China Medical 2007 Results Exceed Expectations

China Medical Technologies, Inc. (CMED), which produces in-vitro diagnostic products and tumor-treating, high-intensity focused ultrasound systems, reported very sharp increases for its full-year 2007 financial results, which ended on March 31, 2008. Revenues jumped 67% to 916 million RMB ($130.6 million). Net income (non-GAAP) rose 39% to 432 million RMB ($61.6 million), a 47% profit margin, and equal to $2.20 per share. China Medical said that its results exceeded expectations.

In 2007, approximately 60% of revenues came from its diagnostics business, comprised of ECLIA and FISH systems. Because these systems are in wider use, sales for the recurring reagents part of the IVD business will grow, and diagnostics will continue to produce a higher percentage of China Medical’s revenues. The FISH business, which was launched in 2007, now reaches 200 hospitals in China. China Medical will expand that to 500 hospitals in 2008.

In 2007, China Medical had to overcome a number of obstacles: the February snowstorm slowed deliveries; declining interest rates reduced income, and China has not yet awarded China Medical with the high-tech designation that would qualify the company for a lower tax rate. If China Medical is granted the High Tech designation, it will pay tax at a 15% rate, down from its current (transitional) 18% rate. Still, despite the obstacles, China Medical was able to exceed its financial guidance.

In Q4, gross margins decreased to 64.2%, compared to 73.2% for the corresponding period of FY2006 year earlier. China Medical put the blame for this on amortization of FISH intangible assets of 17.5 million RMB ($2.5 million), causing a 6.2% decline in gross margin. FISH equipment sales also contributed because they generate lower gross margin. Nevertheless, FISH reagent sales, which generate higher gross margin, are on the upswing and should bring margins up in the future.

In 2008, China Medical predicts that revenues from sales of ECLIA and FISH systems will decline, though their respective reagent businesses will more than make up for the decreases. Qualified hospitals can install ECLIA equipment free of charge, but they have to purchase ECLIA reagents. China Medical will extend this offer to more hospitals in 2008.

Originally, China Medical purchased the microscopes used in the FISH system, subsequently selling them to hospitals. Now, it has begun referring the hospitals directly to the manufacturers so that hospitals can reduce the cost of setting up this new FISH platform and get up to speed more quickly. This is expected to have a positive effect on FISH reagent revenue.

China Medical expects fiscal year 2008 revenues to be between 1,190 million RMB ($169.7 million) and 1,230 million RMB ($175.4 million), a year-over-year increase of about 32%. Adjusted net income excluding stock compensation expense and amortization of acquired intangible assets (non-GAAP) is expected to be between 585 million RMB ($83.4 million) and 605 million RMB ($86.3 million), a year-over-year increase of approximately 38%. That would equate to an EPS of about $2.92.

Disclosure: none.