BEIJING - The leadership of WuXi PharmaTech, China's top contract research organization, has spelled out for the first time in detail how its ill-timed acquisition of an American biologics manufacturing and testing outfit, lashed by the tempests of the West's financial crisis, triggered a massive loss that wiped out five years of earnings.

In an annual report filed with the Securities and Exchange Commission in the U.S., where WuXi PharmaTech's shares are listed, the CRO's American-educated chief executive officer also sketched out how the economic maelstrom still surrounding the life sciences sector could hurt the company's performance through 2009 and beyond.

Prior to the January 2008 acquisition of the U.S.-based AppTec Laboratory Services for $160 million, the Shanghai-headquartered WuXi PharmaTech had been a rising symbol of the wisdom of providing U.S.-level drug research services for a fraction of the American price by tapping Chinese scientists.

WuXi PharmaTech CEO Li Ge, who holds a doctorate in organic chemistry from Columbia University, succeeded in attracting the world's top 10 pharmaceutical giants as clients and guided the outfit through steadily advancing profits as more research was outsourced to China.

Yet the company's devastating loss for 2008, as the credit crisis suffocated the American biotech start-ups that had been AppTec's primary customers, erased earnings posted by WuXi PharmaTech back through 2004.

"In the second half of 2008, the global economy suffered a serious downturn, including a significant deterioration in credit markets," stated CEO Li in the report. "As a result, some AppTec customers, including small biotechnology companies, had considerable difficulty in obtaining credit or in raising capital, and consequently cut back on their spending for our services, particularly in biologics manufacturing."

"We concluded that the prospects of a recovery in the foreseeable future was unlikely and therefore discontinued the [AppTec] biologics manufacturing operation in December 2008," Li explained to SEC regulators. (Also see "Hit By U.S. Economic Tremors, Collapse In Biologics Business, WuXi PharmaTech Posts Massive Loss For 2008, American Unit AppTec Deeply Devalued" - Scrip, 27 March, 2009.)

As a result, Li added, "We recorded a net loss of $64.2 million in 2008, which included pretax impairment charges of $60.5 million relating to the continuing AppTec business and a pretax loss from discontinued AppTec operations of $61.7 million."

And although WuXi PharmaTech posted a remarkable turnaround in the first quarter of 2009, chalking up net profits of $11 million, Li stated that the company still faces troubled economic times ahead.

"The current global economic crisis affects all areas of our business, including global pharmaceutical, biotechnology and medical device R&D outsourcing markets, in all the regions in which we operate," he said.

"Disruptions in orderly financial markets in recent months … along with the interconnectivity and interdependence of international economies, have created a global downturn in economic activity."

That, in turn, could create a minefield of dangers for WuXi PharmaTech's operations ahead.

"In a period of economic uncertainty," he explained, "customers may adopt a strategy to defer spending for global pharmaceutical, biotechnology and medical device R&D outsourcing services to later periods."

And if the globe's drug and biologics giants do slow down the process of outsourcing more research to China, the expanding number of CROs across the country will intensify competition for that business and might engage in a pricing war.

Li noted that while WuXi PharmaTech is moving to expand its scope of services by opening a drug safety testing laboratory later this year, it will face an array of competitors that now includes Charles River's new toxicology outpost in Shanghai.

And, he added, healthcare reforms that are now on the drawing boards in the corridors of power in Washington could ultimately have a negative rippling effect half-way across the world in Shanghai.

"In recent years, the U.S. Congress and state legislatures have considered various types of healthcare reform to control growing healthcare costs," said Li. "Healthcare reform legislation that restricts or caps costs could limit or eliminate profits that can be made from new pharmaceutical developments."

"This," he said, "could adversely affect R&D expenditures by pharmaceutical, biotechnology and medical device companies, which in turn could decrease the related business opportunities available to us."

- Kevin Holden (k.platt@elsevier.com)

WuXi PharmaTech's Leader Explains How U.S. Economic Tremors Tore Through American Subsidiary, Buried Five Years of Company Earnings

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