China Medical Technologies Responds to the Allegations Raised by Glaucus Research Group

BEIJING, Dec. 6, 2011 /PRNewswire-Asia-FirstCall/ -- China Medical Technologies, Inc. (the "Company") (Nasdaq: CMED), a leading China-based advanced in-vitro diagnostic ("IVD") company, responded today to the allegations raised in a research report by Glaucus Research Group ("Glaucus") dated December 6, 2011. The Company maintains that the allegations set forth in the Glaucus Research report (the "Report") concern matters which have long been disclosed in the Company's annual reports and press releases, misrepresent the information they present and attribute motives to management that are based on innuendo and fail to take into account business and commercial considerations relevant to the matters discussed in the Report. The Company denies the allegations entirely.

Allegation 1

CMED paid $28 million for an acquisition from a seller who we believe was secretly related to CMED's chairman. Evidence also shows that CMED radically overpaid for the acquisition: a few months before selling the company to CMED, a company controlled by parties related to CMED insiders bought out minority shareholders at prices suggesting that the business was worth $5-$8 million, not the $28 million paid by CMED for the acquisition. In our opinion, CMED's chairman orchestrated an acquisition to embezzle roughly $20-$23 million from the public company. (Source: Glaucus Research Group)

The Company confirmed with Mr. Xiaodong Wu, the Chairman and Chief Executive Officer of the Company, that he never employed a general manager assistant or executive assistant for his private company, Beijing Chengxuan and Mr. Shujun Chen is not a related party to him.  The employment history of Mr. Chen with Beijing Chengxuan in the registration form is wrong.  Glaucus alleged a secret related party transaction based on wrong information.  The conclusion of overpayment for the acquisition based on partial public information without commercial consideration indicates lack of business knowledge of Glaucus’s team.  During 2007, many PRC medical diagnostic companies were valued with more than 5 times revenue multiples and over 20 times earnings multiples.  There were a number of cases of venture capital investments in PRC diagnostic companies where US$5 million can take only a minority equity interest.  The disclosed payments of Beijing Yimin were only part of the price.  Glaucus provided financial information of BBE on page 8 of the Report.  For the financial year ended December 31, 2006 before the acquisition by the Company, the equity was about US$7 million.  BBE is a long established company and was reputable in the PRC IVD industry before the Company’s acquisition. It does not make sense for the previous shareholders of BBE to sell the whole company only at the book value to Beijing Yimin.  The Company acquired BBE from Finnea which is a real company and was incorporated in the British Virgin Islands.  The owner of Finnea was not Mr. Wu or his related party or Mr. Chen based on the company records of Finnea which were verified by the Company’s lawyers conducting the legal due diligence for the Company’s acquisition.  Besides, the decline of the financial performance of BBE after the acquisition during 2007 was because the Company’s subsidiary, Beijing Yuande, took over the profitable ECLIA business of BBE which conducted competing business with Beijing Yuande before the acquisition.  The acquisition eliminated a growing competitor of the Company.  The Company’s ECLIA business grew strongly in 2007 and 2008. The Company arranged BBE to focus on the research and development of a fully-automated ECLIA analyzer after the acquisition.    

Allegation 2

CMED sold its primary business segment, responsible for the majority of the firm’s sales since inception, to the chairman at less than 2x trailing EBITDA.We believe that this suspicious looking transaction was designed to cover up that the Chinese FDA was about to (or already had) suspended CMED’s permit to sell HIFU products, thus rendering CMED’s core business segment worthless almost overnight. (Source: Glaucus Research Group)

Again, the allegation by Glaucus indicates its team’s lack of commercial knowledge. Mr. Wu would not pay US$53.5 million to buy the business from the Company if he knew that the HIFU business would be suspended by SFDA around mid-2009 before the purchase in December 2008. It was fine to let the suspension happen as the decision of SFDA, a government agency, was not within the control of the Company or its management.  Glaucus’s reasoning is also conflicting.  If the business is known to be worthless, nobody should buy the business even at 2X EBITDA of historical financial results.  The Company provided a detailed discussion for the sale of the HIFU business to Mr. Wu in the Company’s press release in December 2008 while Glaucus only extracted partial information favorable to Glaucus’s analysis and allegation.  Besides, the sale of the HIFU business to Mr. Wu was part of the internal investigation conducted in 2009.  The investigation did not find anything wrong for the sale of the business.  The investigators reviewed the independent business evaluation of the HIFU prepared by a Big Four firm.

Allegation 3

Despite a purportedly profitable business, CMED is a serial capital raiser and has not generated free cash flow for most of its history. The company has spent twice as much on “investing activities” as it has purportedly generated from operations, so much like a typical Chinese fraud, it relies on debt or equity financing as its primary source of cash generation. (Source: Glaucus Research Group)

The Company spent substantial cash to transform from a higher risk therapeutic medical equipment business (HIFU) to an IVD business offering traditional immunoassay diagnostic products (ECLIA) and advanced molecular diagnostic business (FISH and SPR) to a much broader customer base and generating recurring revenues.  The molecular diagnostic business continued to generate high double-digit growth since the acquisition of FISH in 2007.

Allegation 4

CMED’s balance sheet presents numerous highly suspicious red flags. CMED’s receivables account for a much higher percentage of net revenues than its Chinese competitors and its Day Sales Outstanding are on average 141.9 days longer than a leading Chinese competitor, despite the fact that both companies sell similar products to similarly situated customers. (Source: Glaucus Research Group)

Glaucus claimed to read our press releases and quoted information in the Report.  However, Glaucus intentional or unintentional overlooked our explanations of our long DSO contained in our several earnings press releases and our annual reports.  The Company conducted its molecular diagnostic business through its direct sales team rather than distributors.  The payment time for hospitals is much longer than distributors.  One of the reasons to use distributors is to get working capital provided by the distributors while distributors take the place to collect long time payment from hospitals for diagnostic consumable products.  One of the disadvantages to use distributors is to share profit margin with distributors.  This explained partially the “Uncreditable Margins” alleged by Glaucus.

Allegation 5

In 2009, an anonymous letter to the audit committee accused senior management of committing fraud with respect to the company’s financials and its acquisitions. After an investigation by the audit committee, CMED’s auditor, KPMG, resigned. (Source: Glaucus Research Group)

Again, Glaucus demonstrated again the lack of business knowledge of its team.  If KPMG resigned because of the findings of the internal investigation, PwC, a similar reputable firm would not be willing to take up the audit.  PwC would not benefit to take up a case if the findings indicated problems of the Company or its management.  The Company explained the reasons for the change in auditors in its press release in August 2009.  In addition, KPMG continued to provide its consent to include its audit report in the annual reports for the subsequent two fiscal years.

The Company is aware of usual doubts of investors for a related party transaction of a company even though it is a good transaction. For example, Glaucus questioned the related party transaction of the Company to purchase ECLIA technology in 2004. In fact, it is a very successful acquisition of the Company which contributed substantial revenues and earnings to the Company in the past five years. The Company will not engage any related party transaction in the future.

Glaucus did not contact the Company to verify the facts, analyses and allegations in the Report.

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. 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.

Contact:

Winnie Yam
Tel: 852-2511-9808
Email: [email protected]

SOURCE China Medical Technologies, Inc.