Dragon Pharmaceutical Inc.
OTC Bulletin Board : DRUG

Dragon Pharmaceutical Inc.

April 03, 2006 08:00 ET

Dragon Announces 2005 Year End Results

VANCOUVER, BRITISH COLUMBIA--(CCNMatthews - April 3, 2006) - Dragon Pharmaceutical Inc. (TSX:DDD)(OTCBB:DRUG) today announced results for the year ended December 31, 2005.

Highlights for 2005

- Sales increased by 94% to $56.24M in 2005 with strong growth in the Chemical division. Sales of the Chemical division increased by 543% to $27.33M in 2005 from $4.25M in 2004. Sales contribution of the Chemical division surpassed the Pharma Division and increased to 49% of total revenues in 2005 from 15% of total revenues in 2004.

- Contribution of sales from international markets, outside of China, increased to 19% of total sales in 2005 from 5% of total sales in 2004 with remarkable increase in export of the Chemical division products.

- The Company completed the technology improvement and process optimization at its facility in Datong during 2005. This increased the production capacity of its 7-ACA facility from 400 tons to 600 tons and its Clavulanic Acid facility from 30 tons to 50 tons.

- The construction of the new EPO and Freeze-dry Injectable production facility in Datong, China was completed and received the GMP certificate from Chinese State Food and Drug Administration ("SFDA") in December, 2005. Since then, production has started in the new EPO facility with capacity of bulk EPO doubled to 120 grams and the capacity for sterile vialing tripled to 5 million vials.

Financial Summary

Dragon reported sales of $56.24 million for the year ended 2005, an increase of 94% compared to the year ended 2004. The increase in sales was mainly due to the remarkable growth of sales from the Chemical Division, which increased by 543% to $27.33M in 2005 from $4.25M in 2004.

Gross profit and gross margin were $13.95 million and 24.8% for 2005 compared to $12.88 million and 44.4% for the same period in 2004.

Net profit was $0.18 million for 2005, or $0.00 per share compared to $ 6.36 million, or $0.14 per share for the same period in 2004.

Gross margin and net income was lower than 2004 because of the change in product mix especially with the significant increase in sales of the Chemical Division, which was at the ramp-up stage of production during 2005 and therefore incurred higher production and operation cost, especially depreciation expenses. In addition, the operating expenses were higher in 2005 as compared to 2004 because of the inclusion of the Biotech Division and the full operations of both facilities of the Chemical Division as compared to just one facility of the Chemical Division. Also, as a result of the reverse take-over of Dragon Pharmaceutical on January 12, 2005, the Company incurred additional operating expenses as a public company in 2005 compared to 2004 as a private company.

Market Segment

The contribution of sales from the international markets, outside of China, has been increasing and is expected to continue as the Company keeps on increasing commercialization of its products outside of China. Compared to 2004, of which 95% of total sales were generated from the Chinese market and the remaining 5% from the international markets (outside of China), only 81% of the sales for the same period in 2005 were generated from the Chinese market and 19% of the total sales were generated from the international markets.

Product Segment

During 2005, sales from Chemical Division, Pharma Division, and Biotech Division contributed $27.33 million or 48.6% of total sales, $25.08 million or 44.6% of total sales and $3.83 million or 6.8% of total sales, respectively, compared to $4.25 million or 14.6% of total sales for Chemical Division, and $24.77 million or 85.4% of total sales for Pharma Division, for 2004. The significant increase in the sales from Chemical Division and including sales from Biotech Division products changed the product segment of the Company.

Management acknowledges a significant increase of sales may not achieve the same effect on net earnings and have identified the following reasons:

The ramping up of production and technology optimization of Chemical Division resulted in a low gross margin of 3.83%;

Based on the technology transfer agreements, the designed capacity for 7ACA was 400 tons and for Clavulanic Acid 30 tons. At the beginning of 2005, the facilities of Chemical Division were still in its initial stage that needed to be rectified; so the utility rates of the facilities were fluctuating during the whole year. For the 7ACA, the lowest utility rate was 15%, and had been improved to 95% in December.

Through collaboration with research institutes and international experts, management has made efforts on increasing fermentation yield and abstract purification for a higher capacity. This has increased the expenses of production and aroused capital investment on renovation of the facilities. Management believes that the efforts will be materialized this year since the capacity for 7ACA has been increased for 50% to 600 tons per year and for Clavulanic Acid has been increased for 67% to 50 tons.

Price control affects the margin for Pharma Division

The gross margin of Pharma Division was 40% for 2005 compared to 51% for 2004. This decrease was mainly due to price controls by the government. The company changed its sales model by lower selling prices and selling expenses, which affected gross margin but did not substantially change the profitability of this Division's business.

Operating expenses increase by $6.74 million

As compared to Oriental Wave the private company with only Pharma and Chemical Division in 2004, the increase in Operating Expenses for 2005 reflects the increased overhead of all three business divisions as well as the operational cost of a public company, including professional fees such as legal and accounting and fees related as a public company.

The Company was efficient in marketing and sales for the Chemical products. 100% of the 7-ACA and 90% of Clavulanic Acid produced during 2005 were sold. Management believes the Chemical Division will still be the strong growth driver for sales with significantly improved margins based on the increased capacity.

"We went though many challenges for the production configuration of Chemical Division last year, " said Mr. Yanlin Han, Chairman and CEO of the company, "The fermentation technology we used has to be aligned with the site conditions and raw material specifications to achieve better yields. We suffered high costs and low utility rates while optimizing the process, and we are very confident that these efforts will be compensated by more efficient production this year. Meanwhile, we also passed through the difficult time for customer acceptance. The qualities of our products have been proven by many customers and we will be treated as a reliable supplier rather than a starter. I believe the marketing efficiency will be improved further in 2006.

"I saw 2005 as the year of cultivation," summarized by Mr. Han, "2006 should be the year of harvest."

This press release contains forward looking statements, including, but not limited to, that the Company's operations will be more efficient and will achieve higher yields. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward looking statement. Factors that might cause such a difference include, but are not limited to, the following: (1) risks and uncertainties relating to the political and regulatory environment in China; (2) the undeveloped nature of the market for pharmaceutical and biotechnology products in China; and (3) continued availability of working capital on terms and conditions favourable to the Company. Further risks are set forth in the Company's filings with the SEC. Readers should not place undue reliance on forward looking statements, which only reflect the view of management as of the date hereof. The Company does not undertake the obligation to publicly revise these forward looking statements to reflect subsequent events or circumstances.

Readers should carefully review the risk factors described in other documents the Company files from time to time with the Company's regulatory agencies.

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