WuXi Biologics: Interim Earnings Underwhelm but Fundamentals Remain Intact; Shares Undervalued

No-moat WuXi Biologics’ 02269 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.

Non-COVID-19 revenue grew approximately 60% year on year, which is close to our estimate of 58% that we had published in June. Additionally, the company reported that it added 46 new projects as of June and is on track to fulfill its most recent guidance of 80 new projects by the end of the year. This target is a significant slowdown compared with previous years, and is attributable to higher funding costs for biotech companies, major customers for WuXi’s early-stage projects. However, given the fast growth of non-COVID-19 revenue, we expect WuXi’s growth to accelerate after 2023.

We reiterate our view that management’s guidance is consistent with the published interim results.

We still feel good about both the long-term outlook for biologics as a modality, as well as WuXi’s market positioning within the industry. At the end of the day, biologics or large molecules as a modality should continue to grow, because we believe they’re so much better than traditional small molecules. We think biologics contract development and manufacturing organizations will be needed to manufacture about one third of the global supply because the services they provide are capital-intensive and labor-intensive relative to other parts of drugmaking—and in many cases, it is not efficient for drugmakers to undertake these tasks in-house.