WuXi Biologics: Upgraded to Narrow Moat Rating; Shares Undervalued

We transfer coverage of WuXi Biologics with little change to our fair value estimate, but raise our moat rating to narrow from none. We believe WuXi benefits from switching costs. In our view, the stickiest business is its commercial manufacturing services one due to regulation requirements. Although its clinical-stage services are less sticky, switching costs still exist due to the difficulty of making technology transfers. When we initiated coverage of WuXi in 2019 as a no-moat company, its pre-IND services business, which still doesn't have a moat, accounted for 45.4% of total revenue and it also only had one commercial project. Pre-IND means preinvestigational new drugs and includes drug discoveries and preclinical developments. Currently, late-phase services and commercial manufacturing represent 44.9% of its total revenue. It also had 22 commercial projects as of June 2023. We believe a narrow moat rating better reflects WuXi's competitive advantages in the future.