China Medical second quarter revenue increases 21.5% to RMB201.8 million

China Medical Technologies, Inc. (the "Company") (Nasdaq: CMED), a leading China-based advanced in-vitro diagnostic ("IVD") company, today announced its unaudited financial results for the second fiscal quarter ended September 30, 2010 ("2Q FY2010").

2Q FY2010 Highlights

• Revenues increased by 21.5% year-over-year to RMB201.8 million (US$30.2 million).
• Non-GAAP net income, as defined below, increased 270.1% year-over-year to RMB65.4 million (US$9.8 million).
• Non-GAAP diluted earnings per ADS, as defined below, increased 273.1% year-over-year to RMB2.50 (US$0.37).
• Adjusted EBITDA, as defined below, increased 62.6% year-over-year to RMB116.3 million (US$17.4 million).
• Net cash generated from operations was RMB67.3 million (US$10.1 million).

Outlook for 3Q FY2010

• Target revenues are expected to be not less than RMB220.0 million (US$32.9 million), representing a year-over-year increase of not less than 27.7%.
• Target non-GAAP net income is expected to be not less than RMB74.0 million (US$11.1 million), representing a year-over-year increase of not less than 62.2%.
• Target non-GAAP diluted earnings per ADS is expected to be not less than RMB2.82 (US$0.42), representing a year-over-year increase of not less than 62.1%.

Outlook for FY2010

• Target revenues are expected to be not less than RMB846.0 million (US$126.4 million), representing a year-over-year increase of not less than 17.0%. The year-over-year increase of annual revenues for FY2010 is lower than that of 3Q FY2010 because of the 10.9% year-over-year decrease in quarterly revenues of 1Q FY2010.
• Target non-GAAP net income is expected to be not less than RMB280.0 million (US$41.9 million), representing a year-over-year increase of not less than 49.5%.
• Target non-GAAP diluted earnings per ADS is expected to be not less than RMB10.69 (US$1.60), representing a year-over-year increase of not less than 49.9%.

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

"We are pleased to see the commencement of contribution from sales of HPV-DNA chips which are expected to become another main revenue stream and an important growth driver in addition to our FISH business during the next few years. We have received strong interest in our SPR equipment from many of our top tier hospital customers and significant purchase orders on our chips from hospitals which have used our chips for their patients on a regular basis. We expect substantial growth on sales of our chips in upcoming quarters. In addition, our FISH business continued its growth momentum and our ECLIA business has resumed year-over-year growth," commented Mr. Xiaodong Wu, Chairman and Chief Executive Officer of the Company.

2Q FY2010 Unaudited Financial Results

The Company reported revenues of RMB201.8 million (US$30.2 million) for 2Q FY2010, representing a 21.5% 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.  

Molecular diagnostic system sales for 2Q FY2010 were RMB118.3 million (US$17.7 million), representing a 32.6% 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 served by the Company's direct sales personnel as well as the sales of SPR-based HPV-DNA chips of RMB3.8 million (US$0.6 million) to hospitals during 2Q FY2010.

Immunodiagnostic system sales for 2Q FY2010 were RMB83.5 million (US$12.5 million), representing an 8.7% 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 55.2% for 2Q FY2010 which decreased year-over-year from 65.4% for the corresponding period of FY2009. Due to the commencement of sales of HPV-DNA chips, the amortization of SPR intangible assets amounted to RMB27.3 million (US$4.1 million) was classified from operating expenses to cost of revenues starting from 2Q FY2010. The year-over-year decrease in gross margin was primarily due to this change in classification. The gross margin for 2Q FY2010 would be 68.6% without this change in classification of expense.

Research and development expenses were RMB10.9 million (US$1.6 million) for 2Q FY2010, representing a 14.5% 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 RMB21.5 million (US$3.2 million) for 2Q FY2010, representing a 23.2% year-over-year increase. The year-over-year increase was primarily due to the increase in direct sales efforts for molecular diagnostic systems.

General and administrative expenses were RMB25.0 million (US$3.7 million) for 2Q FY2010, representing a 44.5% year-over-year decrease. The year-over-year decrease was primarily due to no cost of independent internal investigation and lower allowance for doubtful accounts for 2Q FY2010.

Interest expense on convertible notes was RMB32.0 million (US$4.8 million) for 2Q FY2010. As of September 30, 2010, the Company's outstanding convertible notes of US$135 million and US$248 million bear interest at 3.5% and 4% per annum, respectively, and will mature in November 2011 and August 2013, respectively.

Interest expense on amortization of convertible notes issuance costs was RMB3.9 million (US$0.6 million) for 2Q FY2010.

Interest expense on amortization of share lending costs was RMB2.5 million (US$0.4 million) for 2Q FY2010.

Income tax expense was RMB21.8 million (US$3.3 million) for 2Q 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 2Q FY2010.

Net loss was RMB2.9 million (US$0.4 million) for 2Q FY2010, representing a 94.1% decrease from the corresponding period of FY2009. The significant year-over-year decrease in net loss was primarily due to growth in molecular diagnostic system sales and recovery from immunodiagnostic system sales.

Non-GAAP net income, as defined below, was RMB65.4 million (US$9.8 million) for 2Q FY2010, representing a 270.1% increase from the corresponding period of FY2009.

Earnings before interest, taxes, depreciation and amortization ("EBITDA") was RMB107.1 million (US$16.0 million) for 2Q FY2010, representing a 66.8% increase from the corresponding period of FY2009.

Adjusted EBITDA, which excludes stock compensation expense and gain on purchase of convertible notes from EBITDA, was RMB116.3 million (US$17.4 million) for 2Q FY2010, representing a 62.6% increase from the corresponding period of FY2009.

Stock compensation expense for 2Q FY2010 was RMB9.2 million (US$1.4 million), of which RMB0.1 million was allocated to cost of revenues, RMB1.1 million to research and development expenses, RMB0.2 million to sales and marketing expenses and RMB7.8 million to general and administrative expenses. The Company approved the grant of 2,100,000 restricted stock, equivalent to 210,000 ADSs, to directors, officers and certain employees on November 5, 2010. The restricted stock vests at the end of a three-year period.

Amortization of acquired intangible assets for 2Q FY2010 was RMB49.4 million (US$7.4 million) which was all allocated to cost of revenues.

As of September 30, 2010, the Company's cash and cash equivalents was RMB805.9 million (US$120.5 million). Net cash generated from operating activities for 2Q FY2010 was RMB67.3 million (US$10.1 million). Net cash used in investing activities for 2Q FY2010 was RMB1.2 million (US$0.2 million). There was no financing activity for 2Q FY2010.

As of September 30, 2010, the Company's net accounts receivable was RMB333.1 million (US$49.8 million), representing an increase of 7.0% from the balance at June 30, 2010.

For the convenience of readers, certain RMB amounts have been translated into U.S. dollars at the rate of RMB6.6905 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, September 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 September 30, 2010 or at any other dates.

Update on Receivable from Chengxuan

The receivable of US$30 million from Chengxuan, one of the Company's major shareholders and owned by Mr. Xiaodong Wu, is due on December 31, 2010 which relates to the sale of the Company's HIFU business to Chengxuan. Chengxuan made an early payment of US$8 million to the Company in November 2010 and has indicated to the Company that the remaining amount will be paid on or before December 31, 2010.

Non-GAAP Measure Disclosures

The Company provides gross profit, operating income, net income, earnings per ADS, EBITDA and adjusted EBITDA on a Non-GAAP basis to enable investors to better assess the Company's operating performance. The Non-GAAP measures described by the Company are reconciled to the corresponding GAAP measures in the exhibit below titled "Reconciliations of GAAP measures to Non-GAAP measures".

The Company reported for 2Q FY2010 and provided estimates of net income and diluted earnings per ADS for 3Q FY2010 and full year FY2010 on a Non-GAAP basis. Each of the terms used by the Company is defined as follows:

• 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 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 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 and gain on purchase of convertible notes.
• 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 as well as amortization of acquired intangible assets.
• Adjusted EBITDA represents EBITDA adjusted for the effects of stock compensation expense and gain on purchase of convertible notes.

Non-GAAP financial measures are used by the Company in its financial and operating decision-making because management believes they reflect the Company's ongoing business in a manner that allows meaningful period-to-period comparison. The Company's management believes that these non-GAAP financial measures provide useful information to investors and others in understanding and evaluating the Company's current operating performance and future prospects in the same manner as management does, if they so choose.

The presentation of this additional financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP. For a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures, please see the financial information included with this earnings announcement.