China Medical Technologies third quarter revenues increase 30.0% to RMB223.9 million ($33.9M)

China Medical Technologies, Inc. (the "Company") (Nasdaq: CMED), a leading China-based advanced in-vitro diagnostic ("IVD") company, announced its unaudited financial results for the third fiscal quarter ended December 31, 2010 ("3Q FY2010") today.

Outlook for 4Q FY2010

• Target revenues are expected to be approximately RMB234.0 million (US$35.5 million), representing a year-over-year increase of 33.2%.
• Target non-GAAP net income is expected to be approximately RMB71.0 million (US$10.8 million), representing a year-over-year increase of 37.9%. The Company has taken into account the impact of incremental cash interest arising from the issuance of 2016 Convertible Notes in December 2010 to refinance its 2011 Convertible Notes.
• Target non-GAAP diluted earnings per ADS is expected to be approximately RMB2.69 (US$0.41), representing a year-over-year increase of 35.9%.

Outlook for FY2010

• Target revenues are expected to be approximately RMB846.0 million (US$128.2 million), representing a year-over-year increase of 17.0%.
• Target non-GAAP net income is expected to be approximately RMB269.1 million (US$40.8 million), representing a year-over-year increase of 43.7%.
• Target non-GAAP diluted earnings per ADS is expected to be approximately RMB10.24 (US$1.55), representing a year-over-year increase of 43.6%.

The above targets are based on the Company's current views on the operating and market conditions, which are subject to change.

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

"We are pleased with the results of our 3Q FY2010," commented Mr. Xiaodong Wu, Chairman and Chief Executive Officer of the Company. "The business of HPV-DNA chips started to contribute increasing revenue to our molecular diagnostic division. We expect our molecular diagnostic revenues to keep driving the growth of the Company."

3Q FY2010 Unaudited Financial Results

The Company reported revenues of RMB223.9 million (US$33.9 million) for 3Q FY2010, representing a 30.0% increase from the corresponding period of FY2009.

The Company's revenues are currently generated from two segments, molecular diagnostic systems and immunodiagnostic systems. The molecular diagnostic system segment includes FISH products and SPR products while the immunodiagnostic system segment consists of ECLIA products. The customers of the molecular diagnostic system segment, that is, Tier 1 hospitals in China, are being served by the Company's direct sales personnel.

Molecular diagnostic system sales for 3Q FY2010 were RMB135.1 million (US$20.5 million), representing a 40.5% increase from the corresponding period of FY2009. The year-over-year increase was primarily due to the increase in usage of the Company's FISH probes by existing and new hospital customers as well as the sales of SPR-based HPV-DNA chips of RMB9.2 million (US$1.4 million) to hospitals during 3Q FY2010.

Immunodiagnostic system sales for 3Q FY2010 were RMB88.9 million (US$13.5 million), representing a 16.7% increase from the corresponding period of FY2009. The year-over-year increase was primarily due to the increase in sales of the Company's ECLIA reagent kits to existing and new distributors.

Gross margin was 58.1% for 3Q FY2010 which decreased year-over-year from 63.4% for the corresponding period of FY2009. The year-over-year decrease was primarily due to the classification of amortization of SPR intangible assets from operating expenses to cost of revenues after the commencement of sales of HPV-DNA chips in 2Q FY2010. Non-GAAP gross margin was 79.9% for 3Q FY2010 which increased year-over-year from 76.4% for the corresponding period of FY2009. The year-over-year increase in non-GAAP gross margin was primarily due to more contribution from the sales of FISH probes which generate higher gross margin.

Research and development expenses were RMB12.3 million (US$1.9 million) for 3Q FY2010, representing a 15.0% year-over-year increase. Non-GAAP research and development expenses were RMB11.2 million (US$1.7 million) for 3Q FY2010, representing a 22.2% year-over-year increase. The year-over-year increase was primarily due to product research and development for FISH probes and SPR chips.

Sales and marketing expenses were RMB24.4 million (US$3.7 million) for 3Q FY2010, representing a 28.2% year-over-year increase. Non-GAAP sales and marketing expenses were RMB24.2 million (US$3.7 million) for 3Q FY2010, representing a 27.2% year-over-year increase. The year-over-year increase was primarily due to an increase in direct sales efforts for molecular diagnostic systems.

General and administrative expenses were RMB21.0 million (US$3.2 million) for 3Q FY2010, representing an 18.8% year-over-year decrease. Non-GAAP general and administrative expenses were RMB13.7 million (US$2.1 million) for 3Q FY2010, representing a 20.6% year-over-year decrease. The year-over-year decrease was primarily due to decrease in professional fees and traveling expenses for 3Q FY2010.

Interest expense on convertible notes was RMB32.8 million (US$5.0 million) for 3Q FY2010. Non-GAAP interest expense on convertible notes was RMB26.7 million (US$4.0 million) for 3Q FY2010. As of December 31, 2010, the Company's outstanding convertible notes of US$29.1 million, US$248 million and US$150 million bear interest at 3.5%, 4% and 6.25% per annum, respectively, and will mature in November 2011, August 2013 and December 2016, respectively.

Interest expense on amortization of convertible notes issuance costs was RMB3.9 million (US$0.6 million) for 3Q FY2010.

Interest expense on amortization of share lending costs was RMB2.4 million (US$0.4 million) for 3Q FY2010.

Other income, net for 3Q FY2010 was RMB22.4 million (US$3.4 million), primarily due to a gain on repurchase of 2011 Convertible Notes. Non-GAAP other expense, net was RMB3.7 million (US$0.6 million) for 3Q FY2010.

Income tax expense was RMB25.2 million (US$3.8 million) for 3Q FY2010. The significant 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. In addition, the Company was required to accrue for withholding income tax on distributable earnings generated in China during 3Q FY2010.

Net income was RMB35.8 million (US$5.4 million) for 3Q FY2010, which improved significantly from the net loss of RMB24.7 million for the corresponding period of FY2009. Non-GAAP net income was RMB75.6 million (US$11.5 million) for 3Q FY2010, representing a 65.8% increase from the corresponding period of FY2009. The significant year-over-year increase was primarily due to the increase in both molecular diagnostic system sales and immunodiagnostic system sales.

Earnings before interest, taxes, depreciation and amortization ("EBITDA") was RMB148.9 million (US$22.6 million) for 3Q FY2010, representing an 81.8% increase from the corresponding period of FY2009. The significant year-over-year increase in EBITDA was primarily due to the increase in both molecular diagnostic system sales and immunodiagnostic system sales as well as a gain on repurchase of 2011 Convertible Notes.

Adjusted EBITDA was RMB131.5 million (US$19.9 million) for 3Q FY2010, representing a 42.8% increase from the corresponding period of FY2009.  The reason for the increase is also due to increased sales in 3Q FY2010.

Stock compensation expense for 3Q FY2010 was RMB8.8 million (US$1.3 million), of which RMB0.1 million was allocated to cost of revenues, RMB1.2 million to research and development expenses, RMB0.2 million to sales and marketing expenses and RMB7.3 million to general and administrative expenses.

Amortization of acquired intangible assets for 3Q FY2010 was RMB48.7 million (US$7.4 million) which was all allocated to cost of revenues.

As of December 31, 2010, the Company's cash and cash equivalents were RMB1,119.4 million (US$169.6 million). Net cash generated from operating activities for 3Q FY2010 was RMB49.7 million (US$7.5 million). Net cash generated from investing activities for 3Q FY2010 was RMB77.9 million (US$11.8 million). Net cash generated from financing activities for 3Q FY2010 was RMB190.5 million (US$28.9 million).

As of December 31, 2010, the Company's net accounts receivable was RMB397.7 million (US$60.3 million), representing an increase of 19.4% from the balance at September 30, 2010. The increase in net accounts receivable was primarily due to the increase in molecular diagnostic system sales to hospital customers.

Issuance of 2016 Convertible Notes

In December 2010, the Company issued US$150 million 6.25% convertible senior notes due December 2016 ("2016 Convertible Notes"). The Company used a large portion of the net proceeds from the 2016 Convertible Notes to repurchase US$105.9 million aggregate principal amount of its outstanding convertible notes due November 2011 ("2011 Convertible Notes") and recorded a gain of approximately US$4.8 million and a reduction of additional paid-in capital of approximately US$8.6 million. The remaining balance of 2011 Convertible Notes was US$29.1 million in principal amount on December 31, 2010. The Company will continue to look for opportunities to repurchase the remaining 2011 Convertible Notes before maturity in November 2011. Approximately 900,000 ADSs were returned to the Company as treasury stock following the repurchase of 2011 Convertible Notes under the prepaid forward arrangement in connection with the issuance of 2011 Convertible Notes.  Upon the issuance of 2016 Convertible Notes, the Company expensed off the costs of approximately US$0.8 million in connection with the suspended high yield note offering in December 2010.

Nine Months FY2010 Unaudited Financial Results

Revenues were RMB612.0 million (US$92.7 million) for the nine months ended December 31, 2010, representing an 11.8% increase from the corresponding period of FY2009. The year-over-year increase in revenues was primarily due to the increase in molecular diagnostic system sales.

Gross margin was 59.8% for the nine months ended December 31, 2010 which decreased year-over-year from 67.9% for the corresponding period of FY2009. The year-over-year decrease was primarily due to the classification of amortization of SPR intangible assets from operating expenses to cost of revenues after the commencement of sales of HPV-DNA chips in 2Q FY2010. Non-GAAP gross margin was 79.6% for the nine months ended December 31, 2010 which decreased year-over-year from 80.2% for the corresponding period of FY2009. The year-over-year decrease in non-GAAP gross margin was primarily due to the impact of the price reduction for ECLIA reagent kits.

Research and development expenses were RMB33.9 million (US$5.1 million) for the nine months ended December 31, 2010, representing a 6.0% year-over-year increase. Non-GAAP research and development expenses were RMB30.1 million (US$4.6 million) for the nine months ended December 31, 2010, representing an 11.4% year-over-year increase. The year-over-year increase was primarily due to product research and development for FISH probes and SPR chips.

Sales and marketing expenses were RMB64.2 million (US$9.7 million) for the nine months ended December 31, 2010, representing a 35.5% year-over-year increase. Non-GAAP sales and marketing expenses were RMB63.7 million (US$9.6 million) for the nine months ended December 31, 2010, representing a 34.5% year-over-year increase. The year-over-year increase was primarily due to an increase in direct sales efforts for molecular diagnostic systems.

General and administrative expenses were RMB71.2 million (US$10.8 million) for the nine months ended December 31, 2010, representing a 39.6% year-over-year decrease. Non-GAAP general and administrative expenses were RMB47.0 million (US$7.1 million) for the nine months ended December 31, 2010, representing a 49.5% year-over-year decrease. The year-over-year decrease was primarily because the Company incurred costs for the independent internal investigation during the nine-month period ended December 31, 2009 which did not recur in 2010 and lower allowance for doubtful accounts.

Net income was RMB66.5 million (US$10.1 million) for the nine months ended December 31, 2010, which improved significantly from the net loss of RMB74.4 million for the corresponding period of FY2009. Non-GAAP net income was RMB198.1 million (US$30.0 million) for the nine months ended December 31, 2010, representing a 45.8% increase from the corresponding period of FY2009.

EBITDA was RMB397.9 million (US$60.3 million) for the nine months ended December 31, 2010, representing a 54.1% increase from the corresponding period of FY2009.

Adjusted EBITDA was RMB353.0 million (US$53.5 million) for 3Q FY2010, representing a 22.6% increase from the corresponding period of FY2009.

Stock compensation expense for the nine months ended December 31, 2010 was RMB28.6 million (US$4.3 million), of which RMB0.3 million was allocated to cost of revenues, RMB3.7 million to research and development expenses, RMB0.5 million to sales and marketing expenses and RMB24.1 million to general and administrative expenses.

Amortization of acquired intangible assets for the nine months ended December 31, 2010 was RMB147.8 million (US$22.4 million), of which RMB120.5 million was allocated to cost of revenues and RMB27.3 million to operating expenses.

For the convenience of readers, certain RMB amounts have been translated into U.S. dollars at the rate of RMB6.6000 to US$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 Thursday, December 30, 2010. 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 rate on December 30, 2010 or at any other dates.

Update on Receivable from Chengxuan

As of December 31, 2010, the remaining amount of receivable due December 31, 2010 from Chengxuan, one of the Company's major shareholders and owned by Mr. Xiaodong Wu, was reduced from US$30 million to US$18 million. This receivable relates to the sale of the Company's HIFU business to Chengxuan. Chengxuan made two payments to the Company in the amount of US$8 million and US$4 million during 3Q FY2010. Subsequently, Chengxuan made another payment of US$3 million to the Company in January 2011. Chengxuan indicated to the Company that payments will be made to the Company to pay off the remaining balance together with interest thereon before June 30, 2011.

Non-GAAP Measure Disclosures

The Company reported its operating results in accordance with U.S. generally accepted accounting principles ("GAAP") for the three months and nine months ended December 31, 2009 and 2010, respectively. The Company also presented non-GAAP information, which included EBITDA and adjusted EBITDA, for the three months and nine months ended December 31, 2009 and 2010, respectively. The non-GAAP measures are defined below:

• Non-GAAP gross profit represents gross profit reported in accordance with GAAP, adjusted for the effects of stock compensation expense and amortization of acquired intangible assets.
• Non-GAAP gross margin represents non-GAAP gross profit divided by net revenues.
• Non-GAAP research and development expenses represent research and development expenses reported in accordance with GAAP, adjusted for the effects of stock compensation expense.
• Non-GAAP sales and marketing expenses represent sales and marketing expenses reported in accordance with GAAP, adjusted for the effects of stock compensation expense.
• Non-GAAP general and administrative expenses represent general and administrative expenses reported in accordance with GAAP, adjusted for the effects of stock compensation expense.
• Non-GAAP operating income represents operating income reported in accordance with GAAP, adjusted for the effects of stock compensation expense and amortization of acquired intangible assets.
• Non-GAAP interest expense on convertible notes represents interest expense on convertible notes reported in accordance with GAAP, adjusted for the effects of non-cash interest expense of convertible notes.
• Non-GAAP other income (expense), net represents other income and expense, net reported in accordance with GAAP, adjusted for the effects of gain on repurchase of convertible notes as well as high yield note offering expenses.
• Non-GAAP net income represents net income reported in accordance with GAAP, adjusted for the effects of stock compensation expense, amortization of acquired intangible assets, non-cash interest expense of convertible notes, non-cash interest expense for amortization of share lending costs, gain on repurchase of convertible notes as well as high yield note offering expenses.
• Non-GAAP earnings per ADS represents non-GAAP net income divided by the weighted average number of ADSs used in computing basic and diluted earnings per ADS in accordance with GAAP.
• EBITDA represents net income reported in accordance with GAAP, adjusted for the effects of interest income, interest expenses, income tax expense, depreciation and amortization.
• Adjusted EBITDA represents EBITDA adjusted for the effects of stock compensation expense, gain on repurchase of convertible notes as well as high yield note offering expenses.