WuXi PharmaTech beat expectations in the first quarter as strong demand for manufacturing and laboratory services continued.
Sales grew 26 per cent year-on-year as WuXi continued to benefit from the shift in outsourcing to China and the Vertex-aided rise of its commercial-scale manufacturing unit. Strong sales at these units pushed revenues above analysts’ expectations but costs also continued to grow.
“Revenue was better than expected, driving higher operating margin than our model. Increasing China labour costs and higher investments do show up on the gross margin line”, David Windley, equity analyst at Jefferies & Company, wrote.
WuXi has attempted to offset rising labour costs in China by improving productivity and opening a facility in Wuhan where the hiring market is less competitive. Price rises have also helped WuXi offset costs but John Kreger, equity analyst at William Blair, thinks sponsors may resist further increases.
“We continue to believe the ability to pass along inflation through price increases will be the key to longer‐term margin leverage. Given the increased budget sensitivity of most large pharma sponsors, it is unclear if WuXi or its peers will be able to do so until generic pressures wane”, Kreger wrote.
A conservative outlook
Despite concerns about the ability to pass on cost increases to clients Kreger raised his full year sales expectations for WuXi. The firm chose to reaffirm its earlier guidance, despite better than expected first quarter results, and Kreger thinks the conservatism is underpinned by labour cost concerns.
“We suspect part of the conservatism is due to the timing of manufacturing work, which can be lumpy and continued caution regarding labour costs and currency fluctuations”, Kreger wrote. Labour cost concerns are compounded by the need for rapid hiring at WuXi and other China-based biopharmas.
“To meet growing demand of our customers we are hiring aggressively including experienced scientists, senior staff as well as college recruiting. Out total enrolling headcount has reached 6,000”, Ge Li, CEO of WuXi, told investors in the first quarter results conference call.