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December 18, 2009 – Comments (0) | RELATED TICKERS: WX.DL

Chinese Outsourcer Of Clinical Trials Tries To Spread Its WingsKevin Harlin , On Thursday December 17, 2009, 5:28 pm EST

China's factories churn out inexpensive water pumps, photovoltaic solar cells and knockoff iPods.

But its research labs could also discover the next generation of lifesaving drugs and mass-produce them in quantity.

That's the hope behind WuXi PharmaTech (NYSE:WX - News).

The Shanghai company is China's largest contract research organization, or CRO. It provides drug discovery and analytics to the global pharma and biotech industries. As the largest and most trusted of the Chinese CROs, business has been growing.

Now the company is eyeing new areas, including viral toxicology and large-scale manufacturing.

"Our confidence in the continued success of our business model leads us to continue to make investments to build our capabilities and capacities," the company's chief executive, Ge Li, said in a written statement. Company officials did not respond to requests for comment.

China Catching Up

CROs first took off in the U.S. and Europe in the 1990s, as the pharmaceutical industry began to outsource increasingly expensive and complex research and development functions.

The CRO industry in China is younger. WuXi, founded in 2001, is one of that country's oldest and by far the largest. It's also the only one that's publicly traded.

Hundreds of smaller, private Chinese firms also compete in the space, though analysts say they have little specialized differentiation and often compete only in price.

That makes WuXi the better choice for more complex and high-pressure work, analysts say.

The global CRO industry suffered this year as drug companies became more cautious, delaying studies and canceling some projects. WuXi took some lumps too but is still expanding.

"What they've done really well is build a client base in the core medicinal chemistry business and then added on capabilities and cross-sold those services," said Jefferies analyst David Windley.

Of course, new business opportunities also present risks.

Windley points to the company's push into toxicology services with its facility in Suzhou. If WuXi can pull it off, it's potentially big. Pharmaceutical firms rely on those later-stage tox studies to show that a drug is safe before it's cleared for clinical trials.

But toxicology is a more complex field, where the company and country have little expertise. It's not at all clear that Western firms will turn their tox business over to WuXi, at least not at first, analysts say.

"There are a lot of chemists coming out of Chinese universities. There are not a lot of viral toxicologist coming out," Windley said. "Can they recruit a solid senior management team and senior study directors into that operation and have the same success as they have in the more native chemistry side?"

The company says it has begun some early client-sponsored tox studies and expects to be ready for later-stage studies in 2010.

Windley also says to watch the new large-scale manufacturing facility in Jinshan. It too is promising, though there's no guarantee it will ramp up quickly.

WuXi says it will do test runs in Jinshan this quarter and could start full-scale production soon after. But timing there is tied to one major client, Vertex (NasdaqGS:VRTX - News).

That company is still waiting for U.S. Food and Drug Administration approval to manufacture its hepatitis C drug, Telaprevir, which will be made by WuXi.

WuXi says it's talking to other clients about potential business for Jinshan, but for now its fate is tied to Telaprevir.

WuXi doesn't seem worried. It's gearing up for the extra work in the new business lines. It added 400 fresh college graduates in the third quarter, mostly in its laboratory services area. It ended the quarter with 4,135 employees, 3,230 of them scientists.

Susquehanna International Group analyst Ding Ding thinks firms in Europe and the U.S. are increasingly turning to China for these services. And WuXi, as the "go-to" firm in that space, should do well.

She also expects acquisitions to pick up as foreign CROs try to buy a foothold in the Chinese market. In November, Wilmington, N.C.-based Pharmaceutical Product Development (NasdaqGS:PPDI - News) said it would spend $77 million to acquire BioDuro, a private preclinical CRO based in Beijing.

Looking For Acquisitions

Ding thinks WuXi could even join that spree to add market share or expertise.

The company is investing in the facilities for those new business lines. It expects to have spent between $55 million and $60 million through all of 2009 on capital expenses.

As with many companies in this space, some of WuXi's revenue is lumpy, particularly on the manufacturing side.

Annual results have been up and down. WuXi posted earnings of 42 cents per American depositary receipt in 2007 before swinging to a $1.01 loss, ex items, in 2008. But analysts expect earnings of 71 cents per ADR when 2009 is tallied.

Revenue climbed 87% in 2008 to $253 million. The company is projecting $265 million to $275 million in revenue when 2009 is done.

In the third quarter, earnings jumped 90% to 19 cents per ADR. Revenue rose just 10%, to $70 million.

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