Investors reacted with enthusiasm last week as China’s WuXi PharmaTech delivered earnings per share well above analysts’ estimates for the first quarter of 2009.

Shares in the Shanghai-based contract research organisation (CRO) climbed by nearly 43% to US$7.98 on the New York Stock Exchange the day after WuXi reported diluted net earnings of US$0.16 per American Depositary Share (ADS) for the quarter ended 31 March 2009.

That represented a fall of 15.8% compared with the first quarter of 2008, but analysts had been expecting earnings per ADS of US$0.09 for the latest quarter, according to Reuters estimates.

WuXi’s net revenues rose by 5.3% to US$59.1 million (analysts had been looking for revenues of US$58.5 million), while operating profit dived 25.0% to US$10.3 million and adjusted earnings before interest, taxes, depreciation and amortisation (EBITDA) were 8.0% lower at US$18.1 million.

The main driver of first-quarter revenue growth was China-based laboratory services, where net revenues jumped 28.5% to US$41.6 million. These gains were offset by a decline of 81.3% in China-based manufacturing services, to US$2.6 million, with WuXi blaming “project delays that postponed work authorisation and delivery”. Moreover, the majority of manufacturing services revenues in the first quarter of 2008 came from a single non-recurring project, the CRO noted.

Net revenues from US-based laboratory services grew by 48.0% to US$14.9 million in the latest quarter, reflecting WuXi’s acquisition of AppTec Laboratory Services in January 2008. Last December WuXi announced it was shedding the US biologics manufacturing capabilities it acquired with AppTec, which also supplies laboratory testing and contract research and development services.

Challenging environment

Chairman and chief executive officer Dr Ge Li said revenues from US-based laboratory services and China-based manufacturing in Q1 were in line with the company’s expectations and a challenging operating environment.

As he pointed out, WuXi is holding to its financial guidance for 2009, which includes projected net revenues of US$265 million to US$275 million compared with revenues of $258.5 million in 2008 from continuing operations on a pro-forma basis.

Adjusted EBITDA in 2009 is still expected to be “relatively flat” against adjusted EBITDA of US$72.2 million last year. WuXi is forecasting net revenue growth of 15-20% year on year from China-based laboratory services and “lower” net revenue from manufacturing services. The CRO expects net revenues from US testing (i.e., AppTec) to be “comparable” to the 2008 figure on a pro-forma basis.

“While our core discovery chemistry business continued its solid growth, we are seeing even stronger growth in newer capabilities such as discovery biology, DMPK (drug metabolism and pharmacokinetics)/ADME (absorption, distribution, metabolism, and excretion), process research, and bioanalytical services,” Dr Li commented.

"We are investing in an even broader suite of services to drive accelerated revenue growth in 2010 and beyond,” he added. Planned capital expenditures in 2009 amount to US$50-60 million, with the bulk of that earmarked for upgrading and expanding facilities in the China-based laboratory services business.