WuXi PharmaTech: Poster Child for China’s CRO Industry

 |  Includes: CKUN, CSKI, WX
by: ChinaBio Today

CROs received more coverage in the pages of ChinaBio Today during the past week. No wonder about that, because doing drug research in China, in-house or out-sourced, is a well-documented trend. This week, Chemizon, BioDuro, Medicilon and Pharmaron were seen in the context of the tremendous growth and upheaval in the industry (see story).

In its earliest stage, China CROs were founded by returnees, their businesses starting small and concentrating in a specific area of expertise. Now, CROs are being formed with significant financial backing. Their labs are large from the outset and capable of handling all aspects of drug development. And their leaders may not be Chinese.

The poster child for China’s CRO industry is WuXi PharmaTech (NYSE:WX). Its IPO, conducted in August 2007, made the world at large aware of China biopharma, because the financial world loves to hear stories about a winner. The IPO was priced at $14, slightly above the expected range of $11-$13. But what happened next is what caught the world’s attention. WuXi’s stock began trading at about $19 per share in a time when biotech IPOs were not usually the recipients of that kind of post-IPO bump. And the stock continued to climb until it hit a high of $45 in October, a level better than three times its IPO price.

Since then, WuXi has given up a lot of those gains. It closed Friday at $24.91, after suffering a loss of 94 cents or 3.6% during the session. There was no particular news to account for the setback. WuXi, which will report its year-end numbers soon, is expected to make a profit of 47 cents per share on $135 million in revenue. In 2008, analysts forecast a profit of 69 cps on $205 million in revenue. In other words, revenues will grow at a 52% rate while earnings climb only 38%.

During the past week, WuXi received the go-ahead from US authorities on its acquisition of US-based CRO AppTec. While the acquisition will increase WuXi’s business backlog, it may have a negative effect on the company’s margins. A US scientist represents an annual outlay of $200,000-$250,000, while a China scientist costs around $30,000. No doubt, synergies abound: some of the AppTec sourced work will be done in China, and AppTec can provide services to WuXi’s customers that are not available in its China labs. But questions remain about the deal. Hopefully, WuXi management will relieve some of the uncertainty surrounding the acquisition in its post-announcement earnings call.

AsiaPharm Group [SI: ASPH], a China biopharma that is listed in Singapore, accepted a proposal from MBK Partners to go private, and 44% of the shares have been pledged to vote in favor of the deal (see story). The offer values AsiaPharm at $253 million, a small premium to the price of the stock at its last close and a 31% premium to the last 30-day average price. MBK has $1.5 billion in assets, and it manages its China investments from a home base in the Cayman Islands.

Another notable deal announced last week was the private placement of $25 million worth of shares in China Sky One Medical (OTCPK:CSKI) (see story). China Sky One already had a fairly comfortable cash cushion of $7 million, so it was not exactly a surprise when the company said the new money would be used for acquisitions. China Sky One Medical also has a number of drugs awaiting approval. Given all this activity, the future news flow should be heavy. If China Sky One Medical could migrate from the Bulletin Board to NASDAQ, its stock price would probably move higher as well. It seems to have the financials to support that move.

Looking at deals from a worldwide perspective and including all industries, KPMG of the UK reported that M&A peaked in mid-2007 and seems to be declining, while joint ventures are on the rise (see story). China, however, is another matter, as the financials of China’s companies still support deals. And as we have reported elsewhere, venture capital and private equity throughout 2007 continued to find prospects in China generally and biopharma specifically. KPMG’s support of the joint venture structure was interesting as it is the basis of many China deals.

Moving from deals and financings to individual drug developments, Lotus Pharmaceuticals, Inc. [LTUS.OB] reported success for a clinical trial of a generic angina drug (see story). In a 1350-patient clinical trial, the isosorbide mononitrate sustained release tablet produced a therapeutic effect, though Lotus is holding specific data until a later date. The dual mechanism drug dilates blood vessels and lowers blood pressure. Lotus will submit the drug to the SFDA with hopes of a 2009 launch.

And traditional Chinese medicine company China Shenghuo Pharmaceutical Holdings, Inc. (KUN) announced it will market its TCM-based skin care products line in the US through the Home Shopping TV Network (see story). The 12Ways® Skin Care line is derived from the Sanchi root, just like China Shenghuo’s main product, Xuesaitong Soft Capsules.

Disclosure: none.