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Management Comment
"WuXi had a strong second quarter, with results in line with, or at theupper end of ranges for, results provided in our announcement on July 15,2010," said Dr. Ge Li. "We achieved 21% year-over-year revenue growth. Thatrevenue growth was broad-based, with each of our businesses contributing atleast 18% year-over-year revenue growth. Gross margin and operating marginwere also strong. We met or exceeded our projections for second-quarter 2010performance. We are increasing our guidance for operating income forfull-year 2010 and reconfirming the remainder of the increased full-year 2010financial guidance that we announced on July 15.
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"On July 29, WuXi announced that we and Charles River Laboratories wouldnot proceed with our planned combination due to insufficient support amongCharles River shareholders," Dr. Li continued. "We received a breakup fee of$30 million, which we will record in the third quarter and which more thanoffsets our transaction-related expenses. This outcome will have no effect onour strategy or operations, and we remain committed to our goal of building abroad, integrated platform of R&D services. This platform will help ourcustomers to improve the success of discovery and shorten the development timeof new products to meet unmet patient needs. This open-access serviceplatform will allow customers to use the entire portfolio of our services orany portion of it.
"WuXi is achieving strong current financial performance while making theinvestments to continuously build capabilities and capacities in our coreLaboratory Services business and our new large-scale manufacturing andtoxicology businesses. With a sound strategy, market-leading position, andtalented people, our future remains bright," Dr. Li concluded.
GAAP Results
Second-quarter 2010 net revenues increased 21% year over year to $81.0million due to 18% growth in Laboratory Services net revenues and 55% growthin Manufacturing Services net revenues. Revenue growth in Laboratory Serviceswas strong in both discovery chemistry and downstream services and in bothChina and the United States. Revenue growth in Manufacturing Services wasdriven by increasing demand for clinical-trial supplies.
Second-quarter 2010 GAAP gross profit increased 23% year over year to$33.2 million due to strong contributions from both Laboratory Services andManufacturing Services, driven by revenue growth and gross-margin improvementin both segments. Second-quarter 2010 GAAP gross margin improved year overyear due to improved project mix in both Laboratory Services and ManufacturingServices and benefits of Lean Six Sigma programs undertaken in the UnitedStates. This gross margin improvement occurred in spite of a largercontribution from the relatively lower-margin Manufacturing Services businessand increased expenses related to the ramp-up of the Suzhou toxicologyfacility.
Second-quarter 2010 GAAP operating income grew 18% year over year to $16.1million, driven by the 23% increase in gross profit and lower operatingexpenses driven by cost control, offset by $2.9 million of non-recurring dealcosts relating to the previously proposed combination with Charles RiverLaboratories, mostly third-party professional service fees.
Second-quarter 2010 GAAP net income declined 6% year over year to $13.8million due to an unfavorable change in other income (expenses) net and highertaxes, offset by the 18% increase in operating income, which was impacted by$2.9 million of non-recurring deal costs relating to the previously proposedcombination with Charles River Laboratories. In second-quarter 2009, otherincome (expenses) net included gains from settlement of escrow shares of $1.7million associated with the AppTec acquisition. The year-over-year increasein tax expense was mainly driven by higher 2010 China statutory tax ratescompared to 2009 as a result of the income tax transitional phase-out rules inChina.
Second-quarter 2010 GAAP diluted earnings per ADS decreased 8% to 18 cents,mainly due to the 6% decrease in net income. Non-recurring deal costsassociated with the terminated WuXi - Charles River merger had an impact of 4cents per share.
Non-GAAP Results
Non-GAAP financial results excluded the impact of share-based compensationexpenses, amortization of acquired intangible assets and the associateddeferred tax impact, and non-recurring deal costs relating to the previouslyproposed combination with Charles River Laboratories.
Second-quarter 2010 non-GAAP gross profit increased 23% year over year to$35.0 million, due to strong contributions from both Laboratory Services andManufacturing Services, driven by revenue growth and gross-margin improvementin both segments. Second-quarter 2010 non-GAAP gross margin improved yearover year due to improved project mix in both Laboratory Services andManufacturing Services and benefits of Lean Six Sigma programs undertaken inthe United States. This gross margin improvement occurred in spite of alarger contribution from the relatively lower-margin Manufacturing Servicesbusiness and increased expenses related to the ramp-up of the Suzhoutoxicology facility.
Second-quarter 2010 non-GAAP operating income increased 32% year over yearto $22.5 million, driven by the 23% increase in gross profit and loweroperating expenses driven by cost control.
Second-quarter 2010 non-GAAP net income grew 12% year over year to $19.9million due to the 32% increase in operating income, offset by an unfavorablechange in other income (expenses) net and higher taxes. In second-quarter2009, other income (expenses) net in second-quarter 2009 included gains fromsettlement of escrow shares of $1.7 million associated with the AppTecacquisition. The year-over-year increase in tax expense was mainly driven byhigher 2010 China statutory tax rates compared to 2009 as a result of theincome tax transitional phase-out rules in China.
Second-quarter 2010 non-GAAP diluted earnings per ADS increased 10% to 27cents, mainly due to the 12% increase in net income.
2010 Financial Guidance
The Company is pleased to increase its guidance for full-year 2010operating income and to reconfirm the rest of its previous financial guidancefor 2010 provided on July 15, 2010. All comparative comments refer toyear-over-year comparisons. The Company's current guidance for 2010 is asfollows:
The Company provides the following guidance for third-quarter 2010performance:
"Strong trends toward greater outsourcing and offshoring of pharmaceuticalR&D services will continue for years," Dr. Li concluded. "As the leadingChina-based CRO, WuXi is well positioned to benefit from these trends. WuXihas excellent prospects to sustain strong revenue and income growth for manyyears to come."
(in thousands of U.S. dollars, except ordinary share, ADS and par value data)
Conference Call
WuXi will hold a conference call at 10:00 am EDT to discuss the resultsand the outlook for WuXi's business. The conference call may be accessed bycalling:
A live webcast of the conference call and replay will be available on theinvestor relations page of WuXi PharmaTech's website athttp://www.wuxiapptec.com .
About WuXi PharmaTech
WuXi PharmaTech is a leading pharmaceutical, biotechnology, and medicaldevice R&D outsourcing company, with operations in China and the United States.As a research-driven and customer-focused company, WuXi PharmaTech providesbroad and integrated portfolio of laboratory and manufacturing servicesthroughout the drug and medical device R&D process. WuXi PharmaTech'sservices are designed to assist its global partners in shortening the cycleand lowering the cost of drug and medical device R&D. WuXi PharmaTech'soperating subsidiaries are known as WuXi AppTec. For more information, pleasevisit: http://www.wuxiapptec.com .
Use of Non-GAAP Financial Measures
We have provided second-quarter 2009 and 2010 gross profit, gross margin,operating income, operating margin, and earnings per ADS on a non-GAAP basis,which excludes share-based compensation expenses, amortization of acquiredintangible assets and associated deferred tax impact, and non-recurring dealcosts relating to the previously proposed combination with Charles RiverLaboratories. We believe both management and investors benefit from referringto these non-GAAP financial measures in assessing our financial performanceand liquidity and when planning and forecasting future periods. These non-GAAP operating measures are useful for understanding and assessing underlyingbusiness performance and operating trends. We expect to continue providinggross profit, operating income, and diluted earnings per ADS on a non-GAAPbasis using a consistent method on a quarterly basis. You should not viewnon-GAAP results on a stand-alone basis or as a substitute for results underGAAP, or as being comparable to results reported or forecasted by othercompanies.
Cautionary Note Regarding Forward-Looking Statements
Statements in this release contain "forward-looking" statements within themeaning of Section 27A of the Securities Act of 1933, as amended, and Section21E of the Securities Exchange Act of 1934, as amended, and as defined in thePrivate Securities Litigation Reform Act of 1995. These forward-lookingstatements, including those with respect to our financial guidance for third-quarter 2010 and full-year 2010 and prospects generally, anticipated customerbenefits of our integrated R&D platform, expected strong performance of allour businesses and industry trends favoring outsourcing and offshoring R&D,are not historical facts but instead represent only our belief regardingfuture events, many of which, by their nature, are inherently uncertain andoutside of our control. Our actual results and financial condition and othercircumstances may differ, possibly materially, from the anticipated resultsand financial condition indicated in these forward-looking statements. Amongother factors, potential customer, employee and management distractionfollowing the termination of our proposed combination with Charles RiverLaboratories, continued uncertainty in the global economy, the pressures beingfelt by our customers, and pharmaceutical industry consolidation may adverselyimpact our business and the trends for outsourced and offshored R&D andmanufacturing for longer than expected or more severely than expected; we maybe unable to successfully make our planned investments and capitalexpenditures on a timely basis, these investments may not yield the desiredresults, and we may need to modify the nature and level of our investments andcapital expenditures; pharmaceutical companies may not change their businessmodels as expected or in a manner favorable to us; we may fail to capitalizeon the opportunities presented; we may not maintain our preferred providerstatus with our clients and may be unable to successfully expand ourcapabilities to meet client needs. In addition, other factors that could causeour actual results to differ from what we currently anticipate include failureto generate sufficient future cash flows or to secure any required futurefinancing on acceptable terms or at all; failure to retain key personnel;effective integration of continuing products and services from AppTec; ourreliance on a limited number of customers to continue to account for a highpercentage of our revenues; risk of payment failure by any of our largecustomers, which could significantly harm our cash flows and profitability;dependence upon the continued service of our senior management and keyscientific personnel; our ability to retain our existing customers or expandour customer base; and future regulatory or legislative actions. Foradditional information on these and other important factors that couldadversely affect our business, financial condition, results of operations andprospects, see "Risk Factors" beginning on page 6 of our 2009 Annual Report onForm 20-F filed with and available on the Securities and Exchange Commission'swebsite at http://www.sec.gov. All projections in this release are based onlimited information currently available to us, which is subject to change.Although these projections and the factors influencing them will likely change,we undertake no obligation to update or revise these forward-lookingstatements, whether as a result of new information, future events or otherwise,after the date of this press release, except as required by law. Suchinformation speaks only as of the date of this release.(Logo: http://photos.prnewswire.com/prnh/20040705/CNM002LOGO ) (Logo: http://www.newscom.com/cgi-bin/prnh/20040705/CNM002LOGO ) Highlights -- Second-Quarter 2010 Net Revenues Increased 21% Year Over Year to $81.0 Million -- Laboratory Services Net Revenues Grew 18% Year Over Year to $72.6 Million -- China-Based Laboratory Services Net Revenues Increased 18% Year Over Year to $52.7 Million -- U.S.-Based Laboratory Services Net Revenues Increased 19% Year Over Year to $19.9 Million -- Manufacturing Services Net Revenues Grew 55% Year Over Year to $8.4 Million -- GAAP Diluted Earnings Per ADS Declined 8% Year Over Year to 18 Cents, Reflecting Non-Recurring Deal Costs Associated With the WuXi - Charles River Merger of 4 Cents Per Share -- Non-GAAP Diluted Earnings Per ADS Increased 10% Year Over Year to 27 Cents -- Company Increases Full-Year 2010 Guidance for Operating Income to 15- 20% Growth, Reconfirms Remaining Full-Year 2010 Guidance
SOURCE WuXi PharmaTech (Cayman) Inc.
