Shares of Wuxi PharmaTech Inc.  (WX) are trading sharply higher this morning after the company announced a strong third quarter.  The company grew revenue by 10% over last year for a total of $70.0 million while adjusted earnings per share grew 32% to $0.24 per share.  More importantly, the company is increasing its guidance for the year which is giving investors confidence in the long-term growth prospects for this innovative company.

Wuxi has built a strong reputation as an offshore research and laboratory service company and its clients include many of the major drug developers in the US.  While the corporation is registered in the Cayman Islands, the majority of its operations are in China where it has built efficient laboratory and manufacturing facilities.  During  the third quarter,the company increased its headcount by 400 in order to ramp up for what is expected to be a strong growth season for the company.

With a strong balance sheet and a positive outlook for worldwide pharmaceutical demand, Wuxi is investing heavily in its future.  The company has ambitious plans to expand into toxicology and large-scale manufacturing which will not only increase the revenue and earnings levels, but will also provide diversification in business lines.  Through September, the company has spent $33.4 million for capital improvements, but is guiding analysts to expect $55 to $60 million for the year.  This means that at a minimum, the company will be spending another $20 million to expand its capacity.

Our confidence in the continued success of our business model leads us to continue to make investments to build our capabilities and capacities…  As a result of these investments, we expect Laboratory Services, toxicology, and large-scale manufacturing each to be major contributors to the company’s growth in revenues and earnings over the next several years. ~Dr. Ge Li, CEO

The financial stability of the company is what allows for this aggressive growth approach.  Currently, the company is sitting on $85 million in cash with another $22 million in short-term investments.  Long-term debt is minimal at roughly $2 million so it is easy to see how the company has the ability to spend another $20 million on increasing its facilities.

Investors have faced a bumpy ride with this technology position.  In mid 2007, the stock was issued to the public at $14. per share and immediately began trading at a premium.  Within three months, the stock had reached $40 as optimism for the prospects of offshore drug development became inflated.  As the global economy downshifted, the stock eventually reached a low of $3.67 as investors worried not only about the end demand for business, but also about the financial solvency for many major Wuxi customers.

Today, the stock is back above the IPO price, and cannot be considered a cheap investment.  Analysts expect the company to earn 65 cents per share this year and 72 cents in 2010.  Those estimates are likely to be revised higher as the earnings announcement is considered and after management concludes the conference call.  However, there appears to be the potential for significant growth in the stock price and I believe Wuxi offers an exceptional opportunity.

As demographic shift and the global population experiences increasing demand for pharmaceutical products, Wuxi’s large-scale manufacturing facilities will likely receive steady business.  The company already has established strong relationships with major drug developers so the manufacturing process would be a natural fit.  US health care reform initiatives will likely cause drug manufacturers to seek more efficiencies in order to cut costs.  Outsourcing many processes to China will likely help facilitate these cost cuts.

So WX is positioned to grow sharply over the coming years and I believe that analyst expectations may not fully account for this increase.  There will certainly be volatility in the shares and I wouldn’t be surprised if the stock came back to test the $14 level again.  But over the next six to 12 months, investors could see the stock cross $25 simply by analysts increasing 2010 expectations to 85 cents and investors using a 30 multiple due to the sharp growth.  So don’t put all your eggs in this basket, but a diversified account could do well to allocate capital to this strong growth opportunity.

FD: Author does not have a position in WX

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