Stock of the Day - January 29, 2009 - WX

Wuxi PharmaTech Inc. (WX)

Wuxi PharmaTech (WX) operates as a pharmaceutical, biotechnology, and medical device research and development outsourcing company in both China and the United States.  The company performs outsourced pharmaceutical research for healthcare giants such as Eli Lilly (LLY), Merck (MRK), and Pfizer (PFE).

Wuxi’s stock price was absolutely crushed in 2008, and it is currently trading at $5.80 per share.  The 52-week range has been as low as $3.89 and as high as $27.90, and the company traded as high as $41.28 per share in October 2007.  Wuxi is a small-cap company ($380.64 market cap), which makes it more risky than the average company to invest in.  But, because it is an international small cap stock, there are fewer analysts covering the company.  I believe that it is a very strong company with a ton of potential, and I love the fact that it is still slightly obscure and out of the public’s eye, as it gives us a chance to buy it low.  

There are many reasons I think investing in Wuxi PharmaTech would be a wise decision.  The first intriguing aspect of Wuxi is the company’s continued growth through acquisitions and contracts.  Early in 2008, Wuxi agreed to buy AppTec Laboratory Services, another research and development services provider, for about $151 million.  This deal with AppTec will boost Wuxi’s per-share earnings and will greatly increase the company’s revenue stream, as AppTec is expected to bring in over $70 million per year.  In November 2008, Wuxi also inked a contract with pharmaceutical giant Pfizer.  As a result of the deal, Wuxi will conduct tests on Pfizer’s drug candidates, and it will create tests that will help Pfizer learn about the properties of the drugs it is making.   

But, Pfizer is definitely not Wuxi’s only influential client, as the company works with AstraZeneca (AZN), Amgen (AMGN), Bristol Myers Squibb (BMY), Genentech (DNA) and several other huge pharmaceutical companies.  With such a solid foundation of companies that Wuxi works with, it is clearly a huge player in the global drug research market.  Wuxi also works with many big-name Chinese pharmaceutical companies, conducting drug research for them as well.

But, while the deal making and partnerships will definitely help Wuxi grow and stay relevant for a very long time, I believe that the biggest upside for this company comes from external factors, such as the weakening global economy, and the current recession in the United States.  There is no doubt that American pharmaceutical companies are feeling the affects of the economy.  Just recently, Pfizer slashed 800 research and development (R&D) positions, and cut around 2,400 sales positions.  Pharmaceutical R&D is undoubtedly a very expensive aspect of business for drug companies.  Having said this, drug companies must continue to pay for R&D if they want to produce new drugs that will bring them profits.  So, as they are trying to cut costs but still make new and unique products, a logical place to look for help is China.  There is no better place to get high quality scientists and productive R&D people for cheap than in China.  As the economy gets worse and American pharmaceutical companies continue to look for ways to cut costs, they will start looking to outsource more and more R&D projects to China.  A company like Wuxi, which has so many giant pharmaceutical companies locked in as partners, will definitely reap the benefits of this fundamental shift in R&D outsourcing as the American economy continues to weaken and drug companies continue looking for ways to cut costs. 

For a company whose P/E ratio usually hovers around 30, and for a company that is expected to increase earnings by about 25% every year for the next five years, Wuxi seems like a steal at under $6 per share and with a current P/E ratio of around 11.  There are obviously many risks that come with investing in a relatively unknown small-cap Chinese R&D company that has only been publicly traded since 2007, but I hope that I have convinced you that now is the time to buy shares in Wuxi PharmaTech.

Finding hidden gems,

 

Niki Pezeshki

College Trillionaire