As global pharmaceutical companies focus on improving margins and rapidly bringing new drugs to market, they’re increasingly turning to contract research organizations (CRO) to fulfill several functions ranging from product development and testing to process design and manufacturing.

According to a report from GlobalData, CRO revenue rose by 10.2 percent between 2011 and 2012, reaching $13.6 billion. Revenue for CROs in the emerging markets posted even stronger growth over that period, jumping 14.6 percent to $394 million in 2012.

Emerging market CROs will continue to experience faster growth than their developed market peers over the next several years. Over the next 18 months, nearly $20 billion worth of “biologic” drugs will be losing patent protection, leading many drug companies to invest heavily in reengineering the drugs to extend protections and for generic drug manufacturers to develop cheaper versions at a fast clip.

Biologics are created by biological processes, rather than being chemically synthesized. Considering the drug market’s current price sensitivity, much of the biologic work contracted out will find its way into the emerging markets where costs are cheaper.

WuXi PharmaTech (NYSE: WX) is a China-based CRO that has been laying claim to a growing share of development and testing work.

Offering a full menu of contract services including chemistry and discovery, development, manufacturing and both US- and China-based lab services, the company’s annual revenue has shot up from $10 million in 2003 to $500 million last year.

WuXi invested $68 million in new facilities and equipment last year, most notably building a new biologics manufacturing facility in Wuxi, China that will allow it to provide contract manufacturing services for US-bound drugs.

The company also delivered nine new small molecule preclinical drug candidates to clients and a proof of concept compound while forming new joint ventures with MedImmune, which is a division of AstraZeneca (NYSE: AZN), and PRA International to develop novel antibody drugs for the Chinese market and offer clinical research services in the country.

In the third quarter of this year, WuXi’s revenue grew 16.6 percent year-over-year to $146.7 million, as laboratory services revenue grew 9.2 percent and manufacturing services revenue increased 43.6 percent. The company manufactures 10 products currently in Phase III trials, driving its rapid manufacturing growth.

Earnings totaled $30.4 million in the quarter, up 42.7 percent from last year, while operating margin ticked up 18.5 percent. Earnings per American Depository Receipt (ADR) shot up 40.7 percent on this terrific revenue growth, reaching 42 cents per ADR.

While management forecasts that the company’s full-year 2013 margins will be comparable to last year’s (about 21 percent), its strong third quarter performance prompted a boost in low-end revenue guidance. After previously forecasting revenue of between $572 million and $578 million for the year, management now pegs the low end at $574 million. Earnings per share (EPS) guidance was also marked up substantially, increasing from $1.38 – $1.44 to $1.51 – $1.55.

WuXi’s upward trajectory should also be sustained by the rapid growth of the Chinese pharmaceutical market, fueling revenue growth from toxicology services of about 30 percent annually over the next few years.

The company’s biologics revenue is expected to reach between 10 percent and 15 percent of total company revenue in the next few years, allowing it to be broken out and reported separately from what the company currently terms as “development” revenue. That’s largely thanks to the construction of the new, US-compliant manufacturing facility.

Another major growth driver for WuXi is the eagerness of foreign companies to enter the Chinese market, which is expected to be the second-largest pharmaceutical market in the world by 2020. Unfortunately for foreign companies, though, it can take up to 7 years to bring a drug to market in China, even if the drug is already approved in the US or the EU.

But by partnering with a local Chinese CRO to conduct clinical trials in the country, that wait time can be reduced by as much as 3 years, thanks to more favorable treatment by the Chinese State Food and Drug Administration which generally takes a distrustful attitude towards foreign drug companies.

Much of that growing pie will go to WuXi, largely because of its robust capabilities and sheer size—although a small-cap, the company is nearly four times larger than any of its competitors.

Despite delivering nearly twice the revenue growth of any of its peers, the company currently trades at just 21.6 times trailing one-year earnings as compared to an average price-to-earnings ratio of 27.8 for the industry. The discount becomes even more pronounced on a forward-looking basis at just 16.4 times next year’s forecast earnings.

With the median analyst estimate looking for 45.8 percent year-over-year growth in 2013 earnings and at least 15 percent growth next year, much of that discount is largely attributable to investors’ general leeriness towards China. But while economic growth in China has been slowing, WuXi fits in perfectly with the government’s strategy of reorienting the country’s economy more towards domestic consumers.

With attractive long-term growth drivers in place, WuXi PharmaTech rates a buy up to 40.