Tongjitang Pharmaceuticals (TCM)

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Tongjitang Chinese Medicines Company Announces Third Quarter 2007 Financial Results
Tuesday November 6, 4:01 pm ET
Revenue Increases 29% to RMB126.9 Million
Net Income per ADS of $0.20 or RMB1.48
Reiterates Full Year 2007 Expectations

SHENZHEN, China--(BUSINESS WIRE)--Tongjitang Chinese Medicines Company (NYSE: TCM - News), a leading specialty pharmaceutical company focusing on the development, manufacturing, marketing and selling of modernized traditional Chinese medicine in China, today announced its unaudited financial results for the third quarter of 2007, ended September 30, 2007.

Highlights for the Quarter Ended September 30, 2007

* Net revenues increased 29% year over year to RMB126.9 million ($16.9 million)1, driven by sales of Xianling Gubao (“XLGB”), which grew 2% year over year to RMB82.0 million ($10.9 million) and other core products excluding XLGB, which increased 723% year over year to RMB25.5 million ($3.4 million).
* Gross margin for the quarter was 63.9%, up significantly from 61.3% year over year and in-line with management expectations.
* Net income increased 465% year over year to RMB50.1 million ($6.7 million).
* Net income per ADS was $0.20, and net income per share2 was RMB0.37 ($0.05) per share. This per share performance reflects the 48% increase year over year in the weighted average number of shares used in the calculations, resulting from the Company’s initial public offering (“IPO”) in March 2007.

Xiaochun Wang, Tongjitang’s Chief Executive Officer and Chairman, stated, “We are very pleased with our strong financial performance in what is seasonally our weakest quarter. Our leading product, XLGB, continues to be the leading TCM osteoperosis product on the market in China and we successfully drove new revenue in our other core product segment by effectively marketing and leveraging our distribution network in the OTC and prescription points of sale. Going forward, we expect to build on the revenue diversification that we demonstrated this quarter. Product pricing remained stable, as we expected, and we are entering the last part of 2007 with considerable sales momentum.”

Net revenues for the third quarter were RMB126.9 million ($16.9 million), up 29% from RMB98.7 million in the third quarter of 2006. Revenue performance reflects strong growth in the Company’s other core products such as Moisturizing and Anti-itching Capsules, which drove other revenue to increase 723% to RMB25.5 million ($3.4 million), as well as continued growth in the Company’s flagship product, XLGB, which increased 2% year over year to RMB82.0 million ($10.9 million).

Gross profit increased 34% to RMB81.1 million ($10.8 million), representing a gross margin of 63.9%, in the third quarter of 2007 compared to RMB60.5 million and 61.3% in the third quarter of 2006, respectively, and compared to RMB93.0 million and 65.9% in the second quarter of 2007, respectively. Tongjitang’s cost of revenues and gross margin were in line with management’s expectations and reflect product mix in the third quarter as well as the price of barrenwort, which remained the same in the third quarter of 2007 as in the second quarter of 2007.

Operating income increased 147% to RMB29.4 million ($3.9 million) from RMB11.9 million in the third quarter of 2006, reflecting a 6% increase in operating expenses to RMB52.0 million ($6.9 million) in the third quarter of 2007 from RMB49.1 million in the third quarter of 2006. Operating expenses include approximately RMB4.3 million ($0.57 million) for costs that management consider unique to the third quarter of 2007, including a public donation to a healthcare fund for publicity efforts, initial promotional expenses to drive sales of Moisturizing & Anti-Itching Capsules, PRC legal fees associated with a court case recognizing Tongjitang as a famous brand in China, and expenses related to barrenwort plantation and clinical trial research.

Net income increased 465% to RMB50.1 million ($6.7 million), or RMB0.37 ($0.05) per share, in the third quarter of 2007 from RMB8.9 million, or RMB0.10 per share, respectively, in the third quarter of 2006. Net income results include interest income and a disposal gain on listed shares associated with the Company’s cash management efforts, as well as other income of RMB4.2 million ($0.56 million) arising from an extinguishment of debt with a creditor. Net income per ADS was $0.20. The Company’s year over year net income per share and net income per ADS comparison directly reflects the 48% increase in weighted average number of shares related to the Company’s IPO, on a year over year basis.

Financial Results for the Nine Months Ended September 30, 2007

For the nine months ended September 30, 2007, revenues increased 25% to RMB416.3 million ($55.6 million) from RMB333.3 million in the first nine months of 2006. During this same time period, gross profit improved 23% to RMB272.3 million ($36.3 million) from RMB222.3 million. Income from operations increased 16% to RMB120.5 million ($16.1 million) from RMB104.3 million in the first nine months of 2006, and net income improved 52% to RMB153.1 million ($20.4 million), or RMB1.23 ($0.16) per share, from RMB100.8 million, or RMB1.12 per share, in the first nine months of 2006. Net income per ADS was $0.66 in the first nine months of 2007. Please note that on a year over year basis, weighted average number of shares outstanding for the first nine months of 2007 increased 38% to 124.0 million.

Balance Sheet

As of September 30, 2007, the Company had cash and cash equivalents of RMB719.5 million ($96.0 million), as well an RMB41.4 million ($5.5 million) deposit for the acquisition of trading securities. This compares to RMB772.3 million as of June 30, 2007. Tongjitang had working capital of approximately RMB1.0 billion ($133.8 million) as of September 30, 2007.

Xiaochun Wang continued, “Our formidable cash position bolsters our ability to execute potential acquisitions. In fact, we are currently in the midst of due diligence on several acquisition targets, which we are evaluating within the boundaries of our strict criteria. We’ll consider profitable opportunities, with traditional Chinese medicine as well as with Western medicine, or we’ll pursue promising product lines with significant revenue and profit growth potential.”

Business Highlights

* On September 7, 2007, the Company announced that Guizhou Tongjitang Pharmaceutical Company Limited (“Guizhou TJT”), a wholly-owned subsidiary of Tongjitang Chinese Medicines, entered into a Share Purchase Agreement with Guizhou Long-Life Pharmaceutical Company Limited (“Guizhou LLF”) at the end of August 2007 to acquire 100% of the registered capital of Guizhou LLF and relevant intellectual properties for RMB42.2 million in cash. Guizhou LLF produces and markets more than 10 over-the-counter and prescription traditional Chinese medicines as well as nutritional products in China.

* Tongjitang received preliminary clinical trial results for XLGB. Tongjitang partnered with Synarc, a premier, U.S.-based pharmaceutical organization exclusively dedicated to global clinical trials, to execute the clinical trial. The preliminary results are interesting and encouraging, but not yet definitive without the final report. A comprehensive report is expected to be completed by the end of 2007 or in the first quarter of 2008.
* In order to retain and motivate Tongjitang’s personnel, both the board of directors and the compensation committee have approved grants of a limited number of restricted shares and share options under its 2006 Share Incentive Plan (the “2006 Plan”) to certain management members and employees. The Plan, which had previously been approved by the Company’s board of directors, was amended and approved by shareholders in the Company’s annual general meeting on October 24, 2007. The amendments comprised the following: (1) while the maximum number of shares issued pursuant to the Plan is 10% of the total and outstanding shares at such time, no more than ten million shares may be issued pursuant to Incentive Share Options (as defined in the Plan); and (2) the Plan shall be effective when initially approved by the board of directors, and it is no longer the case that shareholders’ approval is required.

Financial Outlook

Today, the Company is reiterating its previously announced financial guidance for the full year 2007:

* revenues in the range of RMB590 million to RMB620 million, driven by sales of XLGB and other principal products in the fourth quarter of 2007; and
* gross margins sustainable at levels in the mid-60% range.

Additionally, over the long term, the Company expects to capitalize on incremental revenue and income opportunities not yet factored into the above guidance, including:

* a potential cumulative tax refund of up to RMB16.6 million for Guizhou TJT, resulting from Guizhou TJT enlarging its registered capital in the fourth quarter of 2007 through reinvestment of undistributed retained earnings and according to PRC tax regulation, to be recognized on a quarterly basis through the fourth quarter of 2007 and the full year 2008;
* acquisitions which enhance the Company’s product portfolio, brand leadership, revenue diversification and profitability;
* expansion of the sales and marketing network to distribute core products into new pharmacies and hospitals; and
* new product roll outs from the Company’s product pipeline, which currently includes over 11 potential new products.

These forecasts reflect the Company’s current and preliminary view, which is subject to change.

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