Demand from top 10 customers drove double-digit third quarter sales growth at ShangPharma. To continue this trend and deepen links to one of its biggest clients ShangPharma is investing in a new facility.
“During the third quarter, we made a critical investment in a new facility, which is fully dedicated to one of our top customers”, Michael Xin Hui, founder and CEO of ShangPharma, said. ShangPharma is renovating the facility, which it began leasing in June, ahead of its opening by the end of 2011.
Leasing the facility for months before it contributes revenues is dragging on profits at China-based ShangPharma. Operating profit fell 34 per cent year-on-year but ShangPharma expects to recover quickly.
“Results…modestly missed our expectations. However, top-line growth was impressive and revenue and gross margin guidance for 2011 was reconfirmed”, Liping Cai, equity analyst at William Blair, wrote in a note to investors.
Hui said “rapid utilisation” at the new site will add to sales in 2012. Speaking in a call with investors Hui said ShangPharma secured a double-digit price increase and larger volumes from the client as part of the move to a dedicated facility for biology, chemistry and process development work.
“We believe the price increase alone is sufficient to cover the extra rental costs incurred”, Cai said. Cai expects margin pressure to continue in the fourth quarter but thinks in the long-term the investment “will pay off and help drive sustainable top- and bottom-line growth for ShangPharma”.
As well as adding to revenues the site eases “some of the over capacity pressures that [ShangPharma was] beginning to experience at the existing locations”, Hui said. Buying a Shanghai toxicology site from Charles River Laboratories was also part of efforts to prepare for expected growth in 2012.
Hui said the site will accommodate continued fast growth in in-vivo pharmacology, with oncology and metabolic disease work particularly in demand. ShangPharma has shown clients around the site and is confident utilisation will ramp up over the next few quarters.
China-based clients and biology services are other growth areas at ShangPharma. Both posted triple-digit sales growth in the third quarter, off small bases, and play key roles in ShangPharma’s plans for next year and beyond.
ShangPharma reconfirmed its guidance for 2011. On a bad day for financial markets ShangPharma shares closed down 2.7 per cent at $8.00. Shares were down a further 1.5 per cent in after-hours trading.