WuXi PharmaTech (Cayman) (WX)
Q2 2013 Earnings Call
August 13, 2013 8:00 am ET
Executives
Ronald Aldridge - Director of Investor Relations
Ge Li - Co-Founder, Chairman, Chief Executive Officer, Member of Compensation Committee and Member of Strategy & Finance Committee
Edward Hu - Chief Financial Officer and Chief Operating Officer
Analysts
David H. Windley - Jefferies LLC, Research Division
Tycho W. Peterson - JP Morgan Chase & Co, Research Division
Wei Du - Goldman Sachs Group Inc., Research Division
Ye Yin - Oppenheimer & Co. Inc., Research Division
John Kreger - William Blair & Company L.L.C., Research Division
Jack Hu - Deutsche Bank AG, Research Division
Iris Wang - Crédit Suisse AG, Research Division
Isabella Zhao - Morgan Stanley, Research Division
Serena Shao - BofA Merrill Lynch, Research Division
Operator
Thank you for standing by, and welcome to the WuXi PharmaTech Second Quarter 2013 Earnings Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, 13th of August 2013.
I would like to turn the call over to your first speaker today, Ron Aldridge, Director of IR. Please go ahead, Mr. Ron Aldridge.
Ronald Aldridge
Thank you, Derrick, and good morning or good evening to everyone participating in our second quarter 2013 earnings conference call. Hosting this call today is Dr. Ge Li, Chairman and Chief Executive Officer. Joining him is Edward Hu, our Chief Operating Officer and Chief Financial Officer.
During today's presentation and question-and-answer session, we will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts but instead are predictions about future events. Although we believe that our predictions are reasonable, future events are inherently uncertain, and our forward-looking statements may turn out to be incorrect. Information on many of the risks relating to our forward-looking statements can be found in our filings with the SEC. Our forward-looking statements speak only as of the date on which they are made, and we assume no obligation to update any forward-looking statements, except as required by law.
Also, in discussing our financials, we will use certain non-GAAP measures, which exclude share-based compensation expenses and amortization and deferred tax impact of acquired intangible assets. We believe these non-GAAP operating measures are useful for understanding and assessing underlying business performance and operating trends. Reconciliations of our GAAP to non-GAAP second quarter and first half 2013 results of operations are found in today's earnings release, which has been posted to our website and in the appendix to this presentation. [Operator Instructions]
And now, it's my pleasure to introduce Dr. Ge Li to review our second quarter 2013 performance and to discuss our third quarter and full year 2013 business outlook. Dr. Li?
Ge Li
Thank you, Ron, and good evening or good morning, everyone.
Slide 4 please. I'm happy to report that WuXi had a good second quarter. We had a solid revenue growth of 9.2%. Leading this performance was 18.6% revenue growth in China Lab Services driven by integrated drug discovery and development service and the ramp-up of biologics and the tox services.
U.S. Lab Service had a small year-over-year revenue decline due to a difficult comparison with record revenue in the second quarter of 2012. Manufacturing Service had an excellent quarter. Strong process development and the recent manufacturing revenues largely made up for decline of Commercial Manufacturing revenues year-over-year. We are pleased to see our margins are stabilized. Our gross margins and the operating margin this quarter on both GAAP and non-GAAP basis were comparable to margins during the past year. These stable margins were achieved despite continuing labor inflation, R&D appreciation and the investment in new business.
One important factor for us to achieve stable margins is that we have institute company-wide Lean Sigma programs to improve our operational efficiency, increase productivity and eliminate waste. In addition, business mix is helping as newer business ramp up their revenues and improved their profitability by achieving scale of operations.
We've also had a strong non-operating income in the second quarter, mainly from large mark-to-market gains on foreign exchange forward contracts, which are fairly unpredictable on a quarterly basis, subject to fluctuation of currency exchange rate between the U.S. dollar and RMB.
Foreign exchange gains on forward contracts are intended to partially offset the margin pressure from RMB appreciation. So it is nice that, this quarter, we achieved large foreign exchange gains in a period of time with RMB appreciation, while keeping our margins stable as our hedging strategy worked efficiently and effectively. We also had a relatively low tax rate in the quarter from a one-time tax benefit that we'll discuss later in the presentation.
Due to these factors, we exceeded our revenue guidance for the quarter and have also exceeded our diluted EPS guidance.
Slide 5, please. We will expect continued growth revenue and earnings growth throughout our company. Biologics service and small molecule Manufacturing Service have exciting opportunities ahead of us. Biologics is a unique opportunity for WuXi because of our strong management team, integrated biologics drug discovery development capabilities, state-of-the-art facilities and the regulatory requirements that incentivize companies [indiscernible] Chinese partners if they want to -- speed up developing biologics for the China market.
In small molecule manufacturing, research and manufacturing continued to achieve strong double-digit growth. Commercial manufacturing has turned the corner, with revenue gains from new products, roughly offsetting the revenue loss from single products. And we have now increased our pipeline of Phase III products [indiscernible] to become commercial manufacturing opportunities from the previously announced 7 to 9 products now.
In clinical services, we and our partner PRA took an important step forward this quarter by hiring Dr. James Pusey to be the President and the General Manager of the WuXiPRA joint venture.
As a result of our strong second quarter performance and a good outlook for the second half of 2013, we are increasingly -- we are increasing our full year guidance for both revenue and diluted EPS. We now expect to achieve full year revenues in the range of $572 million to $578 million, full year GAAP EPS of $1.38 to $1.44 and a full year non-GAAP EPS of $1.61 to $1.67.
And now, Ed will discuss our second quarter in more detail. Ed, please.
Edward Hu
Thank you, Dr. Li. Turn to Slide 6, please.
Here you can see our second quarter performance versus our guidance. We exceeded top end of our second revenue guidance by $2.3 million and the top end of diluted EPS guidance by $0.06. Better than expected revenue growth came mainly from biologics, manufacturing and medicinal chemistry business, with most of the rest of the company performing in line with our expectations.
Our better-than-expected EPS growth came from the strong revenue growth in gross[ph] margins and gain from foreign exchange forward contracts and some tax benefit.
Turn to Slide 7, please. Here you can see that our total company revenue growth was driven by China-based Lab Services, particularly from integrated drug discovery and development services and the ramp-up of biologics services and toxicology services. Our Manufacturing Services delivered a strong quarter in the face of a difficult comparison with the second quarter of 2012, which was a record quarter. Strong revenue growth in Process Chemistry and research and manufacturing made up for the decline of Commercial Manufacturing revenue relative to the second quarter of 2012, when commercial products contributed a significant portion of the revenues. Our growing manufacturing product pipeline will drive steady growth in commercial manufacturing revenue in the coming years.
Our U.S.-based Lab Service underperformed this quarter. The lack of large product wins and delay in new project start-up slowed down the revenue growth in the quarter. We expect the second half will be -- will perform better.
Turn to Slide 8, please. Here you can see the quarterly sequence of revenues. We are growing nicely from a trough in last year caused by a slowdown of our Manufacturing Services revenues. China Lab Services continued to have a strong quarter-over-quarter sequential growth, apart from the first quarter, which is typically lower. We expect sequential quarter growth in China Lab Services to continue throughout the year, and we expect a particularly strong fourth quarter based on our conversation with our customers and our business outlook.
U.S. Lab Service revenue has been flat for almost a year due to fewer large project wins, particularly in biologic testing. We expect sequential revenue growth in this business in the second half of the year.
Manufacturing Services revenue has historically been quite lumpy, but we believe this business has achieved the scale that will allow us and our revenue to grow much more steadily going forward as our commercial product portfolio grows.
Turn to Slide 9, please. Looking at our GAAP P&L. We achieved a gross profit increase -- 5% revenue increase as a result of productivity and our operating efficiency improvement that more than offset the labor cost inflation and RMB appreciation.
Operating income grow 8.1%, as we invested in sales and marketing operations and increased R&D expenses to develop new service capabilities. Our 45.5% diluted EPS growth this quarter was due to revenue and profit growth and non-operational incomes. We had $1.6 million of realized gains and $3 million of mark-to-market gains from foreign-exchange forward contracts this quarter. In comparison, in the second quarter of 2012, we had $2.3 million of mark-to-market losses from foreign-exchange forward contracts. The lower effective tax rate in this quarter resulted from full[ph] one-time tax benefit, a $1.1 million refund of 2012 income tax [indiscernible] Chinese legal entities that provides Process Chemistry R&D services, which enjoyed our tax harder year [ph] and a $1.2 million tax benefit from a sup[ph] deduction of R&D expenses that allowed us to deduct 150% of certain 2012 R&D expenses. This is a part of a tax incentive program the Chinese government provides to stimulate companies to invest in R&D and innovate.
Turn to Slide 10, please. Our quarterly GAAP P&L shows record profit, operating income, stable gross margins and operating margin.
On Slide 11, our non-GAAP P&L is similar to GAAP, with about 42% diluted EPS growth for the reasons as we discussed on Slide 9.
Turn to Slide 12, please. Here, we show the quarterly progression. We have achieved record non-GAAP gross profit and operating income with a stable margin trend.
Slide 13, please. So this slide shows that our company revenue base is well balanced and diversified. In addition, these businesses support each other as seamless platform of integrated services from synthetic chemistry at the beginning of a drug discovery program to Phase III clinical testing and commercial manufacturing at any of the drug development. The fastest-growing part of the company is drug development, which has grown from 11% to 16% of the total company revenue in the past 12 months. Medicinal chemistry and other discovery services are also growing about the company average. We will look at each of the business in more detail later in the presentation.
Turn to Slide 14, please. The analysis of year-over-year growth in our second quarter diluted EPS shows somehow the same factors we discussed in the previous quarter. Business growth almost entirely from volume growth is a key driver of our EPS performance and contributed $0.14 to the second quarter 2013 EPS growth.
Mark-to-market gains on foreign exchange forward contracts account for $0.07 of the EPS growth relative to the second quarter of 2012. We had unrealized gains of $3 million in the second quarter of 2013 was unrealized of[ph] $2.3 million in the second quarter of 2012. Other foreign exchange impacts, such as RMB appreciation against the U.S. dollar as well as factors such as labor inflation and investment in new business, continued to have negative impact on EPS.
Turn to Slide 15, please. Our balance sheet remains very strong, with about $300 million cash and about $65 million short-term and long-term bank loans. Our operating cash flow has been strong and steady, with about $40 million cash generated in the second quarter and about $79 million cash generated in the first half of the year. Our capital expenditures have been more variable simply because of timing of purchases. Capital expenditures totaled about $15 million in the first half of 2013, but it will increase considerably in the second half as we have planned. Our full year guidance for total CapEx is still about $60 million.
Turn to Slide 16, please. Our strong second quarter will benefit our full year, and we are increasing our full year 2013 revenue and diluted EPS guidance. We forecast our full year revenue to be in the range of $572 million to $578 million or 14% to 16% year-over-year growth. China Lab Service is expected to grow 16% to 17%. Manufacturing Service, including the ramp-up of biologics manufacturing in the second half of 2013, will grow about 20% to 24%. And U.S. Lab Services will grow low-single digits.
We expect margin trends in the first half of the year to continue in the second half and our guidance to continue to be for full year 2013 gross margin and operating margin, both GAAP and non-GAAP, to be comparable to those in 2012.
And we forecast GAAP EPS in the range of $1.38 to $1.44 or 16% to 21% year-over-year growth and our non-GAAP EPS in the range of $1.61 to $1.67 or 15% to 19% year-over-year growth. Again, we expect the full year CapEx spending to be about $60 million.
Turn to Slide 17, please. I think it's important to take a moment to put this year's performance in context. As you can see from this chart, our strong revenue and diluted EPS growth in 2013 are not one-time events, but a continuation of years of growth built on the historic business model that we are executing successfully, that is building an open-access integrated R&D service platform to serve the global life science industry discover and develop therapeutic products more cost effectively and efficiently.
Turn to Slide 18, please. Here, we give out our preview[ph] for the third quarter. We expect to generate $143 million to $145 million in revenue in the third quarter. And GAAP EPS is expected to be in the range of $0.32 to $0.34, and non-GAAP EPS is expected to be in the range of $0.38 to $0.40.
Now Dr. Li will discuss the performance and strategies in our major business. Dr. Li?
Ge Li
Thank you, Ed. Slide 19, please. Our Synthetic chemistry business continued to achieve single-digit revenue growth from increased volume despite modest pricing pressure and an increasingly competitive environment. Several recent customer wins will drive good sequential growth in the second half of 2013 though[ph] large pharmaceutical companies remain our primary customers, biotech companies are increasingly using our chemistry services.
Despite pricing pressure, we have stable margins in this business, in part, from our new chemistry facility in Wuhan. Wuhan offers a pricing alternative for our customers and now represent about 20% of total synthetic chemistry business. Synthetic chemistry is 1 area where we have been particularly successful in improving our operational efficiency through implementing Six Lean Sigma programs. We have been able to increase the success rate of chemical reactions and reduce material consumption. We are measuring productivity with such metrics as compounds produced per employee and the steps taken to produce compound per employee et cetera in the way we have seen substantial improvement in these areas after training. We think we can maintain single-digit growth in synthetic chemistry beyond 2013.
Slide 20, please. Medicinal chemistry and other discovery services now represent more than 1/4 of the company's revenues and growing at mid-teens rate. We have now 34 lead optimization projects ongoing, mainly with multi-national companies and they are progressing well. We delivered 2 preclinical drug candidates to our customers in the second quarter, and we expect to deliver about 9 additional drug candidates in the second half of this year.
Among other discovery services, biology is growing very rapidly and achieving good customer satisfaction, particularly in support of medicinal chemistry products.
Slide 20 -- 21, please. Despite worldwide toxicology market that has seen little to no growth and the substantial pricing declines in the past 5 years, our tox business is performing very well. It is expected to grow about 40% year-over-year this year and driven by the quality and the value we deliver. Our Suzhou site capacity utilization rate is close to 70% now. Our number of active customers has increased to 48 from 32 a year ago, with healthy mix of large and small Chinese and the multi-national pharmaceutical and biotech companies. About 70% of our studies are now GLP, which speaks to the quality of our services. Many of our studies packages are used by bio clients require R&Ds with the U.S. FDA, European and Australian regulatory agencies, as well as China FDA.
Slide 22, please. Our biologics business performed very well in the second quarter, exceeding our expectation as we gained business from both international and the domestic pharmaceutical companies. We expect revenues to ramp up continuously in the second half of this year and in years to come. With the strong performance, we expect this business to break even probably by the end of this year, about 1 year earlier than our previous expectation. Our project backlog has continued to grow from a $40 million reported last quarter to $53 million now, and we expect further growth in the second half of the year from new contracts. The highlight of the second quarter was our signing an agreement with Ambrx and the Zhejiang Medicine Co. to develop the antibody drug conjugate, ARX788, for treating Her2-positive breast cancer patients.
Other projects are progressing well, such as our joint venture with MedImmune to develop MEDI5117 for rheumatoid arthritis and other autoimmune disorders for the China market. 5 multi-national companies are emerging as our anchor[ph] clients now with the focus of developing innovative biologics products for China market and worldwide. We have completed construction of the drug product fill/finish facility in Wuxi city and is currently being validated. We also have installed 2 2,000-liter bioreactors to produce Phase II and Phase III clinical trial materials starting the second half of this year.
Slide 23, please. Our clinical JV, WuXiPRA, began operation in April and achieved a key milestone with the appointment of Dr. James Pusey as the President and General Manager. Dr. Pusey has 25 year of experience in medicine and the biopharmaceutical industry, including previously served as the founding CEO and President of a major clinical CRO. He also had executive roles at 2 major multi-national pharmaceutical companies, and he was a practicing physician at 4 other hospitals. Under Dr. Pusey's leadership, we expect WuXiPRA to become the clinical service provider of choice in China, a pharmaceutical market that is growing at a mid to high teens annually and will become the second largest in the world within the next few years.
Slide 24, please. Our small molecule manufacturing business was an another source of over performance in the second quarter. Manufacturing service is growing at a high-teens pace this year, driven by our capability in Process Chemistry and the research and manufacturing. We are particularly excited about our growing pipeline of products and the potential products in commercial manufacturing. We are now manufacturing advanced to intermediate for 6 commercial products, 9 Phase III products [indiscernible] could become a long-term commercial manufacturing program for us. 2 of the 9 also particularly have large revenue potential for the company. 3 of commercial -- or Phase III products have been identified by the FDA as breakthrough products, and then a fourth is receiving fast-track FDA review. This again shows the innovative nature of the products that will help our customers to bring to the market.
Slide 25, please. Our U.S. Lab Service business was one of our few areas of disappointment in the second quarter. Revenue were down 3% year-over-year in the second quarter and flat for the first half. A number of factors were responsible: Fewer new business wins, project delays and difficult comparisons with the first half of 2012, when revenue grew 17% on the strength of 2 one-time projects. We expect a low-single digit growth for the full year in the -- however in the longer term, we expect solid growth from the testing business, as the industry is growing pipeline of biologics products, particularly therapeutic antibodies.
Slide 26, please. So to conclude, we outperformed in the second quarter and expect this outperformance to continue throughout the year, which will reflect an increased guidance. Our outperformance was a combination of operational performance, such as higher revenue in biologics and the manufacturing and the cost control and the non-operational items. We believe that all of our business are growth business and that the best future growth opportunities are in integrated drug discovery service, small molecule drug development and manufacturing, biologics service and the clinical services. Again, we're just excited about going to work each day as the knowledge that we're building a broad integrated platform of R&D service have not only provides convenience to our more than 1,000 clients, but also help them realize their dream of being a drug discoverer and developer.
Thank you for your attention. And now, we'll be happy to answer your questions.
Question-and-Answer Session
Operator
[Operator Instructions] Your first question comes from the line of Dave Windley from Jefferies.
David H. Windley - Jefferies LLC, Research Division
I was wanting to dig into customer mix a little bit. You've mentioned in prior quarters some growing demand, growing interest from Chinese domestic customers. And I wondered if you'd comment on maybe where that level is in the company today, how much of your revenue are you deriving from domestic customers and perhaps help us understand which of your business units are seeing most of that demand?
Ge Li
David, thanks for the question. We're seeing continued growth of demand from our domestic customers. But percentage-wise, the revenue is still small. So right now, it's about 5%. And we think, within the next 12 months, it's more likely to grow to 10%.
David H. Windley - Jefferies LLC, Research Division
Okay. And is that in synthetic chemistry, in medicinal chemistry or is it in some of the newer businesses like tox?
Ge Li
Well, actually, across the board, and mostly in medicinal chemistry and the preclinical services.
David H. Windley - Jefferies LLC, Research Division
Okay. And then, a similar question. On biologics, it sounds like you're making really good progress there. Are your customers in biologics a new customer base? Are you essentially cross selling those services into your traditional large pharma core customers?
Ge Li
Actually, both. [indiscernible] increasingly the existing customers and also within new customers.
Edward Hu
Like Ambrx, which is...
David H. Windley - Jefferies LLC, Research Division
I'm sorry. I missed the name there? Like?
Edward Hu
Ambrx.
Operator
Your next question comes from the line of Tycho Peterson from JPMorgan.
Tycho W. Peterson - JP Morgan Chase & Co, Research Division
I wanted to maybe just ask a question on the toxicology business. We've heard from some of the other shareholders[ph] about trends picking up a little bit. Can you maybe just talk about the leading indicators for your tox business to the extent that things are turning a little bit here? Obviously, you've talked about your targets with the new capacity. But can you maybe just talk about whether some of the underlying trends are picking up a bit?
Ge Li
Yes. Tycho, I think that we are steadily growing our tox business as more and more kind of fully integrated R&D packages come into our business. So -- and we have product[ph] good balance of projects from both international clients and the domestic Chinese clients.
Tycho W. Peterson - JP Morgan Chase & Co, Research Division
Okay. I mean, are you able to talk about how, say, like things have trended in the last couple of months? I mean, I think one of your competitors was fairly specific about things picking up in July. And I'm just wondering whether you've seen any sort of near-term inflection here or...
Edward Hu
I don't think there's a huge inflection point yet, but we're seeing a pretty steady growth from both international and domestic customer base.
Tycho W. Peterson - JP Morgan Chase & Co, Research Division
Okay. And then, on Synthetic Chemistry, do you see pricing turning at all? I mean, you talked about it being -- seeing modest declines there. At what point do you think maybe pricing in Synthetic Chemistry starts to stabilize a bit?
Ge Li
I think that we're getting there. So as we indicated, we only saw modest pricing pressure. And also, our Wuhan facility is becoming very productive, and we offer pricing alternatives for our customers.
Tycho W. Peterson - JP Morgan Chase & Co, Research Division
Okay. And then, last one just the outlook for the U.S. lab business. I mean, you commented that was a bit disappointing and has been for a bit. Can you maybe just talk on how you're thinking about that business going forward?
Edward Hu
I think that, in the first half of the year, we have been winning less large projects. I'm not sure whether those similar project has cyclicality, when biochem studies for Phase III programs, $0.5 million each project, and those projects are quite cyclical. But we have clearly a growing pipeline for the second half and into 2014 now.
Operator
Your next question comes from the line of Wei Du from Goldman Sachs.
Wei Du - Goldman Sachs Group Inc., Research Division
Ed, I actually noticed you seem to have some seasonality on the gross margin, especially -- I don't know. I hope my number is right. When I break down the Laboratory Service, often, to show 4Q seemed to be relatively higher. I'm not sure whether that's because random case or it's a trend? I think, second, when I look at the manufacturer service revenue, I think you also -- when we look at your numbers this quarter, it is about 29%. Last quarter, it was 31%. Can we -- This is really a housekeeping item. Can we assume the margin is about that level? Could you give us a little bit more color? I guess especially I want to ask about the biological service, I guess you lumped everything pretty much in the laboratory service in China. And I wonder whether we're seeing the margin improvement, especially sequentially. I think you probably already explained is because the change in service mix. So basically, can I assume the biological service actually offers a relatively higher margin?
Edward Hu
Biologics -- let's step back a little bit. For China Lab Service, actually, the margin typically is highest in the fourth quarter because there were -- the fourth quarter is typically also the highest revenue quarter as many of our customers want to finish their project before the end of the year. So we're always rushing and working very hard to achieve. So historically, we always achieved very strong fourth quarter as the complementing margin also a bit higher than the first 3 quarters. Well, the biologics business, currently still probably runs below the company average and gross margin, but it's ramping up.
Operator
Your next question comes from the line of Ingrid Yin from Oppenheimer.
Ye Yin - Oppenheimer & Co. Inc., Research Division
My question is about the utilization rate of the manufacturing business. Now you have 9 Phase III products in the pipeline. Will you be running into capacity problems at some point next year?
Ge Li
I think our current capacity will support us throughout the next year.
Ye Yin - Oppenheimer & Co. Inc., Research Division
Okay. And then, next year and beyond, you will think about capacity...
Ge Li
Yes, we probably will add capacity, yes.
Ye Yin - Oppenheimer & Co. Inc., Research Division
Okay. Great. And also, if we look at your growth of the 5 different segments, Synthetic Chemistry, which probably has the lowest margin, is going down in terms of percentage of sales; and development is growing at high-double digits. So the service product mix is very favorable for margins. Just wonder if there's potential margin expansion opportunities going forward?
Edward Hu
Ingrid, I think we still are facing the macroeconomics, like the labor cost and RMB appreciation, that trend still stays there. So we are working very hard and through operating improvement and also ramping up the new business and to maintain our margins. I won't be able to comment on the specific sub sector of the margins.
Ye Yin - Oppenheimer & Co. Inc., Research Division
Okay. So can you comment a little on the competitive situation in Synthetic, Medicinal and U.S. Lab and Tox business? I know you don't really have a competitor for the biologics business?
Ge Li
Well, actually, medicinal chemistry and integrated service are our strengths. So we have a very strong management team, and we have a very deep knowledge and understanding of the drug discovery and development. So again, we see consistent wins of discovery products.
Ye Yin - Oppenheimer & Co. Inc., Research Division
Okay. How about Synthetic Chemistry? I mean, are you competing just with local companies, or you're starting to see there are more international players like Indian CROs that are starting to compete for business?
Ge Li
We actually compete globally, and we -- well, in general, our win rate is about 30% of the RFPs for synthetic chemistry. And honestly, with the establishment of the Wuhan facility, our win rate actually is trending up.
Operator
Your next question comes from the line of John Kreger from William Blair.
John Kreger - William Blair & Company L.L.C., Research Division
Do you have any early thoughts that you could pass along on 2014? I'm curious if you got any visibility from your key clients about, kind of, project size and whether or not that could improve revenue growth going into next year? And do you think '14 could perhaps be a year where margins start to improve a bit?
Ge Li
Well, again, we are in constant dialogue with our customers. But it's still too early for 2014. But we do believe the trend now for R&D service outsourcing is now reversed. I think it will continue to grow. So again, actually, we're seeing more and more small individual companies and individuals are using our platform. So it goes with our vision to enable anyone, any company to discover and develop drugs.
Edward Hu
Across our businesses, even though it was showed clearly. But at the trends there, manufacturing business clearly is going to grow. Biologics are ramping up quite nicely, and U.S. operation will improve next year and medicinal chemistry is continuing to grow. So I think in the growth part [ph] you'll see a few impact.
John Kreger - William Blair & Company L.L.C., Research Division
And would you say you're feeling better or worse about the margin outlook given some of the headwinds like wage inflation and currency appreciation?
Edward Hu
It's probably a direction that we're getting better.
Ge Li
Yes. Partially, we don't think RMB will continue to appreciate in the future years. So...
John Kreger - William Blair & Company L.L.C., Research Division
Great. And then, one last question. Could you perhaps elaborate a bit on where you stand with your clinical joint venture with PRA? Are you out competing and signing large clinical programs at this point? Or is that something that you'd be looking to ramp up next year?
Ge Li
Yes. Well, definitely, we look forward to ramping up the business, and we also -- I think with our partners, PRA [indiscernible] aggressively invest in this area, as the China pharmaceutical market continues to grow to mid to high teens. And in the last quarter, we brought Dr. James Pusey on-board. He's a very experienced clinical CRO veteran. So we do believe we have very good chance to become a partner of choice for the clinical service in China.
Operator
Your next question comes from the line of Jack Hu from Deutsche Bank.
Jack Hu - Deutsche Bank AG, Research Division
My question is actually on your Lean Sigma. Can you give us some color what exactly you have done on this initiative and then quantify the impact of margin improvement or margin stabilization? And then, lastly, how sustainable should we expect?
Ge Li
We have across the company-wide Lean Sigma initiatives. So like for example, looking into detail of the process and to improve the efficiency. Again, I -- personally, I do believe that there's always room to improve, so I do feel this is sustainable.
Operator
Our next question comes from the line of Iris Wang from Crédit Suisse.
Iris Wang - Crédit Suisse AG, Research Division
My question was also about the WuXiPRA. So what's your feel about the competition landscape of -- about the clinical services in China because from our perspective we see that increasing number of player are getting into this market. Do you have any concern about the pressure on the pricing? And what is the differentiating factors of the WuXiPRA compared to other clinical service providers in China?
Ge Li
Again, it's not uncommon because to see our competitors in a very high market because for us, I believe the quality of science will differentiate us from others.
Edward Hu
I believe that WuXiPRA is a combined strength of both companies. PRA with the 35 years experience win growth[ph] and WuXi has a strong experience running China operations and also all the laboratory support to focus on[ph] studies.
Iris Wang - Crédit Suisse AG, Research Division
I have a follow-up question on that. I just would like to know more about your advantage[ph] if you have any strengths in the hospital coverage or the any -- cost advantaging the, for example, the monitoring services or the data processing. So what exactly it is?
Ge Li
Again, the market will continue to grow rapidly. And I think we have many clients they want me introduce their products for China. So again, clinical business requires a very high level of confidence, credibility and trust. I think, as Ed just mentioned, with 35 years of experience -- clinical experience -- global experience of PRA and 13 plus years of China operation -- CRO experience of WuXi, we do believe that we have a good advantage. So again, I think WuXiPRA is aiming to offer global-standard, high-quality CRO clinical service in China.
Operator
Your next question comes from the line of Bin Li from Morgan Stanley.
Isabella Zhao - Morgan Stanley, Research Division
And I'm Isabella asking questions in behalf of Bin Li. Actually, most of my questions has been answered. I just want to follow up with WuXiPRA. What's your sales revenue outlook for the -- for this JV, and when are we going to see any top line contribution from this JV?
Edward Hu
Actually, the WuXiPRA -- it will be a separate company. So the SG&A won't be consolidated into WuXi's P&L. So it's reported as equity income or loss line in our P&L. So going forward, we won't be able to disclose the revenues of WuXiPRA. But arguably, right now, the joint venture is just up and running. It probably would take some time to ramp up. And particularly, at the larger clinical studies, if we'd win the project today, it will take 6 to 12 months to get started because clinical trial approval process in China is very long. But it has a great pipeline ahead starting from next year.
Isabella Zhao - Morgan Stanley, Research Division
And also, 1 last housekeeping question. For the foreign exchange forward contracts gain, are we going to expect any more gains in the second half?
Edward Hu
We're continuing going to see gains -- realized gains of the forward-exchange contracts because those contracts will enter into last year it's all[ph] the money. Unrealized gains are also subject to the exchange rates at quarter end when we close the quarter. So if the RMB stops to appreciate and then we probably won't expect to see any mark-to-market gain or losses. If RMB continue to appreciate, then we'll continually going to see mark-to-market gains.
Operator
Your next question comes from the line of Serena Shao from Bank of America.
Serena Shao - BofA Merrill Lynch, Research Division
Actually, most of my questions have been answered. I just have a very quick question on your toxicity capacity utilization. How -- what percentage of the current capacity has been utilized?
Edward Hu
Actually, we talked about it in the slide. Currently, our total toxicology facility utilization is around 70%.
Operator
[Operator Instructions] Our next question comes from the line of Dave Windley from Jefferies.
David H. Windley - Jefferies LLC, Research Division
I wanted to ask about CapEx. There was an earlier question about manufacturing capacity, I believe. And I guess I'm just curious more broadly across the business, as you look beyond 2013, do you believe your CapEx levels are sustainable at the current level? Or would you expect any, kind of, step-function increases in CapEx for buildings or other capacity?
Ge Li
David, we do expect the CapEx around the current level with some fluctuations. I will say, aggressively, we probably will go around like $70 million to $75 million, but not really more than that.
David H. Windley - Jefferies LLC, Research Division
Okay. That's helpful. And then, your slides mentioned, 2 -- I think there were 2,000 liter bioreactors that you've added in the biologics manufacturing. And I wondered if those were installed specifically for 1 client or compound in particular, or are you just putting in general capacity to be sold to multiple clients for culturing?
Edward Hu
Yes. Those bioreactors are actually going to be used -- can be used for manufacturer most of[indiscernible] anybody products. But we have -- we do have 1 kind in mind, we need to start a manufacture for the Phase II, Phase III clinical supply starting in the second half of this year. This is a pretty significant campaign [indiscernible] better but the facility itself is actually multifunctional and can be used for any products.
David H. Windley - Jefferies LLC, Research Division
Okay. And I believe you said those are in validation. So everything is on track to start this [indiscernible] campaign for this client and the revenue from that is included in your guidance for the second half. Is that correct?
Edward Hu
Yes.
Operator
[Operator Instructions]
Edward Hu
Operator, we probably can conclude this conference call.
Operator
There are no further questions at this time. I will now hand the call over to the speaker.
Ronald Aldridge
We'd like to thank you very much for calling in, and we appreciate your attention and your thoughtful questions. We look forward to speaking to you again in November to go over our third quarter results. Thanks very much.
Ge Li
Thank you.
Edward Hu
Thank you.
Operator
That does conclude our conference for today. Thank you for participating. You may all disconnect.
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