Full Transcript of China Medical Technologies’ 3Q05 Conference Call - Q&A (CMED)

Nov.19.05 | About: China Medical (CMEDQ)

Here’s the entire text of the Q&A from China Medical Technologies’ (ticker: CMED) Q3 2005 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen if you wish to ask a question, press “*” followed by “1” on your touchtone telephone. If your question has been answered or you wish to withdraw your question, press “*” followed by “2”. You may begin by pressing “*”, “1” to ask your question. And we ask you to keep your question to a minimum of 1 question. Thank you.

As a reminder, ladies and gentlemen, “*” “1” to register your question. And, at this time Mr. Tsang, there are no questions in the queue sir. I do apologize, our first question, just a moment. Our first question will come from the line of Richard Lou (ph) with RJC Capital Management. You may proceed.

Richard Lou

All right, why is there little damage to surrounding cells at around the, the cancer tumors of, from your ultrasound system?

Company Speaker

Because the, the size of the focal point 3 x 3 x 8 millimeters so and also, ultrasound has good therapeutics of the eruption so the collateral damage to the healthy tissue, is minimum.

Richard Lou

I see, and of course this is much more pin point compared to radiation, is that correct?

Company Speaker

That’s right.

Richard Lou

Well lastly can you, can you do anything for lung cancer?

Company Speaker

Currently, no because ultrasound cannot pass through the ear.

Richard Lou

Yes that’s what I thought. Thank you very much and congratulations.

Company Speaker

Thank you.

Operator

As a reminder, ladies and gentlemen, to register your question it is “*” “1”. And our next question will come from the Weidong Huang with TimesSquare Capital Management. You may proceed.

Weidong Huang

Hi all, good morning and congratulations on a good quarter.

Company Speaker

Thank you.

Weidong Huang

I want to ask you, if you maybe could tell us a little more about you effort to expand HIFU’s presence in the US. If you could maybe give us some idea as to what timeframe do you expect to enter the US market?

Company Speaker

As of today, we have shipped our first equipment to the University of Washington and Seattle and it is going to be installed very soon and we are going to start the animal testing before we submit the IDE application only next year. So, we are expecting to start the human clinical trials in 2006 and according to our FDA lawyer, we are going to apply for 2 applications which is uterine fibroids and pancreatic cancer, it will take us approximately a little bit over 3 years to complete the whole process. So, that’s the constraint for the FDA approval.

Weidong Huang

So, are you expecting the US market entry in 2009?

Company Speaker

If we can complete the FDA according to our lawyers time frame. And, meanwhile, we are also talking to our lawyer here to see if there is a possibility to use some of the FDA clinical cases to apply EU and Japanese FDA approval.

Weidong Huang

I see, okay. You mentioned there is a multinational company, medical supplier that has also entered the HIFU market, could you elaborate on that?

Company Speaker

Since, the International Symposium of Therapeutic Ultrasound, just occurred in Medical School, Harvard Medical School 2 weeks ago, one of the 3 major medical companies they had a research paper announcing that they are developing HIFU equipment by themselves and they are planning to start the CE or clinical application for uterine fibroids next year.

Weidong Huang

So, the same timeframe as you?

Company Speaker

Yeah they are going to start with the CE and not the FDA.

Weidong Huang

Oh I see, okay. Could you say which company is that, is it Siemens?

Company Speaker

I am not sure, if we could announce their name, it should be. I think we are better not to disclose their name.

Weidong Huang

Okay, you mentioned some of these pipeline timeframes for your non-invasive thermal sensor as well as your automated version of the ECLIA system, you can say, yearend for the thermal sensor and the second half of 2006 for automated ECLIA system, are you talking about fiscal ’06 or calendar ’06?

Company Speaker

For the temperature measurement we are talking about the calendar year, yearend to start applying this technology in clinical procedures.

Weidong Huang

So, it’s the calendar 2005.

Company Speaker

Calendar 2005 and we’re going to choose several large off-schedules, to do the clinical trial first. But this new capability, does not need to go through Chinese FDA approval, it just needs to use several clinical trials to further validate the data. And for the fully automated system of the ECLIA analyzer, we’re also talking about the calendar year, the second half of calendar year 2006.

Weidong Huang

Okay, thank you.

Company Speaker

Thank you.

Operator

And our next question comes from the line of Matt Wyden (ph) with Stafford Capital (ph). You may proceed.

Matt Wyden

Hi and also congratulations. Can you give a little more granularity on the guidance you’ve provided in terms of how that splits out between, the HIFU and ECLIA?

Company Speaker

The guidance we give is revenue for the whole year. And, you see the second quarter results for HIFU and ECLIA also demonstrate strong growth. The HIFU currently composes about 60% of our total revenue, and we expect those similar results for the entire year.

Matt Wyden

Okay. And, in terms of seasonality is there any unusual seasonality we should expect, in the next couple of quarters?

Company Speaker

When we mentioned seasonality we have already discussed the historical track records. So, we expect that the next quarter, December quarter, should be the best quarter for HIFU sales.

Matt Wyden

Okay. And I’m sorry because I did miss most of your prepared remarks. As it relates to the infrastructure support for ECLIA what exactly, what kind of resources are you adding there? Is it service support, additional sales people? What should I be thinking about over there and how many people are you adding?

Company Speaker

The ECLIA operations commence September, last year. So, it’s slightly over one year’s operation. And we are adding people continuously to strengthen the sales and marketing team as well as the R&D team. Of course, the production team for the ECLIA is also enlarging. And, we are also innovating or expanding our ECLIA reagent facility as well, in order to meet the increasing demand for the ECLIA reagent.

Matt Wyden

Okay, in terms of the growth in ECLIA, how did that split between systems, and the analyzers versus the reagents? And, can you talk a little bit about the number of placements and the kind of growth you are seeing there in terms of instruments?

Company Speaker

Yeah, last year, although there was only a seven-month operation, the revenue coming from the ECLIA is about 5 million. And for the two quarters, first two quarters this financial year, the revenue from ECLIA system is about, 6.5 million. So, you can see from the results that these two quarters have already exceeded last year’s. And, turning to the equipment sales, compose about 60% of our ECLIA revenue. In long term we expect the revenue from ECLIA reagents will be at least half of our opening from ECLIA sales.

Matt Wyden

Okay. But, in terms of instrument placements and the gains you are making on instrument placements, can you be a little more specific?

Company Speaker

Yeah, by the end of last year, we will have about 450 units of ECLIA systems sold. And, up to September end, we have totally about 900, 900 units of ECLIA, in accumulation, that is including our 450, sold last year.

Matt Wyden

Okay, and the raw material cost in components that are going what perhaps should we think of those? What are they?

Company Speaker

I’m sorry. Could you repeat the question?

Matt Wyden

The raw materials and component costs that are increasing, what should we think of those? What are those?

Company Speaker

Yeah, these just lie in place because, we keep deleting best cell quality raw materials which will increase slightly of course, but this is not significant, that is slightly increasing our overall cost.

Company Speaker

Another reason is the, sales mix because our gross margin for different kinds of reagents is different. So, this is another reason for the change of our gross margin.

Matt Wyden

Okay. And also, I guess, you are still placing a large number of units probably more than, more than you had a year ago. Does that have an impact as well, the mix between reagents versus instruments?

Company Speaker

Yeah, particularly about sales mix, we have taken gross margin for HIFU and ECLIA and as well as the ECLIA reagents because we have over, now over 30 types reagent kits sold. It will affect the gross margin slightly but because they are lagging large differences in gross margin. So, it affects us slightly. Our gross margin for this quarter is 69.8. So, you see it’s just fine by about 1%.

Matt Wyden

Okay thank you.

Company Speaker

Thank you.

Operator

And our next question comes from the line of Patrick Lin with Primarius Capital. You may proceed.

Patrick Lin

Hi good morning and congratulations on both the IPO’s as well as the quarter. I was wondering there are too many companies in the US that are growing, are US listed that are growing 20, 30 or even in their case between 40, to 80% year-over-year, but their price earnings are pretty multiple in the, anywhere from the 20 times range depending on what numbers you use. I was wondering what’s your plan to actually get out to, meet investors over the next, two, three months, in terms of, and trying to get your story out there and, getting to meet the broader investor base?

Company Speaker

If I understand your question correctly you’re asking, what is our business plan to keep up this high growth rate?

Patrick Lin

No. Actually, my question was, you’ve a great story but it seems like the low multiples reflected on kind of a combination of using the new company and maybe not enough investors knowing your story. So, are you planning to go and meet investors either in Asia or US or Europe in the next quarter?

Company Speaker

Yes.

Company Speaker

Yes, we have no control on the life of multiples, but we need to have plans to pull more of our company or at least have more communication with the investor. In fact, after this earnings call, currently we are now in New York and we will have about one weeks’ time to meet our investors in the States to tell them more about us. So, we will have other communication as well to strengthen our communication with both existing and potential investors.

Patrick Lin

Great, thank you. And, just in terms of follow-up, I don’t know, maybe if you brought focus on the GE medical ownership of China Medical. Can you tell us when this relationship started and will it add in terms of, is there potential to do things together either with them entering into China or China Medical entering into US, for future business opportunities?

Company Speaker

The discussions between GE and the company started actually from 2001, and by the time of 2003, GE made a decision to invest into our company and before the IPO the held about 20% of the shares and now it’s diluted to about 14.6%. And that’s a little bit of history. And for the co-operation right now GE is the supplier of the one of key components of the HIFU equipment. They supply the product ultrasound for us to use as imaging, targeting and location device, during the achievements of feeders. And also, they have at present been chosen to be our global distributor for HIFU system. Currently, they haven’t exercised this option yet because; we haven’t started the FDA process. That’s pretty much of the relations between the two companies.

Patrick Lin

Great, thank you and congratulations again on the quarter.

Company Speaker

Thank you.

Company Speaker

Thank you.

Operator

And our next question we have a follow up from Matt Wyden with Stafford Capital. You may proceed.

Matt Wyden

Hi, just a follow-up to that last question regarding GE. If this arrangement on the uterine fibroids expansion of the indication for your technology for European approval, if that arrangement with GE, would you be disclosing something like that?

Company Speaker

The current FDA and CE application is done by the company. By ourselves fully and we are not working with GE on those applications.

Matt Wyden

But you’re working with another large, multinational company on that is that right?

Company Speaker

No.

Company Speaker

Well, we mentioned the last company because we are aware that it is a very large medical equipment company announced its plans to start the FDA application in Europe and they are possibly going to start the FDA application. So, it’s a clear indication that many large companies are considering HIFU and its potentials.

Matt Wyden

Well, okay, thank you.

Operator

As a remainder ladies and gentlemen to register your question it is “*” “1”.

And at this time there are no further question in the queue, I would like to turn it over to Sam Tsang for closing remarks.

Sam Tsang, Chief Financial Officer

Once again, thank you for joining us today. Please don’t hesitate to contact us if you have any further questions. Have a good day. Bye.

Company Speaker

Thank you.

Operator

Ladies and Gentlemen, this does concludes your presentation at this time you may all disconnect and have a wonderful day.

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