WuXi PharmaTech Earnings Seem Stellar

WuXi PharmaTech (WX) earnings seem quite stellar on first glance - I am assuming the analysts' expectations are non GAAP since we live in a non GAAP world (which is a whole issue onto itself) but I digress. $0.14 EPS was consensus, with a range of 8 analysts of $0.08 to $0.19 - I only point that out because this is a young company with a short track record and a bevy of analysts who are having trouble coming to a consensus.

They appear to have done a $0.21 quarter... and the market yawns if last night's after hours action signifies anything. If this were an American contract research organization posting a beat of that significance (50% over consensus) I assume it would be up 15-20%. Oh well, the beat goes on. Or is it (our) beating goes on? We even have the right sector (health care) on this one, but apparently the wrong country.

• Net revenues for the second quarter 2008 were $70.8 million, representing a year-over-year increase of 134% from $30.2 million in the second quarter 2007.
• Net revenues from laboratory services increased 80% to $45.2 million in the second quarter 2008 from $25.1 million in the second quarter 2007. Net revenues from manufacturing services increased 400% to $25.6 million in the second quarter 2008 from $5.1 million in the second quarter 2007.
• Our overall non-GAAP gross margin was 40%, laboratory service non-GAAP gross margin was 50% and manufacturing non-GAAP gross margin was 24%. GAAP gross profit for the second quarter 2008 was $22.1 million and overall GAAP gross margin was 31%, laboratory service GAAP gross margin was 39% and manufacturing GAAP gross margin was 17%. (don't often see gross margin expressed as GAAP v non GAAP)
• Non-GAAP operating income was $17.0 million in the second quarter 2008, a 90% increase from $8.9 million in the second quarter 2007. Non-GAAP operating margin was 24% in the second quarter 2008, down from 30% in the second quarter 2007. GAAP operating income for the second quarter 2008 was $7.7 million. GAAP operating margin was 11% in the second quarter 2008, down from 25% in the second quarter 2007 primarily due to amortization of acquired intangible assets. (this is a negative divergence but they hired a lot of "seasoned executives" which probably causes some of the increase in expenses, and hence reduction in operating margin)
• Non-GAAP net income for the second quarter 2008 grew 81% to $15.5 million, compared to the non-GAAP net income of $8.6 million in the second quarter 2007. Non-GAAP net profit margin was 22% in the second quarter 2008.
• GAAP net income for the second quarter 2008 increased 19% to $8.5 million from $7.1 million for the second quarter 2007. GAAP net profit margin was 12% in the second quarter 2008.
• Non-GAAP diluted earnings per ADS were $0.21 compared to $0.13 in the second quarter 2007. GAAP diluted earnings per ADS were $0.12 in the second quarter 2008 compared to $0.11 in the second quarter 2007.

Guidance

• We maintain our 2008 annual consolidated net revenues guidance in the range from $280 million to $300 million

All the non GAAP vs GAAP figures are making for a messy earnings report but generally the "wink wink" methodology on Wall Street is to use non GAAP because huge amounts of executive compensation can thus not "count" against profits. Another in the many games we play.

Even with the reduction in operating income percentage, WX is showing a 24% which compared to the 12-15% range of American peers. Some of the margin pressure looks to be "growing pains" but in the long run, with a much lower labor cost (one reason we bought it) they should maintain superior to peer margins even with the quarterly ebbs and flows. Well, we've held it this long - I don't see any reason to sell it here - I guess it can trade in obscurity for an unknoweable amount of time going forward. We're just racking up profitable Chinese companies growing 100%+ who cannot find a bid...

Disclosure: Long WuXi PharmaTech in fund; no personal position