China Medicine Announces Strong Third Quarter 2009 Results

Tuesday, November 17, 2009 General News
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GUANGZHOU, China, Nov. 16 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 third quarter2009 results.

"We are delighted to report that China Medicine experienced a strong thirdquarter in 2009 with significant increases in revenues and net income. As thegovernment implements its plan to support rural healthcare and establish auniversal healthcare system, we expect to be positively impacted as wedistribute pharmaceutical products through our extensive distribution networkthat addresses this underserved market. In addition, once the recentacquisition of LifeTech is consummated, we should be positioned as a strongerplayer in the pharmaceutical industry as we will have the ability to sellLifeTech's self-manufactured pharmaceutical products through our extensivedistribution network, thus improving our margin structure," said Mr. SenshanYang, Chairman and CEO of China Medicine Corporation.

"Our top-selling drugs for the quarter included Iopamidol by injection,which accounted for 14.0% 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 5.3% of revenues and isused for the treatment of cardio-cerebral vascular diseases; and HongjinXiaojie capsules, which accounted for 5.0% of revenues are used to treat painand for blood circulation. Combined gross margins for these products were34.3%. Collectively, our top three selling drugs accounted for approximately24.2% of revenues," said Mr. Yang.

Third Quarter 2009 Results

China Medicine's total revenues in the third quarter were $19.2 million,an increase of 82.2% over the third quarter of 2008. This increase was mainlyattributable to the 393% increase in industry-wide sales on regional leveldriven by growth in second and third tier cities resulting from theimplementation of the health care reform in rural areas, where the Companyexcels at meeting higher industry standards required to supply pharmaceuticalproducts in China.

Product sales in the third quarter totaled $18.8 million and accounted for98.1% of total net revenues. Sales of Western-style prescription products andover-the-counter products accounted for 66.3% of total revenues in the thirdquarter of 2009. Sales of TCM, prescription and over-the-counter productsaccounted for 29.3% of total revenues. Sales of dietary supplements, medicalequipment and others accounted for 4.4% of revenues.

During the third quarter of 2009, revenues generated from rADTZ wereapproximately $78,173 and gross profit was $61,604, representing a grossmargin of 78.8%, up from 65.4% in second quarter 2009. As China Medicinescales up its production and improves its manufacturing techniques, theCompany expects gross margins for rADTZ to increase gradually.

Gross profit in the third quarter of 2009 was $5.8 million, an increase of78.9% over the third quarter of 2008. Gross margin was 30.5% of total revenuesfor the third quarter, slightly lower compared to 31.0% in the third quarterof 2008 due to changes in product mix.

Operating expenses in the third quarter of 2009 were $1.3 million, up39.2% from $0.9 million in the third quarter of 2008. The increase was due tohigher selling, general and administrative expenses related to travel andallowances, the interest of the bank loan, meals and entertainment, rent,labor unions and salaries. Operating expenses represented 6.8% of totalrevenues in the third quarter of 2009 compared to 8.9% in the third quarter of2008.

Operating income was $4.5 million in the third quarter of 2009, up 94.7%from $2.3 million in third quarter of 2008. Operating margin was 23.7%, ascompared to 22.2% during the same period a year ago.

The Company's provision for income taxes was $1.2 million for the threemonths ended September 30, 2009 compared to $411,890 for the comparable periodof 2008. The increase was due to the increase in operating income and thechange of income tax rate. A favorable tax rate of 16.5% in 2008 expired andthe Company adopted a new tax rate of 25% in 2009.

Net income for the third of 2009 was $3.2 million, or $0.21 per dilutedshare, which included a $0.14 million non-cash expense related to a change inthe fair value of warrants, compared to $2.0 million or $0.13 per dilutedshare, in the third quarter of 2008. This is due to the adoption of a newaccounting 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 third quarter of2009 was $3.4 million, or $0.22 per fully diluted share, which translates to a71.1% increase in net income for the third quarter of 2009 compared to thesame period last year.

Nine Month Results

For the first nine months of 2009, total revenues increased to $44.3million, up 51.7% from $29.2 million in first nine months of 2008. Grossprofit increased 24.8% to $12.1 million in the first nine months of 2009,versus $9.7 million in the first nine month of 2008. Gross margin was 27.4% inthe first nine months of 2009 compared to 33.3% during the first nine monthsof 2008. Operating income in the first nine months of 2009 increased 20.1% to$8.1 million compared to $6.7 million in the first nine months of 2008. Netincome for the first nine months of 2009 was $3.8 million or $0.25 per dilutedshare, compared to $5.6 million, or $0.36 per diluted share in the first ninemonths of 2008. Adjusted net income, excluding expenses related to $2.1million fair value of warrants, was $5.9 million in first nine months of 2009,or $0.39 per diluted share, which translates to a 5.7% increase in net incomefor the first nine months of 2009 compared to the same period last year.

Financial Condition

As of September 30, 2009, China Medicine had $2.2 million in cash and cashequivalents. Working capital was approximately $32.1 million. Accountsreceivable stood at $14.9 million as of September 30, 2009, down from $19.2million as of December 31, 2008, reflecting increased customer collections.China Medicine Corporation Stockholders' equity as of September 30, 2009 was$46.4 million compared to $42.8 million recorded as of December 31, 2008. Forthe nine months ended September 30, 2009, cash from operating activities was$3.5 million. Cash flow used in investing activities was $7.1 million for thenine months ended September 30, 2009, versus $3.0 million for the nine monthsended September 30, 2008. The increase is attributable to the purchase ofequipment used to expand the Company's rADTZ production capacity.

Business Outlook

"As we get further into the fourth quarter and look towards 2010, we areexcited about the prospects for recombinant Aflatoxin Detoxifizyme (rADTZ),our novel product for removing aflatoxins found in food and animal feed. Ourcurrent product permit for rADTZ allows for small-scale trial sales andrevenue contributed by rADTZ has not yet been significant. Nonetheless, weanticipate receiving the product permit for rADTZ from the Chinese Ministry ofAgriculture by the end of the year and we have purchased additional equipmentto increase our current rADTZ production capacity from 50 tons to 1,200 tonsin 2010, and 4,200 tons in 2011," said Mr. Yang, the company's CEO.

"We continue to seek out opportunities to further expand our business anddeliver the highest value possible for shareholders. We recently entered intoa two-year agreement to export our self-owned, OEM manufactured productLevocarnitine, which will be sold in Pakistan. Levocarnitine is used to treatcoronary heart disease and acute myocardial infarction. The potential marketfor Levocarnitine in Pakistan is estimated at two million vials per year andwe expect to launch this product in January 2010. We estimate that grossmargin for this product will be at least 65%," said Mr. Yang.

In October, the Company entered into an equity transfer agreement withSinoform Limited to acquire 100% of Sinoform's equity interests in GuangzhouLifeTech Pharmaceutical Co., Ltd ("LifeTech"). LifeTech's assets are appraisedat RMB 174.3 million ($25.5 million) and comprise product licenses, permits,patents, land use rights, manufacturing facilities, state-of-the-artproduction equipment, and a portfolio of 39 TCM and Western medicine productsto treat a variety of illnesses, including two new products undergoingclinical trials. China Medicine expects the acquisition to be accretive toearnings generating revenues of between $10.0 million and $12.0 million andnet profit margin of at least 40% in 2010.

Given the need to temporarily set aside cash to fund the acquisition ofLifeTech and facilitate our transition to become a leading, verticallyintegrated pharmaceutical company, we have had to decrease the amount ofworking capital available for operations in the fourth quarter of this year.As a result, our fourth quarter results may be affected.

In November, China Medicine signed a preliminary, non-binding term sheetto receive a strategic investment from a leading private equity firm (the"Investor") of up to $59.5 million consisting of three stages. Pursuant to theterm sheet, the first stage consists of the Investor purchasing up to $7.5million in convertible secured notes with a conversion price of $3.50 pershare. The second stage consists of the Investor subscribing for approximately$24.2 million in newly issued shares of China Medicine common stock at a priceof $2.60 per share. The third and final stage consists of the Investorsubscribing for up to $27.8 million, according to the needs of China Medicine,in newly issued shares of China Medicine common stock at a price of $2.60 pershare. China Medicine and the Investor believe they will act in good faith tomove forward the proposed transactions as soon as practical, includingcompletion of final due diligence and obtaining necessary shareholders'approval. China Medicine anticipates using the proceeds from stage one toreplenish working capital used to acquire LifeTech. The Company anticipatesusing proceeds from stage two of this investment for expanding LifeTech'smanufacturing capabilities and for general working capital purposes. Proceedsfrom the third stage are expected to be used to acquire additionalpharmaceutical companies once identified and agreed upon by the Investor.However, as of the date herein, China Medicine has not entered into anydefinitive agreements related to any financing plans including those statedabove.

"In summary, we are very excited about our recently announced acquisitionof LifeTech and also our intent to raise a significant amount of capital froma highly reputable, private equity investor, subject to final documentationand shareholder approval," China Medicine's Chairman and Chief ExecutiveOfficer Senshan Yang commented. "The pharmaceutical industry in China ishighly fragmented and we believe that by forming a strategic relationship witha significant financial sponsor, we will have the unique opportunity to be aconsolidator and leader in the industry. The acquisition of LifeTech is thefirst step in implementing our new strategy to move upstream in thepharmaceutical value chain and to combine manufacturing capabilities with ourexisting nationwide distribution network. We are committed to strengtheningour product mix and margin structure and expect that 70% of our revenues willcome from the sale of our own products and 30% from our distribution businessin the next three to five years. We believe that the new initiatives we havein place will bring considerable value to China Medicine and its shareholders,and we look forward to providing an update on our progress in the nearfuture."

Conference Call

China Medicine will hold its third quarter conference call for allinterested persons at 10:00 a.m. Eastern Time on Monday, November 16, 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 448 636 62. If you areunable to participate in the call at its scheduled time, a replay will beavailable for 14 days starting on Monday, November 16 at 12:00 p.m. EasternTime. To access the replay, dial 888-286-8010 (international callers dial617-801-6888, and enter the passcode 329 743 86.

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 at .

Use of Non-GAAP Financial Measures

GAAP results for three and nine months ended September 30, 2009 includenon cash expenses related to change in the fair value of the Company'swarrants. The non-GAAP measure provides a consistent basis for investors tounderstand our financial performance in comparison to historical periodswithout variation of non-recurring items and non-operating related charges.In addition, it allows investors to evaluate our performance using the samemethodology and information as that used by our management. Non-GAAP measuresare subject to inherent limitations because they do not include all of theexpenses included under GAAP and because they involve the exercise of judgmentof which charges are excluded from the non-GAAP financial measure. However, wecompensate for these limitations by providing the relevant disclosure of theitems excluded.

Because these expenses are non-cash, and not related to the Company'soperating results, the Company believes that the non-GAAP information isuseful to supplement the Company's condensed consolidated financial statements.A reconciliation of the adjustments to GAAP results appears in the tableaccompanying this press release. This additional non-GAAP information is notmeant to be considered as a substitute for GAAP financials. The non-GAAPfinancial information that the Company provides also may differ from thenon-GAAP information provided by other 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 anyforward-looking statement to reflect events or circumstances after the date ofthis release.Third Quarter 2009 Highlights: -- Revenues increased 82.2% from Q3 of 2008 to $19.2 million -- Gross profit increased 78.9% from Q3 of 2008 to $5.8 million -- Operating income increased 94.7% from Q3 of 2008 to $4.5 million -- Adjusted net income, which excluded a non-cash expense related to change in fair value of warrants for the third quarter of 2009, was $3.4 million, or $0.22 per diluted share -- Net income was $3.2 million, or $0.21 per diluted share -- Entered into a two-year Distribution and Supply Agreement in Pakistan for Levocarnitine -- Entered into agreement to acquire LifeTech Pharmaceuticals, Co. Ltd., a developer, manufacturer and marketer of pharmaceutical products with a portfolio of 39 TCM and Western medicine products

SOURCE China Medicine Corporation

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