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Management Comment
"WuXi PharmaTech continued to achieve strong financial and operationalperformance in the third quarter of 2009, while making the investmentsnecessary to sustain our growth in 2010 and beyond," said Dr. Ge Li, Chairmanand Chief Executive Officer. "We achieved double-digit year-over-year revenueand EPS growth in the quarter, driven by a strong performance in ourChina-based Laboratory Services business. We achieved our target of 3-5%sequential growth in net revenues in the quarter, coming in at the upper endof that range. Profit margins were strong in the quarter, and as a result ourearnings performance exceeded our expectation.
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"This strong performance gives us confidence that we will achieve ourguidance for full-year 2009 revenue of $265-$275 million. Our China-basedLaboratory Services business is performing better than previously expected,and we are increasing our full-year 2009 revenue guidance for that business to23-26% from our previous guidance of 20-23% growth. We continue to expectthat full-year 2009 Manufacturing Services net revenues will be $20-$30million, depending on delivery schedules. As a result of better than expectedprofitability in the third quarter, we are increasing our full-year 2009guidance for adjusted EBITDA to $86-90 million from our previous guidance of$80-85 million.
"Our confidence in the continued success of our business model leads us tocontinue to make investments to build our capabilities and capacities. Weincreased our total company headcount by about 400 people in the third quarterfrom college recruiting, mainly in Laboratory Services, as demand for ourbroad range of laboratory services continues to grow. Our total companyheadcount was 4,135, including 3,230 scientists, at the end of September 2009.We continued to make strong capital investment, which we expect to be about$55-60 million for full-year 2009, with capital investment through September30 totaling $33.4 million.
"We continue to make progress in building our capabilities in two newbusinesses -- toxicology and large-scale manufacturing. In toxicology, wehave initiated non-GLP studies as well as client-sponsored GLP validationstudies, both of which are intended to develop our capability to conduct GLPstudies. We remain on target with our previous timetable to offer GLPtoxicology services by mid-2010. In our recently completed large-scalemanufacturing facility, we are undertaking test runs in the fourth quarter.The timing of initial revenue in large-scale manufacturing depends on theprogress of our customers' products in clinical trials. As a result of theseinvestments, we expect Laboratory Services, toxicology, and large-scalemanufacturing each to be major contributors to the company's growth inrevenues and earnings over the next several years," Dr. Li concluded.
GAAP Results
Third-quarter 2009 net revenues increased 10% year over year to $70.0million due to 20% growth in Laboratory Services net revenues, partiallyoffset by a 44% decline in Manufacturing Services net revenues. LaboratoryServices net revenues in third-quarter 2009 benefited from stronger demand forour integrated drug discovery and development services. ManufacturingServices net revenues are inherently variable due to fluctuating demand andcustomer delivery schedules and are also being impacted by lower demand.
Third-quarter 2009 GAAP gross profit increased 18% year over year to $28.8million, mainly due to an increased contribution from Laboratory Services,driven by both revenue growth and gross-margin improvement, offset by adecline in the gross-profit contribution of Manufacturing Services from lowerrevenues. Third-quarter 2009 GAAP gross margin improved year over year to41.1% from 38.4%, mainly due to lower amortization expenses for acquiredintangible assets as a result of a lower balance for these assets followingimpairment charges taken in fourth-quarter 2008. In addition, GAAP grossmargin benefited from a larger contribution from our higher-margin LaboratoryServices business and improved profitability of newer downstream laboratoryservices, offset by higher expenses related to the start-up of the Suzhoutoxicology facility. Gross margin from Laboratory Services improved year overyear to 42.9% from 40.6% for the same reasons. Partially offsetting thisbenefit, gross margin declined year over year in Manufacturing Services to21.1% from 26.8% due primarily to unfavorable project mix and lower demand.
Third-quarter 2009 GAAP operating income increased 35% year over year to$14.6 million due to the 18% increase in gross margin and only a 4% increasein operating expenses. Operating expenses consisted of an 8% increase ingeneral and administrative expenses mainly due to increased staffing,partially offset by a 21% decrease in selling and marketing expenses, mainlydue to reduced staffing and cost-control efforts.
Third-quarter 2009 GAAP net income from continuing operations increased72% year over year to $14.5 million due to the 35% increase in operatingincome, a favorable change in other income (expenses) net, and lower taxes.Other income (expenses) net in third-quarter 2009 included losses fromforeign-exchange forward contracts of $0.5 million, compared to losses of $2.3million on such contracts in third-quarter 2008. Taxes in third-quarter 2009were $0.9 million, compared to $1.5 million in third-quarter 2008.
Third-quarter 2009 GAAP net income grew 97% year over year due to the 72%increase in net income from continuing operations and lower losses fromdiscontinued operations. Third-quarter 2008 GAAP net income included a lossfrom discontinued operations of $1.2 million related to the biologicsmanufacturing business. The loss from discontinued operations inthird-quarter 2009 of $0.2 million resulted from a write-off of certainobsolete assets. Third-quarter 2009 GAAP diluted earnings per ADS grew 96%year over year to 19 cents, compared to 10 cents in third-quarter 2008, dueprimarily to the 97% increase in net income.
Non-GAAP Results
Non-GAAP financial results excluded the impact of share-based compensationexpenses, amortization and the deferred tax impact of acquired intangibleassets, and losses from discontinued operations.
Third-quarter 2009 non-GAAP gross profit increased 8% year over year to$30.2 million, mainly due to the favorable impact of higher gross profit inthe Laboratory Services business driven by 20% higher revenues, partiallyoffset by a decrease in Laboratory Services gross margins from 46.9% to 45.0%and a decline in the gross-profit contribution from Manufacturing Services dueto lower revenues and lower gross margins. Third-quarter 2009 non-GAAP grossmargin declined year over year to 43.2% from 43.7% due to higher expenses fromthe Suzhou toxicology facility, which more than offset the favorable impact ofthe larger contribution of our higher-margin Laboratory Services business andimproved profitability of services downstream from discovery chemistry.
Third-quarter 2009 non-GAAP operating income increased 8% year over yearto $18.0 million primarily due to the 8% increase in non-GAAP gross profit,offset by a 10% increase in operating expenses mainly due to increasedstaffing in general and administrative functions.
Third-quarter 2009 non-GAAP net income grew 33% year over year to $17.6million due to an 8% increase in non-GAAP operating income, a favorable changein other income (expenses) net, and lower taxes. Changes in other income(expenses) net and taxes are discussed above for GAAP results. Dilutednon-GAAP earnings per ADS from continuing operations grew 32% year over yearto 24 cents compared to 18 cents in third-quarter 2008, mainly due to the 33%increase in non-GAAP net income.
Conference Call
WuXi PharmaTech senior management will host a conference call at 8:00 am(U.S. Eastern) / 5:00 am (U.S. Pacific) / 9:00 pm (Beijing/Shanghai/Hong Kong)on Tuesday, November 17, 2009, to discuss its third-quarter 2009 financialresults and future prospects. The conference call may be accessed by calling:
A telephone replay will be available two hours after the call's completionat:
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 three-month and nine-month 2008 and 2009 gross profit,operating income, net income and earnings per ADS on a non-GAAP basis, whichexcludes share-based compensation expenses, amortization and deferred taximpact of acquired intangible assets, and discontinued operations. We alsoprovided three-month and nine-month 2008 and 2009 adjusted EBITDA, which isthe GAAP net income adjusted by adding back depreciation and amortization,interest, income taxes, share-based compensation and mark-to-market gains(losses) from foreign-currency forward contracts. We believe both managementand investors benefit from referring to these non-GAAP measures in assessingour financial performance and liquidity and when planning and forecastingfuture periods. These non-GAAP operating measures are useful forunderstanding and assessing underlying business performance and operatingtrends. We expect to continue providing gross profit, operating income, andnet income on a non-GAAP basis using a consistent method on a quarterly basis.
You should not view non-GAAP results on a stand-alone basis or as asubstitute for results under GAAP, or as being comparable to results reportedor forecasted by other companies, and should refer to the reconciliation ofnon-GAAP measures to GAAP measures for the indicated periods attached hereto.
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, including, among others,anticipated full-year and fourth-quarter 2009 operating results (includingestimated total net revenues, China-based Laboratory Services net revenues,Manufacturing Services net revenues, adjusted EBITDA, gross margins, and othertrends), planned capital expenditure and investment levels, and theanticipated benefits of those efforts and the planned expansion of our serviceofferings and areas of related revenue growth.
These forward-looking statements are not historical facts but insteadrepresent only our belief regarding future events, many of which, by theirnature, are inherently uncertain and outside of our control. Our actualresults and financial condition and other circumstances may differ, possiblymaterially, from the anticipated results and financial condition indicated inthese forward-looking statements. Among other factors, continued uncertaintyin the global economy and the pressures being felt by our customers andpharmaceutical industry consolidation may adversely impact our business andthe trends for outsourced R&D and manufacturing for longer than expected ormore severely than expected; we may be unable to successfully make our plannedinvestments and capital expenditures on a timely basis; these investments maynot yield the desired results; we may need to modify the nature and level ofour investments and capital expenditures; pharmaceutical companies may notchange their business models as expected or in a manner favorable to us; wemay fail to capitalize on the opportunities presented; we may not maintain ourpreferred provider status with our clients; and we may be unable tosuccessfully expand our capabilities to meet client needs. In addition, otherfactors that could cause our actual results to differ from what we currentlyanticipate include our limited operating history; failure to generatesufficient future cash flows or secure any required future financing onacceptable terms or at all; failure to retain key personnel; effectiveintegration of continuing products and services from AppTec; our reliance on alimited number of customers to continue to account for a high percentage ofour revenues; risk of payment failure by any of our large customers, whichcould significantly harm our cash flows and profitability; dependence upon thecontinued service of our senior management and key scientific personnel; andour ability to retain our existing customers or expand our customer base. Youshould read the financial information contained in this release in conjunctionwith the consolidated and pro-forma financial statements and related notesthereto included in our 2008 Annual Report on Form 20-F filed with andavailable on the Securities and Exchange Commission's website athttp://www.sec.gov. For additional information on these and other importantfactors that could adversely affect our business, financial condition, resultsof operations and prospects, see "Risk Factors" beginning on page 6 of our2008 Annual Report on Form 20-F. Our results of operations for third-quarter2009 are not necessarily indicative of our operating results for any futureperiods. All projections in this release are based on limited informationcurrently available to us, which is subject to change. Although theseprojections and the factors influencing them will likely change, we undertakeno obligation to update or revise these forward-looking statements, whether asa result of new information, future events or otherwise, after the date ofthis press release, except as required by law. Such information speaks onlyas of the date of this release.(Logo: http://www.newscom.com/cgi-bin/prnh/20040705/CNM002LOGO ) Third-Quarter 2009 Highlights -- Net revenues grew 10% year over year to $70.0 million -- Laboratory Services net revenues increased 20% year over year to $64.3 million -- China-based Laboratory Services net revenues grew 29% year over year to $48.0 million -- U.S.-based Laboratory Services net revenues decreased 1% year over year to $16.3 million -- Manufacturing Services net revenues decreased 44% year over year to $5.7 million -- GAAP diluted earnings per ADS grew 96% year over year to 19 cents -- Non-GAAP diluted earnings per ADS grew 32% year over year to 24 cents
SOURCE WuXi PharmaTech (Cayman) Inc.
