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China Medical Reports Revenue Of RMB166.1 Million In Q2 Fiscal 2010

China Medical Technologies, Inc. (China Medical), a China-based medical device company, has reported revenue of RMB166.1 million for the second quarter of fiscal 2010, compared with the revenue of RMB193.9 million in the year-ago quarter. It has also reported net loss of RMB47.1 million for the second quarter of fiscal 2010, compared with the net income of RMB117.7 million in the year-ago quarter.

“Despite recent challenges, we have seen several positive signs,” commented Mr. Xiaodong Wu, Chairman and Chief Executive Officer of the Company. “In the past quarter, we received SFDA approvals for both our FISH probes in hematology and our SPR-based analysis system, representing a major milestone. Although our ECLIA business was impacted by increased competition and our implementation of price reduction in September, we have seen signs of stabilization. Our FISH business remained healthy despite the diversion of management’s attention and we have seen growth resumed in this business recently. In addition, we have completed a trial launch on our SPR-based analysis system in a small number of top tier hospitals. With the constructive feedback from key opinion leaders after initial usage, we are well positioned for a full-scale launch on the system in the first quarter of 2010. We expect to generate revenue from the sale of HPV-DNA chips used with the system in that quarter.”

2Q FY2009 Unaudited Financial Results

The Company’s revenues are currently generated from two segments, immunodiagnostic systems and molecular diagnostic systems. Immunodiagnostic systems are consisted of ECLIA products while molecular diagnostic systems include FISH products and are expected to include SPR products starting from 4Q FY2009.

Immunodiagnostic system sales for 2Q FY2009 were RMB76.8 million ($11.3 million), representing a 37.1% decrease from the corresponding period of FY2008. The year-over-year decrease in the immunodiagnostic system sales was primarily due to the decrease in customers’ inventory levels in anticipation of a selling price reduction on ECLIA reagent kits as well as the price reduction for ECLIA reagent kits in September 2009.

Molecular diagnostic system sales for 2Q FY2009 were RMB89.2 million ($13.1 million), representing a 24.3% increase from the corresponding period of FY2008. The year-over-year growth in the molecular diagnostic system sales was primarily due to increase in sales of FISH probes to hospitals as a result of increase in new hospital customers and the increased usage of the Company’s FISH probes by existing hospital customers.

Gross margin decreased to 65.4% for 2Q FY2009 as compared to 70.5% for the corresponding period of FY2008. The decrease in gross margin was primarily due to the price reduction on ECLIA reagent kits starting from September 2009.

Research and development expenses were RMB9.5 million ($1.4 million) for 2Q FY2009, representing a 49.9% year-over-year increase. The increase was primarily due to the development of new ECLIA reagent kits, FISH probes and SPR-based chips.

Sales and marketing expenses were RMB17.4 million ($2.6 million) for 2Q FY2009, representing a 55.0% year-over-year increase. The increase was primarily due to the continued expansion of the direct sales force for molecular diagnostic system sales.

General and administrative expenses were RMB45.1 million ($6.6 million) for 2Q FY2009, representing a 77.2% year-over-year increase. The increase was primarily due to the costs of the independent internal investigation and provision for bad debts related to certain ECLIA customers.

Amortization of SPR intangible assets was RMB27.4 million ($4.0 million) for 2Q FY2009. As the SPR acquisition was complete in December 2008, there was no amortization of SPR intangible assets in the corresponding period of FY2008.

Interest expense on convertible notes was RMB35.4 million ($5.2 million) for 2Q FY2009, representing a 38.6% year-over-year increase. The increase was primarily due to the issuance of $276.0 million convertible notes in August 2008. The Company’s outstanding convertible notes of $150.0 million and $276.0 million bear interest at 3.5% and 4.0% per annum, respectively and will mature in November 2011 and August 2013, respectively. Due to the adoption of new authoritative guidance governing the accounting for convertible instruments that can be settled in cash or partially in cash upon conversion effective on April 1, 2009, the Company recorded additional non-cash interest expense of RMB7.6 million ($1.1 million) for the $150.0 million convertible notes in 2Q FY2009. The Company also made an adjustment related to these convertible notes for the corresponding period of FY2008 by increasing non-cash interest expense by RMB7.2 million to adopt this guidance retrospectively. This new guidance is not applicable to the $276.0 million convertible notes.

Interest expense on amortization of convertible notes issuance costs was RMB4.4 million ($0.6 million) for 2Q FY2009, representing a 47.6% year-over-year increase. The increase was primarily due to the issuance of $276.0 million convertible notes in August 2008.

Income tax expense was RMB18.3 million ($2.7 million) for 2Q FY2009. The occurrence of income tax expense was primarily because certain expenses of the Company such as stock compensation expense, amortization of acquired intangible assets and interest expense of convertible notes were not deductible for income tax purpose as well as the accrual for withholding income tax on distributable earnings generated during the quarter in the PRC.

Loss from continuing operations was RMB47.1 million ($6.9 million) for 2Q FY2009 and net loss was RMB47.1 million ($6.9 million) for 2Q FY2009.

Non-GAAP income from continuing operations excluding stock compensation expense, amortization of acquired intangible assets and non-cash interest expense of convertible notes arising from the adoption of the new guidance related to convertible instruments that can be settled in cash or partially in cash upon conversion was RMB17.7 million ($2.6 million) for 2Q FY2009, representing a 82.7% decrease from the corresponding period of FY2008.

Stock compensation expense for 2Q FY2009 was RMB7.4 million ($1.1 million), of which RMB1.3 million was allocated to research and development expenses and RMB6.1 million to general and administrative expenses.

The Company approved the grant of 2,450,000 restricted ordinary shares, equivalent to 245,000 ADS to certain directors, officers and employees on November 16, 2009, which was approximately 0.8% of the Company’s issued ordinary shares. These restricted ordinary shares vest over a period of three years.

Amortization of acquired intangible assets for 2Q FY2009 was RMB49.8 million ($7.3 million), of which RMB22.4 million was allocated to cost of revenues and RMB27.4 million to operating expenses.

As of September 30, 2009, the Company’s cash and cash equivalents was RMB1,236.7 million ($181.2 million). Net cash generated from operating activities for 2Q FY2009 was RMB45.5 million ($6.7 million).

As of September 30, 2009, the Company’s net accounts receivable was RMB317.9 million ($46.6 million), representing a decrease of 7.3% from the balance at March 31, 2009.

For the convenience of readers, certain RMB amounts have been translated into U.S. dollars at the rate of RMB6.8262 to $1.00, the noon buying rate in New York City for cable transfers of RMB per U.S. dollar as set forth in the H.10 weekly statistical release of the Federal Reserve Board, as of Wednesday, September 30, 2009. No representation is made that the RMB amounts could have been or could be converted into U.S. dollars at that rate or at any other certain rate on September 30, 2009 or at any other dates.

Outlook for 3Q FY2009

Given the full impact of the price reduction on ECLIA reagent kits but certain positive trends in December quarter, the Company estimates the target revenues for 3Q FY2009 range from RMB170.0 million ($24.9 million) to RMB180.0 million ($26.4 million).

The Company estimates the target non-GAAP income from continuing operations for 3Q FY2009 to be not less than RMB38.0 million ($5.6 million).