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China Medicine Reports Third Quarter 2010 Financial Results
Date:11/10/2010

GUANGZHOU, China, Nov. 10, 2010 /PRNewswire-Asia-FirstCall/ -- China Medicine Corporation (OTC Bulletin Board: CHME) ("China Medicine" or "the Company"), a leading manufacturer, developer and distributor of Western pharmaceuticals, traditional Chinese medicines ("TCM"), and other health products, today announced financial results for the third quarter ended September 30, 2010.

Third Quarter 2010 Financial Performance

  • Revenue decreased 8.4% to $17.6 million from $19.2 million in the prior year period.
  • Gross margin was 33.1%, compared to 30.5% in the prior year period.
  • Operating income was $2.5 million, compared to $4.5 million in the prior year period, which was mainly due to the R&D expenditure on a diabetes drug.
  • Net income available to common shareholders decreased to $2.2 million, or $0.06 per diluted share, from $3.2 million, or $0.21 per diluted share, in the prior year period.

  • Mr. Senshan Yang, Chairman and CEO of China Medicine Corporation, stated, "We had a very challenging quarter, impacted by a combination of margin pressure on distributing prescription drugs due to the government's influence on the drug distribution bidding system, and rising prices of certain raw materials used in our proprietary products.
    We responded to these challenges by continually executing our 'high-margin focus' strategy.  In addition, we expedited the pace of completing the required clinical trials for Zhimu Huangtong, a patented TCM drug used to treat diabetes, and expect to launch this breakthrough diabetic product in 2012.  We are very confident that we will survive this challenging time and achieve long-term success, because we are well positioned and well prepared amid the rapidly changing industry.  We will continue to strive to work responsibly and aggressively on behalf of our shareholders."

    In the third quarter of 2010, revenue decreased 8.4% year over year to $17.6 million from $19.2 million, reflecting a combination of the change in sales strategy and contributions from the newly-acquired Guangzhou LifeTech Pharmaceutical Co., Ltd. ("LifeTech").  Revenue from distribution decreased 17.6% to $15.1 million from $18.3 million in the prior year period, reflecting the shift of the distribution product portfolio to higher margin products.  Revenue from proprietary products increased to $2.5 million from $0.5 million in the prior year period, reflecting the inclusion of revenues from LifeTech's products, which were acquired at the end of 2009.

    Gross profit was flat at $5.8 million.  Gross margin increased to 33.1% from 30.5% in the prior year period.  The improvement was aided by the revenue mix shift toward higher-margin products within the distribution business and revenue contribution from LifeTech products.  

    Operating income in the third quarter of 2010 was $2.5 million, compared to $4.5 million in the prior year period.  Selling, general and administrative expenses increased to $2.0 million from $0.9 million in the same period last year, primarily due to additional overheads of LifeTech upon the LifeTech acquisition and hiring of new officers. Research and development expenses increased to $1.3 million from $0.4 million in the prior year period, due to funding for Zhimu Huangtong's clinical trials.  

    Net income available to common shareholders in the third quarter of 2010 decreased to $2.2 million, or $0.06 per diluted share, from $3.2 million, or $0.21 per diluted share, in the third quarter of 2009. The earnings per share calculation is based on 39.6 million diluted shares outstanding, compared to 15.4 million diluted shares outstanding in the prior year period.  Non-GAAP net income, which excludes a one-time non-cash charge related to the change in fair value of warrant liabilities, was $1.7 million, or $0.04 per diluted share, compared to $3.4 million, or $0.22 per diluted share, in the prior year period.

    Financial Performance for the Nine Months Ended September 30, 2010For the nine months ended September 30, 2010, revenue increased 2.3% to $45.3 million from $44.3 million in the first nine months of 2009.  During the same time period, gross profit increased 24.8% to $15.2 million from $12.1 million.  Income from operations decreased to $7.5 million from $8.1 million in the first nine months of 2009.  Net Income available to common shareholders was $2.0 million, or $0.05 per share, compared to net income available to common shareholders of $3.8 million, or $0.25 per share, in the first nine months of 2009.  This included a one-time $6.1 million non-cash charge in connection with a deemed preferred stock dividend related to the Company's private placement financing in January 2010. The deemed preferred stock dividend reflects the beneficial conversion feature of the convertible preferred stock issued to OEP CHME Holdings, LLC ("OEP") in the January 2010 private placement in accordance with SAB No.98.

    Balance SheetAs of September 30, 2010, the Company had cash and cash equivalents of $56.3 million, of which $48.5 million was restricted cash. This compares to $62.9 million as of June 30, 2010 and $2.2 million as of December 31, 2009.  Restricted cash represents amounts set aside by the Company in accordance with its debt agreements with a financial institution and the Stock Subscription Agreement that was completed on January 29, 2010.  Working capital was $85.7 million as of September 30, 2010, compared to $15.8 million as of December 31, 2009. The increase was mainly due to the cash and cash equivalents obtained from OEP upon the completion of the private placement.  

    Full Year 2010 Financial GuidanceDue to these challenges, we have revised our expectations for the full year 2010.  Revenue is now expected to increase 5% to 8% year over year to $68 to $70 million, compared to the $72 to $76 million range we announced previously.  We maintain our expectation that gross margin will be in the range of 33% to 38%, as compared to 29.3% in 2009.  We now believe full year operating expenses will represent approximately 16-18% of revenue, up from 12-15% of revenue as announced previously. This guidance reflects China Medicine's current and preliminary views, which are subject to change.

    Conference CallThe Company will hold a conference call on Thursday, November 11 at 8:00 a.m. U.S. Eastern Time following the announcement. Listeners may access the call by dialing the following numbers:United States toll free:

    1-888-812-8522International:

    1-913-312-0840Listeners may access the replay through November 25, 2010 by dialing the following numbers:

    United States toll free:

    1-877-870-5176International:

    1-858-384-5517 Password:

    5783274Use of Non-GAAP Financial MeasuresGAAP results for three and nine months periods ended September 30, 2010 and September 30, 2009 include non-cash gains and expenses related to change in the fair value of the Company's warrant liabilities and a deemed preferred stock dividend related to outstanding convertible preferred stock issued to OEP. The non-GAAP measure provides a consistent basis for investors to understand our financial performance in comparison to historical periods without variation of non-recurring items and non-operating related gains and charges. In addition, it allows investors to evaluate our performance using the same methodology and information as that used by our management. Non-GAAP measures are subject to inherent limitations because they do not include all of the expenses included under GAAP and because they involve the exercise of judgment of which charges are excluded from the non-GAAP financial measure. However, the Company compensates for these limitations by providing the relevant disclosure of the items excluded.

    Because these expenses are non-cash, and not related to the Company's operating results, the Company believes that the non-GAAP information is useful to supplement the Company's condensed consolidated financial statements. A reconciliation of the adjustments to GAAP results appears in the table accompanying this press release. This additional non-GAAP information is not meant to be considered as a substitute for GAAP financials. The non-GAAP financial information that the Company provides also may differ from the non-GAAP information provided by other companies.

    About China Medicine CorporationChina Medicine Corporation, a vertically integrated enterprise with a research and development centre, manufacturing facility and well established sales network, engages in the production and distribution of prescription and over the counter ("OTC") drugs, traditional Chinese medicine ("TCM") products, herbs and dietary-supplements, medical devices, and medical formulations in China. The Company is developing a number of proprietary products for a variety of indications, including oncology, high blood pressure and toxin removal from food and animal feeds. For more information, please visit the Company's website at http://www.cmc621.com.

    Safe-Harbor Statement This press release contains forward-looking statements concerning the Company's business and products. The Company's actual results may differ materially depending on a number of risk factors including, but not limited to, the following: general economic and business conditions, obtaining regulatory approval for new products, government support for rural health care, competition from existing and new competitors, changes in technology, and various other factors beyond its control. All forward-looking statements are expressly qualified in their entirety by this cautionary statement and the risk factors detailed in the Company's reports filed with the Securities and Exchange Commission. China Medicine Corporation undertakes no duty to revise or update any forward-looking statement to reflect events or circumstances after the date of this release.Contact InformationICR, Inc.In New York: Ms. Christine Duan: 1-203-682-8200In Beijing: Ms. Wen Lei Zheng: 86-10-6599-7968China Medicine CorporationIn Guangzhou: Ms. Gavin Chen: 86-20-8737-2102CHINA MEDICINE CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME(amounts in thousands, except per share data)(UNAUDITED)$ amounts in thousandsFor Three Months Ended September 30,For Nine Months Ended September 30,2010200920102009REVENUESDistribution products

    $

    15,093

    $

    18,314

    $

    39,802

    $

    42,514Proprietary products2,4574765,3611,429Medical technology-366150366Total revenues17,55019,15645,31344,309COST OF REVENUESDistribution products10,33813,09527,13031,267Proprietary products1,4082273,024900Medical technology----Total cost of revenues11,74613,32230,15432,167GROSS PROFIT5,8045,83415,15912,14233.1%30.5%33.5%27.4%OPERATING EXPENSESResearch and development 1,2523621,9611,128Selling, general and administrative expenses2,0669355,6772,932Total operating expenses3,3181,2977,6384,060INCOME  FROM OPERATIONS2,4864,5377,5218,082OTHER INCOME (EXPENSE):Other income (expense), net32(48)(135)(69)Change in fair value of warrant liabilities564(142)3,045(2,114)INCOME BEFORE INCOME TAXES AND NONCONTROLLING INTERESTS3,0824,34710,4315,899PROVISION FOR INCOME TAXES9411,2162,5432,331NET INCOME (CHINA MEDICINE CORPORATION ANDNONCONTROLLING INTERESTS)2,1413,1317,8883,568Add: Net loss attributable to noncontrolling interests8288236243NET INCOME ATTRIBUTABLE TO CHINA MEDICINE CORPORATION2,2233,2198,1243,811OTHER COMPREHENSIVE INCOMEForeign currency translation adjustment1,221631,5164Foreign currency translation attributable to
    noncontrolling interests616-COMPREHENSIVE INCOME

    $

    3,450

    $

    3,283

    $

    9,646

    $

    3,815Less: Deemed preferred stock dividend--(6,144)-NET INCOME AVAILABLE TO CHINA MEDICINE CORPORATIONCOMMON SHAREHOLDERS

    $

    2,223

    $

    3,219

    $

    1,980

    $

    3,811EARNINGS PER SHAREBasicRedeemable convertible preferred stock0.06-0.05-Common stock0.060.210.050.25Earnings per share - Basic

    $

    0.12

    $

    0.21

    $

    0.10

    $

    0.25Diluted

    $

    0.06

    $

    0.21

    $

    0.09

    $

    0.25WEIGHTED AVERAGE COMMON SHARES OUTSTANDINGBasicRedeemable convertible preferred stock15,924,637-15,628,815-Common stock23,563,22515,265,90421,490,26415,241,333Total weighted average shares outstanding -
    basic39,487,86215,265,90437,119,07915,241,333Diluted39,592,38915,411,15422,063,96515,305,452CHINA MEDICINE CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(amounts in thousands, except per share data)ASSETSSeptember 30,December 31,20102009UnauditedCURRENT ASSETSCash$

    7,854

    $

    472Restricted cash48,4741,760Accounts receivable, trade, net of allowance for doubtful
    accounts of $160 and $157 as of September 30, 2010  and
    December 31, 2009,  respectively17,27322,315Inventories5,8672,731Advances to suppliers13,2312,518Other current assets1,499465Total current assets94,19830,261PROPERTY, PLANT AND EQUIPMENT, NET15,94312,001OTHER ASSETS Long term prepayments7,2677,900Intangible assets, net16,63716,682Total other assets23,90424,582Total assets

    $

    134,045

    $

    66,844LIABILITIES AND SHAREHOLDERS' EQUITYCURRENT LIABILITIESShort term loans

    $

    3,201

    $

    9,506Notes payable847-Accounts payable, trade8641,324Other payables and accrued liabilities1,010940Customer deposits648483Taxes payable1,8372,120Liquidated damages payable4444Total current liabilities8,45114,417Fair value of warrant liabilities716,918Total liabilities8,52221,335Commitments and contingenciesRedeemable convertible preferred stock, $0.0001 par value,
    1,586,666.6 and Nil shares issued and outstanding at
    September 30, 2010 and December 31, 2009, respectively 47,600-SHAREHOLDERS' EQUITYCommon stock, $0.0001 par value; 90,000,000 shares
    authorized,  23,712,061 and 15,451,105 shares issued and
    outstanding at September 30, 2010 and December 31,
    2009, respectively22Treasury stock, at cost(185)-Stock subscription1,392-Paid-in capital41,32013,380Statutory reserves4,3904,293Retained earnings24,76022,876Accumulated other comprehensive income5,9544,438Total shareholders' equity77,63344,989NONCONTROLLING INTERESTS290520Total equity77,92345,509Total liabilities and shareholders' equity

    $

    134,045

    $

    66,844CHINA MEDICINE CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(amounts in thousands)(UNAUDITED)Nine months ended September 30,20102009CASH FLOWS FROM OPERATING ACTIVITIES:Net income attributable to China Medicine Corporation

    $

    8,124

    $

    3,812Net loss attributable to noncontrolling interests(236)(243)Net income7,8883,569Adjustments to reconcile net income to cash provided by (used in) operating activities:Depreciation and amortization1,353664Bad debt expense119-Loss on sale of assets-27Stock-based compensation233101Change in fair value of warrants liabilities(3,045)2,114Change in operating assets and liabilities:Accounts receivable, trade5,4034,279Inventories(3,048)(3,220)Notes receivables(100)(454)Advances to suppliers(10,476)(2,269)Other current assets(937)(874)Accounts payable, trade(478)243Notes payable833-Other payables and accrued liabilities(1)(21)Customer deposits152(107)Taxes payable(320)(523)Net cash provided by (used in) operating activities(2,424)3,529CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of intangible assets-(235)Purchase of building improvement and equipment(4,607)(3,470)Cash proceeds from disposition of fixed assets-22Advances on long-term prepayments782(3,376)Net cash used in investing activities(3,825)(7,059)CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from exercise of options and warrants1,07050Loan proceeds5,0582,932Repayment of Loans(11,444)Sales of the common stock12,000-Sales of the redeemable convertible preferred stock57,600-Payment for the financing operation(3,220)-Stock repurchase(883)-Increase in restricted cash(46,694)-Net cash provided by financing activities13,4872,982EFFECT OF EXCHANGE RATE ON CASH144(1)CHANGE IN CASH7,382(549)CASH, beginning of period4722,792CASH, end of period

    $

    7,854

    $

    2,243Supplemental disclosure of cash flows:Cash paid interest

    $

    226

    $

    -Cash paid income tax

    $

    1,545

    $

    2,119China Medicine CorporationReconciliation of GAAP to Non-GAAP(amounts in thousands, except per share data)(UNAUDITED)For the Three Months ended September 30,For the Nine Months ended September 30,2010

    20092010

    2009Net Income

    Diluted EPS

    Net Income

    Diluted EPSNet Income

    Diluted EPS

    Net Income

    Diluted EPSAdjusted Amount of Net Income available to Common Shareholders

    $
    ,659

    0.04

    $
    3,361

    0.22$
    5,079

    0.23

    $
    5,925

    0.39Adjustments:Change in fair value of warrant liabilities

    $
    (564)

    (0.02)

    $
    42

    0.01$
    (3,045)

    (0.14)

    $
    2,114

    0.14Deemed Preferred Stock Dividend

    -

    -

    -

    -$
    ,144

    0.28

    -

    -Amount per consolidated statement of operations

    $
    2,223

    0.06

    $
    3,219

    0.21$
    ,980

    0.09

    $
    3,811

    0.25Weighted average diluted shares for the period ended

    39,592,38915,411,15422,063,96515,305,452
    '/>"/>

    SOURCE China Medicine Corporation
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