WuXi PharmaTech Beats Estimates: Should See Upside

I don't have a large position in WuXi PharmaTech (WX) (0.5% of fund) as the stock has been in total free fall, but continue to love this space of drug research outsourcing. I haven't bought any of the US companies due to valuation, nor Irish player Icon (ICLR) [Feb 21: Icon with Solid Report], but I continue to like this group as a macro theme. We do have a very nice report  and the analysts estimates were bested by 4 cents with revenue "in line" with estimates. They ripped the ball off the covers for 2008 revenue guidance though! So next year's current estimate of $0.67 should see some meaningful upside. This is one of my smallest companies in the portfolio and these small caps have simply been crushed in this market. Further, this company has never been cheap so I clearly bought my initial stake at far too high of a price...

• WuXi PharmaTech Inc., a Chinese pharmaceutical and biotechnology research-and-development outsourcing company, said Wednesday its profit more than tripled in the fourth quarter, on higher revenue from its lab and research manufacturing divisions.
• The company earned $12.1 million, or 17 cents per American Depository Share, compared with $4 million, or 7 cents per ADS, a year ago. Revenue jumped 62 percent to $37.1 million from $22.8 million. Analysts polled by Thomson Financial expected a profit of 13 cents per share on revenue of $36.9 million.
• Laboratory services revenue rose 33 percent to $28.8 million while research manufacturing skyrocketed to $8.3 million. The company cited an increase in the number and scope of projects. Drug developers have been increasingly outsourcing various phases of the research and development process in a move to cut costs. Part of that shift involves overseas outsourcing.
• In 2008, the company said it expects revenue between $280 million and $300 million, while analysts expect revenue of $237.1 million.

Disclosure: Long WuXi PharmaTech in fund; no personal position

Comments

[Niksurfs:]

I would rate it a buy here. WYETH just gave up a key piece of information in that it can take 9 months to get a permit in China to create an R&D facility within the PRC. That as opposed to 30 days for permits in US & Europe. Given the economic gains (essentially cost savings) and workforce available not to mention the access to Chinese proprietary remedies it seems to me there is tremendous room for continued growth.

WX is building more and new facilties Wyeth will increase CRO outsourcing from 25% to 30%, Pfizer and others wihich need to develop a fatter pipeline of products need the same economy of scale for R&D.

Despite lofty valuations, I am confident this is a long term hold with great potential. I too have a healthy position about to get larger at these prices. I recentlt bought trading shares and cashed them in on the last dip. The break below 19 gives us another opportunity.

Niksurfs

2008 Apr 14 12:13 PM