China Medicine Reports Third Quarter 2010 Financial Results

GUANGZHOU, China, Nov. 10, 2010 /PRNewswire-Asia-FirstCall/ -- China Medicine Corporation (OTC Bulletin Board: CHME) ("China Medicine" or "the Company"), a leading manufacturer, developer and distributor of Western pharmaceuticals, traditional Chinese medicines ("TCM"), and other health products, today announced financial results for the third quarter ended September 30, 2010.

Third Quarter 2010 Financial Performance

• Revenue decreased 8.4% to $17.6 million from $19.2 million in the prior year period.
• Gross margin was 33.1%, compared to 30.5% in the prior year period.
• Operating income was $2.5 million, compared to $4.5 million in the prior year period, which was mainly due to the R&D expenditure on a diabetes drug.
• Net income available to common shareholders decreased to $2.2 million, or $0.06 per diluted share, from $3.2 million, or $0.21 per diluted share, in the prior year period.

Mr. Senshan Yang, Chairman and CEO of China Medicine Corporation, stated, "We had a very challenging quarter, impacted by a combination of margin pressure on distributing prescription drugs due to the government's influence on the drug distribution bidding system, and rising prices of certain raw materials used in our proprietary products.   We responded to these challenges by continually executing our 'high-margin focus' strategy.  In addition, we expedited the pace of completing the required clinical trials for Zhimu Huangtong, a patented TCM drug used to treat diabetes, and expect to launch this breakthrough diabetic product in 2012.  We are very confident that we will survive this challenging time and achieve long-term success, because we are well positioned and well prepared amid the rapidly changing industry.  We will continue to strive to work responsibly and aggressively on behalf of our shareholders."

In the third quarter of 2010, revenue decreased 8.4% year over year to $17.6 million from $19.2 million, reflecting a combination of the change in sales strategy and contributions from the newly-acquired Guangzhou LifeTech Pharmaceutical Co., Ltd. ("LifeTech").  Revenue from distribution decreased 17.6% to $15.1 million from $18.3 million in the prior year period, reflecting the shift of the distribution product portfolio to higher margin products.  Revenue from proprietary products increased to $2.5 million from $0.5 million in the prior year period, reflecting the inclusion of revenues from LifeTech's products, which were acquired at the end of 2009.

Gross profit was flat at $5.8 million.  Gross margin increased to 33.1% from 30.5% in the prior year period.  The improvement was aided by the revenue mix shift toward higher-margin products within the distribution business and revenue contribution from LifeTech products.  

Operating income in the third quarter of 2010 was $2.5 million, compared to $4.5 million in the prior year period.  Selling, general and administrative expenses increased to $2.0 million from $0.9 million in the same period last year, primarily due to additional overheads of LifeTech upon the LifeTech acquisition and hiring of new officers. Research and development expenses increased to $1.3 million from $0.4 million in the prior year period, due to funding for Zhimu Huangtong's clinical trials.  

Net income available to common shareholders in the third quarter of 2010 decreased to $2.2 million, or $0.06 per diluted share, from $3.2 million, or $0.21 per diluted share, in the third quarter of 2009. The earnings per share calculation is based on 39.6 million diluted shares outstanding, compared to 15.4 million diluted shares outstanding in the prior year period.  Non-GAAP net income, which excludes a one-time non-cash charge related to the change in fair value of warrant liabilities, was $1.7 million, or $0.04 per diluted share, compared to $3.4 million, or $0.22 per diluted share, in the prior year period.

Financial Performance for the Nine Months Ended September 30, 2010

For the nine months ended September 30, 2010, revenue increased 2.3% to $45.3 million from $44.3 million in the first nine months of 2009.  During the same time period, gross profit increased 24.8% to $15.2 million from $12.1 million.  Income from operations decreased to $7.5 million from $8.1 million in the first nine months of 2009.  Net Income available to common shareholders was $2.0 million, or $0.05 per share, compared to net income available to common shareholders of $3.8 million, or $0.25 per share, in the first nine months of 2009.  This included a one-time $6.1 million non-cash charge in connection with a deemed preferred stock dividend related to the Company's private placement financing in January 2010. The deemed preferred stock dividend reflects the beneficial conversion feature of the convertible preferred stock issued to OEP CHME Holdings, LLC ("OEP") in the January 2010 private placement in accordance with SAB No.98.

Balance Sheet

As of September 30, 2010, the Company had cash and cash equivalents of $56.3 million, of which $48.5 million was restricted cash. This compares to $62.9 million as of June 30, 2010 and $2.2 million as of December 31, 2009.  Restricted cash represents amounts set aside by the Company in accordance with its debt agreements with a financial institution and the Stock Subscription Agreement that was completed on January 29, 2010.  Working capital was $85.7 million as of September 30, 2010, compared to $15.8 million as of December 31, 2009. The increase was mainly due to the cash and cash equivalents obtained from OEP upon the completion of the private placement.  

Full Year 2010 Financial Guidance

Due to these challenges, we have revised our expectations for the full year 2010.  Revenue is now expected to increase 5% to 8% year over year to $68 to $70 million, compared to the $72 to $76 million range we announced previously.  We maintain our expectation that gross margin will be in the range of 33% to 38%, as compared to 29.3% in 2009.  We now believe full year operating expenses will represent approximately 16-18% of revenue, up from 12-15% of revenue as announced previously. This guidance reflects China Medicine's current and preliminary views, which are subject to change.

Conference Call

The Company will hold a conference call on Thursday, November 11 at 8:00 a.m. U.S. Eastern Time following the announcement. Listeners may access the call by dialing the following numbers:

Listeners may access the replay through November 25, 2010 by dialing the following numbers:

Use of Non-GAAP Financial Measures

GAAP results for three and nine months periods ended September 30, 2010 and September 30, 2009 include non-cash gains and expenses related to change in the fair value of the Company's warrant liabilities and a deemed preferred stock dividend related to outstanding convertible preferred stock issued to OEP. The non-GAAP measure provides a consistent basis for investors to understand our financial performance in comparison to historical periods without variation of non-recurring items and non-operating related gains and charges. In addition, it allows investors to evaluate our performance using the same methodology and information as that used by our management. Non-GAAP measures are subject to inherent limitations because they do not include all of the expenses included under GAAP and because they involve the exercise of judgment of which charges are excluded from the non-GAAP financial measure. However, the Company compensates for these limitations by providing the relevant disclosure of the items excluded.

Because these expenses are non-cash, and not related to the Company's operating results, the Company believes that the non-GAAP information is useful to supplement the Company's condensed consolidated financial statements. A reconciliation of the adjustments to GAAP results appears in the table accompanying this press release. This additional non-GAAP information is not meant to be considered as a substitute for GAAP financials. The non-GAAP financial information that the Company provides also may differ from the non-GAAP information provided by other companies.

About China Medicine Corporation

China Medicine Corporation, a vertically integrated enterprise with a research and development centre, manufacturing facility and well established sales network, engages in the production and distribution of prescription and over the counter ("OTC") drugs, traditional Chinese medicine ("TCM") products, herbs and dietary-supplements, medical devices, and medical formulations in China. The Company is developing a number of proprietary products for a variety of indications, including oncology, high blood pressure and toxin removal from food and animal feeds. For more information, please visit the Company's website at http://www.cmc621.com.

Safe-Harbor Statement

This press release contains forward-looking statements concerning the Company's business and products. The Company's actual results may differ materially depending on a number of risk factors including, but not limited to, the following: general economic and business conditions, obtaining regulatory approval for new products, government support for rural health care, competition from existing and new competitors, changes in technology, and various other factors beyond its control. All forward-looking statements are expressly qualified in their entirety by this cautionary statement and the risk factors detailed in the Company's reports filed with the Securities and Exchange Commission. China Medicine Corporation undertakes no duty to revise or update any forward-looking statement to reflect events or circumstances after the date of this release.

SOURCE China Medicine Corporation

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