WuXi Gains From Pfizer's Loss

On Tuesday last week, the world's largest drug maker announced it would be eliminating 800 positions from its research and development rolls. The announcement from Pfizer (PFE) is described here. It was bad news for laboratories in St. Louis, Groton, Conn., La Jolla, Calif. and Sandwich, England, where the cuts were made.

For China-based WuXi PharmaTech (Cayman) Inc. (WX), however, the implications are anything but negative. WuXi is a global outsourcer of R&D for pharma and medical device producers. Its shares trade in China, and as American Despository Shares (representing 8 shares) in America. Assuming all of the Chinese shares trade as ADS's, it has a market cap of $400 million. In November, WuXi confirmed its net revenue guidance of $260-$265 million for the full year 2008, as announced in October 2008. This represents year-over-year revenue growth ranging from 92%-96%.

WuXi also confirmed its full-year adjusted EBITDA is expected to be in the range of $70-$75 million (The forecast excludes any potential future impairment charges and further mark-to-market adjustments on foreign currency forward contracts, if any). The confirmation and earnings report is here.

On Sept. 30, 2008, the firm had $73 million in cash, with long term debt of $4 million plus $35 million of convertible notes. The firm did announce in December that it was shuttering much of its Philadelphia operations, consolidating them to China. Incidentally, Pfizer is far from WuXi's only pharmaceutical client. Its roster also includes: Astra Zenica (AZN), Merck (MRK), Amgen (AMGN), Bristol Myers Squibb (BMY), Genentech (DNA), and several others. WuXi's presentation to the JP Morgan Healthcare Conference last week is here.

WX's IPO was August 9, 2007 at $14, but it very quickly traded over $18 before the day was out. Before the first year was over, it had topped $45 but with the implosion of Chinese and global valuations is now just over $6. Description of the IPO is here. At a third of its first day's trade, and with a business model that has both the cost side and the revenue side working in its favor, the risk-reward favors purchase.

Disclosure: Author is long WX, no holdings in PFE.