China Medicine Is Already Seeing Benefits from Healthcare Reform

| About: China Medicine (CHME)

In its Q3 earnings report, China Medicine Corporation (OTCPK:CHME) announced it signed a preliminary non-binding term sheet with a private equity firm that would raise up to $59.5 million for the company. Together with a solid earnings statement, the news sent China Medicine’s shares 12% higher to $2.62 on heavy volume.

The funding would take place in three stages: (1) $7.5 million in convertible secure notes with a conversion price of $3.50 per share; (2) $24.2 million in newly issued shares at $2.60; and (3) $27.8 million in newly issued shares, also at $2.60 but at China Medicine’s discretion. China Medicine ended the quarter with just $2.2 million in cash, though it stated its working capital was $32 million.

At the end of October, China Medicine announced it would pay $8.3 million to buy Guangzhou LifeTech Pharmaceuticals Co. Although payments of the purchase price are staged over time, China Medicine agreed to pay down LifeTech’s $13.2 million in debt immediately, which may have strained the company’s finances. In its outlook for Q4, China Medicine said that low levels of working capital may limit the company’s growth in the immediate future.

LifeTech has a portfolio of 39 TCM and Western medicine products, including manufacturing facilities, while China Medicine has traditionally been a distribution company. China Medicine said the acquisition will help China Medicine in its long-term goal of becoming a vertically integrated company. China Medicine is also developing recombinant Aflatoxin Detoxifizyme (rADTZ), a novel product that removes a potential cancer-causing agent, aflatoxin, from food and animal feed. It expects SFDA approval of the product before the end of 2009.

During Q3, China Medicine’s revenues climbed 82% to $19.2 million, while net income was 60% higher at $3.2 million or 21 cents per diluted share. The company’s tax rate rose to 25% after a more favorable 16% rate expired. China Medicine also said accounts receivable dropped to $14.9 million at the end of the quarter, which was significantly improved from the $19.2 million reported at the end of 2008.

The company was one of the first to say it is already seeing benefits from China’s healthcare reform. According to China Medicine, a general improvement in pharmaceutical sales in second and third tier cities drove its revenues higher.

Disclosure: none.