Second Quarter Reports Are Solid

Last week saw the very successful IPO of WuXi PharmaTech (WX), the Shanghai contract research organization (CRO) that has been growing at a dizzying rate during its seven years of existence. To recap our earlier articles (see stories on WuXi's prospectus and IPO), the company originally proposed a range of $11 to $13 in its offering prospectus, priced at $14, and opened at $18.50, a 30% bump-up for investors in the IPO. Although the stock vacillated in the ensuing two days of trading, it closed out the week at the same $18.50 figure.

At that price, WuXi is worth $1.1 billion. After the IPO, the company has the equivalent of 60 million ADSs outstanding. The underwriters have the option of issuing another 2 million ADSs (the IPO floated 13 million), which will bring that market cap higher, and the equivalent of 16 million ADSs remain under options.

Projecting out the $64 million in revenues that WuXi booked in the first half (and not assuming they will continue to grow), the company is priced at 8 times revenues. This is considerably higher than the 3 times revenues that obtains for WuXi's stateside rivals, Charles River Labs (CRL) and Covance (CVD).

In terms of earnings, however, the numbers are much closer. The price-earnings ratio for WuXi is 42, while Charles River Labs is sitting at 38 and Covance at 30. Using projections for full-year 2007 (rather than trailing 12 months figures), the P-E for Charles River sinks closer to 20 and Covance comes in at 27. WuXi, should it continue its upward bias for the last half of 2007, will bring its number lower as well.

But there are two even more important differences. Net margins for WuXi, which were 20%, were approximately twice those for the US companies. And the growth rate for the two stateside CROs is in the low to mid-teens, while WuXi is more than doubling its prior year revenues. What does Wall Street love more than big growth and high margins?

Well, a good story, would be one thing. And WuXi certainly has that, because it offers the huge cost advantage of China, a company attuned to Western big pharma needs, and a more permissive attitude toward animal testing. Given these, it's no wonder that the IPO for WuXi went off well, even though the mood of the markets became uncertain as the IPO approached, and even though the ADSs began trading on Thursday, a sour day for the stock market.

Elsewhere in China biopharma news last week, three companies based in China but listed in the US released their second quarter financial reports: Mindray (MR) (see story), 3SBio (SSRX) (see story) and American Oriental Bioengineers (AOB) (see story). All three did well, meeting or beating their respective estimates, and American Oriental topped it off by making another acquisition. China released for the first time the amount of money it intends to spend on cleaning up its problems with food and drug safety issues (see story). And, finally, PricewaterhouseCoopers pointed toward the Asia-Pacific area as the emerging center for biopharma. According to the forecast, multinational biopharmas will be forced to move their operations to Asia-Pacific, away from the US-Europe, because they must do more R&D as the blockbuster model fades into obscurity, but at a lower cost (see story).

Disclosure: none.