ShangPharma stumbles over increased costs in Q3

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Chinese CRO ShangPharma ($SHP) posted a 39.5% drop in net income in the third quarter, as increasing costs tamped down a 10.6% rise in revenue.

The company reported $1.6 million in net income, down from $2.6 million a year earlier, and $31.9 million in revenue, compared with $28.8 million a year earlier. ShangPharma blames the profit decline on the cost of new facilities, many of which are yet to come online and start generating revenue, including a new manufacturing plant in Fengxian, China. In total, the CRO's operating expenses rose 9.4% in the quarter.

However, ShangPharma says the uptick in revenue is a sign that it is further entrenching itself in the outsourcing world, as 62.6% of its sales came from its top-10 pharma clients, who pitched in 11.3% more than in last year's third quarter. Among the company's high-profile customers are Eli Lilly ($LLY) and GlaxoSmithKline ($GSK).

The company is continuing to expand its R&D capabilities; it opened a new state-of-the-art biologics facility last quarter, and CFO William Dai said ShangPharma is working to make itself more efficient as it moves forward.

"During a difficult third quarter for global pharmaceutical and biotech companies, we focused on easing margin pressure by optimizing our scientific team and reducing operational structural costs in areas like capital expenditure and administration," Dai said in a statement. "Our optimization plan is helping to improve margins and profitability, while keeping a high ratio of senior-to-junior scientific staff to ensure that we maintain our competitive advantage in the CRO market."

In August, the company said it was considering a private equity takeover, with founder and CEO Michael Xin Hui joining equity outfit TPG Star Charisma in putting forth an offer to acquire ShangPharma's outstanding shares, valuing the company at up to $176 million.

- read ShangPharma's release

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