Wuxi Pharma: Too Much of a Good Thing

My, how quickly times can change. Just 9 months ago the iShares FTSE/Xinhua China ETF index (FXI) had risen to 220 by October, 2007; climbing 320% in three years and peaking just as Wuxi PharmaTech (WX) went public. But since those heady October IPO days, Wuxi shares have steadily lost ground to the tune of –65% 

What’s happened? The high double-digit earnings and growth rates have continued apace, but the stock has been caught in a perfect storm of bad timing, underwriter greed, and poor market judgment on the part of Wuxi (WX) management.  

First off, the Chinese market is down 35% from its October highs and the IPO has been caught in that downstream, but Wuxi’s demise is not all from “market conditions”. It’s mostly from insider selling accounting for 15 to 50% of all volume (depending on the months you’re counting) from February til now. 

On April 4^th, the officers of Wuxi PharmaTech announced they wanted to sell some of their shares (after the IPO lockup had expired), and then float a secondary offering too: 5,862,400 ADSs for the insiders, 4,264,400 for the secondary offering.  That’s very ambitious for a stock that trades 420,000 shares a day. 

It would require 24 days of non-stop selling and ALL the daily volume if insiders were serious about unloading that many shares.  

An invitation to short sellers to piggyback along? Or as as one wag might say, “Stupid …stupid… stupid”. In the next 6 days the stock dropped from $24 to $19, factoring in the estimated share dilution of the secondary combined with the market’s reaction to the insider selling. 

But then shareholders got a partial stay-of-execution. A month later, on May 4^th, WX announced the secondary was off the table; and by mid-May the stock quickly returned to its recent highs. Now there would only be 14 days of non-stop selling required to requite the insiders of their shares!  

But then came another turn for the worse. On June 10^th United Overseas Bank of Hong Kong announced they wanted to sell 2.1 ML shares of their stake (an additional 5 days average volume) at a 4.35% discount to the previous close - $18.40 - or 12% higher from where we are today (June 18, 2008). 

Now I’m no wise guy, but I know that if you stick your finger in a leaking bowl with a hole in it, you’re bound to stop some of the water from coming out. The recent 30% destruction of the share price is entirely attributable to insider-selling and shorting. 

Let’s just say for pretends sake, that 1/4 of all selling during the last 56 trading days (since the original April 4^th announcement) was devoted to insiders unloading their shares. We’ve now come maybe to the end of that, but have another ten days to go while UOB unloads its 2.1 ML shares at ever-lower prices. 1.13 ML shares were sold between May 28 - June 3rd, (stock down 12%; JPM was the biggest seller) and since UOB announced its intention to unload 2.1 ML shares on June 10th, WX is down an additional 15% (-27% total). That 3.23 ML shares equals 57% of all volume for the last 14 trading days. 

There’s also the fact that we are in the fiscal year, end-of-quarter window dressing selling period for funds that surely don’t want Wuxi’s negative stock performance showing up in their holdings.  If nobody at Wuxi (or their underwriters) wants to hold on to their shares, why should they? 

Like I said at the beginning of the article, it’s been a perfect storm of bad timing, underwriter greed, and poor judgment on the part of Wuxi management. The insiders’ unwillingness to count ($) the cost of their actions on the other 98% of Wuxi shareholders borders on willful negligence. They could care less about the shareholders – and in essence, the underlying business too. If Wuxi PharmaTech is a publicly-traded business on the NYSE (and by all accounts it’s still a good business), it shouldn’t be treated like a cash-cow or a golden goose that Jack the Ripper or the Gang of Four carve up at will.  

Disclosure: Author has a long position in Wuxi PharmaTech (WX)

Comments

[rlirph:]

Why would any one want to buy stock in this company when its price has been halved in less than a year and the insiders are selling? Isn't that enough of a warning signal?

2008 Jun 19 04:09 AM

[omega:]

The more relevant question at this point is, what is likely to happen to the stock price when the current bout of insider trading has run its course and we have come out the other side of the perfect storm, humbled but still kicking? With a growing business and very low stock valuation, are we looking a perfect conditions for a dramatic rebound? Or do you see continued pressures keeping the stock price depressed for the foreseeable future?

2008 Jun 19 07:49 AM

[NJgolfer:]

While also long in WX, even after this selling, WX will be a damaged stock in the eyes of alot of institutions. Having been through this before, while we may get a couple of point pop, it is unlikely to get back to 20 - 25 range anytime soon. Strongly considering unloading and cutting the loss.

2008 Jun 19 10:08 AM

[Chipstocktr...:]

I think that if management and the underwriters simply left their personal stock shares alone and concentrated on improving the business, the situation would quickly resolve itself. They are the single biggest drag on the price. Their selling since May 28th accounts for 57% of (all) volume in the stock. That's outrageous, and why the stock is down (-27%) since the 28th.

2008 Jun 19 10:35 AM

[Chipstocktr...:]

WX rallied 7% today on almost double the normal daily volume. It looks like someone at Wuxi Pharma can read English and pulled the plug on the insider sales that were swamping the stock. It's about time! How can you attract institutional interest in your company if the execs and underwriters are treating the shares like a casino trip to Macao? The CEO did the right thing when he pulled the secondary off the table in early May; maybe now he can have a few words with the Gang of Four to get em to wait like the rest of us shareholders. If the company continues its profitable ways - and the correction in the Chinese stock exchange abates - Wuxi Pharma should return quickly to the 20s. Their biggest enemy right now is themselves and their lack of "common sense" regarding market conditions and window-dressing week.

2008 Jun 19 04:18 PM