China Yongxin Pharmaceuticals Reports Third Quarter 2010 Results

CHANGCHUN, China, Nov. 24, 2010 /PRNewswire-Asia/ -- China Yongxin Pharmaceuticals Inc. (OTC Bulletin Board: CYXN), a wholesale distributor and retailer of pharmaceuticals and health-related products in Jilin province in the northeastern region of China, today announced its financial results for the third quarter ending September 30, 2010.

Revenues for the third quarter of 2010 were $10.51 million overall, a 2.75% decrease from $10.81 million for the same quarter in the prior year.

Revenues from the retail segment were $3.77 million, an increase of 0.24% over $3.58 million in the same quarter last year.  The Company realized an additional $425,770 in revenue from 21 new retail drugstores that were opened from July 1, 2009 to September 30, 2010.  However, revenues for four existing stores were disrupted by city road construction, which reduced customer traffic to these stores, resulting in an estimated $329,473 in revenue loss.  Management anticipates that customer traffic and revenue for these stores will normalize once road construction work is completed.  In addition, $105,225 in revenue was deferred from the current quarter and recognized as "accrued revenue" due to a recent change in policy by the Jilin Social Security Administration and Changchun Social Security Administration affecting reimbursement of all drug retailers.  Under the new policy, only 90% of monthly reimbursement revenue for drugs covered by the national health program is paid immediately, with 10% deferred until compliance with health plan rules is confirmed in a periodic review.  Management expects to be in full compliance and that the deferred revenue will be collected.  Furthermore this adjustment is expected to be a one-time event, and revenue in each future quarter from products covered under the national health plan will be subject to this 10% deferral rule.  

Revenues from the wholesale segment were $6.75 million, a slight decrease of 4.34% from $7.06 million in the same quarter of the prior year. This decrease in net revenue was due to a planned reduction in sales to certain distributors with low gross profit margins, as the Company made a shift in 2010 toward higher-margin wholesale customers such as medical institutions and other retailers.   However, even though gross revenue decreased, overall wholesale margins increased significantly, as reflected in gross profit.  In the three month period ended September 30, 2010, the Company added 238 new medical institutions and 978 new retailers as wholesale customers.

Cost of goods sold for the third quarter of 2010 was $6.83 million, a decrease of 10.9%, compared to $7.67 million for the third quarter of 2009. Wholesale cost of goods sold decreased approximately 10.3%, from $5.3 million in the three months ended September 30, 2009 to $4.7 million for the three months ended September 30, 2010. The decrease in wholesale cost of goods sold was due to a decrease in wholesale revenue, however, the decrease was also attributable to efforts to control and reduce procurement costs by selecting suppliers with the most competitive prices for products available from multiple suppliers. Retail cost of goods sold decreased by approximately 12.3%, from $2.4 million in the three months ended September 30, 2009 to $2.1 million in the three months ended September 30, 2010. The decrease is mainly attributable to the Company's efforts to control and reduce procurement costs for its retail operations.

Gross profit increased from $3.15 million for the three month period ended September 30, 2009 to $3.69 million for the three month period ended September 30, 2010, representing a 17.18% increase. Of this increase, approximately 60.1% in additional gross profit was due to increased sales to medical institutional customers. Approximately 18.5% of the increase in gross profit resulted from the addition of 21 new retail drugstores. An additional 12% of the increased gross profit resulted from the increased drug sales as a direct result of an expansion of coverage under the Essential Drug List and provincial insurance catalogue under the national health program.  Approximately 6% of the additional gross profit came from increased sales through existing retail drug stores. According to management, the overall gross profit increase also reflects the Company's continuous efforts to add higher-margin products to its wholesale and retail sales mix.

GAAP net income decreased 64.29% from a net income of $472,116 in the three month period ended September 30, 2009 to a loss of ($168,603) in the three month period ended September 30, 2010. The decrease is attributed to the fact that in the third quarter of 2009, the Company earned "other income" of approximately $1.09 million from promotional activities of suppliers, which was not earned in the third quarter of 2010. Promotional other income declined to $0.49 million for the third quarter of 2010, due to fewer promotional activities for drug makers and suppliers. Additionally, during the quarter the Company recorded charges and expenses of $444,289 related to the private placement of notes and warrants and the related beneficial conversion fees and warrant fee amortization.  Of this $444,289, $412,163 consisted of one-time non-cash charges relating to financing expenses, which if excluded from the reported numbers, would have resulted in a positive GAAP net income result.

Selling expenses increased approximately 25.22% from $0.91 million for the third quarter in 2009 to $1.14 million the same period in 2010. The increase in selling expenses was mainly attributable to an increase in headcount and salary expense, which added $0.21 million to selling expenses.  Headcount increased as the Company continued to expand its retail segment, and hired pharmaceutical representatives to expand its wholesale relationships with medical institutions.  

General and administrative expenses for the third quarter of 2010 decreased to $2.11 million, compared to $2.35 million in the same period of 2009.This decrease was largely due to the fact that there were no bad debt expenses in the third quarter ending September 30, 2010, compared to $1.06 million of such expense in the three month period ended September 30, 2009. The $1.06 million in bad debt expenses recorded in the third quarter of 2009 was due to the fact that the Company reserved that amount for accounts receivable aged over 180 days.  However, these accounts receivable were fully collected in the fourth quarter of 2009, which eliminated this reserve.  The Company then reassessed the collectability of its accounts receivable after reviewing the historical and current record and determined that there was no bad debts risk for accounts receivable aged between three and six months, and no reserve was necessary for the quarter ending September 30, 2010.

As of September 30, 2010, the Company had approximately $1.63 million in cash and cash equivalents, other current assets of $35.2 million and current liabilities of $11.6 million.

China Yongxin is now a retailer or distributor of 290 out of 307 drugs on the government's Essential Drug List that are widely used and deemed vital for health, and are subsidized by the government's national health plan.  In 2009 the national health plan programs covered approximately 317 million urban residents and over 815 million rural residents.  China Yongxin also sells and distributes over 95% of the drugs included in the Jilin Province insurance catalogue listing drugs eligible for reimbursement under the national health plan programs (i.e. Insurance Catalogue), including both traditional Chinese and Western medicines.

In 2010, the government adopted the "new cooperative medical system" (NCMS) which extended medical benefits to rural residents in China, where over 40% of the nation's population resides. As a result, the Company believes that its operations and sales are poised to benefit in 2010 due to anticipated increases in sales to drugstores and hospitals in rural areas.  Prior to March 2010, China Yongxin distributed products (especially essential drugs) to other distributors who then handled distribution to hospitals and clinics. Since then, increasingly the Company has been entering into distribution relationships directly with hospitals and clinics, and has increased the number of its wholesale customers in the rural areas. Currently the Company's sales and distribution network covers all areas of Jilin province.

Mr. Yongxin Liu, Chairman and Chief Executive Officer of China Yongxin commented, "The third quarter results truly indicate that we have been successful in positioning ourselves to profit from health care reform in China.  Health coverage in China has been expanded dramatically, and this opens up tremendous opportunities for increased sales of our products in both retail and wholesale.  Our challenge is to continue an aggressive build out of new retail store locations, and in the wholesale segment, to continue to grow our market share in sales to higher margin customers such as medical institutions."

During 2010, the government provided additional guidance and clarification on medical reform which has improved confidence among manufacturers, suppliers, distributors, medical service providers and retailers, and this has encouraged business decisions and commitments that previously may have been deferred due to uncertainty surrounding application and interpretation of the new laws. In August 2010, China Yongxin entered into sales agreements with over 500 medical institutions in 17 out of 41 counties in Jilin province. Management believes that this heightened level of contract formation would not have been possible prior to the government's guidance and clarification on medical reform. As a result of these new sales agreements, management expects to solidify business relationships with manufacturers and suppliers, providing for greater stability in wholesale revenue.

About China Yongxin Pharmaceuticals Inc.

China Yongxin Pharmaceuticals Inc. (OTCBB: CYXN), a Delaware corporation, is a wholesale distributor and retailer of prescription and non-prescription pharmaceuticals, Chinese traditional medicines, natural health-related products, cosmetics, and medical equipment in Northeastern China.  Founded in 1993, its retail operations began in 2004, and since then has become one of the fastest growing drugstore chains in China's Jilin Province. The Company distributes to wholesale customers including to other retailers, distributors and medical institutions throughout Northeastern China, and owns and operates 110 retail drugstore locations in Jilin province. For more information about China Yongxin Pharmaceuticals, please visit http://www.yongxinchina.com.

Forward Looking Statements

This news release contains certain "forward-looking statements." Forward-looking statements are based on current expectations and assumptions and are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, and many of which are beyond the Company 's control. The forward-looking statements are also identified through the use of words "believe," enable," "may," "will," "could," "intends," "estimate," "anticipate," "plan," "predict" "probable," "potential," "possible," "should," "continue," "project", "expect" and other words of similar meaning. Actual results could differ materially from these forward-looking statements as a result of a number of risk factors detailed in the Company's periodic reports filed with the SEC. Given these risks and uncertainties, investors are cautioned not to place undue reliance on such forward-looking statements and no assurances can be given that such statements will be achieved. China Yongxin Pharmaceuticals Inc. does not assume any duty to publicly update or revise the material contained herein.

SOURCE China Yongxin Pharmaceuticals Inc.