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WuXi PharmaTech Inc Joint Venture With PRA Signals That Interest in Clinical Expansion Remains High

On Tuesday evening, December 18, WuXi PharmaTech and PRA announced a joint venture to offer a broad array of outsourced clinical trial management services in China. We believe that the partnership signals WuXi’s intent to become as dominant of a market participant in the late‐stage contract research organization (CRO) market in China as it is within early stage. We have seen several joint ventures between Chinese and Western CROs be less than successful, but the combination of WuXi’s respected brand name and local market expertise and PRA’s experience in managing large, global clinical trials and reputation for quality makes this a logical partnership that should improve each company’s competitive position. The agreement is not expected to affect 2012 results materially and, although financial implications for 2013 were not discussed, we believe the joint venture will likely lose money in 2013 as hiring ramps up and relatively little revenue is generated. Given the lack of financial disclosures, we are maintaining our 2012 EPS estimate for WuXi of $1.32 (year‐over‐year growth of 6%) and our 2013 estimate of $1.42 (year‐over‐year growth of 7%) pending additional detail on the expected spending on this venture, which we expect on the fourth‐quarter earnings call. We maintain our Outperform rating.

As mentioned above, both WuXi and PRA have a relatively small presence in the late‐ stage CRO market in China. We believe that WuXi has roughly 90 clinical CRO employees and an additional 60 who perform site management functions. Under the terms of this partnership, the clinical CRO employees will become a part of the joint venture, while the remaining employees (the site management entity) will remain a part of WuXi. PRA is not expected to contribute as many employees (we expect the total joint venture to have roughly 100 employees); rather, it will contribute its expertise conducting global clinical trials and IT‐related tools. Throughout 2013, we expect aggressive hiring (perhaps doubling headcount by 2014) as the companies strive to catch up to market leader Tigermed Technology Co. and other global CROs that have had a late‐stage clinical presence in China for a longer time.

From a financial perspective, the company is accounting for this venture under the equity method with a roughly even ownership structure—51% for WuXi and 49% for PRA. As a result of this accounting treatment, we expect WuXi’s existing clinical revenue and expenses to be moved below the line and consolidated into a single line item. Given the significant hiring mentioned above, we expect moderate losses to WuXi in 2013 as there will not likely be any offsetting ramp‐up in revenue until at least the second half of the year (recall that Chinese regulations delay study‐start times for as long as 6‐12 months). As headcount increases level off and studies begin to flow, we expect the net income statement contribution to become positive,
perhaps as early as 2014.

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