China Medical Reports Q3 Fiscal 2008 Results

We made a major strategic acquisition to purchase SPR technology and sold our HIFU business to become a pure advanced IVD company based in China,” commented Xiaodong Wu, chairman and chief executive officer of the company. “Our revenue sources have changed to come only from recurring sales of our ECLIA reagent kits and FISH probes. We expect to launch our SPR-based fully automated analysis system to our existing Tier-1 hospital customers through our direct sales force in April 2009 and expect our SPR-based HPV-DNA biosensor chips used with the closed analysis system to become a new source of recurring revenues for us in the near future. We are also pleased to receive further SFDA approval for our Prenatal and Cervical Cancer FISH probes in addition to the first FISH probe approval from SFDA in China for our Breast Cancer HER-2 FISH probe as well as the high-tech certification from Beijing government authorities. We are confident in our growth prospects despite the current weak economic environment in China because the diagnostic needs are least affected by economic downturn and the PRC government has committed to make substantial additional investment in the healthcare sector to increase medical insurance coverage including 50% more subsidy to each participant of government medical insurance plans.”

Xiaodong Wu continued, “We expect to penetrate more than 400 Tier-1 hospitals in China through our direct sales force managed by our wholly-owned subsidiary, Beijing Jin Pu Jia Medical Technologies Co., Ltd. by the end of March 2009. We have been actively promoting FISH technology to different clinical departments in each hospital to drive the FISH test volume. Our promotion efforts also drew attention of China Central TV which featured our FISH technology in its series of news program. Since the launch of our FISH probes, we have successfully established relationships with almost all the top 5 Tier-1 hospitals in each province of China. For example, Beijing 301 General PLA Hospital, The Affiliated Ruijin Hospital of Shanghai Communication University, The Affiliated Hospital of Guangdong Zhongshan University, The Affiliated Oncology Hospital of Heilongjiang Medical University, The Affiliated Hospital of China Medical University in Shenyang, Tianjing General Hospital, The 1st Affiliated Hospital of Shanxi Medical University, The Affiliated Hospital of Shandong Qilu University, Jiangsu Provincial People’s Hospital, Henan Provincial People’s Hospital, The Affiliated Union Hospital of Wuhan Tongji University, Hunan Xiangya Hospital, Sichuan Huaxi Hospital, The 1st Affiliated Hospital of Gansu Medical University and The Affiliated Hospital of The 3rd PLA Medical University in Chongqing, etc. We expect to leverage our hospital resources to introduce our SPR analysis system and HPV chip. We also expect to use the same direct sales force and coverage to introduce other advanced diagnostic products available to us in the future. When we continue to grow our direct sales coverage, our revenue from direct sales to Tier-1 hospitals will exceed our revenue from distributors in the near future. Therefore, our direct sales coverage, being one of our most important assets, will serve as long term contributor to our sustainable future growth.”

“3Q is a complicated quarter to analyze our performance,” commented Mr. Sam Tsang, Chief Financial Officer of the company. “We have taken into account the preliminary purchase price allocation of the SPR acquisition, the gain from the sale of the HIFU business and the reclassification of financial numbers relating to HIFU business to discontinued operation in this quarter. It is the first time we present our results from continuing operation and report a loss due to the one-time charge for acquired IPR&D in accordance with U.S. GAAP. This was acquired as part of the purchase consideration for our SPR acquisition. Although we charged the fair value of the acquired IPR&D to the income statement in this quarter, the related research and development projects are still ongoing after our acquisition and may create new advanced diagnostic products for us if completed in the future. Besides, due to the sale of the HIFU business, the revenue and the direct costs and expenses of the HIFU business as well as the gain from the sale of the HIFU business were reclassified to income from discontinued operation. For the ease of comparing our performance to previous quarters and prior fiscal year, we provide in the latter part of this release the condensed income statements and the non-GAAP reconciliations for these quarters and prior fiscal year which were prepared on the same basis comparable to 3Q FY2008.”

3Q FY2008 Financial Results

The company’s revenues from continuing operation are currently generated from two product lines, ECLIA diagnostic system and FISH diagnostic system.

Gross margin increased to 75.2% for 3Q FY2008 from 56.9% for the corresponding period of FY2007.

Research and development expenses were RMB8.3 million ($1.2 million) for 3Q FY2008, representing a 49.3% year-over-year increase.

Sales and marketing expenses were RMB14.6 million ($2.1 million) for 3Q FY2008, representing a significant year-over-year increase.

General and administrative expenses were RMB38.1 million ($5.6 million) for 3Q FY2008, representing a 70.1% year-over-year increase.

Interest income was RMB12.4 million ($1.8 million) for 3Q FY2008, representing a 74.4% increase from the corresponding period of FY2007.

Interest expense of convertible notes was RMB27.9 million ($4.1 million) for 3Q FY2008, representing a significant year-over-year increase.

Interest expense of amortization of convertible notes issuance costs was RMB4.7 million ($0.7 million) for 3Q FY2008, representing a significant year-over-year increase.

As of December 31, 2008, the company’s accounts receivable was RMB284.3 million ($41.7 million), representing a decrease of 12.7% from the balance as of September 30, 2008, primarily due to the sale of the HIFU business.

For the convenience of readers, certain RMB amounts have been translated into U.S. dollars at the rate of RMB6.8225 to $1.00, the noon buying rate in New York City for cable transfers of RMB per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York, as of Wednesday, December 31, 2008.

Outlook for FY2008

The targeted revenues from continuing operation for FY2008 are expected to be between RMB825.0 million ($120.9 million) and RMB838.0 million ($122.8 million), representing a year-over-year increase of 50.7% – 53.1%.

The targeted adjusted income from continuing operation excluding stock compensation expense, amortization of acquired intangible assets and acquired IPR&D charge (non-GAAP) for FY2008 are expected to be between RMB410.0 million ($60.1 million) and RMB420.0 million ($61.6 million), representing a year-over-year increase of 76.8% – 81.1%.

The targeted adjusted diluted earnings from continuing operation per ADS excluding stock compensation expense, amortization of acquired intangible assets and acquired IPR&D charge (non-GAAP) for FY2008 is expected to be between RMB14.84 ($2.18) and RMB15.13 ($2.22) assuming a diluted weighted average number of ADS of approximately 34.2 million and excluding interest for convertible notes (RMB83.2 million) and amortization of convertible notes issuance costs (RMB14.3 million), representing a year-over-year increase of 68.6% – 71.9%.