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» 23/07/2009 [Company watch]
China Aoxing Pharmaceutical Corp. Receives Renewal of GMP Certification for Capsule Dosage Form of Pharmaceutical Products
» 15/03/2010 [Industry news]
Recordati S.p.A And Lee Pharmaceutical Announce Partnership For Zanidip(R) In China
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Hong Kong: Recall of all products manufactured by Quality Pharmaceutical Lab Ltd
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»01/09/2009 [Industry news]
China Medical Technologies Still Stumbling

Over the past few years, China Medical Technologies (NSDQ: CMED) transformed itself from a company focused on a single medical device, the tumor-fighting High Intensity Focused Ultrasound machine, into a business with an attractive portfolio of in vitro diagnostic tests. The process looked seamless. China Medical first bought an ECLIA platform, then a FISH diagnostic system. After each purchase, it built a business around the new platform in a process that seemed both quick and steady. Like many successful initiatives, their growth seemed inevitable – after the fact.

 
Over the past few years, China Medical Technologies (NSDQ: CMED) transformed itself from a company focused on a single medical device, the tumor-fighting High Intensity Focused Ultrasound machine, into a business with an attractive portfolio of in vitro diagnostic tests. The process looked seamless. China Medical first bought an ECLIA platform, then a FISH diagnostic system. After each purchase, it built a business around the new platform in a process that seemed both quick and steady. Like many successful initiatives, their growth seemed inevitable – after the fact. Accusations of Accounting Fraud But China Medical has faced some serious obstacles since April of this year, when the first bombshell hit: the company’s audit company received an anonymous letter alleging various kinds of financial malfeasance. At the time, China Medical had just made its largest investment: it committed $345 million, much more than the cost of the previous systems, for a SPV platform that would diagnose HPV. At the time of the allegation, the new platform was about to launch. To respond, China Medical ordered an independent investigation, a project that required management involvement and caused the company’s business to suffer from the lack of attention. The company has blamed its subsequent troubles on the anonymous letter. Revenue Slump However, China Medical’s problems are a little deeper than that. In aconference call, the company admitted that its original price advantage has eroded over time. At the beginning, China Medical’s ECLIA products enjoyed a substantial price discount to foreign competition, while domestic IVD makers did not match the quality or diversity of China Medical’s products. By 2009, China Medical found its products priced at only a small discount to foreign competition, while domestic IVD manufacturers’ products were 30% less expensive. Customers started abandoning China Medical’s products for less-expensive alternatives. Effective September 1, China Medical has dropped its prices on its ECLIA kits by 30%. Because it signaled the move beforehand, customers used up their existing inventory while they waited for lower prices, depressing revenues. The company believes the move will stop the erosion in its customer base and allow its sales force to begin adding clients once again. However, revenues from ECLIA products will be lower in the upcoming quarters. In Q1 of 2010 (the period ended June 30, 2009), China Medical’s ECLIA system sales were down 1% from last year. FISH revenues soared an impressive 96% year-over-year, but they are slightly below the previous quarter’s numbers. All together, Q1 revenues are up 29% to $30.6 million, while net income (GAAP) is off by a tremendous 93%. Revenues were much lower than the estimate of $43 million, and the company reported a mere $.4 million of earnings. Most of the net income was devoured by non-cash charges for stock compensation ($1.8 million) and amortization ($7.3 million). Absent the charges, the non-GAAP net income figure was still off by 8% at $10.8 million. Expenses seemed to be up across all categories, though an important item was interest expense on the $275 million 4% convertible note offering from last August, whose proceeds paid for the acquisition of the SPV platform. The product will not generate revenue until the company’s fourth fiscal quarter, which begins January 1, 2010. Management says the product follows a familiar business model: an analyzing machine is given to hospitals and revenues are generated by the one-use kits. The upshot is that acceptance of the product is not difficult, but the process of getting the hospitals to allocate space is time consuming. In the past, we have questioned the significance of management attention upon China Medical’s ongoing business – once the machines are installed, the reordering of diagnostic kits seems like it should be automatic. In the conference call, management said its 200 member sales force for the FISH program needs considerable guidance, and sales of the product were hurt by the amount of time management spent on the anonymous letter. In the conference call, management said the FISH platform is installed in 400 Tier 1 hospitals in China. The sales force is focusing on the other Tier 1 hospitals.

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