China Medical Technologies 6-K 2007
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
REPORT OF FOREIGN ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the month of February 2007
Commission File Number: 000-51440
CHINA MEDICAL TECHNOLOGIES, INC.
(TRANSLATION OF REGISTRANTS NAME INTO ENGLISH)
No. 24 Yong Chang North Road
Beijing Economic-Technological Development Area
Peoples Republic of China
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.
Form 20-F X Form 40-F
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CHINA MEDICAL TECHNOLOGIES, INC.
TABLE OF CONTENTS
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 27, 2007
China Medical Reports Preliminary Third Quarter Financial Results for the Fiscal Year Ending March 31, 2007
Beijing, China, February 27, 2007 China Medical Technologies, Inc. (the "Company") (Nasdaq: CMED), a leading China-based medical device company that develops, manufactures and markets advanced in-vitro diagnostic (IVD) systems and tumor therapy systems, today announced its preliminary financial results for the third quarter of 2006 (3Q FY2006). The Companys 2006 fiscal year ends March 31, 2007, which makes the quarter ended December 31, 2007, the Companys third quarter.
3Q FY2006 Highlights
*One American Depositary Share (ADS) = 10 ordinary shares
We are pleased to report another strong quarter, which I believe reflects the strength and sustainability of our business, commented Mr. Xiaodong Wu, Chairman and CEO of China Medical. Our acquisition of the Fluorescent in situ Hybridization (FISH) business will further expand our IVD platform to molecular diagnostics and strengthen our leading position in the advanced IVD market in China. The FISH technology is an excellent strategic fit for us and we are enthusiastic about our planned launch of new FISH products to Chinese hospitals in the next few months. We expect revenues from diagnostic products will overtake HIFU revenue to become our largest source of revenue within two years.
Preliminary Results May Be Subject to Material Adjustment
The Company is currently evaluating the accounting treatment with respect to the embedded conversion feature relating to the 3.5% convertible senior subordinated notes due 2011 (the Convertible Notes) the Company issued and sold in November 2006. The accounting treatment involves the technical application of a set of complex accounting rules and standards. The financial results and guidance reported in this press release are unaudited and do not take into account any adjustments that may be required in connection with the potential accounting treatment of this aspect of the Convertible Notes. The Company does not believe that such
adjustments, if made, will impact the Companys cash flows, net revenues, cost of revenues, gross profit or operating income. However, because the financial results and guidance reported in this press release do not include the potential effects of any adjustments which may result from the accounting treatment of the embedded conversion feature of the Convertible Notes, the financial results and guidance reported in this press release are preliminary and may be subject to material adjustment.
China Medical reported net revenues of RMB161.5 million (US$20.7 million) for 3Q FY2006, representing a 46.1% increase from the corresponding period of 2005 and a 22.9% sequential increase from the previous quarter ended September 30, 2006.
The Companys revenues are currently generated from two product lines, ECLIA diagnostic systems and HIFU tumor therapy systems. ECLIA system sales include the sales of ECLIA analyzers and reagent kits.
ECLIA system sales for 3Q FY2006 were RMB55.4 million (US$7.1 million), representing a 64.4% increase from the corresponding period of 2005 and a 7.8% sequential increase from the previous quarter. Both the year-over-year and sequential growth in ECLIA system sales reflect rapid acceptance of ECLIA technology in the medical community in China and drove an increase in sales of reagent kits. Our strong growth in the sales of reagent kits in 3Q FY2006 was partially offset by the lower sales of analyzers due to the launch of the Companys new semi-automatic analyzer and the suspension of production of the old semi-automatic analyzer in October 2006. Sales of the old analyzer in the previous quarter are not a good reference for the performance of the new analyzer because sales of the new analyzer in 3Q FY 2006 following its launch have been stronger than the initial sales of the old analyzer in the first and the second quarters following its introduction in 2004. The addition of new reagent kits over the past 12 months broadened the Companys product portfolio from 27 to 56 and management expects to launch new reagent kits for Down syndrome and liver fibrosis in March 2007.
HIFU tumor therapy system sales for 3Q FY2006 were RMB106.1 million (US$13.6 million), representing a 38.2% increase from the corresponding period of 2005 and a 32.6% sequential increase from the previous quarter. The year-over-year growth in this sector was driven primarily by an increase in unit sales resulting from an increased level of awareness and acceptance of the HIFU tumor therapy system in the medical community in China due to the Companys continued marketing efforts. In addition, the Company was able to pass through an approximately 6% increase in the average selling price in September 2006, which also contributed to the growth in revenue. The sequential growth was primarily due to the seasonality in sales in this market. Historically, HIFU sales in the December and March quarters are particularly strong due to the typical procurement patterns of Chinese hospitals for large capital equipment.
The gross margin increased to 72.6% in 3Q FY2006 as compared to 70.4% and 71.9% for the corresponding quarter in 2005 and the previous quarter, respectively. This improvement in gross margin was primarily due to the price increase for the Companys HIFU tumor therapy system and higher revenue contribution from ECLIA reagents.
Research and development expenses were RMB9.3 million (US$1.2 million) for 3Q FY2006, representing a 39.5% year-over-year increase and a 10.7% sequential increase. The increase was primarily due to the HIFUrelated medical study that is being conducted in partnership with the Chinese Ministry of Health (the MOH), the pre-clinical trials that are being conducted in the United States and research cooperation with the Chinese Academy of Sciences Institute of Acoustics.
Sales and marketing expenses were RMB4.3 million (US$0.5 million) for 3Q FY2006, representing a slight 6.7% year-over-year increase and a slight 4.6% sequential decrease.
General and administrative expenses were RMB13.5 million (US$1.7 million) for 3Q FY2006, representing a 20.7% year-over-year increase and a 12.6% sequential increase primarily due to an increase in headcount as the Company expanded its operations.
Other income was RMB2.6 million (US$0.3 million) for 3Q FY2006, which was primarily related to a government grant that was secured in support of the Companys HIFU development.
The amortization of convertible notes issuance costs of RMB1.0 million (US$0.1 million) for 3Q FY2006 was due to the US$150 million convertible notes that were issued in November 2006. The issuance costs are amortized over the life of the convertible notes for a period of five years.
Interest income was RMB11.1 million (US$1.4 million) for 3Q FY2006, representing a 92.7% increase from the corresponding period of 2005 and a 39.5% sequential increase from the previous quarter. The year-over-year increase was primarily due to interest income generated from the net proceeds received from the Companys initial public offering in August 2005. The sequential increase was due primarily to the interest income generated from the net proceeds received from the Companys issuance of convertible notes in November 2006.
The interest expense of RMB5.2 million (US$0.7 million) for 3Q FY2006 related to interest on the convertible notes issued in November 2006. The notes bear interest at 3.5% per annum.
The income tax expense was RMB9.3 million (US$1.2 million) for 3Q FY2006. The income tax expense increased by only 7.6% from the corresponding period in 2005 because an income tax concession was granted by the PRC tax authorities in February 2006. The income tax rate for the Companys PRC subsidiary was retroactively reduced from 15% to 10% from January 2005 to December 2007. As a result of the tax concession, the Company changed the tax rate used to record its income tax expense from February 2006 and made an adjustment for the months prior to this. The estimated effective tax rate for 3Q FY2006 was 9.5%, which is slightly higher than the 8.9% rate from the previous quarter.
The preliminary net income was RMB88.4 million (US$11.3 million) for 3Q FY2006, representing a 55.4% increase from the corresponding period in 2005 and a 23.4% sequential increase from the previous quarter.
As of December 31, 2006, the Companys cash balance was RMB1.7 billion (US$217.8 million). Net operating cash flow for 3Q FY2006 was RMB115.3 million (US$14.8 million).
As of December 31, 2006, the Companys accounts receivable was RMB190.0 million (US$24.3 million), representing a 5.3% increase from the end of the September quarter. This was quite favorable given the 22.9% sequential increase in net revenues during 3Q FY2006. The turnover days improved to 140 days at the end of December from 148 days at the end of September.
For the convenience of readers, certain RMB amounts have been translated into U.S. dollars at the rate of RMB7.8041 to US$1.00, the noon buying rate in New York City for cable transfers of RMB per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York, as of Friday, December 29, 2006.
Outlook for FY2006
Based on current operating and market conditions and subject to any potential accounting adjustments discussed above, the Company maintains its previously announced targets for the fiscal year ending March 31, 2007. The target net revenues for the fiscal year ending March 31, 2007 are expected to be between RMB521 million (US$66.8 million) and RMB533 million (US$68.3 million) and the target annual net income for the fiscal year ending March 31, 2007 are expected to be between RMB263 million (US$33.7 million) and RMB271 million (US$34.7 million).
(Note The changes in the U.S. dollar figures are the result of the application of the exchange rate as of December 29, 2006.)
Resignation of Chief Operating Officer
The Company received the resignation of Mr. Minshi (Mike) Shen as Chief Operating Officer (COO). His last day with the Company was January 31, 2007. Mr. Shen plans to start his own medical device distribution and supply business, which will include the Companys HIFU tumor therapy and ECLIA systems. We thank Mr. Shen for his hard work and contribution to the Company during his employment and wish him all the best in his future endeavors. stated Mr. Xiaodong Wu, Chairman and CEO. Mr. Shens responsibilities have been taken over by Mr. Wu and Mr. Tsang, CFO.
China Medicals management team will host a conference call at 8:00 a.m. Eastern Time on February 27, 2007 (or 9:00 p.m. Beijing/Hong Kong time on February 27, 2007) to discuss the preliminary results following this earnings announcement.
The dial-in details for the live conference call are as follows:
- U.S. Toll Free Number 1 866 510 0705
- International dial-in number 1 617 597 5363
A live webcast of the conference call will be available on http://ir.chinameditech.com.
A replay of this webcast will be available for one month on this website.
A telephone replay of the call will be available after the conclusion of the conference call through 10:00 a.m. Eastern Time on February 28, 2007.
The dial-in details for the replay are as follows:
- U.S. Toll Free Number 1 888 286 8010
- International dial-in number 1 617 801 6888
About China Medical Technologies, Inc.
China Medical Technologies, Inc. is a China-based medical device company that develops, manufactures and markets advanced in-vitro diagnostics products using enhanced chemiluminescence immunoassay (ECLIA) technology to detect and monitor various diseases and disorders and high intensity focused ultrasound (HIFU) tumor therapy systems for the treatment of solid cancers and benign tumors. For more information, please visit www.chinameditech.com.
Safe Harbor Statement
This press release contains forward-looking statements. These statements constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as will, expects, anticipates, future, intends, plans, believes, estimates and similar statements. Among other things, the quotations from management in this press release contain forward-looking statements. Such statements involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements, including risks related to China Medicals ability of successfully commercialize the products utilizing the FISH technology and launch products in China or elsewhere in a timely manner. Further information regarding these and other risks is included in China Medicals filings with the U.S. Securities and Exchange Commission, including its annual report on Form 20-F. China Medical does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under applicable law.
China Medical Technologies, Inc.
Tel: 86 10 6530 8833
Tel: 852 2117 0861
Tel: 1 212 618 1978
China Medical Technologies, Inc.
Preliminary Unaudited Condensed Consolidated Balance Sheets
China Medical Technologies, Inc.
Preliminary Unaudited Condensed Consolidated Statements of Income