WuXi not worried by Big Pharma R&D spending cuts as manufacturing bolsters Q3
Total revenue last quarter for the contract development and manufacturing organisation (CDMO) stood at $147m (€109m), up 16.6% on the same period 2012. Though the bulk of WuXi PharmaTech’s sales ($108m) came from its laboratory services, sales from manufacturing rose by 44%.
According to William Blair analyst John Krueger, future growth will be led by manufacturing for the firm. He noted: “With 10 products in the late-stage pipeline (in addition to the six commercial compounds already being produced), we believe WuXi could realize a sustainable revenue boost as these products are approved.”
He continued: “Historically, we believe that WuXi generates revenue equal to about 3% of total end-market product sales; thus for every $1 billion in sales for a given drug, WuXi would theoretically generate $30m,” equating to around 4.5% of estimated revenue for 2014.
R&D Cuts
The boost to manufacturing may be offset by a cautious approach to R&D by some of Wuxi’s customers.
Merck & Co. (known as MSD outside North America) is one of the firm’s largest customers, accounting for 16.2% of total net revenue in 2012 according to an SEC filing, and last month announced it was slashing costs by $2.5bn, mostly in R&D spending.
When asked in last week’s conference call discussing Q3 results (transcript here) whether such cutbacks would impact WuXi, CEO Ge Li said “for 2014 and 2015 or beyond, it remains to be seen,” though there would be no effect this year.
“From a positive perspective, it means the industry really needs to have different way to a drug R&D,” he told stakeholders. “WuXi is built to provide alternative R&D for the industry. So this is the place we are in - as long as we continue to improve our capability and the capacity - so in the short term, I don't worry.”
Big Clients, Smaller Contributions
In 2010, the top ten of WuXi’s customers contributed to 60% of the firm’s total revenue. This figure fell in 2011 by 5%, and again in 2012 to 48%, though average revenue from the ten grew steadily.
“We're rapidly growing our business and diversifying our client base,” said CFO Edward Hu on the call, and therefore WuXi is no longer relying on a single client.
