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Third-Quarter 2010 Highlights
- Net revenues grew 20% year over year to $83.8 million
- China-based Laboratory Services net revenues grew 19% year over year to $57.1 million
- U.S.-based Laboratory Services net revenues increased 20% year over year to $19.6 million
- Manufacturing Services net revenues increased 23% year over year to $7.1 million
- GAAP operating income grew 31% and non-GAAP operating income grew 26% year over year
- GAAP diluted earnings per ADS grew 205% year over year to 59 cents, driven by a strong operating performance and a termination fee relating to the proposed transaction with Charles River Laboratories
- Non-GAAP diluted earnings per ADS grew 26% year over year to 30 cents
- Company increases full-year 2010 guidance for net revenue to $330-$333 million from previous guidance of $320-$325 million
- Company increases full-year 2010 guidance for non-GAAP operating income growth to 28-32% from previous guidance of 15-20%
Management Comment
"WuXi continued a strong 2010 with an excellent third quarter," said Dr. Ge Li, Chairman and Chief Executive Officer. "Total company revenues grew 20% year over year, and each of our businesses delivered strong revenue growth in the quarter. GAAP net income grew by 209% year over year, driven by this strong revenue growth and receipt of a $30 million termination fee relating to the proposed merger transaction with Charles River. Non-GAAP net income grew year over year by 27%. This strong performance leads us once again to increase our net revenue and operating income guidance for 2010.
"Strong trends for outsourcing of pharmaceutical discovery services are continuing," Dr. Li continued. "As the leading China-based pharmaceutical R&D services company, WuXi is well-positioned to benefit from these trends. We continue to make substantial progress in building a comprehensive platform of discovery and preclinical R&D services that any pharmaceutical or biotech company can use to discover and develop new drugs efficiently and cost-effectively.
"As examples of that progress, we recently began operations in two newly built laboratories in Shanghai providing in-vivo pharmacology, DMPK, and discovery chemistry services. We made a decision to establish a new laboratory in the city of Wuhan that will house laboratory chemistry operations to tap into the talent pool and to leverage lower costs in central China. Our toxicology facility in Suzhou has been certified by both the OECD and the China State Food and Drug Administration to provide GLP general toxicology and genetic toxicity studies. We are also planning to build a pilot-scale GMP manufacturing facility in the city of WuXi to produce biological products for preclinical and clinical trials. We expect these expansion initiatives to drive continued revenue growth in future years," Dr. Li concluded.
GAAP Results
Third-quarter 2010 net revenues increased 20% year over year to $83.8 million due to 19% growth in Laboratory Services net revenues and 23% growth in Manufacturing Services net revenues. Laboratory Services net revenues in third-quarter 2010 benefited from stronger demand for our broad-based and integrated drug discovery and development services. Growth in Manufacturing Services net revenues reflected higher demand for pharmaceutical advanced intermediates and active ingredients.
Third-quarter 2010 GAAP gross profit increased 4% year over year to $29.8 million, mainly due to increased revenues, partially offset by increased expenses, including depreciation expense, relating to the large-scale manufacturing facility in Jinshan, the toxicology facility in Suzhou, and new pharmacology/DMPK/chemistry laboratories in Shanghai. Laboratory Services gross profit increased 4% year over year to $28.6 million and Manufacturing Services gross profit was essentially unchanged year over year at $1.2 million. In addition, third-quarter 2010 GAAP gross profit was reduced by $3.1 million in transaction-related bonuses paid to scientist employees after the termination of the Charles River transaction. These bonuses rewarded our employees' dedication to serving customers during the pendency of the previously proposed transaction. Third-quarter 2010 GAAP gross margin declined year over year to 35.6% from 41.1%, mainly due to these bonuses (3.7 percentage-point impact) and the increase in depreciation and other operating expenses of the large-scale manufacturing and toxicology facilities and the new pharmacology/DMPK/chemistry laboratories. The company expects the full-year 2010 GAAP gross margin to decline about 2 percentage points.
Third-quarter 2010 GAAP operating income increased 31% year over year to $19.2 million, mainly due to strong revenue growth and lower general and administrative expenses. Of the $30 million termination fee that we received from Charles River, $5 million was used to offset the merger-related costs in general and administrative expenses ($2.9 million was incurred and recorded in second-quarter 2010 and $2.0 million was incurred and recorded in third-quarter 2010). The remaining $25 million of the termination fee was recorded in other income, net. This increase in third-quarter 2010 GAAP operating income was partially offset by $3.7 million in bonuses paid to all employees after the termination of the Charles River transaction ($3.1 million paid to scientist employees and recorded in cost of revenues and $0.6 million paid to other employees and recorded in general and administrative expenses).
Third-quarter 2010 GAAP net income from continuing operations increased 205% year over year to $44.3 million due to the 31% increase in operating income, a $30 million termination fee related to the proposed transaction with Charles River Laboratories recorded in other income, net, and net gains on foreign-exchange forward contracts of $1.1 million versus $0.3 million in the prior-year quarter, partially offset by higher income tax expense driven by higher statutory tax rates in China.
Third-quarter 2010 GAAP net income grew 209% year over year to $44.3 million due to the 205% increase in net income from continuing operations and no losses from discontinued operations in the current quarter. Third-quarter 2009 GAAP net income included a loss from discontinued operations of $0.2 million related to write-off of certain obsolete assets of the biologics manufacturing business. Third-quarter 2010 GAAP diluted earnings per ADS grew 205% year over year to 59 cents, compared to 19 cents in third-quarter 2009, due primarily to the 209% increase in net income.
Non-GAAP Results
Non-GAAP financial results excluded the impact of share-based compensation expenses, amortization and the deferred tax impact of acquired intangible assets, the $30 million termination fee received from Charles River Laboratories related to previously proposed transaction, expenses incurred in connection with that transaction, bonuses paid to all employees after termination of the proposed transaction, and losses from discontinued operations.
Third-quarter 2010 non-GAAP gross profit increased 14% year over year to $34.5 million, mainly due to revenue growth in both the Laboratory Services and Manufacturing Services businesses, offset by increased expenses, including depreciation expense, relating to the large-scale manufacturing in Jinshan, the toxicology facility in Suzhou and new pharmacology/DMPK/chemistry laboratories in Shanghai. Third-quarter 2010 non-GAAP gross margin declined year over year to 41.2% from 43.2% due to increased expenses, including depreciation expense, relating to the large-scale manufacturing and toxicology facilities and new pharmacology/DMPK/chemistry laboratories. This decline in gross margins was consistent with the company's previous financial guidance.
Third-quarter 2010 non-GAAP operating income increased 26% year over year to $22.6 million, primarily due to the 14% increase in non-GAAP gross profit and restraint in spending for selling and marketing and general and administrative functions.
Third-quarter 2010 non-GAAP net income grew 27% year over year to $22.4 million due to the 26% increase in non-GAAP operating income and net gains on foreign-exchange forward contracts of $1.1 million versus $0.3 million in the prior-year quarter, partially offset by higher income tax expense driven by higher statutory tax rates in China. Diluted non-GAAP earnings per ADS from continuing operations grew 26% year over year to 30 cents compared to 24 cents in third-quarter 2009, mainly due to the 27% increase in non-GAAP net income.
(See the table titled Reconciliation of GAAP to Non-GAAP below)
2010 Financial Guidance Update
We update our full-year 2010 financial guidance as follows:
- Total net revenues of $330-$333 million, or year-over-year growth of 22-23%, compared to previous guidance of $320-$325 million, or 19-20% growth
- Growth in net revenues of China-based Laboratory Services of 18-19%, compared to previous guidance of 16-18%
- Growth in net revenues of U.S.-based Laboratory Services of 17-19%, compared to previous guidance of double-digit growth
- Growth of net revenues of Manufacturing Services of at least 80%, compared to previous guidance of at least 70%
- Growth in non-GAAP operating income of 28-32%, compared to previous guidance of 15-20%
- Decline in GAAP gross margin of approximately two percentage points, compared to previous guidance of two to three percentage points; decline in non-GAAP gross margin of less than two percentage points, compared to previous guidance of two to three percentage points
- Capital expenditures $48-$50 million, compared to previous guidance of $50 million
- Effective tax rate of 13-15%, excluding merger-related costs and the termination fee related to the proposed Charles River transaction, as indicated in previous guidance
WUXI PHARMATECH (CAYMAN) INC. | ||||
UNAUDITED CONSOLIDATED BALANCE SHEETS | ||||
(in thousands of U.S. dollars, except ordinary share data) | ||||
September 30, 2010 | December 31, 2009 | |||
Assets: | ||||
Current assets: | ||||
Cash and cash equivalents | 100,537 | 80,510 | ||
Restricted cash | 1,675 | 1,358 | ||
Short-term investment | 52,445 | 22,083 | ||
Accounts receivable, net | 54,977 | 45,817 | ||
Inventories | 13,795 | 14,276 | ||
Prepaid expenses and other current assets | 13,710 | 10,125 | ||
Total current assets | 237,139 | 174,169 | ||
Non-current assets: | ||||
Goodwill | 23,956 | 23,956 | ||
Property, plant and equipment, net | 193,408 | 181,830 | ||
Intangible assets, net | 4,490 | 6,634 | ||
Prepaid land use rights | 5,319 | 5,308 | ||
Deferred tax assets | 8,867 | 9,514 | ||
Other non-current assets | 4,978 | 5,890 | ||
Total non-current assets | 241,018 | 233,132 | ||
Total assets | 478,157 | 407,301 | ||
Liabilities and equity: | ||||
Current liabilities: | ||||
Short-term and current portion of long-term debt | 6,260 | 34,415 | ||
Accounts payable | 16,065 | 14,356 | ||
Accrued expenses | 21,671 | 17,072 | ||
Deferred revenue | 7,192 | 4,554 | ||
Advanced subsidies | 2,630 | 2,800 | ||
Other taxes payable | 4,331 | 2,901 | ||
Other current liabilities | 6,609 | 4,239 | ||
Total current liabilities | ||||
