No Slowdown for China Medical

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The great Chinese crash of 2008 hasn't hit China Medical Technologies (Nasdaq: CMED). Last Friday, the company was trading 6.6% higher than where it ended 2007.

China Medical Technologies turned in another growth-filled quarter yesterday with revenue up 50% year over year, and net income up an even more impressive 79%. To judge by the 3.5% stock drop, investors were looking for more, but the shares have recovered as of this writing.

A lot of that bottom-line growth can be attributed to the jump in gross margins, from 57.5% last year to 69.1% this year. The company has reduced its focus on being the middleman for the microscopes used to run its fluorescent in situ hybridization (FISH) tests. It's instead letting the hospitals buy the microscopes directly from the manufacturers and focusing on selling the higher-margin reagents for both FISH and enhanced chemiluminescence immunoassay (ECLIA).

That's what I like about China Medical Technologies. It's shifted away from focusing solely on its High Intensity Focused Ultrasound (HIFU) tumor therapy systems that don't provide any meaningful recurring revenue. And it's moved toward high-margin, consumable diagnostic tests that can be sold over and over again to hospitals.

The growth story for the ECLIA and FISH tests isn't over either. China Medical has 20 different ECLIA tests under review by the Chinese FDA, as well as some FISH tests. These include a test to see if Genentech's (NYSE: DNA) Herceptin or GlaxoSmithKline's (NYSE: GSK) Tykerb, both for treating breast cancer, will be effective.

With doctors' increased focus on targeted medicine and infectious diseases, China Medical and other diagnostic-test makers like Myriad Genetics (Nasdaq: MYGN), Cepheid (Nasdaq: CPHD), and Genzyme (Nasdaq: GENZ) should benefit greatly. A high-growth industry in a (still) high-growth location seems like a long-term winning combination for China Medical Technologies.