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

Dragon Pharmaceutical Inc.

September 21, 2005 18:39 ET

Dragon Pharmaceutical Announces Financial Results for the Second Quarter of 2005

VANCOUVER, BRITISH COLUMBIA--(CCNMatthews - Sept. 21, 2005) - Dragon Pharmaceutical Inc. ("Dragon" or the "Company") (TSX:DDD)(OTCBB:DRUG) today announced the financial results for the second quarter of 2005.

Due to Dragon's acquisition of Oriental Wave Holding Limited ("Oriental Wave") on January 12, 2005 being deemed a reverse take-over transaction, the following discussion reflects the Company's results of operations for the quarter ended June 30, 2005 while discussions on the quarter ended June 30, 2004 only reflect the results of Oriental Wave's Pharma and Chemical businesses. In addition, discussions regarding the six month results ended June 30, 2004 and 2005 were based on the restated financials (Please refer to a separate press release and the Company's 1Q-QSB filing for details). The Company's financial statements comply with U.S. GAAP (Generally Accepted Accounting Principles) and all dollar amounts are expressed in U.S. currency. The full financial statements will also be available on Dragon's website at www.dragonpharma.com.

Sales for the second quarter ended June 30, 2005 increased 55% to $11.35 million from $7.32 million for the same period in 2004. Sales for the first six months of 2005 were $23.18 million as compared to $14.48 million for the same period in 2004, representing a 60% year-over-year growth rate. The increase in sales was due to the expansion of sales from the Chemical Division and the inclusion of the sales from the Biotech Division.

Gross profit and gross margin for the three months ended June 30, 2005 were $3.18 million and 28% compared to $4.04 million and 55% for the same period of 2004. The Company recorded a net loss of $0.003 million or $0.00 per share for the three months ended June 30, 2005 compared to a net income of $2.34 million, after restatement, or $0.05 per share for the same period in 2004. Gross profit and gross margin for the six months ended June 30, 2005, were $6.39 million and 28% compared to $7.23 million and 50% for the same period of 2005. Net income for the six months ended June 30, 2005 was $1.24 million or 0.02 per share compared to a net income of $4.28 million or 0.10 per share for the same period of 2004. Gross profit and net income was lower than the same period of 2004 because of the change in product mix especially with the significant increase in sales of the Chemical Division whose facilities were constructed and completed in 2004 and is currently at the ramp-up stage of production which incurs higher per unit production and operation cost, especially depreciation expenses. In addition, the operating expenses for the three and six months ended June 30, 2005 were $2.77 million and $5.16 million, respectively, compared to $1.36 million and $2.60 million, respectively, for the same period of 2004. The increase in operating expense reflects the increase overheads related to the operations of all three divisions and the offices in Canada and Switzerland, while for the same period of 2004, only Pharma Division and one of the two facilities of the Chemical Division in operation.



Market Segment Analysis

Second Quarter of 2005 Second Quarter of 2004
-------------------------------------------------
% of Total % of Total
----------- ----------
(in US$ million) $ Sales $ Sales
- ----- - -----
Sales
-----
China $10.50 92.5% $7.32 100%
International $ 0.85 7.5% - 0%
--------------------------------------------------------------------
Total $11.35 100% $7.32 100%
--------------------------------------------------------------------
--------------------------------------------------------------------


During the second quarter of 2004, 100% of total sales were generated from the Chinese market. However, with the addition of the international sales from the Biotech Division, and the export of products from the Chemical Division during the second quarter of 2005, 7.5% of the total sales were generated from the international markets while 92.5% of the sales were generated from the Chinese market. The contribution of sales from the international markets has been increasing and is expected to continue as the Company continues to increase commercialization of its products outside of China.



Product Segment Analysis

Second Quarter of 2005 Second Quarter of 2004
-------------------------------------------------
% of Total % of Total
----------- ----------
(in US$ million) $ Sales $ Sales
- ----- - -----

Sales
-----
Chemical Division $ 4.88 43% $0.53 12%
Pharma Division $ 5.69 50% $6.79 88%
Biotech Division $ 0.78 7% - -
--------------------------------------------------------------------
Total Company $11.35 100% $7.32 100%
--------------------------------------------------------------------
--------------------------------------------------------------------


Second Quarter of 2005 Second Quarter of 2004
-------------------------------------------------
Gross Gross
----- -----
Gross Profit $ Margin % $ Margin %
------------ - -------- - --------
(in US$ million)

Chemical Division $0.18 4% $0.12 23%
Pharma Division $2.41 42% $3.92 58%
Biotech Division $0.59 75% - -
--------------------------------------------------------------------
Total Company $3.18 28% $4.04 55%
--------------------------------------------------------------------
--------------------------------------------------------------------


Chemical Division

The Chemical Division's sales for the second quarter of 2005 were $4.88 million, representing a 814% increase from the sales of $0.53 million during the same period in 2004. The increase is due to the introduction of 7-ACA and the expansion of Clavulanic Acid sales outside China.

The Chemical Division's gross margin for the second quarter of 2005 was 4%, improved sequentially from the first quarter of 2005. The gross margin for the division was low as the Company has increased and expanded the production infrastructure and the associated fixed manufacturing costs, but it is still in the process of ramping up the production level. Production in the Chemical Division during the second quarter of 2004 was limited to Clavulanic Acid. Since then, the Company invested $16.88 million in capital expenditure for the 7-ACA facility and other new production infrastructure (power, steam, purified water supply and water treatment). These new facilities have greatly increased production capacity and capability for the Chemical Division but also have increased the fixed costs in the form of depreciation expense of the new facilities constructed and overhead of the utilities costs to power the new facilities. For example, depreciation expenses for the Chemical Division increased to $1.06 million for the second quarter of 2005 from $0.37 million for the same period of 2004. It is anticipated that gross margin will increase as these fixed manufacturing costs are expected to fall, on a per unit basis, with the ramp up of the production level.

Subsequent to the quarter end, the Company has increased the production of 7-ACA from approximately 30% to 80% of the full production capacity which will increase the sales and margin from the Chemical Division.

Pharma Division

The Pharma Division's sales for the second quarter of 2005 were $5.69 million, accounting for 50% of the Company's total sales. Comparatively, the Pharma Division's sales were $6.79 million for the same period in 2004, contributing 93% of the Company's total sales. The Pharma Division's overall gross margin for the second quarter was 42% during the second quarter of 2005. The lowering of sales and gross margin of the Pharma division as compared to the same period in 2004 was mainly due to a change in product mix with more new products being introduced in the market and the reduction in prices of certain prescription drugs due to increasing competition. The Company introduced a number of new prescription and over-the-counter drugs in the market at a more competitive price initially in order to gain market awareness and market shares. The percentage of lower sales contribution percentage from the Pharma Division to the Company was primarily due to the relative strong growth of the Chemical Division's sales achieved during the second quarter of 2005 compared to 2004.

During the second quarter of 2005, the Company received a total of 9 additional product approvals from the Chinese State Food and Drug Administrator (Chinese SFDA). These newly approved products include:

(1) Amoxicillin Sodium for Injection 1.0g

(2) Fosfomycin for Injection 3.0g

(3) Levofloxacin Hydrochloride for Injection 0.5g

(4) Mezlocillin Sodium for Injection 1.5g

(5) Mezlocillin Sodium and Sulbactam Sodium for Injection 3.75g

(6) Azlocillin Sodium Bulk Drug

(7) Azlocillin Sodium for Injection 0.5g, 1.0g, 2.0g

Biotech Division

The Biotech Division's sales for the second quarter of 2005 were $0.78 million, representing 7% of the Company's sales. The gross margin for the period was 75%. Comparatively, on a pro-forma basis assuming the acquisition of Oriental Wave were completed on January 1, 2004, Dragon's Biotech Division sales for the second quarter of 2004 were $0.91 million with a gross margin of 79%. In addition, under the same proforma basis, revenues for the six months ended June 30, 2005 was $1.73 million, with 79% gross margin as compared to $1.79 million, with 75% margin for the same period in 2004. The slight increase in the gross margin in 2005 was due to an increase in international sales at a higher margin.

Subsequent to the quarter end, the Company started the relocation process of the EPO production facility from its current location in Nanjing city to a site adjacent to the Chemical Division campus in Datong city, which already includes the entire basic infrastructure such as power, steam, purified water supply and water treatment facilities. The relocation of the EPO production site to Datong will allow the Company to capitalize on the existing production infrastructure sharing the fixed and depreciation costs with the Chemical division as well as improving on operational efficiency. In the new EPO facility, the capacity for bulk EPO will be doubled and the capacity for sterile filing will be tripled. It is expected that the new facility will be completed during the fourth quarter, 2005.

"We are satisfied with the overall progress of the Company since the completion of the acquisition at the beginning of this year. The Company has further expanded its formulation drug portfolio within its Pharma Division with 9 additional generic drug approvals issued by the Chinese SFDA. Gross margin for the Chemical division improved sequentially as expected with the ramp up of the production level. We expect that this trend will continue as the Company has increased the production level of the 7-ACA facility from approximately 30% to 80% of the full production capacity starting the end of July 2005," said, Mr. Yanlin Han, Chief Executive Officer of Dragon. "In addition, the Company continues to implement plan to improve its financial structure including the initiative to seek equity financing as previously announced and to restructure our outstanding bank loans and long-term payables."

About Dragon Pharmaceutical Inc.

Incorporated in Florida, USA, Dragon Pharmaceutical Inc. is an international pharmaceutical company headquartered in Vancouver, Canada, with three key business units consisting of (1) a Pharma division for 52 generic prescription, over-the-counter and sterilized bulk drugs; (2) a Chemical division for bulk pharmaceutical chemicals and intermediates (Clavulanic Acid and 7-ACA); and (3) a Biotech division for recombinant drugs (EPO and G-CSF). The Company has four manufacturing facilities in China, approximately 1,800 employees, plus over 1,200 sales representatives in China, and approximately 58 key products in 90 different dosages and presentations currently in market.

This press release contains forward looking statements. 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) that the Company will be able to successfully construct and operate a biotech facility in Datong, China that will be able increase production and operate more efficiently than its facility in Nanjing; (3) that the Company's Chemical Division will be able to increase its gross margins; (4) that the Company will be able to successfully raise capital in an amount that is sufficient to implement its business plan; and (5) that the Company will be able to continue to renegotiate with its banker's to extend the maturity dates of short tem loans coming due. 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.


Contact Information