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: IR@chinameditech.com
SOURCE China Medical Technologies, Inc.