WuXi Pharma Tech looking good
By stlplace on Aug 12, 2007 in Business, China
WuXi Pharma Tech (NYSE: WX) is a pharmaceutical R&D service company based in Shanghai, and they do work for the pharma giants like Pfizer, Merck, etc. They are the No. 1 player in China and growing fast.
To give some background, here is a discussion thread from trader168.com; and a valuation analysis article from Yahoo (ChinaBio Today).
I’m not in the pharma business but from my observation, pharma R&D outsourcing is a sweet area because of the following trend.
1) Labor cost in China: you can get good research scientists, technicians in China for a fraction of the rate in the developed countries.
2) Regulatory advantage: the Chinese laws are more forgiving for animal testing, drug trial on human (for good or bad), this again lowers the overall cost.
3) Drug giants are in cost cutting mode: as you may know, big pharma like Pifzer are not doing well lately due to “patent for blockbuster drug to expire soon”, and “no replacement/new drug in the pipeline”. With revenue declining, one thing to make the income statement looking good is to cut the cost: cut the staff in the developed countries, and outsourcing non-core development.
Considering all these facts, I’m adding WX to my watch list. Just for fun, another WuXi company Suntech Power is the first Chinese solar company came to NYSE, and its stock has done well.
On the down side, I noticed JP Morgan is one of the underwriter. I remember JP Morgan’s names shown up both at NINE and XFML’s IPO. Note NINE and XFML never traded above their first day price…
Disclosure: at this writing I own a few shares of Pfizer (PFE).
stlplace | Aug 13, 2007 | Reply
Here is its prospectus:
http://www.sec.gov/Archives/edgar/data/1403132/000119312507177145/d424b4.htm
Some of the risks:
“Primarily to serve the process development and manufacturing needs of one of our major customers, Vertex Pharmaceuticals Incorporated, or Vertex, related to a single Phase 2b drug candidate, we are expanding our Jinshan facility. Up to US$40 million from this offering may be used to fund this expansion. We expect that manufacturing of this drug candidate will occupy a significant portion of the plant’s capacity. Vertex accounted for 24.8% of our net revenues in the first quarter of 2007, and we expect Vertex to continue to be a significant customer for the foreseeable future. As a result, any downturn in Vertex’s business that affects its ability to continue the drug development project we are servicing could disrupt our growth plan and may harm our financial condition. In addition, Vertex has reported that it plans to initiate Phase 3 clinical trials for this drug candidate in the fourth quarter of 2007. If the FDA does not approve this candidate or if its development is delayed, Vertex may terminate or significantly reduce its orders with us. Consequently, we may be required to re-allocate our resources, which could cause delays in our service offerings and result in lower than expected revenues. As we develop our manufacturing services further, we may become more dependent on the success of specific drug candidates that are in development by one or more of our major customers.”
I was hoping service company can avoid this “FDA drug trial” risk, obviously it is not. But I think its risk is lower than drug maker in this aspect. For instance, if certain drug didn’t get approved, the drug maker will write down all the R&D, WuXi will still get paid for the service, in the case of plant, they could modify it for other purposes…
stlplace | Aug 14, 2007 | Reply
Got a few shares at 21.80 this morning, Aug. 14. I pulled the trigger a bit earlier.
But I felt good about the company in long term.