WuXi not worried by Big Pharma R&D spending cuts as manufacturing bolsters Q3

By Dan Stanton

- Last updated on GMT

Related tags Wuxi Wuxi pharmatech Revenue

Merck & Co. may be cutting R&D spending but WuXi unaffected for now
Merck & Co. may be cutting R&D spending but WuXi unaffected for now
WuXi says diversifying its client base means it is not worried about big clients like Merck & Co. restructuring R&D as the firm reports a strong 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.

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