Dragon Pharmaceutical Inc.
OTC Bulletin Board : DRUG
TSX : DDD

Dragon Pharmaceutical Inc.

August 14, 2006 19:00 ET

Dragon Announces 2006 Second Quarter Results

VANCOUVER, BRITISH COLUMBIA--(CCNMatthews - Aug. 14, 2006) - Dragon Pharmaceutical Inc. (TSX:DDD)(OTCBB:DRUG)(BBSE:DRP) today announced financial results for the three months ended June 30, 2006. As previously disclosed, Dragon sold a part of its formulation business effective July 1, 2006. As a result, the following information only reflects the results of the continuing operations which exclude the formulation business sold.

Highlights for the Second Quarter, 2006

- Sales increased by 111% to $13.89M from $6.57M from the same period in 2005, mainly due to the increase in Chemical Division sales.

- Gross profit was $2.39M with a gross margin of 17.2%.

- International market sales increased by 498% to $5.09M as compared to the same period in 2005.

- Dragon agreed to sell part of its formulation business of the Pharma Division for $14.79M, $12.63M of which are for business and assets and $2.17M are for the net working capital related to the business.

Financial Summary

Dragon reported sales of $13.89M for the second quarter ended June 30, 2006, representing an increase of 111% compared to the same period of 2005. The increase in sales was mainly due to the growth of sales from the Chemical Division, which increased by 144% to $11.92M from $4.88M for the same period in 2005.

Gross profit and gross margin were $2.39 million and 17.2% for the second quarter of 2006, an improvement from $1.00 million and 15.2% for the same period in 2005. The gross margin of Chemical Division increased from 3.8% to 20%, while that of Pharma Division dropped from 24.9% to -14.7%. The Pharma Division's gross margin decrease was partially due to switching into the whole sale business model through distributors rather than to hospitals, therefore selling prices are lower with less selling expense included.

The Company's General Administration expenses and interest expenses increased by $1.16M compared to the same period of last year, and include an increase of $250K in accounting and auditing expenses, and an increase of $530K non-cash interest expenses related to long-term account payables. The discontinued operations recorded a profit of $546K during the second quarter. With the effect of these factors, Dragon reported a net loss of $320,997.

Product Segment

For the sales in the second quarter of 2006, $1.57 million, or 11% of which were from the Pharma Division, $11.92 million, or 86% of which were from the Chemical Division and $0.40 million, or 3% of which, were from the Biotech Division. For the same period in 2005, 14% of sales were from the Pharma Division, 74% of sales were from the Chemical Division and 12% of sales were from the Biotech Division.

Management's View on Business

Since the second quarter of 2006, the Chinese pharmaceutical industry has been facing significant uncertainties as a result of series of market and industrial reforms by Chinese government, including additional price controls, investigation of commercial bribery in drug distribution and stricter quality and GMP inspections.

The operational results of Dragon revealed the anti-risk capability of the business in the tough market situation:

Chemical sales kept increasing with strong market share being captured;

As the main product of the Company, 7ACA's market price dropped by 20% in the second quarter, yet the 7ACA sales exceeded first quarter sales. With summer being the low season for 7ACA, 115 tons were sold in the second quarter, representing an increase of 26% compared to the first 2006 quarter. The Company's market share in China for this product is 15%. The Company believes that its 7ACA production cost is the lowest among all manufacturers.

The Company sold 7.4 tons of Clavalanic Acid in the second quarter, an increase of 40% compared to the first quarter of this year. The Company's market share in China is 60% for the product.

The Formulation business and assets were sold at a gain;

As previously disclosed, management believes that market and industrial reform will adversely affect the formulation business of direct drug sales to hospitals, and management has successfully entered into a transaction to sell the type of business and assets for $12.63M with a gain of $4.48M. After this sale, the Company's remaining 30 drug approvals are mostly cephalosporin active pharmaceutical ingredients and powder for injection. The Company is going to take advantage of upstream synergy to become one of the significant suppliers in this more focused product market.

International sales kept increasing for more diversified market coverage

The sales made to international market in the second quarter were $5.09M, which represented 37% of the total sales. The export of Clavalanic Acid was 64% of its total sales. Indian is still the main market area and efforts to open up other developing country markets have been made with a number of trial orders sent in the second quarter.

Management believes that the Company will continue to face the same types of challenges in the third quarter but believes that the Company will achieve positive results from industry reforms. "We believe that the market will be more regulated and transparent alongside with the reform," said Mr. Han, Chairman and CEO of the Company, "This will provide with us a better business environment."

This press release contains forward looking statements, including but not limited to that the Company will be a significant supplier in its remaining Parma Division and that will be able to maintain or increase its sales in an more regulated environment. 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. 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 and other factors described in its periodic reports with the Securities and Exchange Commission.

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