Company Reports

WuXi Biologics differentiates itself from other well-established global contract development and manufacturing organizations, with its "follow-and-win the molecule" and "global dual-sourcing" strategies. Simply put, it provides end-to-end services for biological drugs from drug discovery all the way to clinical and commercial manufacturing. As such, WuXi has one of the largest bioreactor capacities for biological drug products. DPs are the noncommercialized therapeutic products used in the clinical trial phase. As a result, WuXi has been growing at a compound annual growth rate of 53.3% for the past eight years, much faster than that of global pharmaceutical sales or global CDMOs.

We lower WuXi Biologics' fair value estimate to HKD 28.60 per share from HKD 57.90 per share as we capture a possible slowdown in projects from geopolitical risks. While 2023 revenue growth of 11.6% beat our expected 10.4%, we think both project increase and revenue growth may be challenging in the next three years due to uncertainties around the Biosecure Act. Although the stock is trading at a nearly 50% discount to our valuation, we caution that WuXi's share price will remain very volatile and very sensitive to political rhetoric.

WuXi Biologics shares have fallen 30% since the Biosecure Act bill was proposed in the U.S. House of Representatives, which seeks to ban the use of U.S. genomics by Chinese companies. While we don’t think the bill’s provisions have a direct material impact on WuXi Biologics, the bill nonetheless raises geopolitical uncertainty. However, we think the concerns are overblown, as first, we think the chance of the bill becoming law is currently low. Second, WuXi Biologics does not own or use any U.S. genomics equipment. We fine-tune our WuXi Biologics assumptions after a fresh look to better reflect the latest management guidance for 2023 and 2024. Our fair value estimate is slightly lowered to HKD 57.90 per share from HKD 60.70 per share. We think the shares are trading at an attractive discount.

WuXi Biologics differentiates itself from other global well-established contract development and manufacturing organizations, with its “follow-and-win the molecule” and the “global dual-sourcing” strategies. Simply put, it provides end-to-end services for biological drugs from drug discovery all the way to clinical and commercial manufacturing. As such, WuXi has one of the largest bioreactor capacities for biological drug products. DPs are the noncommercialized therapeutic products used in the clinical trial phase. As a result, WuXi has been growing at a CAGR of 61.4% for the past eight years, much faster than that of global pharmaceutical sales or global CDMOs.

WuXi Biologics differentiates itself from other global well-established contract development and manufacturing organizations, with its “follow-and-win the molecule” and the “global dual-sourcing” strategies. Simply put, it provides end-to-end services for biological drugs from drug discovery all the way to clinical and commercial manufacturing. As such, WuXi has one of the largest bioreactor capacities for biological drug products. DPs are the noncommercialized therapeutic products used in the clinical trial phase. As a result, WuXi has been growing at a CAGR of 61.4% for the past eight years, much faster than that of global pharmaceutical sales or global CDMOs.

We reduced narrow-moat Wuxi Biologics’ fair value estimate to HKD 60.70 per share from HKD 76.80 per share following disappointing cuts in its revenue outlook. The company has indicated that projects will be delayed due to funding challenges for some of its clients. Trading in the shares has been halted by the Hong Kong Exchange and timing in the resumption of trading is uncertain. If the halt is mainly to address share price volatility and there are no additional nefarious issues, we view Wuxi as undervalued. We think project timing should normalize and the growth outlook should stay positive given its global client base and revenue contract backlogs.

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.

WuXi Biologics differentiates itself from other global well-established contract development and manufacturing organizations, with its “follow-and-win the molecule” and the “global dual-sourcing” strategies. Simply put, it provides end-to-end services for biological drugs from drug discovery all the way to clinical and commercial manufacturing. As such, WuXi has one of the largest bioreactor capacities for biological drug products. DPs are the noncommercialized therapeutic products used in the clinical trial phase. As a result, WuXi has been growing at a CAGR of 61.4% for the past eight years, much faster than that of global pharmaceutical sales or global CDMOs.

No-moat WuXi Biologics’ first half of 2023 earnings were on the weaker end of our expectations, especially after considering the foreign exchange impact. While revenue grew 17.8% year on year, exceeding our expectation of 12.5%, gross profit margin was 42%, or 5 percentage points lower than the same period last year. Moreover, we estimate this would have been 7 percentage points worse if it was not for foreign exchange translation gains. Although these results are somewhat disappointing, we think the company’s fundamentals are unchanged and shares are deeply undervalued. We see current headwinds as temporary and retain our HKD 77 fair value estimate.

On June 20, no-moat-rated WuXi Biologics held an investor conference. According to media reports, management said that interim revenue growth will likely be in the low teens year on year and net profit growth will be flat. The number of new projects added this year by May is only 25, compared with 56 for the first half of last year. At the same time, management maintained its previous full-year guidance of 30% growth for total revenue and 60% growth for non-COVID-19 revenue. The market reacted poorly to this news, and shares sold off 17% by the end of the day, prompting WuXi to hold a conference call the following morning to answer follow-up questions.

WuXi Biologics is a young biologics contract development and manufacturing organization, or CDMO. It is rapidly building up capacity to become comparable in size to the top three players. It is the largest biologics CDMO in China and the third largest globally. WuXi is growing at an explosive rate, is already well positioned in China, and is in the process of establishing its global brand. WuXi reported CNY 10.3 billion of revenue in 2021 and a three-year CAGR of 60%. Revenue by geography was 51% from North America, 24% from China, and 22% from Europe. About 33% of its projects are pre-IND (that is prior to clinical testing).

No-moat WuXi Biologics reported full-year earnings and guidance for 2023 that was in line with our expectations. We lower our fair value estimate to HKD 77 (from HKD 90) to reflect lower long-term gross profit margins as we now believe a larger share of the company’s long-term business will be handled by facilities outside of China, which have higher operating costs. We think shares are undervalued by 35%, and this is our top pick among Chinese healthcare names.

WuXi Biologics is a young biologics contract development and manufacturing organization, or CDMO. It is rapidly building up capacity to become comparable in size to the top three players. It is the largest biologics CDMO in China and the third largest globally. WuXi is growing at an explosive rate, is already well positioned in China, and is in the process of establishing its global brand. WuXi reported CNY 10.3 billion of revenue in 2021 and a three-year CAGR of 60%. Revenue by geography was 51% from North America, 24% from China, and 22% from Europe. About 33% of its projects are pre-IND (that is prior to clinical testing).

Chinese healthcare companies have rallied dramatically in the past month. Within our coverage, biotech names Innovent (narrow moat), Junshi (narrow moat), I-Mab (no moat), and Genscript (no moat) have rallied 39%, 47%, 5%, and 45%, respectively, since Oct. 11. Big pharma names CSPC and Sino Biopharm (both narrow moat) have rallied 26% and 16% in the same period. CR Pharma and Shanghai Pharma are narrow-moat drug distributors with drug manufacturing segments and have rallied 15% and 14%. No-moat WuXi Biologics has lagged, having sold off 6% despite rallies from other CDMOs. 3SBio (narrow moat biopharma) and Sinopharm (narrow moat distributor) have also lagged their respective comparables.

On Sept. 12, President Biden signed an executive order to create the National Biotechnology and Biomanufacturing Initiative. One of its goals is to improve U.S. manufacturing capacity for various biologics products. This includes medicinal biologics, which are a major source of revenue for some Chinese contract service organizations, or CXOs. On one hand, the tone of the press release sounded quite protectionist. An exclusionary policy toward medicinal biologics would hurt Chinese CXOs that derive significant revenue from U.S. biotech clients. On the other hand, the order’s text suggests that the policy will be stimulatory in nature rather than exclusionary, perhaps focusing on subsidies and investments, which we think is fairly benign for Chinese CXOs.

No-moat WuXi Biologics posted in-line earnings for the first half of 2022, with revenue growing 64% year on year and operating profit (including cost of sales and expenses for selling, administrative, and research and development) growing 44% year on year. The total backlog grew to CNY 18.5 billion, or 35% higher than six months ago, mostly driven by growth in the service backlog beyond three years. Additionally, the company reported progress on removing its WuXi facilities from the Unverified List, or UVL, which we view as incrementally positive for sentiment.

WuXi Biologics is a young biologics contract development and manufacturing organization, or CDMO. It is rapidly building up capacity to become comparable in size to the top three players. It is the largest biologics CDMO in China and the third largest globally. WuXi is growing at an explosive rate, is already well positioned in China, and is in the process of establishing its global brand. WuXi reported CNY 10.3 billion of revenue in 2021 and a three-year CAGR of 60%. Revenue by geography was 51% from North America, 24% from China, and 22% from Europe. About 33% of its projects are pre-IND (that is prior to clinical testing).

No-moat WuXi Biologics had very strong full-year earnings that far exceeded our expectations in revenue and profit margins. Additionally, its service backlog has grown by 52% since June 2021. All around, this is a strong report. We raise our fair value estimate to HKD 90.00 per share (from HKD 80.00) assuming higher capacity utilization, which we now believe is maintainable for WuXi given its above-industry utilization rates these past two years. The stock is attractively priced at a 22% discount to our new fair value.

WuXi Biologics is a young biologics contract development and manufacturing organization, or CDMO. It is rapidly building up capacity to become comparable in size to the top three players. It is the largest biologics CDMO in China and the third largest globally. WuXi is growing at an explosive rate, is already well positioned in China, and is in the process of establishing its global brand. WuXi reported CNY 10.3 billion of revenue in 2021 and a three-year CAGR of 60%. Revenue by geography was 51% from North America, 24% from China, and 22% from Europe. About 33% of its projects are pre-IND (that is prior to clinical testing).

On Feb. 8, no-moat WuXi Biologics announced that it was added to the U.S. Unverified List, and the stock price has fallen over 15% since then. As per the company’s description, its inclusion on the Unverified List is “because the relevant U.S. government agencies have not been able to undertake the required end-use verifications in order for certain equipment to be exported from U.S. suppliers,” which it says is due to COVID-19 restrictions.