WuXi: Making Money Both Ways

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There are two ways to increase earnings: increase revenue or decrease costs. Pharma-outsourcing specialist WuXi PharmaTech (NYSE: WX) took a lesson from what it preaches to its drug-making customers like AstraZeneca (NYSE: AZN) and Merck (NYSE: MRK): You can make more money if you spend less.

Investors were surprised by the cost cutting at the China-based company and sent WuXi up a whopping 19% yesterday.

As Kendle International and Pharmaceutical Product Development (Nasdaq: PPDI) are well aware, the growth in outsourced work by drug companies just isn't what it used to be. WuXi's revenue was down 3% year over year, but lower costs -- 9% lower cost of services and total operating expenses 5% lower than last year -- helped increase income from continuing operations a whopping 37%.

With yesterday's move, WuXi now seems to be the best performing contract research organization this year.

Company	Year-to-date increase (decrease) in stock price
WuXi PharmaTech	56.4%
Charles River Laboratories (NYSE: CRL)	28.2%
Covance (NYSE: CVD)	19.2%
ICON (Nasdaq: ICLR)	15.3%
Pharmaceutical Product Development	(28.7%)
Kendle International	(57.6%)

Source: Yahoo! Finance.

The slimmed-down company can't cut forever, and in fact expects gross margins to creep up in the second half of the year as it expands operations. But that's ultimately a good thing since it means revenue will start increasing again. In fact, the company is expecting this year's revenue to increase more than 6% year-over-year at the midpoint of guidance. By my calculations, that means it'll grow revenue by more than 12% in the second half of the year.

Looks like WuXi will be growing earnings both ways this year.

Looking for more China based companies with room to run? Check out this volatile company that the Global Gains team recently visited.