TCM » Topics » Net Revenues

This excerpt taken from the TCM 20-F filed Jun 30, 2008.

Net Revenues

In 2005, 2006 and 2007, we generated net revenues of RMB346.1 million RMB485.0 million and RMB596.0 million (US$81.7 million), respectively. Our net revenues are net of PRC sales taxes, discounts, and returns.

We derive net revenues primarily from operations from the following two markets:

 

   

Sales to Hospitals. A substantial majority of our sales of Xianling Gubao and our other prescription medicines designated for hospitals was made through third-party distributors, and a very small portion of these medicines, as well as third-party medicines, was sold directly to hospitals in Guizhou province through Tongjitang Distribution, our wholesale distribution subsidiary. In particular,

 

   

In 2007, we generated 56.1% of our sales of Xianling Gubao from hospitals.

 

   

In 2005 and 2006, since we did not track sales of Xianling Gubao designated for hospitals separately from those designated for retail pharmacies, we cannot separately quantify these sales for these two markets. Based on our analysis of sales data in light of Xianling Gubao’s different pricing patterns for hospitals and for retail pharmacies, however, we believe that a substantial majority of sales of Xianling Gubao was designated for hospitals in these periods and that these sales declined as a percentage of total sales of Xianling Gubao in 2006.

 

   

Sales to Retail Pharmacies. A substantial majority of sales of our OTC medicines was designated for retail pharmacies through distributors, and a very small portion of these medicines, as well as third-party medicines, was sold to retail pharmacies in Guizhou province through Tongjitang Distribution and directly to consumers through Tongjitang Chain Stores. In particular,

 

   

In 2007, we generated 43.9% of our sales of Xianling Gubao from retail pharmacies.

 

   

In 2005 and 2006, since we did not track sales of Xianling Gubao designated for hospitals separately from those designated for retail pharmacies, we cannot separately quantify these sales for these two markets. Based on our analysis of sales data in light of Xianling Gubao’s different pricing patterns for hospitals and for retail pharmacies, however, we believe that sales of Xianling Gubao designated for retail pharmacies accounted for a significant portion of total sales of Xianling Gubao in these periods and that these sales grew larger as a percentage of total sales of Xianling Gubao in 2006.

In 2005, some of our distributors returned some packages of Xianling Gubao to us and asked for an exchange. The total value of returns amounted to approximately 9.0% of our net revenues in 2005. These returns resulted primarily from printing errors in our company name on the exterior carton boxes that contained packs of Xianling Gubao, and secondarily from damage to the carton boxes during shipment. The printing errors in our company name occurred because we changed our company name twice in 2005 due to our internal reorganization and the change of our legal status from a PRC domestic company to a wholly-foreign owned enterprise, but we failed to timely update our company name for printing on Xianling Gubao carton boxes. In each case of returns, we took back packs of Xianling Gubao contained in the misprinted and damaged carton boxes, repacked them into new carton boxes, and re-delivered them to our distributors, who then accepted our exchanged products. We believe that the printing error-related returns in 2005 were isolated incidences and are not likely to recur and that the costs incurred for these returns resulting from shipping damage are not material to our operations. Accordingly, we have not reserved any sales return provisions. We review our sales return provision policy from time to time.

Sales to Beijing Shirentang Pharmaceutical Distribution Co., Ltd., or Beijing Shirentang, one of our 20 regional distributors, equaled 26.3%, 22.5% and 9.7% of our total net revenues in 2005, 2006 and 2007, respectively. Sales to another distributor, Shanghai Leiyunshang Pharmaceutical Distribution Co., Ltd., or Shanghai Leiyunshang, our regional distributor in Shanghai in 2007, accounted for 11.6% of our net revenues in 2007. In 2005, 2006 and 2007, sales to our top 10 distributors accounted for 61.2%, 66.1% and 58.4% of our total net revenues, respectively.

 

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