ShangPharma sees $10m lift in revenues thanks top 10 clients
Of the Chinese contract research organisation’s (CRO) $31.8m net revenue this quarter – up from $20.6m in the same quarter last year – almost 65 per cent came from its Big Pharma customers, including GSK and Eli Lilly.
In total, the firm saw a 21.3 per cent increase in trade with top customers compared to last year.
The news – which follows the recent opening of a facility dedicated entirely to the top ten clients – is a result of what the company says is an increased focus on winning full-time-equivalent (FTE) deals with big firms.
ShangPharma also said new offerings in preclinical and biologics means demand from the big players has increased.
In the results, CFO William Dai said: "Despite industry headwinds, we succeeded in increasing the percentage of revenues generated by FTE-based services, which have better visibility, as well as expanding our integrated drug discovery service offering to many of our larger customers.”
CEO Michael Xin Hui echoed this, adding that investments in integrating its drug discovery, biologics, biology, process development and research manufacturing as well as translational and clinical science will be the key for future growth.
According to William Blair analyst John Kreger, cross-selling new services to create a more “integrated” solution was also a winner with the big payers.
“The cross‐selling initiative around the newer services to create a more‐integrated solution remains the key driver of future growth, in our view,” he said.
A “challenging quarter”
Despite the revenue growth ShangPharma's profits were still down thanks to squeezed margins, which shrank down from 34.7 per cent in Q2 2011, to 29 per cent in the reported period.
The firm said costs related to facility expansions and acquisitions – including the recent acquisition of the Charles River Bioexplorer facility in Shanghai– was to blame. Pricing pressure from Big Pharma clients, especially in synthetic chemistry, was also highlighted as a factor.
The biggest margin pressure was an increase in labour costs in China, however according to Dai this may stabilise for the time being.
“While margins were impacted by annual pay raises and benefit increases effective from April, we believe that these costs will remain relatively stable over the next several quarters. We have already begun to take a series of measures to reduce costs through improving operational efficiency.”
Kreger disagreed however, and said the pressures from labour costs and “pharma’s budget sensitivity” could last for longer than ShangPharma expects.
Swept under the rug?
Unusually, in its announcement the firm made no mention of the recent news it would consider a private equity takeover bid. In August the firm announced it had established an independent board and called JP Morgan to help it mull the matter.
Kreger said he was surprised the firm made no mention of the matter with a reported offer from Xin Hui and TPG to buy up the remaining shares.
He said: “Recall that these shareholders, who together currently own 65 per cent of the company, announced their intentions to acquire the remaining shares at a price of $8.50 to $9.50 per ADS in a going-private transaction in early July.
Kreger added: “In our view, the poor results this quarter make it less likely that a competing offer for the company emerges.”