China Medical Technologies CEO Discusses F3Q2010 Results - Earnings Call Transcript

China Medical Technologies, Inc. (CMED)

F3Q2010 (12/31/10) Earnings Conference Call

February 18, 2011 8:00 AM EST

Executives

Winnie Yam – IR

Charles Zhu – SVP of Operations

Sam Tsang – CFO

Xiaodong Wu – CEO

Analysts

Bin Li – Morgan Stanley

Jack Hu – Deutsche Bank

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2010 China Medical Technologies Incorporated conference call.

My name is Peggy and I will be your operator for today.

At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms. Winnie Yam. Please proceed.

Winnie Yam

Thank you. Good day, ladies and gentlemen. I’m pleased to welcome you to China Medical earnings conference call. China Medical already announced its third fiscal quarter results ended December 31 st, 2010. A copy of the press release is also available on the company’s web site at www.chinameditech.com.

Today, your speakers will be Mr. Xiaodong Wu, CEO; Mr. Sam Tsang, CFO; and Mr. Charles Zhu, Senior VP of Operations. After they finish with their remarks, they will be available to answer your questions.

Before we continue, please bear with me as I 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 US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risk and uncertainty. As such, the results may be materially different from the views expressed today.

A number of potential risk and uncertainties are outlined in the company’s public filings with the US Securities and Exchange Commission. China Medical does not undertake any obligation to update any forward-looking statement, 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 Charles, who will give remarks on behalf of Mr. Wu. Charles?

Charles Zhu

Thank you, Winnie. We have seen growth in each business line again in the past quarter. We’re pleased to see the increasing contribution from our SPR business, where we sell our HPV-DNA chips directly to the hospitals after the placement of our SPR analyzers. We have placed 110 units of SPR analyzers to large hospitals which are – they are the existing [inaudible] by the end of the December last year. We will focus our efforts on the utilization of the analyzers for our HPV-DNA chips by these hospitals to increase the recurring chip revenue from each hospital users.

For FISH, our direct sales teams continues to drive the sales of recurring FISH growth revenue from three areas, first, by increasing the test usage in existing FISH applications in each hospital user; second, by expanding FISH applications to other clinical departments in the existing hospital users; and third, by adding new Tier 1 hospital users.

We expect to receive SFDA approval two to three of our new FISH applications, including prostate cancer detection, EGFR for lung cancer targeted drugs, and Type 2a for breast cancer drugs in the first half of 2011. We will continue to expand our FISH product portfolio to offer a more comprehensive diagnostic manual to physicians and patients which will support the sustainable growth of a recurring FISH revenue.

Revenue from our ECLIA business increased again on year-over-year basis. However we expect normal seasonal sequential decline in ECLIA revenue in March quarter due to the two New Year holidays in that quarter. The trial test on our fully automated ECLIA system by several hospitals is ongoing and we will receive feedback from those hospitals next quarter. We expect to make some modifications to improve the functionality of the system to meet the requirements of large hospitals.

To summarize, each individual business line is operating on track which demonstrated a success of our business transformation. We have transformed ourselves from a large capital medical equipment company to pure advanced IVD company with the focus on high-end molecular diagnostic products where 100% of our revenue is coming from recurring diagnostic consumables used by hospitals on daily basis.

We believe our current business model is more defensive on macroeconomic headwinds and will provide us with long-term stable stream of cash flow and sustainable growth.

I have finished Mr. Wu’s remarks and I’d like to turn the call over to Sam, who will review our financial results. Sam, please.

Sam Tsang

Thank you, Charles, and welcome, everyone. We have made some changes to the presentation of our recent earnings release to include our cumulative results for the fiscal year, that is nine months result ended December 31 st, 2010 and reconciliation of GAAP to non-GAAP numbers on the consolidated financial income statements. We hope it will be helpful to our shareholders and investors to analyze our results.

Let’s highlight our financial results in the past quarter. Our 3Q ‘010 revenues increased by 30% year-over-year to RMB223.9 million or $33.9 million. Our 3Q ‘010 adjusted EBITDA increased 42.8% year-over-year to RMB131.5 million or $19.9 million. Our 3Q ‘010 non-GAAP net income increased 65.8% year-over-year to RMB75.6 million or $11.5 million. Our 3Q ‘010 non-GAAP diluted earnings per ADS increased 64.9% year-over-year to RMB2.57 or $0.43.

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