WuXi (WX): 'Secret weapon' in drug research

"WuXi PharmaTech (NYSE: WX) provides laboratory and manufacturing services for the drug and medical device R&D process," notes Jim Trippon.

In his The China Stock Digest, he explains, "Because Chinese researchers receive much smaller paychecks than their Western counterparts, Shanghai-based WuXi is able to lowering the cost of this research." Here's his review.

"We have often heard major Western pharmaceutical companies complain of the extraordinary cost of discovering and developing drugs.

"More costly than the laboratory infrastructure is the burden of paying for armies of highly trained, highly paid chemists, researchers, analysts and physicians. WuXi has become the secret weapon of many big name global pharmaceutical companies.

"China educates tens of thousands of engineers, chemists and technologists, and outsourcing that expertise has become a growth industry. WuXi became a leader in this trend in 2000 and has gone on to attract an impressive roster of clients.

"The firm’s senior management team consists of Ph.D.s and MBAs with experience in drug and medical device R&D. Wuxi management has more than 200 patents pending or granted, and has published more than 800 scientific publications.

"WuXi’s U.S.-based facilities are all FDA-registered, including a 63,000 square-foot facility in St. Paul, Minnesota, a 46,000 square-foot testing facility in Atlanta, and a 75,000 square-foot facility in  Philadelphia.

"WuXi’s China-based operations provide services to more than 80 pharmaceutical and biotechnology customers including nine of the top ten pharmaceutical companies.  WuXi boasts that most of its customers return to the firm after the completion of a research contract for additional and often larger and longer-term projects.

"Each of WuXi’s top 10 customers over the last three years continues to be its customer today, a fact that speaks well of the firm’s skill, effciency and respect for intellectual property.

"For the first quarter of 2008, WuXi reported Q1 revenues were 69% higher than revenues for the same quarter a year ago at $57.1 million. The big winner was laboratory services, a division that saw its revenues rise by 77% to $38.5 million.

"The shares have plummeted since the company’s 2007 IPO, along with a general retrenchment in the Shanghai Composite Index which fell from unrealistic highs. This made WuXi’s post-IPO blues worse than usual. Additional pressure was added by rumors of an upcoming secondary offering.

"The company has delayed indefinitely plans for a secondary offering while world markets remain turbulent. Meanwhile, with its heady increase in earnings, WuXi is attractively valued with a PE multiple of 22.2. We’re calling this company a buy up to $20."

Editor's note: Investors interested in first hand experience in China and its investment opportunities are invited to join Jim Trippon on his next investment field trip to China. The two-week trip is scheduled for October 8 - 21 will visit, Hong Kong, Shenzhen, Shanghai, Macau, Beijing and the Yangtze River Delta.