China BCT Reports Strong Third Quarter 2010 Results

LIUZHOU CITY, China, Nov. 10, 2010 /PRNewswire-Asia-FirstCall/ -- China BCT Pharmacy Group, Inc., (OTC Bulletin Board: CNBI), ("China BCT" or the "Company"), a leading pharmaceutical distributor, retail pharmacy, and manufacturer of pharmaceutical products in Guangxi Province, China, today announced strong results for the third quarter ended September 30, 2010.

Third Quarter 2010 Highlights

• Revenue increased 55.1% year-over-year to $52.5 million
• Gross profit rose 44.4% year-over-year to $13.2 million
• Operating income grew 30.9% year-over-year to $9.5 million
• GAAP net income was $6.9 million, or $0.18 per diluted share, compared to $5.1 million, or $0.16 per diluted share, in the year ago quarter
• Excluding non-cash income related to a change in the fair value of warrant liabilities, non-GAAP adjusted net income was $6.7 million, or $0.17 per diluted share
• In September 2010, China BCT announced the successful acquisition of 15 retail pharmacy stores located throughout six counties of Liuzhou city and 18 retail pharmacy stores in Liuzhou's Rongshui County, further expanding the Company's pharmacy footprint in Guangxi Province
• In September 2010, China BCT entered into expanded three-year pharmaceutical distribution relationships with Liuzhou People's Hospital and Liuzhou Worker's Hospital. These two contracts, combined with the Company's exclusive contract with Liujiang County Chinese Medicine Hospital signed in June 2010, are expected to contribute additional annual revenue of approximately $7 million, commencing in the fourth quarter of 2010

"All three of our vertically integrated businesses generated robust revenue growth this quarter, led by our pharmaceutical distribution segment, which benefited primarily from new business with clinics and health care centers under China's Basic Drugs Catalog program and from higher sales to drug store customers. During the quarter we expanded our retail pharmacy footprint by acquiring 33 outlets in Guangxi, and achieved higher sales volumes in our manufacturing business by establishing relationships with new distributors," commented Mr. Hui Tian Tang, Chairman and Chief Executive Officer of China BCT Pharmacy Group, Inc. "We intend to solidify our position as the dominant retail pharmacy chain and wholesale drug distributor in Guangxi by continuing to participate in retail pharmacy consolidation, investing in modern logistical centers and information systems, and capitalizing on China's recent healthcare reform policies."

Third Quarter 2010 Results

For the third quarter ended September 30, 2010, revenue increased 55.1% to $52.5 million, as compared to $33.9 million in the same quarter of 2009. The increase in revenue was primarily driven by stronger sales from the Company's pharmaceutical distribution segment and incremental sales contributed from acquired or newly built retail pharmacies after third quarter 2009.

In the third quarter of 2010, net sales from the Company's pharmaceutical distribution segment increased 65.5% year-over-year to $38.1 million, or 72.6% of total revenue.  Within the pharmaceutical distribution segment, sales to clinics and healthcare centers increased by $7.4 million, or 513%, compared to third quarter 2009, largely reflecting new business won in mid-2009 during the bidding process under China's Basic Drugs Catalog program. Higher pharmaceutical distribution segment revenue this quarter was also driven by a $5.0 million year-over-year increase in sales to other drug stores, where the Company distributed a larger quantity and range of products.  

Net sales from the Company's retail pharmacy segment grew 34.2% year-over-year to $11.5 million, or 21.9% of total revenue, in the third quarter of 2010. This quarter's increase in retail pharmacy revenue was driven by approximately $2.9 million of incremental sales from 72 new stores added after September 30, 2009.  Retail pharmacy same store sales declined 3.6% year-over-year to $8.3 million from $8.6 million in the third quarter of 2009.  This quarter's same store sales decline reflects lower medi-card sales during a temporary suspension of the government's insurance computer system to upgrade software beginning in July 2010. Many regions within Guangxi completed the software upgrade by the end of the third quarter, and the Company expects the impact of this disruption on medi-card sales to subside after November 2010.

Manufacturing pharmacy net sales were $2.9 million, or 5.5% of total revenue, up 28.4% from $2.3 million, or 6.6% of total revenue, for the three months ended September 30, 2009. This quarter's growth reflects higher sales volumes primarily due to new distributor relationships established by our sales force since third quarter 2009.  

Gross profit grew 44.4% year-over-year to $13.2 million, up from $9.2 million for the same period of 2009. Gross margin declined 1.9 percentage points to 25.2%, as compared to 27.1% in the comparable period last year.  The decrease in gross margin in the third quarter of 2010 mainly reflects a change in segment mix, with the Company's lower margin wholesale distribution business accounting for 72.6% of total revenue as compared to 68.0% of total revenue in third quarter 2009.

Within pharmacy distribution, gross margins fell from 22.0% in third quarter 2009 to 20.9% this quarter, due to a higher mix of sales to retail stores which generate relatively low margins compared to other customers.  Retail pharmacy segment gross margins declined from 31.9% in third quarter 2009 to 30.8% this quarter, reflecting price reduction campaigns held during the new store openings. The manufacturing pharmacy segment gross margins declined from 60.2% during third quarter 2009 to 59.0% during this quarter due to a higher percentage of sales of products with relatively low profit margin.      

Operating expenses increased by 95.2% to $3.8 million, compared to $1.9 million in the same period last year. Administrative expenses increased 134.6% to $2.4 million, or 4.5% of revenue, as compared to $1.0 million, or 3.0% of revenue, in the same period of 2009, primarily due to $0.4 million of incremental fees and salaries in connection with being a public company and an increase of $0.7 million in share based compensation. Selling expenses rose 51.6% to $1.4 million, compared to $0.9 million in the same period of 2009, due to the Company's increased sales and marketing activities.

Operating income increased 30.9% to $9.5 million, or 18.0% of revenue, from $7.2 million, or 21.4% of revenue, in the third quarter of 2009.

GAAP net income increased 35.5% to $6.9 million, or $0.18 per diluted share, as compared to $5.1 million, or $0.16 per diluted share, in the third quarter of 2009. Diluted earnings per share were calculated using weighted average shares of 38,506,274 and 32,000,000 for the quarters ended September 30, 2010 and September 30, 2009, respectively.

Adjusted net income, excluding the $0.2 million non-cash income related to change in the fair value of warrant liabilities, was $6.7 million, or $0.17 per diluted share. There were no comparable adjustments to net income in the third quarter of 2009.

Nine Months 2010 Results

Net revenue was $134.0 million in the first nine months of 2010, up 34.8% from $99.5 million in the first nine months of 2009. In terms of revenue mix, pharmacy distribution remained the Company's largest segment in the first nine months of 2010 at 70.6% of total sales, compared to 71.1% in the same period last year.  Retail pharmacy represented 23.9% of total Company sales in the first nine months of 2010, up from 22.5% in the same period last year.  Pharmacy manufacturing accounted for 5.5% of total sales during the first nine months of 2010, compared to 6.4% in the first same period last year.    

Gross profit was $34.7 million, or 25.9% of revenue, up 30.8% from $26.5 million, or 26.7% of revenue, in the first nine months of 2009. Operating income was $25.9 million, or 19.3% of revenue, up 22.9% from $21.1 million, or 21.2% of revenue, in the first nine months of 2009. Net income increased 18.9% to $18.3 million, or $0.48 per diluted share, compared to $15.4 million, or $0.48 per diluted share, in the first nine months of 2009. Excluding non-cash expense related to change in the fair value of warrant liabilities, adjusted net income was $18.7 million, or $0.49 per diluted share. There were no comparable adjustments to net income in the first nine months of 2009.  

Financial Condition

As of September 30, 2010, China BCT had $13.6 million in cash and cash equivalents, $44.8 million in working capital and a current ratio of 1.9. Long-term bank debt was $2.4 million. Shareholders' equity was $72.8 million on September 30, 2010, up 36.3% from $53.4 million at the end of 2009.

The Company generated $9.9 million in cash from operating activities for the nine months ended September 30, 2010, compared to cash from operating activities of $14.3 million in the same period in 2009. Cash used in investing activities was $8.5 million, compared to cash used in investing activities of $0.3 million for the same period last year. For the nine months ended September 30, 2010, the Company recorded cash payments of approximately $4.5 million for retail store acquisitions

Business Outlook

"Heading into 2011, we intend to continue to selectively build or acquire retail pharmaceutical chain stores in Guangxi and surrounding regions. By building a larger and stronger retail network, we expect to gain economies of scale and build incremental synergies as we vertically integrate retail with pharmaceutical distribution and manufacturing. In the wholesale distribution we plan to add more profitable contracts with hospitals, as exemplified by our exclusive relationship with Liujiang County Chinese Medicine Hospital and recently strengthened relationships with Liuzhou People's and Worker's Hospitals.  In manufacturing, we are very pleased with the progress of our new Compound Diphenoxylate Tablet product, which is on track to hit an annual revenue run rate of over $1.8 million next year. We aim to replicate this kind of success by focusing on those products in our pipeline that address higher-demand markets. As we execute in each of our business segments, our goal is to deliver shareholder value while playing an important role in China's rapidly growing healthcare industry," Mr. Tang concluded.

Conference Call

China BCT will conduct a conference call at 10:00 a.m. Eastern Standard Time (EST) on Wednesday, November 10, 2010, to discuss its third quarter 2010 financial results. To participate in the live teleconference, please dial 866-355-4234 five to ten minutes before the scheduled start time. International callers are invited to call 706-643-7041.  Please refer to conference ID 23590384.  

If you are unable to participate in the call at this time, a replay will be available for 14 days starting on November 10, 2010 at 11:00 a.m. Eastern Standard Time. To access the replay, dial 800-642-1687. International callers please dial 706-645-9291, and enter conference ID 23590384

About China BCT

China BCT is engaged in pharmaceutical distribution, pharmacy retailing, and the manufacture of pharmaceuticals products through its subsidiaries Guangxi Liuzhou Baicaotang Medicine Limited, Guangxi Liuzhou Baicaotang Medicine Retail Limited and Hefeng Pharmaceutical Co. Limited in Guangxi province, China. We operate a large regional retail network in Guangxi province, consisting of 173 directly owned retail stores in Guangxi province. We currently distribute over 8,000 products through our wholesale distribution network. For more information, please visit www.china-bct.com .

Safe Harbor Statement

This press release contains "forward-looking statements" within the meaning of the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that could cause the actual results of the Company to differ materially from the results expressed or implied by such statements, including: changes from anticipated levels of sales; future international, national or regional economic and competitive conditions; changes in relationships with customers; access to capital; difficulties in developing and marketing new products and services; marketing existing products and services; customer acceptance of existing and new products and services; and other factors detailed in the Company's periodic filings with the Securities and Exchange Commission (http://www.sec.gov). Accordingly, although the Company believes that the expectations reflected in such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct. The Company has no obligation to update the forward-looking information contained in this presentation.

Use of Non-GAAP Financial Information  

GAAP results for the three and nine months ended September 30, 2010 and 2009 include change in fair value of warrant liabilities. To supplement the Company's consolidated financial statements presented on a GAAP basis, the Company has provided non-GAAP financial information excluding the impact of these items in this release, which are non-GAAP net income and non-GAAP diluted earnings per share. The Company's management believes that these non-GAAP measures provide investors with a better understanding of how the results related to the Company's historical performance. The additional adjusted information is not meant to be considered in isolation or as a substitute for GAAP financials. The adjusted financial information that the Company provides also may differ from the adjusted information provided by other companies. Management believes that these adjusted financial measures are useful to investors because they exclude non-cash expenses that management excludes when it internally evaluates the performance of the Company's business and makes operating decisions, including internal budgeting, and performance measurement, as these measures provide a consistent method of comparison to historical periods. As a result, the provision of these adjusted measures allows investors to evaluate the Company's performance using the same methodology and information as that used by the Company's management. Adjusted measures are subject to inherent limitations because they do not include all of the expenses included under GAAP and because they involve the exercise of judgment of which charges are excluded from the adjusted financial measure. However, the Company's management compensates for these limitations by providing the relevant disclosure of the items excluded. A reconciliation of each adjusted measures to the nearest GAAP measure appears in the table below.

-Financial Tables Follow-

SOURCE China BCT Pharmacy Group, Inc.