First Quarter 2007 Unaudited Financial Results:
Net Revenues. Our net revenues amounted to RMB35.4 million (US$4.6 million) in the first quarter 2007 compared to RMB28.1 million net revenues for the first quarter 2006, representing an increase of 26.0%, primarily attributable to the continued growth of our flagship EPO product, EPIAO, and the rapid quarter-over-quarter upward sales trend of our TPIAO products. Net revenues from our leading EPIAO products increased by 12.7% from RMB22.3 million in the first quarter 2006 to RMB25.1 million (US$3.3 million) in the first quarter 2007. Net revenues from our proprietary protein-based therapeutic recombinant human thrombopoietin ("TPO") products, marketed under our TPIAO brand, increased 227.4% over the first quarter 2006 to RMB7.6 million (US$1.0 million). Our TPIAO products are now our second largest revenue contributor, accounting for 21.4% of total net revenues for the first quarter 2007 as compared to 8.2% in the first quarter 2006. In addition, we started seeing results from our sales efforts in promoting our in-licensed Iron Sucrose supplement, Tietai, which generated 1.5% of our overall sales for the first quarter 2007.
Gross Profit. Gross profit increased 27.6% to RMB32.4 million (US$4.2 million) for the first quarter 2007 from RMB25.4 million in the first quarter 2006. Gross margin was 91.7% in the first quarter 2007, up from 90.5% in the first quarter 2006, as we continued to enjoy economies of scale from larger volume production, corresponding to higher unit sales of our EPIAO and TPIAO products.
Income from Operations. Operating income for the first quarter 2007 was RMB11.6 million (US$1.5 million), representing a 26.9% increase, compared to RMB9.1 million in the first quarter 2006, and up 32.9% from an operating income of RMB8.7 million in the fourth quarter of 2006, primarily due to increased operating leveraging from continued sales growth. Operating margin for the first quarter 2007 was 32.8%, comparable to 32.5% for the first quarter 2006. As we initiated additional investments in expanded sales and marketing efforts for our newly marketed products as well as increased research and development efforts in the first quarter of 2007, the net positive effect on our operating leverage derived from our sales growth was temporarily offset. Operating margin for the first quarter 2007 increased by 8% from 24.8% in the fourth quarter of 2006, as the stock-based compensation associated with 312,504 restricted shares awarded in June 2006 was fully recognized, and increased marketing efforts in the fourth quarter of 2006.
Operating Expenses. Our total operating expenses decreased by 11.9% from RMB23.7 million in the fourth quarter 2006 to RMB20.9 (US$2.7 million) in the first quarter 2007, but was up 28.1% from RMB16.3 million in the first quarter 2006. The year-on-year increase in operating expenses was primarily due to the research and development expenses incurred for EPIAO, NuPIAO (our second generation EPIAO) and clinical trials for TPIAO's new indication, and increased sales, marketing and distribution costs. Other Income (Expense), net. Net other income increased by RMB6.9 million (US$0.9 million) in the first quarter of 2007, as compared to net other expense of RMB0.5 million in the first quarter of 2006, as a result of reduced debt level because of internally generated cashflows.
Income before Income Tax Expense and Minority Interests. As a result of the foregoing, our income before income tax expense and minority interests increased by 108.6% from RMB8.6 million in the first quarter 2006 to RMB18.0 million (US$2.3 million) for the first quarter 2007.
Income Tax Expense. Our income tax expense increased by 49.5% from RMB1.2 million for the first quarter 2006 to RMB1.8 million (US$0.2 million) for the first quarter 2007. The effective tax rate was 9.8% for the first quarter 2007, which improved from 13.7% for the prior year period, mainly contributed to by non-taxable interest income earned from IPO proceeds in first quarter of 2007.
Net Income. As a result of the foregoing, our net income increased by 116.3% from RMB7.5 million for first quarter 2006 to RMB16.2 million (US$2.1 million) for the first quarter 2007.
Accounting of Foreign Exchange Impact on Our Assets and Liabilities
On July 21, 2005, the Chinese government changed its policy of pegging the value of the Renminbi to the U.S. dollar and now permits the Renminbi to fluctuate within a band against a basket of certain foreign currencies. This change in policy resulted in an appreciation in the value of the Renminbi against the U.S. dollar. This has resulted in a foreign exchange accounting impact on the Company's assets and liabilities primarily the US$108.0 million of net proceeds the Company received from its initial public offering completed in the first quarter 2007. For the first quarter of 2007, the Company recognized a corresponding foreign currency translation deficit of RMB3.6 million (US$0.47 million) in accumulated other comprehensive loss as a component of shareholders' equity, when the Company's assets and liabilities denominated in U.S. dollars were translated into Renminbi based on the RMB/US dollar exchange rate as of March 30, 2007. If the circumstances with respect to our intended use of our IPO net proceeds change in the future, the accounting treatment with respect to the foreign exchange accounting impact on our IPO net proceeds may also change.