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WuXi PharmaTech (Cayman) (NYSE:WX)

Q4 2013 Earnings Call

March 06, 2014 8:00 am ET

Executives

Ronald Aldridge - Director of Investor Relations

Ge Li - Co-Founder, Chairman, Chief Executive Officer, Member of Compensation Committee and Member of Strategy & Finance Committee

Edward Hu - Chief Financial Officer and Chief Operating Officer

Analysts

Bin Li - Morgan Stanley, Research Division

Ye Yin - Oppenheimer & Co. Inc., Research Division

David H. Windley - Jefferies LLC, Research Division

John Kreger - William Blair & Company L.L.C., Research Division

Jack Hu - Deutsche Bank AG, Research Division

Christopher Eoyang - Goldman Sachs Group Inc., Research Division

Tejas Savant - JP Morgan Chase & Co, Research Division

Serena Shao - BofA Merrill Lynch, Research Division

Operator

Thank you for standing by, and welcome to the WuXi PharmaTech Q4 2013 Earnings Results Webcast Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, March 6, 2014.

I would now like to hand the conference over to your first speaker today, Mr. Ron Aldridge, Director of Investor Relations. Please go ahead, Mr. Aldridge.

Ronald Aldridge

Thank you, operator, and good morning or good evening to everyone participating in our fourth quarter 2013 earnings conference call. Hosting this 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 within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts but instead are predictions about future events. Although we believe that our predictions are reasonable, future events are inherently uncertain and our forward-looking statements may turn out to be incorrect. Information on many of the risks relating to our forward-looking statements can be found in our filings with the SEC. Our forward-looking statements speak only as of the date on which they are made, and we assume no obligation to update any forward-looking statements except as required by law.

Also, in discussing our financials, we will use certain non-GAAP measures, which exclude the impacts of share-based compensation expenses, the amortization of acquired intangible assets and the associated deferred tax impact, revaluation of contingent consideration and impairment charges for goodwill and 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 fourth quarter and full year 2013 results of operations are found in today's earnings release, which has been posted to our website and in the appendix to this presentation.

[Operator Instructions]

And now it's my pleasure to introduce Dr. Ge Li to review our fourth quarter 2013 performance and to discuss our first quarter and full year 2014 business outlook. Dr. Li?

Ge Li

Thank you, Ron. Good evening or good morning, everyone. Slide 4, please. I'd like to begin by saying that while WuXi is known as a premier R&D service provider for the global health care industry, now we are evolving ourselves to a service and solution provider for our partners in their mission to create innovative therapeutic products for patients. We have created an open-access technology and operational platform that any health care company, from the largest pharmaceutical company to the smallest virtual biotech company, and any individual can use the platform to realize their dreams of discovering and developing innovative health care products to benefit patients. We are balancing present and future performance, generating strong current revenue and income growth while making the investments necessary to sustain long-term growth.

Slide 5, please. Looking at our fourth quarter results. We again achieved solid revenue and EPS growth, with gross margins and operating margins similar to those in the prior year. We also achieved solid revenue and EPS growth with stable margins for the full year of 2013. Our growth did not come from just a few of our business but from the entire company and underlined by very good growth from small molecule manufacturing, biologics and the integrated drug discovery services. We expect continued broad-based growth in 2014. Our income growth in 2013 came not just from operations, but also from capable management of foreign exchange exposure that has resulted in significant gains from realized and mark-to-market gains on foreign exchange forward contracts. The gains were more than offset by the RMB appreciation impact on operating income in 2013.

Slide 6, please. Here, you can see how we outperformed throughout the year against our financial guidance. We are very proud that we met or exceeded all of our guidance.

Slide 7, please. Those are the highlights of the business accomplishments in 2013. Our integrated drug discovery unit coinvented 13 molecules that were declared as preclinical candidates in 2014 for our customers. WuXi's scientists are named on the patents or patent applications of those inventions of drug candidates. For our manufacturing business, we now manufacture APIs or advanced intermediates for 8 commercial and 10 Phase III products. 1 year ago, you may remember those numbers were 5 commercial and 7 Phase III products. This increase in our commercial manufacturing portfolio indicates that our strategy of building manufacturing product pipeline is working very well.

As a result, we will be building a new small molecule manufacturing facility in the City of Changzhou, which is about 2.5 to 3 hours’ drive from Shanghai, where our headquarter is. A few of these commercial products are expected to have significant sales potential for life. We are very happy last year we passed FDA inspection of our GMP manufacturing facility that we use to manufacture advanced intermediates for ibrutinib, and we're very happy for our partner, Pharmacyclics, to win the FDA breakthrough drug standards on the ibrutinib.

We also substantially expanded our biologics capabilities, and it was slightly profitable for the full year of 2013, 1 year ahead of our internal schedule. We installed the first 2,000 disposable -- 2,000-liter disposable bioreactors in Asia and have successfully completed a 2,000-liter run involving NS3 -- NS0 cells. We are now producing an antibody drug for a customer for Phase IIb and Phase III trials we conducted in the United States and Europe.

Our genomic lab received CLIA certification from the U.S. Centers for Medicare and Medicaid Services, the only facility in China to receive this honor. This will enable us to undertaken -- undertake certain clinical trial gene sequencing projects for global customers. We also have achieved initial success as a venture investor within our industry. 2 U.S. biotech companies we invested had successful IPOs in 2013 on NASDAQ, and the third portfolio company was acquired by a public U.S. biotech company.

So now I will ask Ed to discuss our fourth quarter financial results in more detail. Ed, please.

Edward Hu

Thank you, Dr. Li. Turn to Slide 8, please. On this slide, you can see that WuXi achieved more than 25% year-over-year revenue growth in the fourth quarter, with accelerating growth rate for each business for the first 3 quarters of the year. Our fourth quarter is typically the strongest quarter. Total revenue growth of 15.5% for the full year was driven by excellent growth of 25.8% by Manufacturing Services and very good growth of 15.5% by China-based laboratory services business.

If you turn to Slide 9, please. Here, you can see strong sequential growth in China-based laboratory service revenue and steady quarterly performance at a high level by Manufacturing Services. We think that our Manufacturing Services now has achieved a scale so that its quarterly revenue are less variable than they have been historically.

Turn to Slide 10, please. Our GAAP P&L shows that we were able to grow gross profit and operating income in line with revenue growth despite the fact that we faced rising labor costs and appreciating Chinese currency against U.S. dollar. We achieved this good performance through relentless focus on improving operating efficiency through company-wide Lean Sigma initiatives and effective cost control. Contributions from gain on foreign exchange forward contracts, high interest income and government subsidies also helped drive diluted EPS growth in 2013. For the fourth quarter of 2013, with 25% revenue growth, GAAP gross profit grew 22.4%. For the full year of 2013, we achieved 15.5% revenue growth and 15.5% gross profit growth, which is in line with revenue growth.

GAAP gross margin sequentially increased from 35.9% in third quarter to 38% and modestly decreased from last year's fourth quarter of 38.8%. Gross profit margin in the fourth quarter was the strongest quarter as a result of higher revenues. For the full year, GAAP gross margin of 36.6% was comparable to the full year of 2012 gross margin of 36.7%.

GAAP operating income in the fourth quarter grew 24.7%, in line with the revenue growth, and GAAP operating income margin of 18.7% was the same as the fourth quarter of 2012. GAAP full year operating income increased 17.7% year-over-year due to G&A cost control and lower spending in sales and marketing. Full year 2013 operating margin of 18.2% was slightly better than 17.2% in 2012. Higher other income contributed significantly to both fourth quarter and full year 2013 net income growth.

For the fourth quarter of 2013, we had $6.7 million of gains from foreign exchange forward contracts, of which realized gains were $4.4 million and mark-to-market gains were $2.3 million. For the full year of 2013, we had $19.3 million of gains on forward -- foreign exchange forward contracts, of which realized gains were $10.2 million and mark-to-market gains were $9.1 million. Loss from equity-method investment were $2.2 million for the fourth quarter and $5.3 million for the full year of 2013. These losses were from our joint ventures with MedImmune and PRA, as well as an equity pickup from 1 venture investment.

Diluted EPS increased 34.5% to $0.45 for the fourth quarter and increased 32.4% to $1.57 for the full year. Gains on foreign exchange forward contracts contributed about $0.26 in 2013 versus $0.07 in 2012. Excluding the impact of gains from foreign exchange forward contracts, full year GAAP diluted EPS would have grown about 17% to $1.31.

Turn to Slide 11, please. This slide shows sequential growth. Our GAAP gross margin and operating margin in the fourth quarter were our best of the year which historically had been the case due to our achieving the highest revenue in the fourth quarter. Turn to Slide 12, please. Our non-GAAP gross -- net revenue, gross profit, operating income and net income were similar to those for GAAP and for the same reasons, strong volume driving revenue growth, good cost control, stable margins and strong gains from foreign exchange forward contracts. Turn to Slide 13, please. As with the GAAP, the fourth quarter was our best quarter for non-GAAP margins, primarily as a result of higher revenues.

Slide 14, please. We are in a very strong financial position with $391 million cash and only $79 million of bank loans. We generated $31 million of free cash flow in the fourth quarter and $125.6 million for the full year. Our capital expenditures came in below our expectation at $55.9 million, and as you will see, we expect a significant step-up in CapEx spending in 2014 to build the small molecule manufacturing facilities and invest in new laboratories and new equipment.

Currently, we are building cash on our balance sheet. We announced a share back -- share buyback program last year when our stock price was around $17 and now it's around $39, so we have not been active in purchasing our stock in the past 12 months. We intend to purchase stock in 2014 to offset dilutions from the vesting and exercise of employee stock options and restricted stocks.

Slide 15, please. We expect 2014 to be another good year, so today, we are giving our 2014 financial guidance. We expect to deliver revenues of $660 million to $670 million. That is a 14% to 16% year-over-year growth. We expect both GAAP and non-GAAP EPS to grow 7% to 10%, with GAAP diluted EPS in the range of $1.68 to $1.73 and non-GAAP diluted EPS in the range of $1.95 to $2.

For the first quarter of 2014, we expect 8% to 10% year-over-year revenue growth to $143 million to $145 million. In light of recent depreciation of RMB versus dollar and potential related volatility, for the purpose of providing our first quarter 2014 EPS guidance, we have not considered the potential mark-to-market gains or losses on foreign exchange forward contracts. On that basis, we expect to generate GAAP diluted EPS of $0.31 to $0.33 and non-GAAP diluted EPS of $0.36 to $0.38.

In 2014, we plan to make investments in a range of areas to strengthen our organization and its capability for sustained long-term growth. We expect to maintain stable gross margin in 2014. On the operating expense side, we are going to incur more operating expenses and will be growing faster than revenues. Therefore, we expect operating margin in 2014 will be slightly lower than that of 2013. These projections for the first quarter reflect a modest reduction in business from one of the large pharmaceutical companies that is undertaking restructuring. And as you can see, we expect to make this up for the full year with more business from other customers.

Turn to Slide 16, please. Here are the key investments for WuXi in 2014. First and foremost is talent. So we have significantly strengthened our organization in the past few years, and that investment in bright, experienced people will prepare our company to grow. Over the past several months, we have hired many executive [ph] level senior managers to strengthen our management team. Our investment in talent cover wide areas of our business, including chemistry, commercial operations, biologics, laboratory testing services, business development, information technology and human resources.

We will be investing over $100 million of CapEx in 2014 and 2015 to build a new small molecule manufacturing facility in the City of Changzhou that we expect to be operational by late 2015. We will continue to invest in biologics, drug discovery development, genomics and diagnostics, as well as discovery biology and many other areas. We will also expand our sales, marketing and business development organizations in our major markets and upgrade our IT infrastructure and capabilities.

Turn to Slide 17, please. This slide shows our new guidance in historical perspective. You can see that we expect to achieve in 2014 an extension of success over many years, driven by an effective business model that we're executing well.

Turn to Slide 18, please. This is how our 5 major businesses performed in 2013. So manufacturing development, particularly biologic development, grew faster than the company average. Synthetic chemistry and medicinal chemistry and other discovery services also achieved good growth. And U.S. lab service achieved modest growth. In the right of the pie chart, you can see the relative contribution of each business to our incremental 2013 revenue growth, with manufacturing development and medi chem leading the way.

Turn to Slide 19, please. So starting in 2014, for revenue reporting purpose, we have regrouped China-based laboratory services, as you see here in this pie chart. We have combined reporting synthetic chemistry, medicinal chemistry and other small molecule chemistry service into a business group that we call Chemistry and Discovery. To better serve our customer needs and to improve operational efficiency, we consolidated our China-based laboratory services under 1 division called Laboratory Testing Services, which include core analytical services, biology, DMPK, bioanalytical services, analytical development, toxicology and genomics. The remaining services, primarily biologics drug development and small molecule formulation development, will be presented as a single Development Service.

This pie chart shows our 2013 results on a pro forma basis as if this had been our organization in that year. The bar chart on the right shows the relative contribution to the incremental 2013 revenue from these businesses. You can see the exact detail of this new classification in notes at the bottom of this chart and the preceding slide.

And now Dr. Li will discuss our long-term performance and strategies in our major businesses. Dr. Li, please.

Ge Li

Slide 20, please. Starting in 2014, we will group our synthetic chemistry, medicinal chemistry, radioactive chemistry and peptide synthesis into a reporting segment called Chemistry and Discovery Service, as shown in previous slide. This service segment had revenue of $194.8 million in 2013, up 8.7% year-over-year. We expect mid- to high-single-digit growth -- single-digit revenue growth in 2014.

Our synthetic chemistry business has a number of advantages that allow us to compete effectively even in a commoditizing market: our customer focus, our scale, our greater efficiency, greater experience and the pricing flexibility because of our Wuhan campus, where we have relatively lower labor cost. Our medicinal chemistry business has been quite productive in 2013. In addition to the 13 preclinical candidates that WuXi coinvented with our customers, we worked on 10 additional compounds that were declared preclinical candidates by our customers in 2013.

Slide 21, please. In order to better serve our customers’ needs and improve operational efficiency, in 2014, we consolidated all of our China-based lab testing service under 1 division we call Laboratory Testing division. This service division includes core analytical service, biology, DMPK/ADME testing, bioanalytical services, analytical development, toxicology and genomics. This service division had a revenue of $107.4 million in 2014 -- 2013, up 21.4% year-over-year. We expect mid- to high-teens revenue growth in 2014.

Slide 22, please. We group small molecule formulation development, biologics drug discovery and development, clinical site management service and the biologic research reagents under Development Services. This service had a revenue of $36.5 million in 2013, up 42.8% year-over-year. We expect strong growth, 40% to 50% revenue growth in 2004 -- 2014 for Development Service.

Slide 23, please. Biologics is expected to be one of our key growth areas over the next few years. Today, most of our biologics revenues are from biologic development service. We had about 50 customers in this business in 2013, a mix of international and Chinese companies, and then we worked on a mix of projects of normal molecules and biosimilars. Our organization grew very fast from about 200 people at the beginning of the year to about 450 during 2013 and expect to expand further in 2014. Our joint venture with MedImmune on MEDI5117 continue to go very well.

Slide 24, please. Our small molecule manufacturing revenue grew about 20% in 2013 to $141 million. Manufacturing Service revenue for the year included the small molecule revenue and about $6 million of biologics manufacturing revenue. We had continued strong growth in Process Chemistry and research and manufacturing revenue in 2013. Commercial Manufacturing revenue are expected to begin strong growth again in 2014. We are now manufacturing APIs and advanced intermediates for 8 commercial products and 10 Phase III products. As a result of this going -- this growing demand, we are undertaking a majority -- major capacity expansion project that will double our manufacturing capacity by late 2015. We passed our first FDA inspection last year relating to our manufacturing of advanced intermediates for Pharmacyclics' ibrutinib, with no Form 483 [indiscernible].

Slide 25, please. U.S. lab services provides service necessary for regulatory approval of medical device and the biologic products. We believe that our capability in this business will allow us to grow at least in line with market growth. In addition, because of advances in cell therapy product development by our customers, we plan to expand our cell therapy manufacturing and testing capability and the capacity to support our clients' late-stage clinical trials supply and the commercial supply demand in the coming years. We also expect to expand our capabilities in material characterization services for medical devices. Investments that we are making in these service offerings are expected to drive high-single-digit revenue growth for U.S. lab service in 2014.

This slide shows how we have expanded and diversified our customer base. Revenue from our top 10 customers, which are almost exclusively large pharmaceutical companies, have grown well over the past 2 years, and they represented 45% of revenue in 2013. Revenue from other customers, including many small and medium-sized pharmaceutical and biotech companies grew more than 70% in the past 2 years, and it was 55% of the total in 2013.

Slide 27, please. So in conclusion, our current performance is excellent, with good revenue and EPS growth exceeding our expectations. We expect continued strong revenue growth in 2014, driven largely by the same businesses that drove 2013 growth. All of our businesses are growth businesses, are benefiting from the continuing outsourcing trend of the health care industry and greater investment in the China lab science industry. Growth is always a result of investments, and we continue to invest behind all of those businesses, particularly our highest-growth business. Despite this investment, we still expect 7% to 10% diluted EPS growth in 2014. This continuing success is a result of our focus on our mission of helping our customers discover, develop and commercialize innovative medicine to benefit patients.

And now we will be happy to answer your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Bin Li from Morgan Stanley.

Bin Li - Morgan Stanley, Research Division

I'd like to ask 2 questions. First is on your guidance. Looks like you're guiding margin is coming down a little bit. And I'd like to ask you to analyze the margin trend in terms of the -- all the different moving parts that are impacting margin in a positive or negative way. Perhaps, if we can look at -- or not looking at SG&A and that kind of stuff, but we're looking at it from an operation point of view by the way that you're categorizing in a new way, i.e., lab testing services, chemistry, discovery. If we look at each of those 5 new business lines, which part will see margin to move up, which part will see margin to move down on the operating margin basis? So that's my first question. The second question is more on the company operation part, also has to do with this new reporting structure you just laid out for us. I mean, this is not just for the reporting purposes. You're actually reorganizing your different units, business units into Chemistry and Discovery, Lab Testing. Can you tell us where are you in terms of physically, operation-wise, separate those? And also, can you explain the rationale behind that? And perhaps if there's any synergies, that kind of stuff, if you can give us more insight on that.

Edward Hu

Bin, on the margin front, as we said, we expect the gross margin to be stable compared to the last year. And on operating margin level, as we said, we are going to be spending more in R&D and SG&A costs, and that will increase the operating expenses more than last year. Therefore, the operating expense line we'll -- the operating margin line, we'll expect slightly below last year.

Ge Li

So Bin, on your second question, we don't call it reorganization. We call it, actually, organizational structure improvement. So the primary driver for this improvement is to better serve customer needs and to drive synergy. So as you know, we view most of the business units starting by silos, right, building by silos and its own capability and capacity. And as you can see, most of the business now is growing to a -- are fairly sizable. So for example, by bundling most of the China lab testing service capability together to form Lab testing division is to drive the synergy and also to drive the cross-border learning and the sharing of operation knowledge and experience.

Bin Li - Morgan Stanley, Research Division

If I can ask you -- to follow up on this margin question. In terms of margin movement, each of your 5 units, are they moving up or down on operating margin?

Edward Hu

In general, they are probably -- in terms of gross margin level, I think some businesses clearly are moving up. Like biologics, we are growing, so the profitability is improving. And other business probably have slightly downward margin because of RMB appreciation and labor cost inflation.

Operator

Your next question comes from the line of Ingrid Yin from Oppenheimer.

Ye Yin - Oppenheimer & Co. Inc., Research Division

My first question is about -- you mentioned WuXi coinvent 13 preclinical candidates for customers. Beside scientist's name on the patents, can you explain what does that mean financially for WuXi? Is there any rights sharing or profit sharing as these candidates turn to real drug in the future? And my second question is about investment in IT infrastructure. I mean, can you share more details? And what kind of IT technology are you -- is there anything that goes to data mining as you're starting to do genomics testing?

Ge Li

Yes. Ingrid, my -- talking about IT infrastructure. Actually, the investment are mainly on IT security and the data mining. So as you know, we have -- historically, we have accumulated a lot of data, so it's very useful we can mining data to improve the efficiency of our operation. Talking about the first question, co-invention of the patents. Most of this, actually, is a service program, and we do have a few, a couple actually, on the risk-sharing programs. If it turns out to be a great product, we do have some economic benefit. But it's only a very small percentage.

Operator

Your next question comes from the line of Sean Dodge from Jefferies.

David H. Windley - Jefferies LLC, Research Division

It's Dave Windley here. Wanted to follow up on the last question. In regard to margin in the preclinical candidates where you're co-inventing, have you -- in the risk-sharing situations, maybe there aren't that many, but have you forgone any current margin in exchange for the risk share? Is there any meaningful effect on margin in that trade-off? Or are you pretty much getting paid full fee-for-service rate?

Ge Li

For some, we actually discount. And -- but in most of the cases, we get our costs covered.

David H. Windley - Jefferies LLC, Research Division

So you get your costs covered but not as much profit margin as a normal fee-for-service payment stream, I assume?

Ge Li

Absolutely. Yes, you're right. But it's only a low percentage of the programs.

David H. Windley - Jefferies LLC, Research Division

Okay. Is there a way to quantify what the impact to, like, gross or operating margin would have been from that?

Ge Li

It's small. Ed?

Edward Hu

I think we actually won't be able to quantify that. Normally, we at least cover the cost with some margin. And then if the program's successful, then we'll get a bonus, and in some instances, we also get a future profit sharing.

David H. Windley - Jefferies LLC, Research Division

Okay. Ed, can you quantify at all -- so you mentioned in your prepared remarks that other income and FX-related gains were fairly large contributor in '13. Can you talk about what your assumptions are in the guidance for that for 2014?

Edward Hu

So for 2014, our assumption is that RMB to U.S. dollar exchange rate will be -- go to $1 to RMB 6. That is our assumption built into full year guidance. In the first quarter, right now, the exchange rates are quite volatile, 1 day it's up, 1 day it's down. So that's why we are unable to pin down the Q1 guidance, excluding the mark-to-market gain on foreign exchange contracts.

Ge Li

David, I want to add on your earlier margin questions. Because we get paid bonus by stage, so -- and if we successfully achieve the milestones and -- which also is calculated failure rate, we should be able to make our margin back, actually slightly better than increasing fee for service.

David H. Windley - Jefferies LLC, Research Division

Right. Have you received any of those milestones yet? Have you gotten the upside from any of those yet?

Edward Hu

Yes, we received some milestones already last quarter.

Operator

Your next question comes from the line of John Kreger from William Blair.

John Kreger - William Blair & Company L.L.C., Research Division

Could you guys maybe just clarify a little bit the net impact on your business from currency fluctuations, particularly when you take into effect your hedging strategy? If we get into a situation where the depreciation in RMB persists, what impact do you think that would have in '14?

Edward Hu

So probably give you a little bit of a background. So typically, the FX rate impact on the overall margin actually is twofold. One shows up on the cost line. So a depreciation in RMB certainly helps on margin. But obviously, we probably will lose money on foreign exchange contracts. Typically, 1 percentage point appreciation on RMB against dollar is actually 0.5 percentage point impact on margin roughly. And then the rest is -- the foreign exchange contract clearly depend on where exchange rates go. So -- but we still expect to book realized gains in 2014 because the contract we've bought before are still way above the current exchange rates.

John Kreger - William Blair & Company L.L.C., Research Division

That's helpful. And Ed, should we assume -- if the quarter were to end about now with the current rates that you'd have a hedging loss rather than a gain in the first quarter, would that be reasonable?

Edward Hu

If the exchange rate -- if the current exchange rate persists to the end of the quarter, we may have a small loss on mark to market -- mark-to-market losses on the foreign exchange contracts.

John Kreger - William Blair & Company L.L.C., Research Division

Got it. Great. And then just finally, any update on your clinical JV with PRA? How is that going?

Edward Hu

It's going well. I think, with the partnership with PRA, we established full operation in China now, and we started winning those sizable Phase IIb, Phase III clinical trials. But due to the -- China's regulatory approval process for clinical trials is very long, typically 9 to 12 months, so revenue probably will come later this year.

Operator

Your next question comes from the line of Jack Hu from Deutsche Bank.

Jack Hu - Deutsche Bank AG, Research Division

So actually, this is again regarding strong underlying for you newly, actually, categorized business segments. I'm not going to ask you for the -- to quantify the profitability or the margins for this each segment, but at least for the testing and the development, are we above breakeven yet? The second question is, if we look at these 2 business segments, what is the targeted operating margin on a normalized basis? And how many years are we going to take to get it there?

Edward Hu

Jack, actually for all the business lines, we already are profitable. Obviously, many of those businesses are within the China lab service overall margin range.

Jack Hu - Deutsche Bank AG, Research Division

So you have a corporate operating margin around 21-something percent. So for the development segment, how far away is it from there?

Edward Hu

That probably would take a few more years to grow into a sizable business.

Operator

Your next question comes from the line of Wei Du from Goldman Sachs.

Christopher Eoyang - Goldman Sachs Group Inc., Research Division

This is Chris. I'll be asking questions on behalf of Wei. This is 2 questions. First is you mentioned that you opened a new bioreactor with 2,000 liters. Can you just clarify that, that's in addition to your previous 1,000 disposable bioreactor? And what is the current utilization rate for the bioreactors? And the second question is, we see there is still equity loss from the JV with PRA and MedImmune. What do you see going forward the profitability of these 2 JV will be like?

Edward Hu

For the 2,000-liter bioreactor, this is a reactor we installed last year, and now it started producing Phase II, Phase III clinical trial material for U.S. and European clinical studies for our customers. And for the JV, for WuXi PRA joint venture, we expect probably we'll start turning to breakeven next year and start growing profits. With MedImmune, this is a long-term JV for drug development, so until the product's approval in the market, we will continue to have losses. But when the product advances in clinical trial, the value increases.

Christopher Eoyang - Goldman Sachs Group Inc., Research Division

So for the bioreactor, it's in addition to the 1,000 liters?

Edward Hu

We have 1,000-liter train and then 2,000-liter train. There are 2 trains.

Christopher Eoyang - Goldman Sachs Group Inc., Research Division

So currently what is the utilization rate for the overall reactors?

Edward Hu

At the moment, it is still not optimal yet because we are ramping up.

Christopher Eoyang - Goldman Sachs Group Inc., Research Division

Okay. And also, when you mentioned PRA is going to turn breakeven next year, you mean '14 or '15?

Edward Hu

'15.

Operator

Your next question comes from the line of Tejas Savant from JPMorgan.

Tejas Savant - JP Morgan Chase & Co, Research Division

Standing in for Tycho here. Can you give us a little bit of color on the backlog in the biologics business. I know you said it was around $60 million or $61 million at the end of 3Q last year.

Edward Hu

The backlog is still about same, yes.

Tejas Savant - JP Morgan Chase & Co, Research Division

Okay. And then any update on utilization and the number of customers in toxicology?

Edward Hu

Animal utilization in toxicology is around 70%.

Tejas Savant - JP Morgan Chase & Co, Research Division

Okay. So it's still around the same range as third quarter last year?

Edward Hu

Yes.

Tejas Savant - JP Morgan Chase & Co, Research Division

Okay. And then finally just to wrap up, any color on U.S. labs? I mean I know that's been a relatively slow grower for you, and I know you called out a couple of investments you're making there in 2014. But any further color you can give in terms of growth and drivers there?

Edward Hu

U.S. business essentially will be growing based on the new product approval, particularly antibodies and cell therapy products. That's where we are making our investments to meet the growing demand. So I think that more and more antibody drug will be approved in the coming years. And cell therapy also now looks very promising, our pipeline. That's where we see business coming.

Operator

Your next question comes from the line of Serena Shao from Bank of America Merrill Lynch.

Serena Shao - BofA Merrill Lynch, Research Division

So I think this might be discussed before, I just want to reemphasize here because we are talking about, next year, like focus of investment is the Changzhou facility. I just want to know when -- I think, as far as we know, the Wuhan facility haven't reached full capacity yet. So when do you think the Wuhan facility will achieve, like, its full utilization? And also, when do we expect Changzhou -- the new Changzhou facility to, like, achieve, like, significant utilization rate?

Ge Li

Yes. First of all, Wuhan facility and Changzhou facility are different. The Wuhan facility is providing a lab chemistry service. Changzhou facility is doing manufacturing. So you asked about capacity utilization, and I think for our Wuhan facility, we're getting close to 100% utilized.

Serena Shao - BofA Merrill Lynch, Research Division

Okay. So when do you expect Changzhou, the new one to, like, reach like...

Ge Li

We just started construction, and hopefully, the Phase 1 will be done in third quarter of 2015.

Operator

There's a follow-up question from Sean Dodge from Jefferies.

David H. Windley - Jefferies LLC, Research Division

This is Dave Windley again. So broader question, I have heard from a couple -- 1 or 2 large pharmas that they are, in medicinal chemistry or early discovery activities, thinking about vendor consolidation efforts, vendor -- call it, consolidation or simplification efforts in that area of their business similar to the procurement efforts that they've put into their Phase II/III clinical development structures or supply chains. Are you seeing that? And if you are, is that contemplated in your growth outlook in the next year or 2?

Ge Li

Well, actually, I don't want to comment on our partners' business strategy. And -- but again, we feel fairly confident about growth prospectives of our business. So remember, our mission is to have this technology, science and the operational platform to enable anyone and any company to discover and develop drugs. So actually, on one of our slides, as you can see, we significantly diversified our customer base. So interesting enough, 5 years ago, the top 10 customers probably contribute to 70% of our total business, now it's about 45%.

David H. Windley - Jefferies LLC, Research Division

Okay. Understanding that you don't want to comment on specific clients and I'm not asking you to do that. But in broad strokes, can you comment as to whether customers of yours may be looking to narrow from 6 down to 2 or 8 down to 2 in terms of their medicinal chemistry activities, where you would have share gain opportunities? Or are you more reliant on just the general growth in their spending in the early chemistry areas?

Ge Li

Well, certainly, because of high quality and -- high-quality provider wins, right, I certainly hope we win more.

David H. Windley - Jefferies LLC, Research Division

Okay. And then in commercial manufacturing, you're talking about 8 products. Do those 8 products include Incivek still? Or have you basically gotten to a point wherein Incivek is no longer part of your activities?

Ge Li

Well, again, that's another question I don't want to be -- to get into very specific. But most of the growth are certainly not from that particular product actually. We significantly developed the commercial manufacturing pipeline because of our research and manufacturing capabilities. So I just want to remind everyone, we actually have the largest group of process chemists in the industry. We have about 500-plus process chemists. And every year, we are doing 60, 70 research APIs for our customers.

Ronald Aldridge

I see we don't have any more callers in the queue. So with that question, we're going to end our conference call today. Thank you very much for your questions, and we look forward to updating you about the company again in May.

Ge Li

Thank you.

Edward Hu

Okay, thank you. Bye.

Operator

That does conclude our conference for today. Thank you for participating. You may all disconnect.

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