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WuXi PharmaTech (Cayman), Inc. (NYSE:WX)

Q3 2012 Earnings Conference Call

November 13, 2012, 08:00 a.m. ET

Executives

Ron Aldridge - Director, IR

Ge Li - Chairman and CEO

Ed Hu - COO and CFO

Analysts

Ingrid Yin - Oppenheimer

Tim Evans - Wells Fargo

[John Crager] - William Blair

Bin Li - Morgan Stanley

Ramesh Donthamsetty - JPMorgan

Wei Du - Goldman Sachs

Shaojing Tong - Bank of America/Merrill Lynch

Jack Hu - Deutsche Bank

Bryan Kipp - CLSA

Operator

Welcome to the WuXi PharmaTech Q3 2012 Earnings Conference Call. At this time all participants are in a listen-only mode. (Operator Instructions) I must advice you that this conference is being recorded today, Tuesday 13 of November 2012.

I’d now like to hand the conference over to your host today Mr. Ron Aldridge. Thank you sir, please go ahead.

Ron Aldridge

Thank you, Jeff, and good morning or good evening to everyone participating in our third quarter 2012 earnings conference call. Hosting this conference call today is Dr. Ge Li, Chairman and Chief Executive Officer; joining him is Edward Hu, our Chief Operating Officer and Chief Financial Officer.

During today's presentation and question-and-answer session, we will make forward-looking statements. These forward-looking statements represent only our belief regarding future events many of which by their nature are inherently uncertain and partially or completely outside our control. I would also like you to refer to the risk factors inherent in our business that you see here and that have been filed with the SEC and are on our company website under the Investor Relations section. Actual results can be materially different from any forward-looking statements we make today.

Also in discussing our financials, we will use certain non-GAAP measures, which exclude share-based compensation expenses, and amortization and the deferred tax impact of acquired intangible assets. We believe these non-GAAP operating measures are useful for understanding and assessing underlying business performance and operating trends. Reconciliations of our GAAP to non-GAAP third quarter and year-to-date 2012 results of operations are found in today's earnings release, which has been posted to our website and in the appendix to this presentation.

In the question-and-answer session, after our presentation, questioners will be allowed to ask one question and one follow-up question and they can then get back in the queue to ask more questions later.

Now, it's my pleasure to introduce Dr. Ge Li to review our third quarter and full-year 2012 performance and to discuss our future business outlook. Dr. Li?

Ge Li

Thank you, Ron, and good evening or good morning everyone.

Slide 3 please. I'd like to begin by reminding you of WuXi business model. Our third quarter 2012 results show that this model is working well. WuXi has been working very diligently to build alternative R&D engine to serve the global life-science industry. He engine offers open access technology platform and integrate service offerings or enable anyone and any kind of company to discover and develop medicines more efficiently and cost effectively.

Our clients utilize our entire integrated service platform from discover to development or any part of it for the (inaudible) from one stage to the next. Our ambition is to make WuXi the backbone of China’s growing life-science R&D industry.

Slide 4 please. I’m very pleased that WuXi delivered another solid quarter with strong revenue and earnings growth in the third quarter. Revenue growth 21% year-over-year driven by continued growth in demand for WuXi’s integrated service platform and increasing new capabilities.

China-based lab service revenue grew nicely with 32.4% year-over-year led by growth in our drug discovery and development services including medicinal chemistry, biology, DMPK, toxicology, analytical services, formulation, and bioanalytical services.

We also achieved the EPS growth up 7.8% on a GAAP basis and up 18.4% on non-GAAP basis. We met or exceeded all of our financial guidance for the third quarter. And we updated our full-year 2012 guidance this total revenue at high end of our previous range and a margin in line with our previous expectations.

Slide 5 please. We achieved this revenue and EPS growth while we continue to invest to sustain our growth. We hired a substantial number of college graduates over the summer as we yearly do keep our operations (inaudible) that for the growing demand that we expect. Our total headcount is now about 7,000 people worldwide. Our continuing investment in senior staff, sales and marketing and R&D for newer capabilities resulted in higher operating expenses in the quarter and we expect this investment to drive future business growth.

We continue to build facilities and added state-of-the art equipment of ongoing business and I newer business such as biologics and clinical development. We now have about 3 million square feet of luxury office and the manufacturing space in use.

(inaudible) we have made particularly large investment in the past year and that we think we will produce future revenue growth as a biologics discovery, development and the manufacturing. We made significant progress in the biologics business in the quarter signing major deals with MedImmune, TaiMed, and Open Monoclonal Technology.

In October we opened our cGMP biologics drug substance manufacturing facility in Wuxi city, the first such facility in China.

Slide 6 please. We aim to grow the bottom-line not only through investment but also by improving our efficiency. Starting from the third quarter, we initiated a company-wide Lean Sigma program to continuously improve our operational efficiency and the service quality.

(Inaudible) business of operations, we continue to return capital to shareholders through our $19.8 million of ADS purchase in the third quarter completing our $30 million ADS purchase program.

Slide 7 please. So, now Ed will discuss the details of our third quarter 2012 financial performance. Ed?

Ed Hu

Thank you, Dr. Li. As Dr. Li mentioned we met or exceeded our guidance for the third quarter. We exceeded our guidance for revenues in total and for both lab services and manufacturing services revenue respectively.

With $98.9 million from lab service revenue we look forward for surpassing $100 million in quarter lab service revenue in the near future. We hit the very top of our end, very top range for GAAP operating income and exceeded our guidance for GAAP operating income.

Slide 8 please. Third quarter revenue growth was led by China-based laboratory services which grew 32.4% driven by drug discovery and development services that include medicinal chemistry, biology, DMPK, toxicology, analytical development services, formulation, and bioanalytical services.

Manufacturing services revenue grew 7% to $26.9 million. (inaudible) towards the first half of his year, our third quarter manufacturing revenues were lower than in the first or second quarter as expected. Our U.S. based laboratory services also contributed 6% revenue growth for the third quarter.

Turn to Slide 9 please. Slide 9 shows our quarter revenue by business segment. Looking sequentially, you can see the China-based laboratory services revenue grew nearly 20% in a past two quarters and nearly 10% in the second quarter.

U.S. base laboratory services operating a stable market place with good revenue growth for somewhat variable quarter performance as certain live project that were completed in first half of this year are now recurring in the second half.

Manufacturing services revenue remained lumpy, driven by a very few large project and product delivery schedules that varies quarter-by-quarter. To put this performance in perspective, our average quarterly revenues for manufacturing services including process chemistry so far in 2012 off of our $32 million in comparable to revenue in their business for the full-year of 2009.

Slide 10 please. Looking at a GAAP P&L. revenue growth 21% and it drives 13.6% increase in gross profit, gross profit margin decreased by 2.4 percentage points year-over-year to 36.6% due to labor inflation, investments in new business and a lower pricing (inaudible) chemistry offset by improved productivity.

Operating income declined 3.6% mainly because of hiring of new senior staff, investment in sales marketing staff, R&D expenditures and increased share-based compensation expenses, partially offset by the 13.6% increase in gross profit.

Net income growth 3.2% driven by higher net operating income that included $1.4 million (inaudible). The effective tax rate was 18% as certain of our China legal entity R&D technology enterprise designation.

Diluted EPS growth 7.8% because of 3.2% net income growth and a 4.2% of lower ADS count as a result of our share buyback program.

Slide 11 please. Looking at our sequential GAAP results. Our gross profit in the quarter was near a record level. Our GAAP gross margin has improved sequentially over the past two quarter as a result of improving operating efficiency and cost control. Our GAAP operating income and operating margin are being impacted in the near-term by investment in senior sales marketing and R&D expenditures in building up new capabilities.

Turn to Slide 12 please. Our non-GAAP results were similar to our GAAP results, 21% of revenue growth drive 13.9% of gross profit increase. Non-GAAP gross margin improved by one percentage point sequentially to 37.8%. operating income grew 6.9% driven by the 13.9% gross profit increase partially offset by increased operating expenses.

Net income increased 13.4% year-over-year as a result of 6.9% operating income growth and higher net operating income from gains of foreign exchange forward contracts and subsidies.

Diluted EPS increased 18.4% driven by net income growth and a lower ADS count as a result of our share buyback program.

Turn to Slide 13 please. Non-GAAP gross profit and operating income were close to the record level of the second quarter. Non-GAAP gross margin and operating margin improved was at the level of first and second quarters.

Slide 14 please. Our balance sheet remains very strong. We had a cash and strong term investment of $186.4 million and only $42.5 million of debt at the end of the third quarter. We achieved $39.3 million of operating cash flow in third quarter and $97.3 million in the first nine month. Capital expenditures totaled $15.2 million for a quarter and $52.3 million for the first nine month, putting up on target to about $17 million of CapEx spending for full-year. Our fresh cash flow was $45 million through the first nine months.

Slide 15 please. We are using a portion of this free cash flow to buyback our ADS. Here we summarize our share purchase program for a year. In February 2012, we purchased approximately 2.8 million shares from General Atlantic for 37 million or $13 per ADS.

On March 8, 2012, we announced a share buyback program to purchase $30 million more of our ADS. We purchased more than 700,000 ADS in the second quarter and more than 1.4 million ADS in the third quarter completing the $30 million share buyback program at an average price of $14.03 per ADS.

In total, during 2012 we spent $68 million to purchase about 7% of our ADS outstanding at the beginning of the year.

Slide 16 please. Now I’d like to update our full-year 2012 financial guidance. We expect to achieve full-year revenues in the range of 495 to $498 million or about 22% year-over-year growth. China-based lab services revenue are expected to grow about 36% to 291 to $292 million.

U.S. based lab service to grow 11 to 12% to 89 to $90 million and manufacturing services to grow to 20 to 21% to 115 to $116 million. We now expect our operating margins both GAAP and non-GAAP to be at the midpoint of our preview range (inaudible) of our 17.5% and 20.5% respectively. Our guidance for effective tax rate and capital expenditure in unchanged.

Turn to Slide 17 please. For the fourth quarter we expect to see total revenue of 121 to $124 million up 11% year-over-year. Laboratory service revenue of 101 to $103 million and manufacturing service revenue of 20 to $21 million. Operating income of about 17% GAAP and about 20% non-GAAP.

Now Dr. Li will discuss our performance and strategies in key business units. Dr. Li.

Ge Li

Thank you, Ed. Slide 18 please. I think it is useful for the third quarter to look at our long-term revenue performance. So, you can see that our performance is part of our plan rather than short-term anomaly.

China-based laboratory service and the U.S. based laboratory service have achieved strong steady growth year-after-year for many years. Our manufacturing service revenues have been more variable with the revenue growth in the past three years. We owe three of this business as gross business going forward.

Slide 19 please. China-based laboratory service consist of drug discovery and drug development, and those scopes of business achieving excellent year-over-year revenue growth. Here are some highlights for our drug discovery and development efforts. Our integrated drug discovery business has achieved five drug candidates for our clients already this year and is in sight to deliver three more in the fourth quarter.

Synthetic chemistry is becoming more commoditize and is facing increasing pricing pressure; we are responding by improving productivity and the leveraging the lower operating costs in our Wuhan facility to offer more pricing for our customers.

Toxicology is on target to more than double revenues in 2012, and the break even on accrual basis in the fourth quarter. So, already break even on cash base.

Our clinical development service capabilities are growing; we have expanded higher comp in this business and expect to be more meaningful contributor revenue over the next few years to provide the fast growing demand for clinical trials in China.

Slide 20 please. Biologics our growing segment of the pipeline (inaudible) customers. Our biologics drug discovery and development capabilities are growing rapidly, with a dozen customer projects ongoing. We began to see revenue contribution although (inaudible) more in the third quarter.

We expect the biologics project portfolio overtime to be a mixture of biosimilars and the novel molecules, with both multinational and Chinese customers. Our biologics capabilities and the Chinese regulations positioned us very well to continue to grow business overtime. Earlier this year we opened a new cGMP biological manufacturing facility and the development lab in Shanghai. And in October we took a big step forward when we opened a new cGMP biologics drug substance manufacturing facility in Wuxi city, with state-of-the-art disposable technology and the first of its kind in China. We have designed our biologics manufacturing facility to meet international GMP standards.

Chinese regulations requires that biologics products used in clinical trials either be approved in other markets or manufactured in China. WuXi’ s unique local manufacturing capabilities help our clients bring innovative biologics products to China faster over as much as four to five years faster.

Slide 21 please. During the third quarter we found three major biologics deals. Our joint venture with MedImmune to co-develop MEDI5117, an anti-IL6 monoclonal antibody for rheumatoid arthritis and other autoimmune diseases, for China market. Our agreement with Open Monoclonal Technology to license their Omnirat technology to discover monoclonal antibodies for our customers. And our agreement with TaiMed to manufacture the HIV product for worldwide Phase 2 and Phase 3 clinical trials. As you can see our biologics business is off to a good start.

Slide 22 please. The manufacturing services, research manufacturing is achieving strong current growth from a broad customer base driven by our capabilities in process chemistry. Commercial manufacturing revenues will be variable over the next few quarters due to a short-term reliance on a single product. However, we are building a large pipeline of late stage clinical and the new commercial products. We have signed contract or are in contract negotiation to our manufacture ingredients or APIs for five launched products and six more product candidates in Phase 3 clinical trials from this large revenue potential of (inaudible).

We expect continued revenue growth in research and manufacturing and the steady revenues incremental manufacturing in 2013.

Slide 23 please. So, to sum up, our strategy for future growth is build around broad-based investment and the integration of services. We expect continued revenue growth across China-based laboratory service driven by our capability to deliver high quality services and the drug candidate for our customers.

Increasing utilization of our integrate drug development service for API manufacturing, IND-enabling toxicology studies and IND filings with the China SFDA and global regulatory authorities.

Steady growth in revenues and margin improvement in U.S. based Laboratory Services. Strong growth in revenues of our manufacturing service led by research and manufacturing. Our ramp-up of biologics drug discovery, development, and manufacturing services and the further expansion of our growing clinical development platform will continue to invest we will do so differently.

We are planning (inaudible) lower capital expenditure next year and implement Lean Sigma programs or continuously improve our operations and to reduce cost.

Thank you for your attention. And now we will be happy to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Ingrid Yin from Oppenheimer. Please ask your question.

Ingrid Yin - Oppenheimer

My question will be around cGMP biologics drug manufacturing facility. What is the current order status and what kind of utilization rate should we expect near-term. If this business will be grouped into the manufacturing business, is it already contributing revenue and on the longer term if we assume very similar utilization rates let’s say cause biologic manufacturing demand a better margin than the chemical drug manufacturing. And how will that expensive gross margin of your overall manufacturing business near-term and longer term.

Ge Li

Our cGMP biologic manufacturing facility was just putting through operations, so in the near-term we will in the testing mode, we customer manufacturing probably begin in next year and we will take some time to gradual ramp up. In terms of margin on the biologics manufacturing business, when the facility utilization reached (inaudible) we expect that the margin will be decent.

Ingrid Yin - Oppenheimer

Will that be similar with chemical drugs manufacturing?

Ed Hu

It's surely curtailing now. We certainly hope to be better.

Ingrid Yin - Oppenheimer

Can you help us understand your U.S. lab business little more? We have seen double-digits growth for the first half of the year, but the third quarter it's 6% year-over-year growth. Is that seasonality or on the longer term on an annual basis what’s the kind of growth rate should we expect U.S. lab to deliver?

Ed Hu

I think in U.S. based lab service, in the first half we had a several pretty large projects was completed and those projects will now recur in second half. So, in the (inaudible) business actually will grow at steady rate and in the steadiest mode I think U.S. business should grow at a high single-digits, low double-digits that kind of rate.

Operator

(Operator Instructions) Your next question comes from the line of Tim Evans from Wells Fargo. Please ask your question.

Tim Evans - Wells Fargo

I was hoping you could comment on the margin pressures you are experiencing going into 2013, how you think those will play out in 2013 and the broader question I’m trying to get out is, do you still like we have reached a point where your operating margins are stable or do you see the potential that they may decrease a little further from here?

Ge Li

We still some headwinds because the labor, installation and R&D appreciation, but I think through the operation efficiency improvement and the Lean Sigma programs and (inaudible) outside some of the headwinds. So, we try to manage the gross margin and operating margin at a certain level.

Operator

Next question comes from the line of [John Crager] from William Blair. Please ask your question.

[John Crager] - William Blair

If we look at your fourth quarter guidance, can you just talk a bit more about the drivers behind the slower revenue growth considering you had three quarters of much higher growth?

Ed Hu

In the third quarter growth is actually, the so called slowdown is there in the manufacturing, so the manufacturing in the third quarter we deliver almost $27 million and in fourth quarter we expect to deliver 20, $21 million. That’s primary reason. And in the lab service segment we continue to see sequential growth. Although same quarter last year in Q4 we had a very strong growth, so the quarter-over-quarter comparison in Q4 will be appear to be slower.

Ge Li

We had really strong fourth quarter last year. And also for the fourth quarter of this year and we will be welcoming our first $100 million revenue of our lab service in the company history.

[John Crager] - William Blair

Just following up on Tim’s question, if any earning release thoughts on 2013 as you have discussions with your key clients, what are the sort of priorities they have and you think we are kind of be moving into another year of ongoing growth or perhaps the belt tightening by client might be increasing. Just any perspective you have would be helpful?

Ge Li

We see we will continue to grow and we will give the guidance in the next quarter earnings release. So, probably around March timeframe, March 2013.

[John Crager] - William Blair

And you mentioned expanding your clinical capabilities a couple of times in your prepared remarks, can you just elaborate on that. How was that going and how far do you plan on pushing into the later stage clinical processes?

Ge Li

As you may recall, we acquired local (inaudible) the last 12 months we have been adding new staff members and also upgrading our capabilities and preparing for client audit. So, we will work hard to be ready for the [prime time].

Operator

Next question comes from the line of Bin Li from Morgan Stanley. Please ask your question.

Bin Li - Morgan Stanley

If I can ask one small question. First, in terms of the share buyback, I know used up the $30 million, what’s the management thinking for use of extra cash that you are getting from cash flow, how should we think about share buyback program going forward?

Ge Li

Again from the management and the board we will continue to return the cash to the shareholders and it depend on the price. We probably will continue to buy back shares.

Bin Li - Morgan Stanley

And also you mentioned for your commercial manufacturing portfolio is really growing, and looks like you are negotiating some of the long-term contract (inaudible). What’s the progress there is there any updates that can led us to think the commercial opportunity for this product line would be much bigger.

Ge Li

I think in the longer term I will, as seen in the presentation also earnings release, we have five commercial opportunities and (inaudible). So, but right now I actually I have seen no we have a single product contribute large number of commercial manufacturing revenue. It will take well to replace the revenue, but longer term I think the commercial manufacturing will be the revenue contributor, continue to be a bigger revenue contributor.

Bin Li - Morgan Stanley

I guess, it's very hard to predict the outcome of the negotiation there and the timeline, but we talking about next year's thing or next two year's contribution from these five plus six.

Ge Li

Actually it’s ongoing. So, it's also the duty of our integration of research manufacturing and the commercial manufacturing.

Operator

Next question comes from the line of Tycho Peterson from JPMorgan. Please ask your question.

Ramesh Donthamsetty - JPMorgan

This is Ramesh Donthamsetty in for Tycho. First just on the toxicology, you obviously have done what you said you have expected to do both from a sales and margin perspective. How do you think about utilization currently, utilization ramping in 2013 and beyond and the opportunity both from U.S. and European customers as well as domestic customers in China?

Ed Hu

Our [cardio] business is ramping up nicely and utilization is somewhere between 50 to 60% range and actually we have a nice mix of client. As of now we have 65 clients and one-third is domestic clients and two-thirds are international. And the revenue contribution from international is still majority, 70% from international client and 30% domestic clients. But see the trend they are actually more and more project they are coming through is because of integrated service capability and lot of those toxicology programs IND programs, the API are made at WuXi. And some of the molecule even discovered at WuXi. So, we really help clients to advance their programs seamlessly from discovery all the way into clinical.

Ramesh Donthamsetty - JPMorgan

And how do you think about margins ramping closer eventually to more toward the corporate average in that business?

Ed Hu

Yes, utilization get fully utilized and then they will be closer to corporate operating margin level.

Ramesh Donthamsetty - JPMorgan

It sounds like in this quarter, any even lower CapEx next year, some of the commentary Lean Sigma, etcetera, some of these commentary have shown that you guys are maybe a little bit more aware of maybe delivering better margin profile even though you have several opportunities to invest. Is that something that’s sort of a new or has increased in your discussion as a management team or is this just continuing the trend as you mature into a major CRO globally that you are?

Ge Li

We will always balance like CapEx and also the opportunities, but we will not hesitate to invest in newer capabilities, but we also need to improve the efficiency of using the existing CapEx.

Operator

Next question comes from the line of Wei Du from Goldman Sachs. Please ask your question.

Wei Du - Goldman Sachs

I want to know what’s your current capacity utilization for the commercial manufacturing. I think that’s number one, number two. I’m not sure whether you can comment despite the strong margin performance, do you see any impact for appreciation in your gross margin level or maybe operating margin if you have that breakdown.

Ed Hu

Commercial manufacturing utilization is that to be low compared to first half and we expect to start ramping up again and probably next year. And RMB appreciation certainly has impact on gross margin and operating margin level. As I’ve said it before one percentage point appreciation of RMB mostly have half percentage point impact on a gross margin.

Wei Du - Goldman Sachs

And do you view the utilization number for the commercial manufacturing?

Ed Hu

I don't know proper exact utilization.

Operator

We got the follow-up question comes from Bin Li from Morgan Stanley. Please ask your question.

Bin Li - Morgan Stanley

In the current industry you are making rapid quick progress on this, I guess Dr. Li if you can shed little light on this, I think you are talking about this is the first kind facility with disposable technology. Can you tell us the landscape in China in terms of this type of scale facilities and perhaps whether they are providing similar services as you are providing?

Ge Li

Again so what we use (inaudible) and we believe this is the first international cGMP biologics facility, and I had mentioned earlier also we have a mix of customers in multinationals and the domestic companies and also the mixture of our project from (inaudible). So, again biologics is not only hardware is both the software and hardware. We have very capable discovery and manufacturing team.

Operator

Your next question comes from the line of Shaojing Tong from Bank of America/Merrill Lynch. Please ask your question.

Shaojing Tong - Bank of America/Merrill Lynch

I’d like to get update on the acquisition you have done with [Abgent], if you can give us update on the revenue and the profitability growth on that subsidiary would be nice. And also we would like to have an update on the competitive landscape in the CRO space in China as your competitor (inaudible) jus announced privatization and would like to get a sense how are your competitors are doing and what’s your expectation going forward in terms of competitiveness in this space.

Ge Li

So, the [Abgent] acquisition we are in integration of this business into WuXi’s overall operations and so we have actually spent significant money, effort this year building up capable sales marketing and distribution team based in the U.S. and then also focused on develop product that is will be in high demand. So, revenue wise it grows a little bit compared to last year. We certainly having a much stronger platform (inaudible).

Shaojing Tong - Bank of America/Merrill Lynch

Is that China lab service or U.S. lab service?

Ge Li

It's in China lab service. On the competitive landscape again in think the chemistry, the field chemistry is more commoditized we continue to see somewhat pricing pressure. But the integrated service I think (inaudible) solution providers and the more results driven. So, we continue to see this phase as a competitive. But again WuXi has seen a lot in newer capabilities and I think it give us the first more advantage. I think we will continue to enjoy this type of advantage. So, we have been in this space for the longest period of time. So, this coming to our 12 years, and given a lot 12 year's we will help you with that significantly with our customers.

Operator

Next question comes from the line of Jack Hu from Deutsche Bank. Please ask your question.

Jack Hu - Deutsche Bank

What do you think of largest deal pharma (inaudible) updates on this for WuXi?

Ge Li

Can you repeat again, so the large scale of what?

Jack Hu - Deutsche Bank

The largest deal pharmaceutical and the CRO strategic, do we have any updates on this front?

Ge Li

Well, I think those are [strategic lines] like pharmaceutical and CRO based we found, CRO offer a unique capabilities and last what the big pharmaceutical needs. So, on the (inaudible) you may notice the large collaborations more in the clinical space. And the pre-clinical we continue to see program treatment and therapeutic area treatment collaborations.

Operator

Next question comes from the line of Paul Knight from CLSA. Please ask your question.

Bryan Kipp - CLSA

You guys got to 20, 20.5 op margin in 3Q, but were able to beat it at 21 non-GAAP. You said it even prior that you are going to see this higher increase over the summer, but now you said that the toxicology which you are citing is where the significant growth came from that in your biologics. Does that you are hoping once fully ramped QC op margin expansion to corporate levels and in your biologics versus chemical. You are saying that hope it will be better but you don't know yet, so where do you see that op margin expansion high end of your expectations in 3Q?

Ed Hu

So, where we have been tied on mitigate is really improving operating efficiency measures in Lean Sigma program and also have a tighter cost, and also moving from over the chemistry work to our new invite.

Operator

The next question comes from the line of (inaudible).

Unidentified Analyst

[Question Inaudible]

Ed Hu

Ed Hu

We forgot to mention the fuel chemistry now is only about 18% of our total revenue.

Unidentified Analyst

And how about the new hiring plans?

Ed Hu

We will continue to add headcount as we still anticipate business growth for 2013. We can’t give you a number.

Unidentified Analyst

For historical number for example, how many added at this year. And any different business unit?

Ed Hu

We don't like provide breakdown and we probably add (inaudible).

Operator

Your last question is a follow-up question from Ingrid Yin from Oppenheimer.

Ingrid Yin – Oppenheimer

Labor cost situation, you mentioned you had a lot of new graduates this summer, are there level is it similar with last summer or you see double-digits increase?

Ge Li

The labor increase from college graduate are not significant.

Ingrid Yin – Oppenheimer

So, for experienced hire, do you see in the magnitude coming down or increase?

Ge Li

It probably will be compared to 2012 will be slightly down, but the demand for experienced labor in China are still pretty strong. As you know more and more global pharmaceutical companies are moving to China for R&D and also domestic companies are now studies investing into R&D as the government encourage you the innovation driven economy and government subsidiary lot of activities in China now. So, experienced labor force, I think are still in high demand.

Ingrid Yin – Oppenheimer

Question on manufacturing is what we think commercial and research, is there something the breakdown, would that be something like 50-50 or something more like 70-30 if you can give us some color on that?

Ge Li

I cannot give you exactly the split. But we view this is kind of in this business research manufacturing we have got in commercial business.

Ron Aldridge

With that question we are going to conclude today’s conference call. Thank you very much for participating and we look forward to speaking with you in March to tell you about our fourth quarter results and our 2013 guidance.

Operator

Thank you ladies and gentlemen that concludes our conference for today. Thank you for your participation, you may now disconnect the lines.

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