Wuxi Apptec WX Q1 2009 update

(Update 2, May 20) Bought it back, looks like it has more room to run 🙂

(Update May 19) Sold out my WX positions. I had a second thought on the stock.

(Original) Formerly Wuxi Pharma Tech, the name change was to reflect the US based Apptec acquisition a year ago.

I have bought and sold WX a few times since its IPO in 2007 (Wuxi Pharma Tech looking good; Got some WX again; Wuxi Pharma continues to drop). I sold out my WX position last Sept. (shortly before Lehman’s fall). I decided to got back some WX again about 10 days ago. A few things have changed since last update:

1) Since Wuxi cancelled the secondary offering last May, the selling shareholder UOB sold shares to private equity firm Warburg Pincus.

2) WX had to wrote down a large portion of good will because buying Apptec at the wrong time (pulled trigger too earlier).

3) The US big pharma(s) are under more political pressure to provide cheaper drugs (healthcare reform), face patent expiration (e.g. Liptor for Pfizer), and unhappy shareholders (because of dismal return of stocks in recent years). They had to cut back in R&D in some cases.

Despite all that, Wuxi delivered a solid quarter in Q1 2009 (IR web site). The CRO (Contract Research Organization) outsourcing is a big market (about $14 billion in 2006) and still growing. In the near future the western big pharmas will still be the main customers for Wuxi. This reminds me of the IT outsourcing in India, where the demand is mostly from the western developed economies. So the main question is can Wuxi hold its place (about $265 to $275 million) amid all these competitors (west or China/India based service providers)? I don’t have a conclusive answer, but here are some of Wuxi’s advantages:

1) Scale, talent and cost: not the biggest compared to the industry big player, but it’s the No. 1 in China, supply of talent in China is ample. There are other Chinese outsourcing companies, but they are smaller and they did not get opportunity to raise money from capital market. The cost of doing business in China is rising too, but still much cheaper compared to the west;

2) Management: Dr. Ge Li and some of his people have extensive US pharma experience and good relationships with them;

3) Stock price: even after Friday 40% jump, the stock is traded at about twice the revenue of 2008/9 (P/S = 528/270 = 2).

Disclosure: hold WX shares as of this writing.

Appendix: The CRO Market Outlook: Emerging Markets, Leading Players And Future Trends
Key findings of the report…
The total CRO market size is estimated at $14bn in 2006 and expected to grow at an annual rate of 14-16% to reach $24bn through 2010. The market is highly fragmented and the number of CROs worldwide has reached over 1,100 despite continued consolidation.
CROs provide substantial global capacity to drug developers and have become critical contributors to clinical trial activity. Clinical trials conducted by CROs are completed up to 30% more quickly than those conducted in-house by pharma companies.
Of the large, global contract research providers, Quintiles is market leader, with 14% of the global market share, followed by Covance and PPD, holding 10% each. The five largest CROs have increased their market share and now hold 45% of the total market.
The leading CROs are commodity full service providers operating on a global scale. They act as one-stop shops for all services, from preclinical through marketing.
CROs and pharmaceutical companies are turning to strategic partnerships to gain a competitive edge in the global business environment.

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