Doing Big Pharma's Dirty Work—and Cheaper
04/06/2009 10:33 am EST
James Trippon, editor in chief of China Stock Digest, says a Chinese outsourcing company profits by providing basic R&D and other services to drug companies.
WuXi PharmaTech (Cayman) (NYSE: WX) is a [global] pharmaceutical research and biotechnology company with good revenue growth and solid earnings. The company provides laboratory and manufacturing services to pharmaceutical, biotechnology, and medical device companies worldwide.
Because Chinese researchers receive much smaller paychecks than their Western counterparts, WuXi is able to assist its global partners in shortening the drug discovery cycle and lowering the cost of drug and medical device research and development (R&D).
Headquartered in Shanghai, the firm’s senior management team consists of PhDs and MBAs with experience in drug and medical device R&D methodologies and international business practices. WuXi management has more than 200 patents pending or granted, and has published more than 800 scientific publications.
WuXi’s China-based operations provide services to more than 80 pharmaceutical and biotechnology customers, including nine of the top ten pharmaceutical companies in the world. The company boasts that each of WuXi’s top ten customers over the last three years continues to be its customer today, a fact that speaks well of the firm’s skill, efficiency, and respect for intellectual property.
WuXi’s US-based facilities are all registered [with the Food and Drug Administration], including an R&D and manufacturing facility in St. Paul, Minn., a testing facility in Atlanta, and an R&D and testing and manufacturing facility in Philadelphia.
In its most recent earnings report, WuXi announced that fourth-quarter 2008 net revenues from continuing operations increased 74% to $64.4 million, compared to the same period a year ago. Net revenues for continuing operations grew 87% year over year [in 2008] to $253.5 million.
WuXi’s gross profit grew 27% to $20.3 million in the fourth quarter and rose by an impressive 53% to $96.3 million for the full year of 2008. Although WuXi enjoyed strong revenue growth during 2008, the worldwide recession hurt its biologics manufacturing business and contributed to a decline in margins by slightly more than 10%.
Despite problems with this one division, WuXi’s performance remains stellar and there is no reason to expect the company to trade below book value. With its heady and steady increase in earnings, WuXi’s ADSs are very attractively valued with a P/E multiple of [less than 12x estimated 2009 earnings of 44 cents a share].
[When we added it to our Buy list,] the stock was trading at $4.59 a share—below its book value—and it [has been] rising steadily towards it “buy-up-to” price limit of $5.00 a share. (It closed slightly above that level on Friday—Editor.)
We believe the company is a bargain at its current price. We have an estimated sell price of $15, and our stop-loss price is $3.