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Wuxi grows revs thanks to lab biz, but margins suffer on costs

14-Aug-2012

Chinese CRO Wuxi Pharmatech posted impressive revenue growth for Q2 driven by demand for lab services, but the firm still faced margin pressure due partly to rising labour costs.

Revenue for the quarter increase 28.9 per cent to $130.4m(EUR105m) driven by growth of the firm’s laboratory services business – both in China and the US – and its manufacturing unit, which increased 41.2 per cent to $36.8m.

Wuxi said that early-phase discovery, development, biology and analytical services at home and in the US were the key growth drivers for its laboratory business while demand for trial supplies and intermediates for commercial products powered the manufacturing gains.

But while the revenue gains helped Wuxi beat consensus estimates and increased gross profit by 20.4 per cent to $46.5m, the contract research organisation’s (CRO) lab business continued to face margin pressure.

Margins

Gross margins shrank from 40.6 per cent to 36.7 per cent due – according to Wuxi – to currency effects and rising labour costs in China, which were only partly offset by productivity improvements.

However, margin pressure in lab services was not unexpected. David Windley from Jefferies wrote in a note to investors that: “This has been a consistent theme in Wuxi’s story for several years now, not a new trend. Management has guided expectations accurately, if not a little conservatively, on this basis.”

In addition to the GM pressure, operating margin was lowered by increased spending on new senior staff, sales and marketing personnel, and higher R&D investing. Most of the hiring was done during 1Q12.

John Kreger from William Blair had a differing view, expressing some surprise that margins were still under pressure given the current economic climate

We are pleased with the results and the increase to guidance (which appears conservative to us on the top line), but we will keep an eye on margins given continued headwinds from foreign exchange and labour cost increases. We are surprised these cost pressures have not eased considering the slowing economy.”

The same cannot be said for Wuxi’s manufacturing margins, which improved to 33.1 per cent from 31.2 per cent in the comparable quarter last year.

Tim Evans from Wells Fargo said: “Manufacturing gross margin actually beat our estimate due to better capacity utilization and project mix.”

Wuxi will hold its conference call on Friday.

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