Financials

Unaudited Results for the First Quarter and Three Months Ended 30 September 2009

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Profit and Loss

Statement of Comprehensive Income

Review of Performance

Business Review

Highlights of the Results of the Group

Revenue, Cost of Goods Sold and Gross Profits by Categories

Percentage of Revenue by Product Segment

Revenue

Total revenue for 1QFY10 grew significantly by 27% from HK$99 million in 1QFY09 to HK$126 million. Sales of Exclusive products increased by 38% while sales of C&O Branded products increased by 31% year-on-year ("y-o-y") as well. The first quarter revenue was recovered from tightened regulations for selling of prescriptive drugs at pharmacies during the Olympic and the Paralympic Games period last year. At the same time, intensive marketing efforts in the past months started to show results and the Group's newly acquired subsidiary, Nanjing Xinaokang Pharmaceutical Limited ("NXPL") also contributed to revenue growth. Overall revenue decreased by 23% in 1QFY10 as compared to 4QFY09. It was mainly attributable to the fact that seasonal factor came into play as antibiotics are usually prescribed by medical practitioners during the winter and spring time when flu and colds are more prevalent.

Profitability

Gross profit for 1QFY10 boosted by 47% from HK$53 million in 1QFY09 to HK$78 million. Gross profit margin also increased from 54% in 1QFY09 to 62% in 1QFY10. The satisfactory growth was again attributable to the Group's revised strategy to focus on higher-margin Exclusive and C&O Branded products. In addition, drop in import price of Exclusive products during the quarter further expanded gross profit and gross profit margin.

Distribution expenses, as percentage of revenue, remained constant at 27% in 1QFY10 (1QFY09: 27%). Increase in distribution expenses was in line with sales increase.

Administrative expenses for 1QFY10 grew by 14% y-o-y due to increase in research and development costs, depreciation of property, plant and equipment, and amortisation of intangible assets.

Interest expenses increased by 27 times y-o-y due to additional finance costs incurred for discounting bills receivable during 1QFY10. Interest income for 1QFY10 climbed by 66% y-o-y due to increment in fixed deposits held at banks.

Depreciation of property, plant and equipment for the quarter increased by 55% y-o-y because of acquisition of additional fixed assets. Amortisation of intangible assets for the quarter increased by 58% as compared to 1QFY09 due to the additional amortisation arising from the acquisition of intangible assets from the newly acquired subsidiary, NXPL in 2QFY09. Research and development costs for the period surged by 36% because of the acceleration of project development process.

Financial position and cash flows

Non-cash current assets

Trade and bills receivables were decreased by HK$34 million or 17% from HK$200 million at 30 June 2009 to HK$166 million at 30 September 2009. It was in line with the decrease in revenue when compared to 4QFY09.

Other receivables and prepayments increased by HK$3 million or 35% from HK$9 million at 30 June 2009 to HK$12 million at 30 September 2009. It was mainly due to the increment in prepayment for sales activities to be organised during next quarter.

Liabilities

Trade and bills payables increased by HK$7 million from HK$23 million as at 30 June 2009 to HK$30 million as at 30 September 2009. The increase was mainly due to more Exclusive products purchased in second half quarter in 1QFY10 when compared to 4QFY09.

When compared to 30 June 2009, other payables and accrued expenses decreased by HK$8 million or 18% from HK$45 million to HK$37 million at 30 September 2009. It was mainly due to the settlement of expenses accrued and the decline in receipt in advance from customers.

Total cash (including fixed deposits held at banks and cash and cash equivalents) increased from HK$193 million as at 30 June 2009 to HK$241 million as at 30 September 2009. The increase in cash and cash equivalents was as a result of a cash inflow of HK$64 million from operating activities, a cash inflow of HK$29 million from investing activities, and a cash outflow of HK$11 million from financing activities.

Commentary

OUTLOOK

The recently announced "Essential Drug List" ("EDL") issued by the PRC government as part of the healthcare reform continued to draw market attention. Despite generic amoxicillin and 7 C&O Branded products were included in the EDL, Amoxycillin, which is under the category of "single-pricing", is not subject to any price adjustment. On 28 September 2009, the National Development and Reform Commission announced reduction to price ceilings to nearly half of the 307 EDL drugs by 12% on average. However, there is no significant effect on the actual market price of most EDL drugs as the adjusted price ceilings are generally higher than the prevailing market price. Again, we will continue to keep a close eye on further implementation policies regarding the healthcare reform and respond promptly.

Our investment in research and development ("R&D") has paid off. Thanks to the persistent effort of our R&D team, we are going to launch two new C&O Branded products in the coming year. Furthermore, PNA, a category one new drug for treatment of hepatitis B in our pipeline, has received official approval to conduct clinical trial. Stage I of clinical trial is planned to start in 2010. We also expect higher contribution from our contract research organisation ("CRO") service with our expanded R&D capacity in both Nanjing and Shanghai. The opening of our CRO Joint Venture will as well bring new prospects to our growth.

The encouraging results in these two quarters marked the results of our revised business strategy, restructuring and enhanced marketing effort in the past few quarters. The first quarter results have made a good beginning, we have a positive outlook on our performance this financial year.

Balance Sheet