China BCT fourth quarter revenue increases 82.3% to $66.8 million

Mar 31 2011

China BCT Pharmacy Group, Inc., (OTC Bulletin Board: CNBI), ("China BCT" or the "Company"), a leading pharmaceutical distributor, retail pharmacy, and manufacturer of pharmaceutical products in Guangxi Province, China, today announced results for the fourth quarter and full year ended December 31, 2010.

Fourth Quarter 2010 Highlights

• Revenue increased 82.3% year-over-year to $66.8 million
• Gross profit rose 57.2% year-over-year to $14.1 million
• Operating income grew 61.3% year-over-year to $9.4 million
• GAAP net income climbed 83.6% to $7.4 million, or $0.19 per diluted share, from $4.0 million, or $0.13 per diluted share, in the year ago quarter
• Excluding non-cash items related to change in the fair value of warrant liabilities and share-based compensation expense, non-GAAP adjusted net income was $7.0 million, or $0.18 per diluted share

Full Year 2010 Highlights

• Revenue increased 47.6% year-over-year to $200.8 million
• Gross profit rose 37.5% year-over-year to $48.8 million
• Operating income grew 31.3% year-over-year to $35.4 million
• GAAP net income climbed 32.4% to $25.7 million, or $0.67 per diluted share, compared to $19.4 million, or $0.61 per diluted share, in 2009
• Excluding non-cash items related to change in the fair value of warrant liabilities and share-based compensation expense, non-GAAP adjusted net income was $26.4 million, or $0.68 per diluted share.
• In 2010, the Company acquired and self-opened a total of 105 retail outlets in Guangxi Province, bringing its total store count to 170 as of December 31, 2010.

"We ended 2010 on a positive note, achieving excellent fourth quarter revenue and earnings growth of 82% and 84%, respectively.  During 2010, we significantly expanded our retail footprint within Guangxi Province by adding 105 stores to our portfolio, while continuing to rapidly grow one of the region's leading wholesale distribution networks," commented Mr. Hui Tian Tang, Chairman and Chief Executive Officer of China BCT Pharmacy Group, Inc. "We commenced 2011 with a meaningful capital infusion from Milestone Longcheng, our new strategic partner, enabling us to further penetrate Guangxi's retail pharmacy market and invest in modern logistical infrastructure for our distribution business. We believe we have put together the right business model and team to become Guangxi's dominant retail pharmacy chain and wholesale drug distributor."

Fourth Quarter 2010 Results

Fourth quarter 2010 revenue increased 82.3% to $66.8 million from $36.6 million in the fourth quarter of 2009.

Net sales from the Company's pharmaceutical distribution segment increased 92.3% year-over-year to $50.7 million, or 75.9% of total fourth quarter revenue. Of the $24.3 million increase in pharmaceutical distribution sales, $12.6 million was attributable to higher sales to hospitals and $7.2 million was due to higher sales to clinics and health care centers. During the fourth quarter of 2010, the Company sold a greater quantity and range of products to hospitals compared to the same period in 2009, reflecting increased coverage by China's national insurance plan and the implementation of the country's New Rural Cooperative Medicare plan. Higher year-over-year sales to clinics and health care centers in the fourth quarter of 2010 reflects a ramp-up of new distribution business that the Company won in six cities and townships in 2009 under the Basic Drugs Catalog Plan.

Net sales from the Company's retail pharmacy segment grew 41.6% year-over-year to $12.6 million, or 18.8% of total fourth quarter revenue. This quarter's increase in retail pharmacy revenue was driven by approximately $5.3 million of incremental sales from new stores added after September 30, 2010, partially offset by a 17.6% year-over-year decline in existing store sales. The decline in existing store sales from $8.9 million in fourth quarter 2009 to $7.3 million this quarter reflects lower medi-card sales due to a temporary suspension of the government's insurance computer system for software upgrades, the maturity of existing stores which experienced a peak in sales in 2009, and management's decision to dedicate a greater portion of its resources to external growth initiatives.

Net sales from the Company's pharmaceutical manufacturing segment rose 153.9% year-over-year to $3.5 million, or 5.2% of total fourth quarter revenue. This quarter's manufacturing sales growth was primarily due to increased sales volume of Diphenoxylate and Levodopa which the Company began to export to the India market.

Gross profit grew 57.2% year-over-year to $14.1 million, up from $9.0 million for the same period of 2009. Gross margin declined 3.4 percentage points to 21.1%, as compared to 24.5% in the comparable period last year. The decrease in gross margin in the fourth quarter of 2010 mainly reflects a change in segment mix, with the Company's lower margin wholesale distribution business accounting for 75.9% of total revenue as compared to 72.0% of total revenue in fourth quarter 2009.

Within pharmaceutical distribution, gross margin declined from 19.7% in fourth quarter 2009 to 16.8% this quarter, due to increased sales to retail stores which provide lower margins. Retail pharmacy segment gross margin declined from 31.2% in fourth quarter 2009 to 27.1% this quarter, reflecting the acquisition of retail stores completed in 2010 with inventories valued at market selling price rather than at cost. Pharmaceutical manufacturing segment gross margin decreased from 71.1% in fourth quarter 2009 to 62.6% during this quarter due to market penetration of lower profit products.

Operating expenses increased by 49.3% to $4.7 million, compared to $3.1 million in the same period last year. Administrative expenses increased 55.7% to $2.8 million, or 4.2% of revenue, as compared to $1.8 million, or 4.9% of revenue, in the same period of 2009, primarily due to an increase in the incurrence of public company professional fees and increased share based compensation. Selling expenses rose 45.8% to $1.9 million, compared to $1.3 million in the same period of 2009.

Operating income increased 61.3% to $9.4 million, or 14.2% of revenue, from $5.9 million, or 16.0% of revenue, in the fourth quarter of 2009.

GAAP net income increased 83.6% to $7.4 million, or $0.19 per diluted share, as compared to $4.0 million, or $0.13 per diluted share, in the fourth quarter of 2009. Diluted earnings per share were calculated using weighted average shares of 38,154,340 and 32,055,319 for the quarters ended December 31, 2010 and December 31, 2009, respectively. Excluding a non-cash benefit of $1.0 million related to change in the fair value of warrant liabilities and excluding non-cash share-based compensation expense of $0.6 million, fourth quarter 2010 non-GAAP adjusted net income was $7.0 million, or $0.18 per diluted share. There were no comparable adjustments to net income in the fourth quarter of 2009.

Full Year 2010 Results

The Company's revenue in 2010 was $200.8 million, up 47.6% from $136.1 million the prior year. Pharmaceutical distribution remained the Company's largest segment in 2010 at 72.4% of total sales, compared to 71.4% in 2009. Retail pharmacy represented 22.2% of total Company sales in 2010 as compared to 22.9% in 2009. Pharmaceutical manufacturing accounted for 5.4% of total sales, compared to 5.7% in 2009.

Gross profit was $48.8 million, or 24.3% of revenue, up 37.5% from $35.5 million, or 26.1% of revenue, in 2009. Operating income was $35.4 million, or 17.6% of revenue, up 31.3% from $26.9 million, or 19.8% of revenue, in 2009. Net income increased 32.4% to $25.7 million, or $0.67 per diluted share, compared to $19.4 million, or $0.61 per diluted share, in 2009. Excluding a non-cash benefit of $0.6 million related to change in the fair value of warrant liabilities and excluding non-cash share-based compensation expense of $1.3 million, 2010 non-GAAP adjusted net income was $26.4 million, or $0.68 per diluted share. There were no comparable adjustments to net income in 2009.

Financial Condition

As of December 31, 2010, China BCT had $20.2 million in cash and cash equivalents, $53.2 million in working capital and a current ratio of 1.97. Long-term bank debt was $1.9 million. Stockholders' equity was $83.1 million on December 31, 2010, up 55.6% from $53.4 million at the end of 2009.

The Company generated $15.9 million in cash flow from operating activities for the year ended December 31, 2010, compared to cash flow from operating activities of $6.9 million in 2009. Cash used in investing activities was $9.2 million, compared to cash provided by investing activities of $1.3 million in 2009. For the twelve months ended December 31, 2010, approximately $6.0 million of cash used in investing activities represented payments to acquire retail stores.

Subsequent Events

In January 2011, the Company entered into an agreement with Milestone Longcheng Limited, an investment vehicle for Milestone China Opportunities Fund II, which is managed by Milestone Capital a Private Equity firm, pursuant to which Milestone purchased 9,375,000 shares of the Company's Series A Convertible Preferred Shares for an aggregate purchase price of $30 million. The transaction successfully closed on March 2, 2011.

On February 22, 2011, China BCT launched 17 new retail pharmacies in Guangxi, further expanding its footprint in the region. The new stores primarily are located in well-populated cities, including Liuzhou, Hechi, Hezhou, Guigang, Laibin and Guilin.

China BCT's Form S-1 registration statement filed with the Securities and Exchange Commission ("SEC") was declared effective on March 17, 2011. Pursuant to the statement, a total of 5,630,575 shares have been registered with the SEC, representing approximately 13.98% of the Company's fully diluted shares outstanding as of February 28, 2011.

Business Outlook

"Looking into 2011, we intend to continue to selectively build or acquire retail pharmacies in Guangxi and surrounding regions, while improving the same store sales volume of our existing portfolio. In wholesale distribution, we plan to develop and invest in a state-of-the-art logistics center and secure more profitable exclusive contracts with hospitals in Guangxi. The centralized bidding process under the New Rural Cooperative Medicare Plan for 2011 is expected to close in the second quarter of 2011, and we expect to win double the bids we won last year, further strengthening our organic growth in wholesale distribution. We will continue to vertically integrate our self-manufactured drugs with our wholesale and retail networks to improve China BCT's overall gross margin," Mr. Tang concluded.