China Medical F4Q07 (Qtr End 3/31/08) Earnings Call Transcript

| About: China Medical (CMEDQ)
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China Medical Technologies, Inc. (CMED) F4Q07 Earnings Call June 12, 2008 8:00 AM ET

Executives

Winnie Yam - Investor Relations

Xiaodong Wu - Chairman of the Board, Chief Executive Officer

Sam Tsang - Chief Financial Officer

Dr. Zhong Chen - Chief Technology Officer

 

Analysts

 

Bin Li - Morgan Stanley

Jinsong Du - Credit Suisse

Xiajing Kong - Merrill Lynch

Louis San - Brean Murray, Carret & Co.

Ho Ki Luc - Citigroup

 

Operator

 

Good day, ladies and gentlemen and welcome to the fourth quarter 2007 China Medical Technologies earnings call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Ms. Winnie Yam. Please proceed, Madam.

Winnie Yam

Hello, ladies and gentlemen. I am pleased to welcome you to China Medical's fourth quarter and full-year earnings conference call. China Medical already announced its fourth quarter and full-year results for the fiscal year ending March 31, 2008, and provided targets for the fiscal year ending March 31, 2009. A copy of the press release is also available on the company’s website at www.chinameditech.com.

Today your speakers will be Mr. Xiaodong Wu, CEO; Mr. Sam Tsang, CFO; and Dr. Zhong Chen, CTO. After they finish with their remarks, they will be available to answer your questions.

Before we continue, please bear with me as I will take you through the company’s Safe Harbor policy. The discussion today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in the company’s public filings with the U.S. Securities and Exchange Commission. China Medical does not undertake any obligation to update any forward-looking statements except as required by applicable law.

As a reminder, this conference call is being recorded. A replay of this conference call will be available via webcast on China Medical's website.

Now, allow me to turn the call over to Dr. Chen, who will give remarks on behalf of Mr. Wu. Dr. Chen.

Dr. Zhong Chen

Thanks, Winnie. Ladies and gentlemen, welcome to our earnings call. As we mentioned in our press release, fiscal year 2007 was a landmark year for Chine Medical to become an advanced IVD company. About 60% of our revenues were generated from both ECLIA and FISH diagnostic businesses and we expect the diagnostic business to drive the future growth of the company.

The major driver in our diagnostic business is the recurring reagent business, which is growing rapidly and generates a high gross margin. The recurring reagent business consists of ECLIA reagents and FISH reagents. Let me discuss the growth potential for ECLIA first.

We already have a large base of middle sized hospitals using our ECLIA reagents. As such, we have introduced a reagent arrangement to hospitals, especially in large and fast-growing small hospitals. These hospitals are provided free ECLIA equipment and in return they will only purchase our ECLIA reagents. We believe this arrangement will help us penetrate to high-end as well as low-end hospitals, which will provide additional recurring and sustainable resource of revenue for the company.

In addition, we will continue to extend our ECLIA reagent manual and expect to increase 10 to 15 new reagents before the end of fiscal year 2008.

Let me talk about the growth potential for FISH. We launched the FISH operation in June 2007 and have seen [several] FISH equipment and reagents directly to large hospitals in China. We purchase the microscopes used for observing the results of FISH tests from microscope manufacturers and sell them directly to hospitals. This explains the low gross margin in selling the equipment.

FISH reagents are made by Chine Medical and contribute a high gross margin for the company. During this year, we have established a sales level covering more than 200 large hospitals and we expect to increase another 300 large hospital customers by the end of fiscal year 2008. The existing and new large hospital customers will drive the use of our FISH reagents rapidly, which again is recurring in nature and generate a high gross margin. In addition, we are developing new FISH reagents and we will launch our prostate cancer detection reagent next month.

Other FISH reagents other development include ETFR for non-cancer lymphoma and microbiology [inaudible]. As such, we expect a tremendous growth in our FISH reagents in the future.

Let’s talk about our other business, HIFU. We have encountered some cross-selling opportunities by selling our FISH products directly to large hospitals and we have sold the first unit of the HIFU system to Korea. As such, we expect our HIFU business to have a positive growth in fiscal year 2008, even though we already have a larger base of HIFU revenue.

I have finished Mr. Wu’s remarks and I would like to turn the call over to Sam and he will give you an overview of our fourth quarter and full-year results. Sam, please.

Sam Tsang

Thank you, Dr. Chen and welcome, everyone. Let’s have a recap first -- our 4Q revenues were up 74.3% and ending revenues were up 67.4% on a year-over-year basis. Our non-GAAP 4Q adjusted net income was up 45.5% and non-GAAP annual adjusted net income was up 39.4% on a year-over-year basis.

Adjusted diluted EPS on a non-GAAP basis was RMB4.66 for the quarter and RMB15.44 for the year. We have declared a cash dividend of $0.50 per ADS.

Let’s look at more specific information for the quarter and the year. 4Q revenues were up 74.3% year over year to RMB284.2 million, or $40.5 million. Our revenues are generated from three product lines -- ECLIA diagnostic systems, FISH diagnostic systems, and HIFU tumor therapy systems.

The ECLIA systems revenue includes sales of ECLIA equipment and reagent kits. 4Q revenues from sales of our ECLIA business were up 70.3% year over year to RMB112.2 million, or $16 million. The key driver in our ECLIA operation is the recurring revenue from the sales of reagent kits.

We expect the growth in reagents to continue and the reagent revenue already accounts for more than 90% of our total ECLIA revenue.

4Q revenues from the sales of our FISH systems were RMB68.8 million, or $9.8 million. We sold more than 100 units of FISH equipment and our reagent revenue continued to grow rapidly.

4Q revenues from the sales of our HIFU systems increased 6.1% year over year to RMB103.2 million, or $14.7 million. We sold 35 HIFU units this quarter and have a backlog of 21 units by March end. We sold 20 HIFU units in first quarter ’07 as the June quarter is particularly the low season for large medical equipment.

Overall, our full year total revenues were up 67.4% year over year to RMB915.7 million, or $130.6 million, which exceeds the high-end of our target revenues of RMB885 million.

Gross margin decreased to 64.2% this quarter from 73.2% in 4Q06. The decrease was because of the amortization of FISH intangible assets of RMB17.5 million, or $2.5 million, and the sale of FISH equipment, which generate low gross margin. Excluding the impact of FISH amortization, gross margin would have been 17.4%.

Full-year gross margin decreased to 62.2% this year from 72.3% in the prior year due to similar reasons. We have seen improvement in gross margin because of the increasing FISH reagent sales.

4Q operating expenses increased 13.9% year over year to RMB56 million, or $5.1 million. R&D expenses increased 43.5% year over year mainly because of the development of new ECLIA and FISH reagents.

Sales and marketing expenses increased 52.7% year over year, mainly due to the establishment and expansion of the direct sales force and promotional activities for FISH systems.

G&A expenses decreased 10.5% year over year to RMB16.3 million or $2.3 million, primarily due to the reduction in cash bonus for senior management.

Full-year operating expenses increased 38.3% year over year to RMB145.4 million, or $20.7 million, which accounts for 15.9% of full-year revenues.

4Q interest income decreased 66.8% year over year to RMB5 million or $0.7 million, primarily due to payments for FISH and other acquisitions, and a decrease in U.S. dollar interest rate. Full-year interest income also decreased 51.7% year over year to RMB28.6 million, or $4.1 million.

4Q interest expenses of RMB12.6 million, or $1.8 million, primarily due to interest expenses for the convertible notes. Full-year interest expenses for RMB52.3 million, or $7.5 million, primarily due to the convertible notes. The coupon of the notes is 3.5% per annum.

4Q income tax expenses was RMB33.7 million, or $4.8 million, primarily due to an increase in revenues and effective income tax rate. The effective income tax rate for 4Q07 was 24.3%.

Full-year income tax expenses was RMB78.2 million, or $11.2 million, and full-year effective tax rate was 19.4%. The increase in the effective tax rate was primarily due to the change in the income tax rate from 10% to 18% after the effect of the new income tax law and certain non-deductible expenses for income tax.

We are ready to submit an application for the high tech enterprise designation to the relevant government authorities once they commence the assessment process. We believe we meet the criteria of the designation and expect to entitle to the preferential 15% income tax rate after receiving the designation.

4Q net income increased 25.7% year over year to RMB105.2 million, or $15 million. 4Q non-GAAP adjusted net income, which excludes stock compensation expense and amortization of acquired intangible assets, was up 45.5% to RMB133.6 million, or $19.1 million. The lower growth rate compared to revenues was primarily due to convertible notes expenses of RMB11.3 million, or $1.6 million, a decrease in interest income and an increase in the effective income tax rate.

Full-year net income was up 12.3% year over year to RMB325.2 million, or $46.4 million. Full-year non-GAAP adjusted net income was up 39.4% to RMB432.1 million, or $61.6 million, which exceeds the high-end of our target adjusted net income of RMB420 million.

At March 31, 2008, we had a cash balance of RMB682.7 million, or $97.4 million.

Accounts receivable at March 31, 2008 was RMB289.8 million, or $41.3 million, representing a 14.4% increase from the December ending balance last quarter. Accounts receivable turnover days were 114 days this quarter, while they were 115 days prior quarter.

We have declared a cash dividend of $0.50 per ADS based on our ’07 net income for shareholders of record on July 25, 2008.

We have provided our outlook on target revenues and non-GAAP adjusted net income for the financial year 2008 ending March 31, 2009. As we mentioned in our press release, we expect a decline in our equipment sales in both ECLIA and FISH because of the introduction of the reagent rental arrangement for ECLIA business and direct purchase of microscopes by hospitals from equipment manufacturers. Although our revenues from equipment will decrease, the number of equipment placement in effect increased because of the above mentioned reasons.

We expect the reagent revenues to increase rapidly, which will offset the loss in equipment revenue and drive the growth of the company in the financial year 2008.

We expect our other business, HIFU, to maintain a positive growth this year. Let’s talk about the specific targets.

The target revenues range from RMB1.19 billion or $169.7 million, to RMB1.23 billion or $175.4 million, representing a year-over-year growth rate of 30% to 34.3%. The target non-GAAP adjusted net income excluding stock compensation expense and amortization of acquired intangible assets ranged from RMB585 million, or $83.4 million, to RMB605 million, or $86.3 million, representing a year-over-year growth rate of 35.4% or 40%.

Target non-GAAP adjusted diluted EPS after adding back interest expense and amortization from convertible notes on assumed ADS of about 31.5 million range from RMB20.10, or $2.87, to RMB20.73, or $2.96, representing a year-over-year growth rate of 30.1% to 34.3%. These targets are based on our current views on operating and market conditions, which are subject to change.

This concludes our remarks. Now we will be happy to take your questions. Operator, please.

Question-and-Answer Session

 

Operator

(Operator Instructions) Your first question comes from the line of Bin Li of Morgan Stanley.

Bin Li - Morgan Stanley

Thank you. Just want to ask a question on the guidance, if I could -- I guess you are guiding that the top line is going to grow 30% to 34%. I’m just trying to understand what is the growth assumption you build for your top line, specifically for each business line? And you mentioned a little bit about HIFU but if you can talk about the ECLIA and the assumption for FISH.

Sam Tsang

You can see what we have discussed. The growth driver for this top line growth is mainly coming from our reagent business, which includes ECLIA and FISH. And for the HIFU, we already expect just a positive growth and also for ECLIA and FISH, we already expect a decline in equipment sales because of our ECLIA reagent rental arrangement and also our FISH, the customers for FISH, they will basically buy the microscope from manufacturers.

Bin Li - Morgan Stanley

Have you stopped shipping the HIFU equipment and the ECLIA equipment already?

Sam Tsang

Start ship it?

Bin Li - Morgan Stanley

Have you stopped already?

Sam Tsang

Oh, no, no, no -- we already introduced a reagent rental arrangement, which means we already provide hospital with ECLIA equipment.

Bin Li - Morgan Stanley

No, I mean for FISH.

Sam Tsang

For FISH, the hospitals now already purchase directly from the equipment manufacturers, those that manufacturer the microscope used for FISH operation.

Bin Li - Morgan Stanley

Right, and you also on the -- on your guidance, you are also saying that your net income is going to grow 35% to 40%. Can you explain the -- I guess there was some leverage here between the top line and bottom line growth. Can you explain that -- you know, where is the leveraging coming from? Is it coming from gross margins? I assume increased sales of reagent or there’s a little bit coming from cost savings on the G&A line.

Sam Tsang

Bin, you are correct. The leverage is about 5% higher on the growth rate of net income over the revenue. It’s mainly coming from the gross margin. You see, we expect increasing sales of our reagent and which you know are generating a higher gross margin compared to other products. And so that’s why we expect higher gross margin for this financial year 2008, which drives up a higher growth rate in our net income.

Bin Li - Morgan Stanley

Okay, thanks. I’ll go back to the queue.

Operator

Your next question comes from the line of Jinsong Du of Credit Suisse.

Jinsong Du - Credit Suisse

Just a question on the new approach you guys mentioned on ECLIA. So apparently this is I think a good move because I understand that some other competitors are giving out equipment for free as well. But I would just like to understand more about your decision process. Previously you were selling the equipment and now you are giving out for free, so is it because of the intensifying competition or is it because of other reasons, please? Thank you.

Sam Tsang

We already mentioned that we already have a very large base of mid-sized hospital customers in China and the decision to introduce this reagent rental arrangement is to keep the momentum of increasing equipment placement to hospitals, especially the high-end and low-end hospitals, which means the large hospitals as well as the small-sized hospitals. So it can help us to capture the [inaudible] market as quickly as possible, which will in turn continue to drive up the growth of our ECLIA reagent sales.

Jinsong Du - Credit Suisse

Right. Does that mean that going forward, we will see minimal revenue contribution from both ECLIA devices and the FISH microscopes?

Sam Tsang

You know, in this 4Q, the ECLIA equipment is contributing less than 10% of our ECLIA revenue, so more than 90% are coming from ECLIA reagents. And you are right -- we expect basically minimal revenue from ECLIA equipment in this year, and also a low level of revenue from the FISH microscope.

Jinsong Du - Credit Suisse

Right, I understand that will definitely help the gross margins but could you quantify it a little bit -- just by using this approach, this new approach, what would be the potential increase in gross margins?

Sam Tsang

It is very obvious you see we have increasing sales of FISH reagents. For example, the third quarter last year or fourth quarter last year, there is about -- every quarter there is about a 1% increase in gross margin, so I think this is already a good indication of the direction of our gross margin in the future.

Jinsong Du - Credit Suisse

Right. And the HIFU backlog, is that just now is 28?

Sam Tsang

The backlog -- are you talking about the backlog?

Jinsong Du - Credit Suisse

Yeah, the HIFU backlog, yeah.

Sam Tsang

The backlog by the end of March is 21 units and last year the corresponding period of that -- that is June last year, the June quarter of last year, we sold 20 units. You know HIFU is a seasonal business and the June quarter is typically the low season for large, capital equipment. And so when you compare the backlog, you should compare also the last quarter unit sales, which is 20 units.

Jinsong Du - Credit Suisse

Thank you. Could you comment on the approval timeline for several products, like SFDA approval for the FISH probes, as well as the approval for the automatic ECLIA machine? And also if you could share with us the current progress of the HIFU FDA application, that would be great. Thank you.

Sam Tsang

Dr. Chen will translate your questions for Mr. Wu to give you an answer.

Xiaodong Wu (Translation)

So far, we already submitted our application to Chinese FDA for FISH and so far we have not received any notice from Chinese FDA to ask us to provide additional information, so we believe everything will go under the guidance of the SFDA. The original ECLIA based automatic system has been in the stage for approval. However, since we have acquired BBE, we felt that the BBE magnetic beads based system is better than the ECLIA based system, so we are in the developing stage to try to combine the magnetic beads system with our ECLIA based system and try to resubmit our application to FDA for the final approval for the magnetic beads fully automatic system.

Jinsong Du - Credit Suisse

Right. Thank you. So the BBE contribution for next year will pick up how many percent of the company’s overall sales and earnings?

Sam Tsang

Jinsong, you probably remember the acquisition price for the BBE is about $28 million, which is a small acquisition. And the contribution to the overall company, overall revenue is a very small amount.

Xiaodong Wu (Translation)

Mr. Wu would like to make another comment about our semi-automatic ECLIA system, and as you guys know, our semi-automatic system actually we can penetrate to the bigger hospitals. Why? It’s because we have so many kinds of reagents, especially the ECLIA system, and these kind of reagents can be easily adopted by some specialized departments in the hospital.

However, if we would like to compete with high volume fully automatic system, we have to wait until our magnetic beads fully automatic system has been developed and approved by the SFDA. Thank you.

Jinsong Du - Credit Suisse

Thanks. I will go back to the queue. Thank you.

Operator

Your next question comes from the line of [Xiajing Kong] of Merrill Lynch.

Xiajing Kong - Merrill Lynch

Congratulations on the great results and the strong guidance. I just want to ask a couple of questions, specific questions on the FISH franchise. First, can you break down the revenue from the unit and reagent from last quarter for me? Hello?

Sam Tsang

For the FISH revenue for the fourth quarter, equipment sales is accounting about -- over 50%, so last quarter, third quarter equipment is accounting about 70%, so there is already a very rapid growth in our FISH reagent revenue.

Xiajing Kong - Merrill Lynch

Okay. From what I see here, the -- because the equipment from FISH sales is likely to go down significantly next year and so the reagent probe sales will be the major driving force, and not only for the franchise but also for your full-year revenue guidance. So can you elaborate a little bit more on what are the major driving factors behind this strong growth for FISH probes?

Sam Tsang

Dr. Chen will translate your question for Mr. Wu to answer.

Xiaodong Wu (Translation)

FISH definitely is growing rapidly in the Chine Medical history, and during the visit by Mr. Wu to lots of hospitals in China, we find some new areas for FISH applications. Case in point -- for the bladder cancer probe and traditionally, we use the FISH probes for bladder cancer diagnosis and for the monitoring of the course of the disease. However, after the visit to the hospitals, we find out that in the department, especially the out-patient department, not the patient with unknown reason of bloody urine, actually has been diagnosed with bladder cancer. And in the past, all this kind of patient can easily be misdiagnosed and with the FISH probe, we can’t [diagnose them out]. And case in point, and in a -- for example, in the kidney disease related department, about 50% of the out-patients with bloody urine with unknown reason and among them, 10% to 15% probably with totally unknown reason. And all this would be a target for the FISH business.

So in several hospitals, they already established a [bloody urine] department to treat and diagnose the patient and FISH will play a major role in this kind of business.

Another case in point is for the cervical cancer diagnosis, and based on a study conducted by the 301 military hospital of China, and the People’s Hospital of the Beijing University, they already finished more than 500 cases and find out the result is too evident to make a [inaudible] diagnosis between [CIM-1] and [CIM-2]. [CIM-1] is a low grade, pre-cancer reaching and [CIM-2] is a high grade pre-cancer [inaudible]. And very interestingly today, we just happened to find another report from a U.S. study and it showed the same result. So we believe this particular probe, the probe for cervical cancer will serve a major role for the pathological diagnosis of the cervical cancer, especially for early diagnosis.

Xiajing Kong - Merrill Lynch

Okay, so my understanding is that the major driving force for the FISH probe will be an expanded area of us. Is that fair?

Dr. Zhong Chen

Yes, the application area. I mentioned to you guys, one -- Mr. Wu just made two cases in point, one for the bladder cancer -- it’s not just for the diagnosis of bladder cancer and actually can be used for the diagnosis between, such as the bloody urine and malignant bloody urine, and another case for the cervical cancer. It can be used for the screening purpose for early and later stage of pre-cancer lesions.

Xiajing Kong - Merrill Lynch

Okay. Thank you. And another quick question on ECLIA -- in your guidance, you said you expect ECLIA to penetrate into more high-end and low-end hospitals. As far as my understanding is that your current models are more suitable for tier-2 and 3 hospitals, so now you are expecting it to expand into high-end hospitals. Does that mean you already see some good effect from your direct sales force, so you expect ECLIA to be penetrating into high-end hospitals due to that direct sales force?

Sam Tsang

Dr. Chen will translate your question but after this question, if you have other questions, can you queue up again?

Xiaodong Wu (Translation)

Mr. Wu said yes, and as you know, if we sell our ECLIA system by distributor, it’s impossible to penetrate into the tier-1 hospitals in China. However, by FISH we have a direct sales force and we use the same sales force, we can relatively easily penetrate our ECLIA system to the high-end, the tier-1 hospitals. That’s exactly the evidence that we have right now.

Xiajing Kong - Merrill Lynch

Okay, great and lastly, I just want to ask a question on the potential future acquisitions. In your mind, what kind of targets are you most interested in? Will that be something within your current technology platform or will that be some different technologies? And geographically, are you more interested in going abroad or remain focused on the domestic market?

Xiaodong Wu (Translation)

We have already [transformed] to become a high-end and with a recurring revenue and high gross margin revenue IVD company. So for the future growth, as for future acquisitions, it’s got to be related to the high-end IVD area. And the focus will be related to the molecular diagnostic or molecular biology related products. And the products have got to be complementary to our existing products, got to be complementary to our current customers. And the market, I’m talking about for the testing customers, it’s got to be huge and with great potential and with high gross margin. It doesn’t matter the geographic distribution, China or abroad. If a company approaches us and meets the principals just as Mr. Wu outlined to you guys, we’d do it.

Xiajing Kong - Merrill Lynch

Okay. Great. Thank you very much for answering my questions.

Operator

Your next question comes from the line of Louis [San] of Brean Murray. Please proceed.

Louis San - Brean Murray, Carret & Co.

Thanks for taking my call. Congratulations on a good quarter. Basically I have two fairly straightforward questions, one is basically it’s regarding the income statement. I noticed that for this past quarter, the gross margin is down quite a bit. I don’t know if I missed any possible explanation earlier, so could you give us a little more color on that? So that’s the first question.

And secondly, you know, I just want to get a little more color from the management because considering the fact that CMED is moving towards the direction of becoming mostly a diagnostic company, so what is the management’s view, overall view of the HIFU business? Eventually do you expect to see any negative growth in this area?

And also, I know you have touched on it a little earlier -- do you have anymore updates in terms of do we have anymore short to medium term catalysts with regard to the HIFU business? Thank you.

Sam Tsang

Thank you, Louis. For your first question, the gross margin, in fact the gross margin decreased since first quarter last year. It is after we acquired the FISH technology and also when we start selling the FISH equipment, because we have to amortize the FISH intangible assets, which is about RMB20 million every quarter. And so -- and the FISH equipment because we do not manufacture the equipment, that is the microscopes, they just buy the equipment and sell to hospitals, and so that’s why the gross margin is relatively low compared to our other products.

And so the gross margin decreased from 72%, 73% to about 62% -- 61%, 62% in our first quarter last year. But because of the sales, increasing sales of our ECLIA and FISH reagents, the gross margin actually improved quarter over quarter and [inaudible] third quarter and fourth quarter, the gross margin increased about 1% quarter over quarter basis.

And so we -- as we expect more and more sales of reagents in this financial year 2008, we expect the gross margin will continue to improve.

And for your second question, I will let Dr. Chen translate for Mr. Wu to answer.

Xiaodong Wu (Translation)

Mr. Wu still believes HIFU will maintain a very positive growth. Why? It’s because we will continue to increase our market penetration, especially with the FISH direct sales force we believe will help and enhance the HIFU penetration to large hospitals. And another point Mr. Wu would like to make is as you know, we will not put more extra resource into the HIFU business. However, we will continue our efforts and try our best to get the [market approval] and American FDA approval. After that, after approved by [inaudible] and American FDA, we believe HIFU business still will be very positive.

Louis San - Brean Murray, Carret & Co.

Great. Thank you very much.

Operator

Your next question comes from the line of [Ho Ki Luc] of Citigroup.

Ho Ki Luc - Citigroup

Thank you. I have a question in regard to your effort to penetrate into the higher end hospitals for ECLIA. I understand that was the direct sales force and the selling should be more effective, but most of these hospitals currently use fully-automated ECLIA equipment in the IVD department. So realistically, how likely would they purchase semiautomatic equipment and -- in other words, what kind of penetration should we be expecting?

Sam Tsang

Dr. Chen will translate your question.

Xiaodong Wu (Translation)

The competition in the big hospitals is not for the automatic system or the equipment itself. We believe our strength is in the numbers of the reagents, what we sell to the hospital. Case in point, [inaudible] probably has about 40 reagents right now but we have more than 70 reagents, so that means we have 30 more reagents than [inaudible]. And another case in point for Roche, Roche probably has about 60 reagents. And by the end of fiscal year 2008, we are going to have more than 90 reagents, so we are going to have 30 more reagents than Roche.

So after three years intelligent and continuous effort in developing our new reagents, CMED already probably achieved the highest reagent number in terms of the reagents number in the world as of today.

And the [landing] rate as Mr. Wu just pointed to you guys, by the end of this year we’re going to achieve that.

Ho Ki Luc - Citigroup

Okay. And then just in your current guidance, what kind of tax rate assumption is in your guidance?

Sam Tsang

For the current guidance, I assume the first nine months in this financial year, which is April to December, the tax rate is 18% and January and March, that is the last three months of our financial year 2008, I assume 20%.

Ho Ki Luc - Citigroup

All right. Thank you.

Operator

Your next question comes from the line of Bin Li of Morgan Stanley.

Bin Li - Morgan Stanley

Thanks for taking my follow-up question. It looks like I only have time for one, so I just want to follow-up on previous questions. In terms of your FISH business, Sam, you mentioned that the equipment sales for this quarter is more than 100 units. Can you tell us what we should think about the run-rate going forward for the next few quarters? And the fact that you are changing your selling strategy to the third party, would that have positive, negative, or neutral impact on the -- on your installation speed?

Sam Tsang

Yes, we sold 100 units of FISH equipment this 4Q07 and as we discussed our outlook, you can expect the unit sales of microscopes will decrease substantially, but which is just our revenue. But the actual installment of the microscopes in hospitals will be higher than the current run-rate, as we expect. Because you see currently we are selling our FISH reagents to about -- to more than 200 large hospitals, and we expect our sales level to come from more than 500 large hospitals by the end of financial 2008. And you also know that each hospital will have multiple units of microscope, so you can expect the microscope placement will be more than what we have sold in financial year 2007.

So even though we -- our revenue from the equipment sales will be lower but the actual installment or actual use, actual number of microscopes used by hospitals will be much more compared to this year. And the impact to us will be -- we will have lower revenue from equipment sales of microscope but we will have much, much higher revenue from FISH reagents, which you know are generating much higher gross margin for the company. And we make FISH reagents, but we do not make microscopes.

Bin Li - Morgan Stanley

Right. I understand that year over year, you might install more equipment or the third party may install more equipment, but as I’m looking at the run-rate of your placements to a FISH unit, it’s going up sequentially for the last four quarters. Now you’ve reached a new, a peak rate of 100 units this quarter. Now should I think this rate is sustainable going forward or should I take the average of the last four quarters as my run-rate going forward?

Sam Tsang

You see, from 200 hospitals to 500 hospitals and in each hospital we will have multiple units, and also existing hospitals, they can increase -- they may increase their units of microscope, so you can expect, even though we have sold 100 units at the quarter, it’s just 400, isn’t enough to satisfy all these 500 large hospitals by the end of 2008.

Bin Li - Morgan Stanley

Okay. All right, thanks.

Operator

At this time, we have reached our allotted time for questions. I will now turn the call over to Sam for closing remarks.

Sam Tsang

Thank you. Once again, thank you for joining us today. Please don’t hesitate to contact us if you have any further questions. Thank you.

Operator

Thank you for participating in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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