China Medical Technologies fourth-quarter revenues down 29.3% to $25.7 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 fourth fiscal quarter ("4Q FY2009") and the full fiscal year ended March 31, 2010 ("FY2009").

4Q FY2009 Highlights -- Revenues decreased by 29.3% year-over-year to RMB175.7 million (US$25.7 million) but increased by 2.0% sequentially. -- Income from continuing operations and net income was RMB9.1 million (US$1.3 million). -- Non-GAAP income from continuing operations, as defined below, decreased by 57.2% year-over-year to RMB51.5 million (US$7.5 million) but increased by 12.8% sequentially. -- Diluted earnings from continuing operations per ADS* was RMB0.35 (US$0.05). -- Non-GAAP diluted earnings from continuing operations per ADS*, as defined below, decreased by 56.7% year-over-year to RMB1.98 (US$0.29) but increased by 13.8% sequentially. -- Net cash generated from operations was RMB59.8 million (US$8.8 million). -- Approximately 110,000 ADSs* were repurchased under the Company's share repurchase program. -- Approximately RMB76.8 million (US$11.2 million) 4% convertible notes were purchased and cancelled by the Company. Approximately 192,000 ADSs* were returned to the Company under the share lending agreement in connection with the issuance of 4% convertible notes in August 2008. FY2009 Highlights -- Revenues decreased by 12.9% year-over-year to RMB723.1 million (US$105.9 million). -- Loss from continuing operations and net loss was RMB57.0 million (US$8.4 million). -- Non-GAAP income from continuing operations, as defined below, decreased by 55.5% year-over-year to RMB187.3 million (US$27.4 million). -- Diluted loss from continuing operations per ADS* was RMB2.17 (US$0.32). -- Non-GAAP diluted earnings from continuing operations per ADS*, as defined below, decreased by 55.5% year-over-year to RMB7.13 (US$1.04). Targets for 1Q FY2010 -- Target revenues are expected to be not less than RMB185.0 million (US$27.1 million). -- Target non-GAAP income from continuing operations is expected to be not less than RMB56.0 million (US$8.2 million). -- Target non-GAAP diluted earnings from continuing operations per ADS* is expected to be not less than RMB2.14 (US$0.31). Targets for FY2010 -- Target quarterly revenues are expected to increase in a range of 5%-7% on a quarter-over-quarter basis during FY2010. -- Target quarterly non-GAAP income from continuing operations and target quarterly non-GAAP diluted earnings from continuing operations per ADS* are expected to increase at a rate higher than that of target quarterly revenues. * One American Depositary Share ("ADS") = 10 ordinary shares

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

"We continued to achieve organic growth in the past quarter despite the impact of two important public holidays in China," commented Mr. Xiaodong Wu, Chairman and Chief Executive Officer of the Company. "Our business turnaround is demonstrated by the solid progress we made on every line of business, as well as imminent cost synergies we expect to come as we broaden our product offering. While the first half of FY2009 proved to be eventful for us, we executed well in the past quarter on our three strategic imperatives including formal launch of our SPR analyzer, expansion in product portfolio and investment in research and development for future growth. Our initial SPR launch has resulted in penetrating a number of our top tier hospital customers and we will start to generate revenue from sales of HPV DNA chips this quarter. Turning to our FISH business, we continue to see significant uptake in a number of applications including prenatal, urology, gynecology and hematological malignancies. We also saw momentum in companion diagnostic tests for targeted cancer drugs such as our HER-2 gene test for the use of Herceptin in breast cancer patients and stomach cancer patients as well as our EGFR gene test for the use of Iressa and Tarceva in non-small cell lung cancer patients. Our direct sales force has been focusing on these high growth areas with our existing top tier hospital customers. As for our ECLIA business, we received SFDA approval for our fully-automated analyzer in April, 2010. Our major target end users will be top tier hospitals as well as high volume users among mid size hospitals of our ECLIA existing users, which we expect to be another growth driver for our relatively maturing ECLIA business starting in 2011. Finally, we continue to invest in research and development and anticipate additional SFDA approvals in the coming quarters, most notably our HPV DNA chip in the near term. With more extensive product offering and broader coverage of top tier hospitals, we believe that we are well positioned for a phase of accelerated growth starting this quarter."

Mr. Sam Tsang, Chief Financial Officer of the Company commented, "To address certain concerns raised by some of our shareholders and potential investors regarding our high level of leverage, we have taken various measures during the past few months including the purchases of our 3.5% tranche as well as 4% tranche of convertibles notes from the open market at significant discounts on the face value of the convertible notes, the termination of our share repurchase program and the suspension of our annual dividend. We intend to continue to reduce our leverage by accumulating cash generated from our operations. When we reduce our leverage to an appropriate level, we will resume our annual dividend. Nevertheless, we will not reduce our investment in the expansion of our direct sales network serving top tier hospitals and the internal product development on our three technology platforms which will sustain our growth in the mid to long term."

4Q FY2009 Unaudited Financial Results

The Company reported revenues of RMB175.7 million (US$25.7 million) for 4Q FY2009, representing a 29.3% decrease from the corresponding period of FY2008 but a 2.0% increase from 3Q 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 is expected to include SPR products in 1Q FY2010 while the immunodiagnostic system segment consists of ECLIA products.

Molecular diagnostic system sales for 4Q FY2009 were RMB100.9 million (US$14.8 million), representing an 8.0% decrease from the corresponding period of FY2008 but a 4.9% increase from 3Q FY2009. The year-over-year decrease was primarily due to the sales of remaining inventory of fluorescent microscopes during 4Q FY2008 while there were no such sales since 1Q FY2009.

Immunodiagnostic system sales for 4Q FY2009 were RMB74.8 million (US$11.0 million), representing a 46.2% decrease from the corresponding period of FY2008 and a 1.7% decrease from 3Q FY2009. The year-over-year decrease was primarily due to the price reduction for ECLIA reagent kits in September 2009.

Gross margin was 64.9% for 4Q FY2009 which decreased year-over-year from 75.1% for the corresponding period of FY2008 but improved sequentially from 63.4% for 3Q FY2009. The year-over-year decrease in gross margin was primarily due to the impact of the price reduction for ECLIA reagent kits. The sequential increase in gross margin was primarily due to the purchase price reduction for major raw materials used in the production of ECLIA reagent kits from January 2010.

Research and development expenses were RMB10.4 million (US$1.5 million) for 4Q FY2009, representing a 3.0% year-over-year decrease and a 3.6% sequential decrease.

Sales and marketing expenses were RMB16.7 million (US$2.4 million) for 4Q FY2009, representing a 39.6% year-over-year increase but a 12.4% sequential decrease. The year-over-year increase was primarily due to the increase in direct sales efforts for molecular diagnostic systems.

General and administrative expenses were RMB26.7 million (US$3.9 million) for 4Q FY2009, representing a 30.2% year-over-year increase and a 3.5% sequential increase. The year-over-year increase was primarily due to the increase in staff expenses.

Amortization of SPR intangible assets was RMB27.3 million (US$4.0 million) for 4Q FY2009.

Interest expense on convertible notes was RMB34.8 million (US$5.1 million) for 4Q FY2009. As of March 31, 2010, the Company's outstanding convertible notes of US$150.0 million and US$264.8 million bear interest at 3.5% and 4.0% per annum, respectively and will mature in November 2011 and August 2013, respectively. Due to the adoption of new authoritative guidance governing the accounting for convertible instruments that can be settled in cash or partially in cash upon conversion effective on April 1, 2009, the Company recorded additional non-cash interest expense of RMB7.6 million (US$1.1 million) for the US$150.0 million 3.5% convertible notes in 4Q FY2009. The Company also made an adjustment related to these convertible notes for the corresponding period of FY2008 by increasing non-cash interest expense by RMB7.2 million to adopt this guidance retrospectively. This new guidance is not applicable to the US$264.8 million 4% convertible notes.

Interest expense on amortization of convertible notes issuance costs was RMB4.3 million (US$0.6 million) for 4Q FY2009.

Other income was RMB26.3 million (US$3.8 million) for 4Q FY2009. The significant year-over-year increase was primarily due to the gain from the purchase of the Company's convertible notes on the open market.

Income tax expense was RMB15.2 million (US$2.2 million) for 4Q FY2009.

Income from continuing operations and net income was RMB9.1 million (US$1.3 million) for 4Q FY2009.

Non-GAAP income from continuing operations excluding stock compensation expense, amortization of acquired intangible assets, non-cash interest expense of convertible notes arising from the adoption of the new guidance related to convertible instruments that can be settled in cash or partially in cash upon conversion and gain on purchase of its convertible notes was RMB51.5 million (US$7.5 million) for 4Q FY2009, representing a 57.2% decrease from the corresponding period of FY2008 but a 12.8% increase from 3Q FY2009.

Stock compensation expense for 4Q FY2009 was RMB10.7 million (US$1.6 million), of which RMB1.4 million was allocated to research and development expenses and RMB9.3 million to general and administrative expenses.

Amortization of acquired intangible assets for 4Q FY2009 was RMB49.8 million (US$7.3 million), of which RMB22.4 million was allocated to cost of revenues and RMB27.4 million to operating expenses.

As of March 31, 2010, the Company's cash and cash equivalents was RMB815.5 million (US$119.5 million). Net cash generated from operating activities for 4Q FY2009 was RMB59.8 million (US$8.8 million).

As of March 31, 2010, the Company's net accounts receivable was RMB303.4 million (US$44.4 million), representing an increase of 0.8% from the balance at December 31, 2009.

FY2009 Unaudited Financial Results

Revenues were RMB723.1 million (US$105.9 million) for FY2009, representing a 12.9% year-over-year decrease.

Molecular diagnostic system sales for FY2009 were RMB384.8 million (US$56.4 million), representing an 18.3% year-over-year increase. Immunodiagnostic system sales for FY2009 were RMB338.3 million (US$49.5 million), representing a 33.0% year-over-year decrease. The year-over-year increase in molecular diagnostic system sales 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. The year-over-year decrease in immunodiagnostic system sales was primarily due to the price reduction of ECLIA reagent kits from September 2009.

Gross margin decreased to 67.1% for FY2009 as compared to 72.0% for FY2008 primarily due to the price reduction of ECLIA reagent kits.

Research and development expenses were RMB42.3 million (US$6.2 million) for FY2009, representing a 34.5% year-over-year increase. The increase was primarily due to the development of FISH probes, SPR-based chips, ECLIA reagent kits as well as fully-automated ECLIA analyzers.

Sales and marketing expenses were RMB64.1 million (US$9.4 million) for FY2009, representing a 49.9% year-over-year increase. This increase was primarily due to the increase in direct sales efforts for molecular diagnostic systems.

General and administrative expenses were RMB144.7 million (US$21.2 million) for FY2009, representing a 48.2% year-over-year increase. The increase was primarily due to the costs for the independent internal investigation as well as provision for bad debts related to certain ECLIA customers.

Interest expense on convertible notes was RMB141.1 million (US$20.7 million) for FY2009, representing a 26.2% year-over-year increase. The increase was primarily due to the issuance of US$276.0 million 4% convertible notes in August 2008.

Interest expense on amortization of convertible notes issuance costs was RMB17.4 million (US$2.5 million) for FY2009, representing a 30.6% year-over-year increase. The increase was primarily due to the issuance of US$276.0 million 4% convertible notes in August 2008.

Other income was RMB26.5 million (US$3.9 million) for FY2009. The significant year-over-year increase was primarily due to the gain from the purchase of the Company's convertible notes on the open market.

Income tax expense was RMB63.6 million (US$9.3 million) for FY2009. 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 is required to accrue for withholding income tax on distributable earnings generated in China during the year.

Loss from continuing operations and net loss was RMB57.0 million (US$8.4 million) for FY2009.

Non-GAAP income from continuing operations excluding stock compensation expense, amortization of acquired intangible assets, non-cash interest expense of convertible notes arising from the adoption of the new guidance related to convertible instruments that can be settled in cash or partially in cash upon conversion and gain on purchase of its convertible notes was RMB187.3 million (US$27.4 million) for FY2009, representing a 55.5% year-over-year decrease.

Stock compensation expense for FY2009 was RMB40.4 million (US$5.9 million), of which RMB6.3 million was allocated to research and development expenses and RMB34.1 million to general and administrative expenses. The Company approved the grant of 3,250,000 restricted stock, equivalent to 325,000 ADSs to certain directors, officers and employees on May 21, 2010 which was approximately 1.0% of the Company's issued shares. The restricted stock vests at the end of a three-year period.

Amortization of acquired intangible assets for FY2009 was RMB199.1 million (US$29.2 million), of which RMB89.7 million was allocated to cost of revenues and RMB109.4 million to operating expenses.

For the convenience of readers, certain RMB amounts have been translated into U.S. dollars at the rate of RMB6.8258 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 Wednesday, March 31, 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 March 31, 2010 or at any other dates.

Share Repurchase Program

In September 2009, the Company's board of directors authorized a share repurchase program, under which the Company may repurchase up to US$30 million worth of its outstanding ADSs from the open market or in block trades for a period of one year, commencing on October 1, 2009. As of March 31, 2010, the Company repurchased a total of 500,000 ADSs at a cost of approximately US$6.4 million (including transaction costs). The Company has terminated the program.

Convertible Notes

The Company purchased 4% convertible notes with principal amount of about RMB76.8 million (US$11.2 million) for a total consideration of RMB50.5 million (US$7.4 million) during 4Q FY2009. As of March 31, 2010, the Company had US$264.8 million 4% convertible notes and US$150 million 3.5% convertible notes outstanding. The Company purchased additional 3.5% and 4% convertible notes subsequent to March 31, 2010.

Outlook for 1Q FY2010

The Company expects the molecular diagnostic system segment to continue its growth momentum and the immunodiagnostic system segment to rebound from its low level in 1Q FY2010.

The Company estimates the target revenues for 1Q FY2010 to be not less than RMB185.0 million (US$27.1 million).

The Company estimates the target non-GAAP income from continuing operations for 1Q FY2010 to be not less than RMB56.0 million (US$8.2 million).

The Company estimates the target non-GAAP diluted earnings from continuing operations per ADS for 1Q FY2010 to be not less than RMB2.14 (US$0.31).

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

Outlook for FY2010

The Company expects the sales of HPV DNA chips used with its SPR analyzers to increase rapidly in later quarters of FY2010 following the increasing number of SPR analyzers placed with its hospital customers during the fiscal year. The Company also expects a higher non-GAAP net margin for FY2010 compared with that of FY2009 primarily due to increasing revenue contribution from sales of FISH probes and HPV DNA chips which generate higher non-GAAP gross margin among the Company's products.

The Company estimates the target quarterly revenues to increase in a range of 5%-7% on a quarter-over-quarter basis during FY2010.

The Company estimates the target quarterly non-GAAP income from continuing operations and target quarterly non-GAAP diluted earnings from continuing operations per ADS to increase at a rate higher than that of target quarterly revenues.

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