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WuXi Biologics: China’s drugs development platform success story

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WuXi Biologics [HKG:2269] recently announced (October 7, 2022) one of its subsidiaries, WuXi Biologics Co., Ltd., has been removed from the ‘Unverified List’ by the U.S. Commerce Department following successful completion of an on-site end-use check visit.

WuXi Biologics is a leading global Contract Research, Development and Manufacturing Organization (CRDMO) offering end-to-end solutions that enable partners to discover, develop and manufacture biologics from concept to commercialization for the benefit of patients worldwide.

With over 10,000 employees and 3,400 scientists in China, US, Europe, and Singapore, WuXi Biologics is supporting 534 integrated client projects, including 14 in commercial manufacturing.

Cutting through the pharma speak, in essence WuXi Biologics focuses on discovering and manufacturing new drugs that are still in their very early stage.

For a new drugs to fully access the market, the pharmaceutical company has to go through a few processes, Investigational New Drug (IND) is the first, and after that the three stage New Drug Application (NDA) awaits. WuXi Biologics provides services around the IND and three stages of the NDA.

The company runs a ‘following and winning molecules’ strategy, where the ‘follow’ means to follow the client from the discovery of the new drug, they call them pre-IND stage, and provide services to finish their entire new drug publishing till the end of NDA, while the ‘winning’ means leveraging their technology to finish what their competitors cannot finish or doing the job with a cheaper or faster procedure.

The strategy started in 2018, and it brings WuXi’s growth of the late-stage NDA section to the next level, with a constant 10+ new projects being brought in per year.

Outlook for WuXi Biologics stock

Founded in 2010, WuXi Biologics grew to become one of the leading CRDMO companies in China, but what do the financials of this giant of market cap 281 billion yuan look like?

The first half of 2022, revenue YoY growth at 63.5% reaching CNY 7.2 billion, gross profit growing at 48.6% to CNY 3.4 billion, adjusted net profit also reached 2.9 billion with a 60.9% growth rate. The total outstanding order book is growing at 48.2% to CNY 18.4 billion. Outstanding service orders refer to the amount of revenue that the Group has contracted but has not yet provided services for.

The ‘following and winning molecules’ department secured 82 new clients in a year, representing a 23% growth on client numbers. Even the Covid has helped WuXi to grow during 2020 and 2021 with 35+ Covid related projects, the non-COVID projects revenue is also looking strong, with a YOY growth rate at 72.6%.

WuXi Biologics is actively taking up stake in established assets from other pharmaceutical companies, demonstrated in the diagram:

Financial health check

WuXi Biologics has available funds of approximately RMB 9.9 bn (GBP 1.22 bn) as of June 30, 2022, with a total liability to equity ratio of 33.8%, and expects to have sufficient funds for capacity expansion and no plans to issue any equity to raise cash. The company has approx. RMB 2.9 bn borrowings as of June 30 2022, and maintains bank credit facilities of around RMB 3.5 bn with operating cash flow of RMB 1.5 bn, 82.7% increased YoY, which looks healthy relative to the debt.

Buy backs and positive attitude from the board

WuXi Biologics had completed US$500 million in share buy backs by the end of January 2022, demonstrating management’s confidence in the company’s outlook. Recently, the firm has also started share repurchasing (13 October 2022), spending HKD 236million (~US$30 million) buying back 5 million in stocks on the Hong Kong exchange.

According to an announcement on the 26 September 2022, WuXi Biologics is going to spend at most US$300 million in share repurchasing, because the board considers that ‘the current price of the shares fails to reflect its intrinsic value or the actual business prospects of the g roup, and provide the company with a good opportunity to further repurchase shares. In addition, the company’s financial position remained healthy.’

The board believes that the proposed share repurchase and subsequent cancellation will not only enhance the value of the shares, thereby improving shareholder returns, it can also reduce the potential dilution effect of the group’s various share award plans on the company’s equity.

In addition, the proposed share repurchase reflects WuXi’s recognition of its own value and confidence in its strong growth prospects.

Stock price activity

What made the board think the price is not indicative of the intrinsic value of the shares? The stock has been falling quite a bit from the 52-week high of 121.50, trading now at 50.65, just 10 dollars above the 52-week low of 40.3. WuXi is trading at a 49.09 P/E ratio, compared to the industry average of a 33.5 P/E ratio. From the 28 analysts covering the stock, the consensus price target is looking at around 101.99.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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