China Medicine reports total revenues of $19.2M for the third quarter of 2009

China Medicine Corporation (OTC Bulletin Board: CHME) ("China Medicine" or "the Company"), a developer and a leading distributor of prescription and over-the-counter pharmaceuticals, traditional Chinese medicines (TCM), nutritional and dietary supplements, and medical devices and medical formulations, today announced its third quarter 2009 results.

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

"We are delighted to report that China Medicine experienced a strong third quarter in 2009 with significant increases in revenues and net income. As the government implements its plan to support rural healthcare and establish a universal healthcare system, we expect to be positively impacted as we distribute pharmaceutical products through our extensive distribution network that addresses this underserved market. In addition, once the recent acquisition of LifeTech is consummated, we should be positioned as a stronger player in the pharmaceutical industry as we will have the ability to sell LifeTech's self-manufactured pharmaceutical products through our extensive distribution network, thus improving our margin structure," said Mr. Senshan Yang, 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 is used for the treatment of cardio-cerebral vascular diseases; and Hongjin Xiaojie capsules, which accounted for 5.0% of revenues are used to treat pain and for blood circulation. Combined gross margins for these products were 34.3%. Collectively, our top three selling drugs accounted for approximately 24.2% 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 mainly attributable to the 393% increase in industry-wide sales on regional level driven by growth in second and third tier cities resulting from the implementation of the health care reform in rural areas, where the Company excels at meeting higher industry standards required to supply pharmaceutical products in China.

Product sales in the third quarter totaled $18.8 million and accounted for 98.1% of total net revenues. Sales of Western-style prescription products and over-the-counter products accounted for 66.3% of total revenues in the third quarter of 2009. Sales of TCM, prescription and over-the-counter products accounted for 29.3% of total revenues. Sales of dietary supplements, medical equipment and others accounted for 4.4% of revenues.

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

Gross profit in the third quarter of 2009 was $5.8 million, an increase of 78.9% over the third quarter of 2008. Gross margin was 30.5% of total revenues for the third quarter, slightly lower compared to 31.0% in the third quarter of 2008 due to changes in product mix.

Operating expenses in the third quarter of 2009 were $1.3 million, up 39.2% from $0.9 million in the third quarter of 2008. The increase was due to higher selling, general and administrative expenses related to travel and allowances, the interest of the bank loan, meals and entertainment, rent, labor unions and salaries. Operating expenses represented 6.8% of total revenues in the third quarter of 2009 compared to 8.9% in the third quarter of 2008.

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%, as compared to 22.2% during the same period a year ago.

The Company's provision for income taxes was $1.2 million for the three months ended September 30, 2009 compared to $411,890 for the comparable period of 2008. The increase was due to the increase in operating income and the change of income tax rate. A favorable tax rate of 16.5% in 2008 expired and the 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 diluted share, which included a $0.14 million non-cash expense related to a change in the fair value of warrants, compared to $2.0 million or $0.13 per diluted share, in the third quarter of 2008. This is due to the adoption of a new accounting policy that became effective January 1, 2009, which requires changes in the fair value of warrants to be recognized in earnings each quarter. Excluding this expense, adjusted net income for the third quarter of 2009 was $3.4 million, or $0.22 per fully diluted share, which translates to a 71.1% increase in net income for the third quarter of 2009 compared to the same period last year.

Nine Month Results

For the first nine months of 2009, total revenues increased to $44.3 million, up 51.7% from $29.2 million in first nine months of 2008. Gross profit 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% in the first nine months of 2009 compared to 33.3% during the first nine months of 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. Net income for the first nine months of 2009 was $3.8 million or $0.25 per diluted share, compared to $5.6 million, or $0.36 per diluted share in the first nine months of 2008. Adjusted net income, excluding expenses related to $2.1 million 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 income for 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 cash equivalents. Working capital was approximately $32.1 million. Accounts receivable stood at $14.9 million as of September 30, 2009, down from $19.2 million 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. For the 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 the nine months ended September 30, 2009, versus $3.0 million for the nine months ended September 30, 2008. The increase is attributable to the purchase of equipment used to expand the Company's rADTZ production capacity.

Business Outlook

"As we get further into the fourth quarter and look towards 2010, we are excited about the prospects for recombinant Aflatoxin Detoxifizyme (rADTZ), our novel product for removing aflatoxins found in food and animal feed. Our current product permit for rADTZ allows for small-scale trial sales and revenue contributed by rADTZ has not yet been significant. Nonetheless, we anticipate receiving the product permit for rADTZ from the Chinese Ministry of Agriculture by the end of the year and we have purchased additional equipment to increase our current rADTZ production capacity from 50 tons to 1,200 tons in 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 and deliver the highest value possible for shareholders. We recently entered into a two-year agreement to export our self-owned, OEM manufactured product Levocarnitine, which will be sold in Pakistan. Levocarnitine is used to treat coronary heart disease and acute myocardial infarction. The potential market for Levocarnitine in Pakistan is estimated at two million vials per year and we expect to launch this product in January 2010. We estimate that gross margin for this product will be at least 65%," said Mr. Yang.

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

Given the need to temporarily set aside cash to fund the acquisition of LifeTech and facilitate our transition to become a leading, vertically integrated pharmaceutical company, we have had to decrease the amount of working 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 sheet to receive a strategic investment from a leading private equity firm (the "Investor") of up to $59.5 million consisting of three stages. Pursuant to the term sheet, the first stage consists of the Investor purchasing up to $7.5 million in convertible secured notes with a conversion price of $3.50 per share. The second stage consists of the Investor subscribing for approximately $24.2 million in newly issued shares of China Medicine common stock at a price of $2.60 per share. The third and final stage consists of the Investor subscribing 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 per share. China Medicine and the Investor believe they will act in good faith to move forward the proposed transactions as soon as practical, including completion of final due diligence and obtaining necessary shareholders' approval. China Medicine anticipates using the proceeds from stage one to replenish working capital used to acquire LifeTech. The Company anticipates using proceeds from stage two of this investment for expanding LifeTech's manufacturing capabilities and for general working capital purposes. Proceeds from the third stage are expected to be used to acquire additional pharmaceutical companies once identified and agreed upon by the Investor. However, as of the date herein, China Medicine has not entered into any definitive agreements related to any financing plans including those stated above.

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