Date: October 2, 2024
Broker: OCBC Investment Research
Company Overview
WuXi AppTec, founded in 2000, is a global leader in contract research, development, and manufacturing (CRDMO). The company has evolved from a discovery chemistry business into an integrated platform offering a wide range of services across pharmaceutical, biotech, and medical device industries. It operates over 30 research and development (R&D) and manufacturing sites in China, the US, and Europe. The majority of its revenue comes from the US, although it faces geopolitical risks.
Recent Performance and Investor Sentiment
In September 2024, WuXi AppTec’s stock experienced significant rebounds, with its H-share rising by 59% and A-share by 34%. This surge followed the company’s Investor Day on September 26, 2024, where management indicated optimism that the US Biosecure Act would likely not pass this year. Furthermore, WuXi reaffirmed its 2024 growth guidance, contributing to the positive sentiment.
Impact of the Biosecure Act
WuXi AppTec, along with companies like BGI Genomics, remains affected by the US Biosecure Act. However, its near-term impact is expected to be manageable. The bill has passed the House but is yet to be voted on in the Senate. If not passed this year, the legislative process will restart in 2025. WuXi’s management reassured investors that the company’s growth targets for 2024 remain on track, with revenue projections between CNY 38.3-40.5 billion and a stable net profit margin.
Business Segments and Growth Drivers
WuXi AppTec provides a broad spectrum of services, including small molecule/chemical drug development, medical device testing, precision medicine R&D, and manufacturing services. Its TIDES business is a significant growth driver, expected to show a 60% year-on-year increase for 2024, fueled by rising order commitments for peptides. WuXi AppTec aims for an annual growth rate of over 12% from 2023-2028, despite macroeconomic challenges.
Financial Performance
The company reported revenue of CNY 40.3 billion for FY2023, with a gross profit of CNY 16.4 billion and a net profit of CNY 10.7 billion. While revenue is projected to decrease slightly in FY2024 to CNY 38.3-40.5 billion, the net profit is expected to remain stable at CNY 10 billion. WuXi’s operational margins are strong, with an operating margin of 28.2% expected for FY2024.
ESG (Environmental, Social, and Governance) Practices
WuXi AppTec has an above-median ESG rating among global peers, particularly excelling in corporate governance and quality management systems. Its board is considered above average, with independent audit and pay committees. Product safety and quality are well-managed, and the company has implemented initiatives to reduce carbon emissions, ranking highly among its peers.
Risks and Challenges
While WuXi AppTec continues to perform well, it faces several risks. These include competitive pressures, policy risks, potential geopolitical tensions, and the possibility of a reduction in demand for outsourced discovery and development services. Additionally, the company must navigate the uncertainties surrounding the US Biosecure Act and the potential for delays in client decision-making for its advanced therapies (ATU) business.
Valuation
Following adjustments to growth, margin estimates, and WACC assumptions, WuXi AppTec’s fair value has been raised to HKD 79.40 from HKD 46.50. The company is well-positioned for continued growth, despite the challenges it faces in the near term.
Potential Catalysts
Key factors that could drive future growth include:
- Faster growth in the global pharma R&D outsourcing market
- Accretive mergers and acquisitions
- A favorable regulatory environment
- New vaccine CDMO order wins and increased success-based project contributions
Conclusion
WuXi AppTec remains a dominant player in the pharmaceutical outsourcing industry, backed by robust financial performance, positive investor sentiment, and well-managed ESG practices. The company’s growth prospects are solid, though it must carefully navigate regulatory and geopolitical risks.
