a significant increase for the corresponding period of FY2007.The strong year-over-year growth in the FISH system sales was primarily due toa significant increase in sales of FISH probes to hospitals directly. As ofSeptember 30, 2008, more than 300 large hospitals in China were using theCompany's FISH probes.

HIFU tumor therapy system sales for 2Q FY2008 were RMB96.5 million(US$14.2 million), representing a 5.5% increase from the corresponding periodof FY2007. The year-over-year growth in this sector was driven primarily byan increase in unit sales.

Gross margin increased to 73.2% for 2Q FY2008 from 61.5% for thecorresponding period of FY2007. The increase in gross margin was primarily dueto the change in revenue mix where a substantial portion of revenues wasgenerated from recurring sales of higher margin ECLIA reagent kits and FISHprobes.

Research and development expenses were RMB11.6 million (US$1.7 million)for 2Q FY2008, representing a 43.8% year-over-year increase. The increase wasprimarily due to the development of new ECLIA reagent kits and FISH probes andan increase in stock compensation expense arising from a restricted stockgrant in June 2008.

Sales and marketing expenses were RMB18.2 million (US$2.7 million) for 2QFY2008, representing a significant year-over-year increase. The increase wasprimarily due to the expansion of the direct sales force for FISH system sales,increased product promotional activities as well as the cost of the ECLIAanalyzers given free of charge to customers.

General and administrative expenses were RMB27.7 million (US$4.1 million)for 2Q FY2008, representing a 32.3% year-over-year increase. The increase wasprimarily due to the increased headcount associated with the expansion of theCompany's operations and an increase in stock compensation expense arisingfrom a restricted stock grant in June 2008.

Interest income was RMB10.3 million (US$1.5 million) for 2Q FY2008,representing a 32.3% increase from the corresponding period of FY2007. Theincrease was primarily due to interest earned on the net proceeds from theUS$276 million convertible notes issued in August 2008.

Interest expense of convertible notes was RMB18.4 million (US$2.7 million)for 2Q FY2008, representing an 85.6% increase from the corresponding period ofFY2007. The increase was primarily due to the US$276 million convertiblenotes issued in August 2008. The existing two convertible notes bear interestat 3.5% and 4.0% per annum, respectively.

Interest expense of amortization of convertible notes issuance cost wasRMB3.2 million (US$0.5 million) for 2Q FY2008, representing a 60.9% increasefrom the corresponding period of FY2007. The increase was primarily due tothe convertible notes issuance cost in connection with the US$276 millionconvertible notes issued in August 2008.

Other interest expense was RMB1.1 million (US$0.2 million) for 2Q FY2008primarily due to the present value discounting of long term other payable ofUS$10.0 million for the final payment of the FISH acquisition due in March2009.

Income tax expense was RMB24.9 million (US$3.7 million) for 2Q FY2008.The effective tax rate for 2Q FY2008 was 17.5%.

The China Unified Corporate Income Tax Law (the "New Law") becameeffective on January 1, 2008. The New Law established a single unified 25%income tax rate for most companies with some preferential income tax ratesincluding a 15% income tax rate to be applicable to qualified hi-techenterprises. The related detailed implementation rules and regulations on thedefinition of various terms and the interpretation and application of theprovisions of the New Law were promulgated in December 2007, April 2008 andJuly 2008. The Company has submitted application for hi-tech enterprisequalification to the relevant government authorities. Before the approval forthe qualification to be a hi-tech enterprise, the Company is required to payincome tax in accordance with the transitional income tax arrangement underwhich the income tax rate is 18% in 2008 and 20% in 2009. The Company believesthat it meets the criteria of hi-tech enterprise under the New Law.

Net income was RMB117.7 million (US$17.3 million) for 2Q FY2008,representing a 52.1% increase from the corresponding period of FY2007.

Adjusted net income excluding stock compensation expense and amortizationof acquired intangible assets (non-GAAP) was RMB154.3 million (US$22.7 million)for 2Q FY2008, representing a 46.8% increase from the corresponding period ofFY2007.

Stock compensation expense for 2Q FY2008 was RMB14.1 million (US$2.1million), which was allocated to research and development expenses (RMB2.4million) and general and administrative expenses (RMB11.7 million).

Amortization of acquired intangible assets for 2Q FY2008 was RMB22.5million (US$3.3 million), which was allocated to cost of revenues.

As of September 30, 2008, the Company's cash balance was RMB2,702.7million (US$398.1 million).

As of September 30, 2008, the Company's accounts receivable was RMB325.6million (US$48.0 million), representing an increase of 7.8% from the balanceas of June 30, 2008. The accounts receivable turnover days remained the sameat 110 days.

For the convenience of readers, certain RMB amounts have been translatedinto U.S. dollars at the rate of RMB6.7899 to US$1.00, the noon buying rate inNew York City for cable transfers of RMB per U.S. dollar as certified forcustoms purposes by the Federal Reserve Bank of New York, as of Tuesday,September 30, 2008.

Completion of the Acquisition of HPV-DNA Biosensor Chip and SPR-basedAnalysis System

The Company has recently completed the acquisition of human papillomavirus("HPV")-DNA Biosensor Chip and Surface Plasmon Resonance ("SPR") basedAnalysis System (the "Acquisition"). The Company expects to generate thefollowing potential benefits from the Acquisition:

Preliminary Purchase Price Allocation for the Acquisition

The Company prepared the preliminary purchase price allocation for theAcquisition. The Company allocated approximately US$307 million to intangibleassets and estimates the related annual amortization of the intangible assetsto be approximately US$16 million. The Company also allocated approximatelyUS$37 million to in-process research and development. This amount will becharged to the income statement for the third fiscal quarter ending December31, 2008 ("3Q FY2008"). The charge is a one-off expense item of the incomestatement for 3Q FY2008.

The Company will consider the valuation report to be submitted by theindependent valuers before finalizing the purchase price allocation for theAcquisition.

Outlook for FY2008

Due to the sale of the HIFU business to be completed before the end ofDecember 2008, the historical revenues and related costs and expenses of theHIFU business will be reclassified to discontinued operations. The revenuesfor FY2007 excluding revenue from the HIFU business for comparative purposeare RMB547.4 million (US$80.6 million). The Company estimates the annualrevenues for FY2008 comprising ECLIA business and FISH business to be in therange of RMB825 million (US$121.5 million) and RMB838 million (US$123.4million), representing a year-over-year growth of 50.7%-53.1%.

For the time being, the Company cannot estimate the non-GAAP adjusted netincome and non-GAAP adjusted diluted earnings per ADS for FY2008 because ofthe sale of the HIFU business which is expected to close before the end ofDecember 2008 and to record a gain. The Company will estimate the non-GAAPadjusted net income and non-GAAP adjusted diluted earnings per ADS for FY2008after the closing of the sale of the HIFU business and expects to providethese estimates when the Company reports the financial results for the nextquarter.

All estimates are based on the Company's current views on the operatingand marketing conditions which are subject to change.

Non-GAAP Measure Disclosures

To supplement its consolidated financial statements presented inaccordance with United States Generally Accepted Accounting Principles("GAAP"), the Company uses non-GAAP measures of adjusted net income andadjusted earnings per ADS, which are adjusted from results based on GAAP toexclude the impact of stock compensation expense and amortization of acquiredintangible assets. Non-GAAP financial measures are used by the Company intheir financial and operating decision-making because management believes theyreflect the Company's ongoing business in a manner that allows meaningfulperiod-to-period comparison. The Company's management believes that these non-GAAP financial measures provide useful information to investors and others inunderstanding and evaluating the Company's current operating performance andfuture prospects in the same manner as management does, if they so choose. TheCompany's management also believes the non-GAAP financial measures are usefulfor itself and investors because it makes more meaningful comparisons of theCompany's current results of operations to those of prior periods.

The Company's management believes excluding the non-cash stockcompensation expense from its non-GAAP financial measures is useful for itselfand investors as such expense will not result in future cash payment and isotherwise unrelated to the Company's core operating results.

The Company's management believes excluding the non-cash amortizationexpense of acquired intangible assets resulting from acquisitions from itsnon-GAAP financial measures is useful for itself and investors because theyenable a more meaningful comparison of the Company's performance betweenreporting periods. In addition, such amortization will not result in cashsettlement in the future.

The presentation of this additional financial information is not intendedto be considered in isolation or as a substitute for the financial informationprepared and presented in accordance with GAAP. For a reconciliation of thenon-GAAP financial measures to the most directly comparable GAAP financialmeasure, please see the financial statements included with this press release.

Conference Call

The Company's management team will host a conference call at 8:00 a.m.Eastern Time on December 18, 2008 (or 9:00 p.m. Beijing/Hong Kong time on thesame date) to discuss the results following this earnings announcement.

A live webcast of the conference call will be available on .

A replay of this webcast will be available for one month on this website.

A telephone replay of the call will be available after the conclusion ofthe conference call through 10:00 a.m. Eastern Time on December 19, 2008.

About China Medical Technologies, Inc.

China Medical Technologies is a leading China-based medical device companythat develops, manufactures and markets advanced in-vitro diagnostic productsusing Enhanced Chemiluminescence (ECLIA) technology, Fluorescent in situHybridization (FISH) technology and Surface Plasmon Resonance (SPR) technologyto detect and monitor various diseases and disorders. For more information,please visit .

Safe Harbor Statement

This press release contains forward-looking statements. These statementsconstitute "forward-looking" statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended, and as defined in the U.S. PrivateSecurities Litigation Reform Act of 1995. These forward-looking statementscan be identified by terminology such as "will," "expects," "anticipates,""future," "intends," "plans," "believes," "estimates" and similar statements.Among other things, the quotations from management in this press release, theCompany's strategic operational plans, as well as outlook for FY2008, containforward-looking statements. Such statements involve certain risks anduncertainties that could cause actual results to differ materially from thosein the forward-looking statements. Further information regarding these andother risks is included in the Company's filings with the U.S. Securities andExchange Commission, including its annual report on Form 20-F. The Companydoes not undertake any obligation to update any forward-looking statement as aresult of new information, future events or otherwise, except as requiredunder applicable law.2Q FY2008 Highlights -- Revenues increased by 35.2% year-over-year to RMB290.5 million (US$42.8 million). -- Net income increased by 52.1% year-over-year to RMB117.7 million (US$17.3 million). -- Non-GAAP adjusted net income, as defined below, increased by 46.8% year-over-year to RMB154.3 million (US$22.7 million). -- Diluted earnings per ADS* increased by 43.4% year-over-year to RMB4.13 (US$0.61). -- Non-GAAP adjusted diluted earnings per ADS*, as defined below, increased by 38.1% year-over-year to RMB5.22 (US$0.77). * One American Depositary Share ("ADS") = 10 ordinary shares

SOURCE China Medical Technologies, Inc.

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