China Medical Technologies Reports Fourth Fiscal Quarter and Full Fiscal Year Financial Results

Outlook for first fiscal quarter ending June 30, 2011

• Target net revenues are expected to range from RMB232.0 million (US$35.4 million) to RMB234.0 million (US$35.7 million), representing a year-over-year increase of 24.6% - 25.7%.
• Target non-GAAP net income is expected to range from RMB73.0 million (US$11.1 million) to RMB74.0 million (US$11.3 million), representing a year-over-year increase of 28.0% - 29.8%.
• Target non-GAAP diluted earnings per ADS* is expected to range from RMB2.75 (US$0.42) to RMB2.79 (US$0.43), representing a year-over-year increase of 26.1% - 28.0%.

Outlook for full fiscal year ending March 31, 2012

• Target net revenues are expected to range from RMB970.0 million (US$148.1 million) to RMB995.0 million (US$151.9 million), representing a year-over-year increase of 15.2% - 18.1%.
• Target non-GAAP net income is expected to range from RMB310.0 million (US$47.3 million) to RMB318.0 million (US$48.6 million), representing a year-over-year increase of 13.5% - 16.5%. The slightly lower growth rate in non-GAAP net income is primarily due to the full year impact of additional interest expense arising from new convertible notes issued in December 2010.
• Target non-GAAP diluted earnings per ADS* is expected to range from RMB11.70 (US$1.79) to RMB12.00 (US$1.83), representing a year-over-year increase of 12.6% - 15.5%.

The above targets are based on the Company's current views on the operating and market conditions, which are subject to change.

*One American Depositary Share ("ADS") = 10 ordinary shares

See "Non-GAAP Measure Disclosures" below, where the impact of certain items on reported results is discussed.

"We are pleased with the quarterly results, in particular, the continued growth of our molecular diagnostic business during the seasonally weak quarter. We expect our FISH business and HPV-DNA chip business to drive our growth in the following quarters," commented Mr. Xiaodong Wu, Chairman and Chief Executive Officer of the Company. "We will continue to expand our product offering in FISH probes and PCR assays as well as develop a new SPR analyzer through investment in research and development. We will leverage our established sales networks to introduce our new products to our hospital customers. In addition, we are working on several initiatives to support our sustainable growth including discussion with a leading independent laboratory testing service group in China for a potential collaboration to promote the use of molecular diagnostic tests to the group's hospital customers."

Mr. Sam Tsang, Chief Financial Officer of the Company commented, "We issued new convertible notes in December 2010 to extend our debt maturity profile. We have been focusing to improve our leverage profile and have reduced our net debt to adjusted EBITDA ratio from 5.1 times to 3.3 times. However, we believe that we are still maintaining relatively high leverage, and the continued improvement in our leverage to the level of 2 times or below is our priority. We have been very cautious in making capital expenditures and did not consider new acquisition and will continue to do so. Meanwhile, we will maintain our investment in product research and development which will support our future growth. We will also continue to invest in our direct sales network to attract and retain Tier 1 hospitals which are major consumers in China's healthcare industry."

4Q FY2010 Unaudited Financial Results

The Company reported net revenues of RMB230.4 million (US$35.2 million) for 4Q FY2010, representing a 31.1% increase from the corresponding period of FY2009.

The Company's revenues are currently generated from two segments, molecular diagnostic systems and immunodiagnostic systems. The molecular diagnostic system segment includes FISH products and SPR products while the immunodiagnostic system segment consists of ECLIA products. The customers of the molecular diagnostic system segment, that is, Tier 1 hospitals in China, are being served by the Company's direct sales personnel.

Molecular diagnostic system sales for 4Q FY2010 were RMB146.6 million (US$22.4 million), representing a 45.3% increase from the corresponding period of FY2009. The year-over-year increase was primarily due to the increase in usage of the Company's FISH probes by existing and new hospital customers as well as the sales of SPR-based HPV-DNA chips of RMB11.9 million (US$1.8 million) to hospitals during 4Q FY2010.

Immunodiagnostic system sales for 4Q FY2010 were RMB83.8 million (US$12.8 million), representing a 12.0% increase from the corresponding period of FY2009. The year-over-year increase was primarily due to the increase in sales of the Company's ECLIA reagent kits to existing and new distributors.

Gross margin was 61.4% for 4Q FY2010 which decreased year-over-year from 64.9% for the corresponding period of FY2009. The year-over-year decrease was primarily due to the classification of amortization of SPR intangible assets from operating expenses to cost of revenues after the commencement of sales of HPV-DNA chips in 2Q FY2010 which offset the positive impact on more contribution from the sales of FISH probes which generate higher gross margin. Non-GAAP gross margin was 82.4% for 4Q FY2010 which increased year-over-year from 77.7% for the corresponding period of FY2009. The year-over-year increase in non-GAAP gross margin was primarily due to more contribution from the sales of FISH probes which generate higher gross margin.

Research and development expenses were RMB12.6 million (US$1.9 million) for 4Q FY2010, representing a 21.8% year-over-year increase. Non-GAAP research and development expenses were RMB11.4 million (US$1.7 million) for 4Q FY2010, representing a 28.0% year-over-year increase. The year-over-year increase was primarily due to product research and development for SPR analyzers and PCR assays.

Sales and marketing expenses were RMB24.0 million (US$3.7 million) for 4Q FY2010, representing a 43.9% year-over-year increase. Non-GAAP sales and marketing expenses were RMB23.8 million (US$3.6 million) for 4Q FY2010, representing a 42.7% year-over-year increase. The year-over-year increase was primarily due to an increase in direct sales efforts for molecular diagnostic systems.

General and administrative expenses were RMB25.4 million (US$3.9 million) for 4Q FY2010, representing a 5.1% year-over-year decrease. Non-GAAP general and administrative expenses were RMB18.4 million (US$2.8 million) for 4Q FY2010, representing a 5.0% year-over-year increase.

Interest expense on convertible notes was RMB34.6 million (US$5.3 million) for 4Q FY2010. Non-GAAP interest expense on convertible notes was RMB33.2 million (US$5.1 million) for 4Q FY2010. As of March 31, 2011, the Company's outstanding convertible notes of US$22.7 million, US$248.0 million and US$150.0 million bear interest at 3.5%, 4% and 6.25% per annum, respectively, and will mature in November 2011, August 2013 and December 2016, respectively.

Interest expense related to amortization of convertible notes issuance costs was RMB4.2 million (US$0.6 million) for 4Q FY2010.

Interest expense related to amortization of share lending costs was RMB2.4 million (US$0.4 million) for 4Q FY2010.

Income tax expense was RMB28.1 million (US$4.3 million) for 4Q FY2010. The high effective tax rate was due to certain expenses of the Company such as stock compensation expense, amortization of acquired intangible assets and interest expense of convertible notes were not deductible for income tax purpose. In addition, the Company was required to accrue for withholding income tax on distributable earnings generated in China.

Net income was RMB16.1 million (US$2.5 million) for 4Q FY2010, which improved significantly from RMB4.8 million for the corresponding period of FY2009. Non-GAAP net income was RMB75.0 million (US$11.5 million) for 4Q FY2010, representing a 45.7% increase from the corresponding period of FY2009. The significant year-over-year increase was primarily due to the increase in both molecular diagnostic system sales and immunodiagnostic system sales.

Earnings before interest, taxes, depreciation and amortization ("EBITDA") was RMB133.3 million (US$20.4 million) for 4Q FY2010, representing an 18.0% increase from the corresponding period of FY2009. The year-over-year increase in EBITDA was primarily due to the increase in both molecular diagnostic system sales and immunodiagnostic system sales.

Adjusted EBITDA was RMB140.2 million (US$21.4 million) for 4Q FY2010, representing a 40.8% increase from the corresponding period of FY2009. The reason for the increase is also due to increased sales in 4Q FY2010.

Stock compensation expense for 4Q FY2010 was RMB8.5 million (US$1.3 million), of which RMB0.1 million was allocated to cost of revenues, RMB1.2 million to research and development expenses, RMB0.2 million to sales and marketing expenses and RMB7.0 million to general and administrative expenses.

Amortization of acquired intangible assets for 4Q FY2010 was RMB48.2 million (US$7.4 million) which was all allocated to cost of revenues.

As of March 31, 2011, the Company's cash and cash equivalents were RMB1,123.8 million (US$171.6 million). Net cash generated from operating activities for 4Q FY2010 was RMB37.3 million (US$5.7 million). Net cash generated from investing activities for 4Q FY2010 was RMB18.8 million (US$2.9 million). Net cash used in financing activities for 4Q FY2010 was RMB48.9 million (US$7.5 million).

As of March 31, 2011, the Company's net accounts receivable was RMB481.1 million (US$73.5 million), representing an increase of 21.0% from the balance at December 31, 2010. The increase in net accounts receivable was primarily due to the increase in molecular diagnostic system sales to hospital customers.

FY2010 Unaudited Financial Results

Net revenues were RMB842.4 million (US$128.6 million) for FY2010, representing a 16.5% year-over-year increase. The year-over-year increase in revenues was primarily due to the increase in molecular diagnostic system sales.

Gross margin was 60.3% for FY2010 which decreased year-over-year from 67.1% for FY2009. The year-over-year decrease was primarily due to the classification of amortization of SPR intangible assets from operating expenses to cost of revenues after the commencement of sales of HPV-DNA chips in 2Q FY2010 which offset the positive impact on more contribution from the sales of FISH probes which generate higher gross margin. Non-GAAP gross margin was 80.3% for FY2010 which increased year-over-year from 79.6% for FY2009. The year-over-year increase in non-GAAP gross margin was primarily due to more contribution from the sales of FISH probes which generate higher gross margin.

Research and development expenses were RMB46.5 million (US$7.1 million) for FY2010, representing a 9.9% year-over-year increase. Non-GAAP research and development expenses were RMB41.5 million (US$6.3 million) for FY2010, representing a 15.5% year-over-year increase. The year-over-year increase was primarily due to product research and development for FISH probes, SPR analyzers and PCR assays.

Sales and marketing expenses were RMB88.2 million (US$13.5 million) for FY2010, representing a 37.7% year-over-year increase. Non-GAAP sales and marketing expenses were RMB87.5 million (US$13.4 million) for FY2010, representing a 36.6% year-over-year increase. The year-over-year increase was primarily due to an increase in direct sales efforts for molecular diagnostic systems.

General and administrative expenses were RMB96.6 million (US$14.7 million) for FY2010, representing a 33.3% year-over-year decrease. Non-GAAP general and administrative expenses were RMB65.4 million (US$10.0 million) for FY2010, representing a 40.8% year-over-year decrease. The year-over-year decrease was primarily because the Company incurred costs for the independent internal investigation in FY2009 which did not recur in FY2010.

Net income was RMB82.6 million (US$12.6 million) for FY2010, which improved significantly from net loss of RMB69.6 million for FY2009. Non-GAAP net income was RMB273.1 million (US$41.7 million) for FY2010, representing a 45.8% year-over-year increase from FY2009.

EBITDA was RMB531.2 million (US$81.1 million) for FY2010, representing a 43.1% year-over-year increase from FY2009.

Adjusted EBITDA was RMB493.3 million (US$75.3 million) for FY2010, representing a 27.3% year-over-year increase from FY2009.

Stock compensation expense for FY2010 was RMB37.2 million (US$5.7 million), of which RMB0.4 million was allocated to cost of revenues, RMB4.9 million to research and development expenses, RMB0.7 million to sales and marketing expenses and RMB31.2 million to general and administrative expenses.

Amortization of acquired intangible assets for FY2010 was RMB196.0 million (US$29.9 million), of which RMB168.7 million was allocated to cost of revenues and RMB27.3 million to operating expenses.

For the convenience of readers, certain RMB amounts have been translated into U.S. dollars at the rate of RMB6.5483 to US$1.00, the noon buying rate in New York City for cable transfers of RMB per U.S. dollar as set forth in the H.10 weekly statistical release of the Federal Reserve Board, as of Thursday, March 31, 2011. No representation is made that the RMB amounts could have been or could be converted into U.S. dollars at that rate or at any other rate on March 31, 2011 or at any other dates.

Product Development Plan

The Company plans to focus on the following product development activities with respect to its molecular diagnostic products:

FISH

• to develop more applications in the areas of prenatal diagnosis, cancer detection and companion diagnostics for cancer targeted drugs through internal research and development.

SPR

• to develop a new automated analyzer for hospitals and independent laboratories to conduct HPV tests using our DNA chips through internal research and development.

PCR

• to develop more assays in the area of companion diagnostics for cancer targeted drugs through internal research and development.

Update on Receivable from Chengxuan

As of March 31, 2011, the remaining amount of the receivable from Chengxuan, a company which is one of the Company's major shareholders and is owned by Mr. Xiaodong Wu, was reduced from US$18 million to US$15 million. This receivable relates to the sale of the Company's HIFU business to Chengxuan. Subsequently, Chengxuan paid US$8 million to the Company and indicated that the remaining balance of US$7 million together with interest thereon will be paid in full before June 30, 2011.

Non-GAAP Measure Disclosures

The Company reported its operating results in accordance with U.S. generally accepted accounting principles ("GAAP") for the three months and the year ended March 31, 2010 and 2011, respectively. The Company also presented non-GAAP information, which included EBITDA and adjusted EBITDA, for the three months and the year ended March 31, 2010 and 2011, respectively. The non-GAAP measures are defined below:

• Non-GAAP gross profit represents gross profit reported in accordance with GAAP, excluding the effects of stock compensation expense and amortization of acquired intangible assets.

• Non-GAAP gross margin represents non-GAAP gross profit divided by net revenues.

• Non-GAAP research and development expenses represent research and development expenses reported in accordance with GAAP, excluding the effects of stock compensation expense.

• Non-GAAP sales and marketing expenses represent sales and marketing expenses reported in accordance with GAAP, excluding the effects of stock compensation expense.

• Non-GAAP general and administrative expenses represent general and administrative expenses reported in accordance with GAAP, excluding the effects of stock compensation expense.

• Non-GAAP operating income represents operating income reported in accordance with GAAP, excluding the effects of stock compensation expense and amortization of acquired intangible assets.

• Non-GAAP interest expense on convertible notes represents interest expense on convertible notes reported in accordance with GAAP, excluding the effects of non-cash interest expense of convertible notes.

• Non-GAAP interest expense on amortization of share lending costs represents the exclusion of interest expense on amortization of share lending costs reported in accordance with GAAP, as this item is non-cash.

• Non-GAAP other income (expense), net represents other income and expense, net reported in accordance with GAAP, excluding the effects of gain on repurchase of convertible notes as well as high yield note offering expenses.

• Non-GAAP net income represents net income reported in accordance with GAAP, excluding the effects of stock compensation expense, amortization of acquired intangible assets, non-cash interest expense of convertible notes, interest expense for amortization of share lending costs, gain on repurchase of convertible notes as well as high yield note offering expenses.

• Non-GAAP earnings per ADS represents non-GAAP net income divided by the weighted average number of ADSs used in computing basic and diluted earnings per ADS in accordance with GAAP.

• EBIT represents net income reported in accordance with GAAP, excluding the effects of interest income, interest expense and income tax expense.

• EBITDA represents net income reported in accordance with GAAP, excluding the effects of interest income, interest expense, income tax expense, depreciation and amortization.

• Adjusted EBITDA represents EBITDA excluding the effects of stock compensation expense, gain on repurchase of convertible notes as well as high yield note offering expenses.

Non-GAAP financial measures are used by the Company in its financial and operating decision-making because management believes they reflect the Company's ongoing business in a manner that allows meaningful period-to-period comparison. The Company's management believes that these non-GAAP financial measures provide useful information to investors and others in understanding and evaluating the Company's current operating performance and future prospects in the same manner as management does, if they so choose.

The presentation of this additional financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP. For a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures, please see the financial information included with this earnings announcement.

Conference Call

The Company's senior management team will host an earnings conference call at 8:00 a.m. U.S. Eastern Time on June 2, 2011 (or 8:00 p.m. Beijing/Hong Kong time on the same date) to discuss the results following this earnings announcement.

The dial-in details for the live conference call are as follows:

A live webcast of the conference call will be available on http://ir.chinameditech.com.

A replay of this webcast will be available for one month on this website.

A telephone replay of the call will be available after the conclusion of the conference call through 10:00 a.m. U.S. Eastern Time on June 3, 2011.  

The dial-in details for the replay are as follows:

About China Medical Technologies, Inc.

China Medical Technologies, Inc. is a leading China-based advanced IVD company using molecular diagnostic technologies including Fluorescent in situ Hybridization (FISH) and Surface Plasmon Resonance (SPR) and an immunodiagnostic technology, Enhanced Chemiluminescence Immunoassay (ECLIA), to develop, manufacture and distribute diagnostic products used for the detection of various cancers, diseases and disorders as well as companion diagnostic tests for targeted cancer drugs. The Company generates all of its revenues in China through the sale of diagnostic consumables including FISH probes, SPR-based DNA chips and ECLIA reagent kits to hospitals which are recurring users of the consumables for their patients. The Company sells FISH probes and SPR chips to large hospitals through its direct sales personnel and ECLIA reagent kits to small and mid-size hospitals through distributors. For more information, please visit http://www.chinameditech.com.

Safe Harbor Statement

This press release contains forward-looking statements. These statements constitute "forward-looking" statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as "expects," "anticipates," "future," "intends," "plans," "believes," "estimates" and similar statements. Among other things, the quotations from management in this press release, as well as its outlook for the first fiscal quarter ending June 30, 2011 and full fiscal year ending March 31, 2012, contain forward-looking statements. Such statements involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Further information regarding these and other risks is included in the Company's filings with the U.S. Securities and Exchange Commission, including its annual report on Form 20-F. The Company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under applicable law.