The once stellar growth of WuXi PharmaTech seems to be over for the time being, as the Shanghai-based company reported a US$56.7 million operating loss for the fourth quarter of 2008 and forecast “relatively flat” earnings before interest, taxes, depreciation and amortisation (EBITDA) in 2009.
The fourth-quarter losses reflected non-cash, pre-tax charges of US$60.5 million, recorded in the fourth quarter for goodwill and acquired intangible asset impairment following a strategic assessment of the ongoing AppTec business bought by the Chinese contract research organisation (CRO) in January 2008.
Last December WuXi announced it was shedding the US biologics manufacturing capabilities it acquired with AppTec Laboratory Services, which also supplies laboratory testing and contract research and development services. The WuXi AppTec facility in Philadelphia would instead focus on the CRO’s “expanding” biologics testing, cell banking and cell therapy services, it explained.
The decision stemmed from the problems small biotechnology customers have faced raising finance in the current economic climate to move forward with early-stage product development.
Reporting its third-quarter results in October, WuXi lowered its net revenue guidance for 2008, citing “cancelled or delayed projects from small biotechnology customers”. The AppTec subsidiary as a whole had already been performing below expectations in the first quarter of the year.
Guidance met
Including US$8.3 million in net revenues from the discontinued operations, WuXi managed to meet its revised revenue guidance for the full year, which had been adjusted downwards from US$280-US$300 million to US$260-US$265 million. Net revenues for 2008 came in at US$261.8 million (US$253.5 million of which was continuing operations), up by 93.7% over 2007.
Adjusted EBITDA for continuing and discontinued operations was US$72.2 million, up by 38.0% over 2007 and within the range of the third-quarter guidance for EBIDTA of US$70-75 million. This guidance excluded share-based compensation charges, the potential impact of goodwill-impairment charges, and further adjustment of foreign currency forward contracts.
In the fourth quarter net revenues from continuing operations were US$64.4 million, 73.7% higher than in the year-before period. Laboratory Services, which with the pull-out from biologics manufacturing now comprise China-based laboratory services and all AppTec testing services (biopharmaceutical and medical device testing), brought in net revenues of US$57.4 million, up by 99.1% year on year.
Revenues from Manufacturing Services (China-based manufacturing of advanced intermediates and active pharmaceutical ingredients) dropped by 14.8% to US$7.0 million.
WuXi’s China-based laboratory services achieved revenue growth of 46.6% to US$42.3 million in the fourth quarter. AppTec’s US-based laboratory services contributed US$15.1 million in the quarter, excluding the biologics manufacturing operation now classified as discontinued operations.
Extraordinary challenges
Looking back over a year of “extraordinary economic challenges”, Dr Ge Li, chairman and chief executive officer of WuXi PharmaTech, commented: “In retrospect, we wish we had foreseen the unprecedented economic downturn and credit freeze that severely impacted many of AppTec’s customers and, as a result, negatively impacted AppTec’s 2008 results, particularly in biologics manufacturing”. The continuing US-based testing business was profitable, he added.
Adjusted EBITDA for continuing and discontinued operations in the final quarter was US$10.5 million, 42.3% lower than in the same quarter last year. The operating loss of US$56.7 million compared with a US$9.3 million operating profit in Q4 2007.
According to Dr Li, 2009 will be “a year of continued growth in our Laboratory Services business and of continued investment in building new capabilities to sustain growth in 2010 and beyond”.
Investment would be concentrated in three areas, he said: building up WuXi’s talent pool of scientists to support growing demand for its laboratory services; the toxicology facility currently under construction in Suzhou, China, with the aim of starting to provide non-Good Laboratory Practice (GLP) toxicology services in the second half of 2009 and GLP toxicology services in mid-2010; and an expanded manufacturing facility in Jinshan, which should open by the end of 2009.
Chief operating officer and acting chief financial officer Edward Hu added: “While WuXi PharmaTech is not immune from the impact of the global recession and the pressures being felt by our customers, we expect to achieve net revenue growth in 2009 while we invest in our future beyond 2009”.
The CRO is projecting net revenues of US$265 million to US$275 million for 2009, compared with revenues of $258.5 million in 2008 from continuing operations on a pro-forma basis. Adjusted EBITDA in 2009 is expected to be “relatively flat” against adjusted EBITDA of US$72.2 million last year.
