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China Medical Technologies Inc. (Nasdaq: CMED)

China Medical Technologies Inc. (CMED), a medical device company, engages in the development, manufacture, commercialization, and sale of medical devices and supplies in the People’s Republic of China. It offers in-vitro diagnostics (IVD) products, which utilize enhanced chemiluminescence immunoassay (ECLIA) technology, Fluorescent in situ Hybridization (FISH) technology and Surface Plasmon Resonance (SPR) technology to detect and monitor various diseases and disorders through laboratory evaluation, and analysis of blood, urine, or other body fluids and system.

The Company’s ECLIA system is used for detecting and monitoring various types of diseases and disorders, including thyroid disorders, diabetes, hepatitis, SARS, Down syndrome, liver fibrosis, disorders related to reproduction and growth, and various types of tumors. The FISH probes are used for the detection and monitoring the course of bladder cancer; the treatment of breast cancer; prediction and diagnosis of cervical cancer; and diagnosis and prognosis of various leukemias and multiple myeloma. The SPR System can be used in various clinical diagnostic applications, such as the detection of biomarkers related to infectious diseases, cancers, cardiovascular disorders and immune system disorders.

The Company was awarded ISO 9001 certification and ISO 13485:2003 certification in 2006.

CMED was founded in 1999 and is based in Beijing, the People’s Republic of China.

*year-ending March, 31.
Source: Reuters.com, SEC Filings.

Financial Summary

CMED’s revenues from continuing operations are currently generated from two product lines, ECLIA diagnostic systems and FISH diagnostic systems. The Company reported revenues of RMB209.0 million ($30.6 million) for the first quarter ended June 30, 2009, representing a 28.9% increase from the corresponding period of 2008. ECLIA system sales for the first quarter of 2009 were RMB110.5 million ($16.2 million) and FISH system sales for the first quarter were RMB98.5 million ($14.4 million). The gross margin increased to 74.7% for the first quarter of 2009 as compared to 68.4% for the corresponding period of 2008. The increase in gross margin was primarily due to the change in revenue mix where almost all revenues were from recurring sales of higher margin ECLIA reagent kits and FISH probes in the first quarter of 2009.

Interest expense of convertible notes was RMB35.4 million ($5.2 million) for the first quarter of 2009, representing a significant year-over-year increase. The increase was primarily due to the issuance of $276.0 million convertible notes in August 2008. Net income was RMB2.9 million ($400,000) compared with RMB80.3 million in the year-earlier quarter.

The Company’s cash balance at the end of June was about RMB1.548 million ($227 million). CMED had unpaid balance of about $100 million for the SPR acquisition, and receivables of $30 million from the sale of the HIFU business, which resulted in a net balance of about $157 million. The Company generated cash of RMB94.3 million ($13.8 million), from operations in the first quarter of fiscal 2009. As of June 30, 2009, the Company’s net accounts receivable was RMB346.9 million ($50.8 million), representing an increase of 1.1% from the balance at March 31, 2009. CMED declared an annual cash dividend of $0.55 per ADS for shareholders of record as of September 30, 2009.

The Company has reduced its selling price of ECLIA reagent kits this month and it expects ECLIA revenue to continue to decrease in the second quarter of 2009 and to stabilize in the third quarter. The target revenues for the second quarter of fiscal 2009 range from RMB165.0 million ($24.2 million) to RMB180.0 million ($26.4 million).

Source: Reuters, SEC Filings.

According to Reuters Estimates, analysts are expecting the Company to report revenue of $126.9 million and EPS of $2.17 per share for the fiscal year 2009, and revenue of $149.2 million and EPS of $2.48 per share for the fiscal year 2010.

Analyst Consensus

This is the consensus forecast amongst four polled investment analysts:

Source: http://markets.ft.com/tearsheets/analysis.asp?s=CMED%3ANSQ

Investment Highlights

The Company has operated the ECLIA business for more than five years. Over the last year, the number of competitors has increased; the price differentiation has become narrower and until recently, the Company’s products price was just slightly lower than the international players pricing. Meanwhile, the Company’s domestic competitors’ products pricing was roughly about 50% lower than CMED’s price. During the past few months, the Company lost about 15% of its major distributors to competitors. As a result, in September 2009, CMED adopted a final strategy and reduced prices by about 30%, which made its pricing still about 30% to 35% lower than the international players pricing after the adjustment. In anticipation of a price reduction, the Company’s ECLIA customers have reduced their inventory level during the past months. As a result, ECLIA revenues are expected to decrease in the second quarter and should stabilize in the following third quarter of fiscal 2009.

For its FISH business, CMED has already established direct relationships with 400 hospital customers; the Company is still planning to penetrate its FISH probes to remaining tier 1 large hospitals in China, but at a slower pace. CMED is currently focusing on strengthening relationships with the existing hospital and promoting the clinical benefits of FISH probes among relevant departments of its hospital customers. For FISH business, the Company has built up a direct sales force of more than 200 people in the field.

In April 2009, CMED launched the SPR-based analysis system to its existing FISH hospital customers. However, due to the recent investigation, the attention of management has been significantly diverted since April 2009, which has affected the progress on the placements of SPR analysis systems with hospitals. The Company expects to deliver the analysis systems to some hospitals in October 2009 and will commence the training for the hospital personnel on the use of analysis system for HPV retesting. CMED anticipates revenue from the sale of HPV chips used with SPR analysis system in January 2010.

In December 2008, the Company sold its High Intensity Focused Ultrasound (HIFU) tumor therapy system business to Chengxuan International Ltd. In June 2009, CMED received a letter from Chengxuan in connection with a notice issued by the State Food and Drug Administration (SFDA) in April 2009. The notice from the SFDA required the submission of new clinical trial data for the renewal application of the registration certificate for the HIFU system for the further evaluation of the renewal application and did not permit the sale of the HIFU system starting from April 2009 until the approval of the renewal application. As a result of loss of revenues, Chengxuan is seeking compensation of approximately $15.5 million. The Company does not agree with this compensation request and currently a special committee seeks to come up with a fair and acceptable solution for both parties.

Since the 1980s, China’s in-vitro diagnostics (IVD) industry has been growing for more than two decades. In fact, there has not been a year in the last decade in which the IVD market in China has failed to grow faster than any other major IVD market in the world. Currently there are in China about 1,000 IVD producers. According to a report from Market Avenue, China has become the world’s seventh largest IVD market, whose value is about $1.5 billion, up 100% from the $800 million value in 2004. In the past few years, China’s IVD market kept expanding at 15% annually, the fastest in the world, and there is still large room for the market to grow due to: low expense on IVD per capita – less than $2 now (falling far behind $28, the similar figure in developed countries); and rising living standard in China.

According to the The Economist journal, China will age more quickly than Mexico, Brazil and other emerging countries with young populations. Using the U.N.’s medium-case scenario, China’s over-60 crowd is expected to account for 30% of its population by 2050. Currently, the country has approximately 11% of its population over the age of 60. By comparison, about 17% of the U.S. population is over 60, and by 2050 the number is projected to increase to 27%. China is planning a major overhaul of its health care system which aims to provide care for 90% of the population by 2011 and for all citizens by 2020.China has already announced that it will spend about RMB850 billion ($124.4 billion) on the initial stage of the programme up to 2011.

Technical Analysis

Source: http://stockcharts.com/h-sc/ui

CMED’s MACD is currently indicating a weak bullish signal. Although the MACD is trending above the signal line, the indicator is still below 0, which suggests that the underlying moving averages are bearish.

The Company is trading within its Bollinger Bands. This is a normal condition and suggests that the penny stock is neither overbought nor oversold relative to the recent price action.

Comparative Analysis

CMED is trading with significant discount to its peers, despite the solid growth prospects in the expanding healthcare market of China. The Chinese population is growing old and is getting wealthier. The China IVD market is still largely underdeveloped, with huge potential in many sub-sectors. This places the Company in an advantageous position, as demand for its medical diagnostics and monitoring tools increases along with the growing Chinese economy.

Source: Thomson Financial, Yahoo! Finance, Analyst estimates.

Insider Trading Activity

Net Share Purchase Activity

Data provided by Thomson Financial

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