After 2022 Slowdown, WuXi Biologics Gets Growth Medicine From Big New Order

Call it a "Covid hangover."

After five straight years of explosive growth, most recently fueled by surging demand for Covid-related services, leading biomolecular Contract X Organization (CXO) company WuXi Biologics (Cayman) Inc. (OTCPK:WXXWY) (2269.HK) has moved into a new slower medical growth lane since peaking last year. Its 2022 earnings preview released last Monday showed the company's revenue grew about 48.4% last year to about 15.3 billion yuan ($2.23 billion), while its net profit grew about 30% to about 4.4 billion yuan.

In all fairness, the 48% revenue growth is nothing to sneeze over when one considers the huge size of its annual revenue. But it's a far cry from the 83.3% growth in 2021. Last year's 30% profit growth was also just a third of the doubling in profit the previous year. The signs of a slowdown weighed on WuXi Biologics' stock, which dropped for four consecutive days after it published the "positive profit" report last week, shaving 12% from the shares and wiping out HK$33.4 billion ($4.28 billion) in market value.

WuXi Biologics is one of China's leading companies in the CXO sector, which has taken the outsourced medical services arena by storm these last few years. Following its spinoff from WuXi AppTec (OTCPK:WUXIF) (2359.HK; 603259.SH) in 2017 and separate listing, WuXi Biologics was a stellar performer for most of the past five years, posting more than 56% growth in all of those years but one as its revenue ballooned from 1.62 billion yuan in 2017 to 10.29 billion yuan in 2021, equal to a compound annual growth rate of 44.76%.

The turbocharged growth of 2021 came on a boom in Covid-related projects, including WuXi Biologics's production of more than 1,500 kg of anti-Covid neutralizing antibodies and its delivery of hundreds of millions of doses of Covid-19 vaccine for its drug-making customers.

But the latest earnings are making analysts think twice about the company's future growth trajectory. Morgan Stanley lowered its revenue forecast for WuXi Biologics by about 1% for each year from 2022 to 2025 after the latest profit alert publication. But it also raised its longer-term revenue forecast by 2% to 7% based on the expectation the company will get a stronger boost from its contract manufacturing organization (CMO) business. It also raised its long-term profit forecasts for the company by 4% to 14% for similar reasons and gives the company an "overweight" rating.

Aggressive expansion

WuXi Biologics said its 2022 growth was driven by the successful execution of its "follow and win the molecule" strategy, which generated a record-breaking volume of new integrated projects and a significant increase in customers, reflecting its high growth potential. Momentum in the program's first year of commercial production in 2021 has allowed the company to recognize a significant increase in revenue from non-Covid projects.

While its Covid-related projects are now slowing down, they have also dramatically strengthened WuXi Biologics' global presence and helped to increase its market share. In early January, the company announced a major new agreement with GSK Plc (GSK), providing the global pharmaceutical giant with exclusive global research, development, manufacturing and commercialization rights for up to four TCE dual/multiple antibodies developed on WuXi Biologics' proprietary technology platform.

The agreement gave WuXi Biologics a $40 million down payment and up to $1.46 billion in milestone payments. More importantly, the Chinese company is also eligible to receive future tiered commissions based on net sales of products it makes under the partnership.

As it receives new business from GSK and other major new orders, WuXi Biologics has been aggressively expanding its capacity. Despite frequent talk of overcapacity in the contract development and manufacturing organization (CDMO) sector, WuXi Biologics appears to be bucking the trend through its nonstop acquisitions and construction of new manufacturing capacity.

"We did so well in the first half of (2022) because our capacity was being fully utilized, and the rate of capacity release was not even close to catching up with the demand for new services," CEO Chris Chen said at the company's interim results press conference last year. He added the company will invest $400 million over the next three years and hopes to keep developing 15 to 20 new projects each year.

Its ambition doesn't stop there. In 2021, WuXi Biologics acquired one drug production base from Pfizer (PFE) in the Eastern Chinese city of Hangzhou, and another from Bayer AG (OTCPK:BAYZF) (BAYN.DE) in Wuppertal, Germany. In July last year, it announced a new integrated service center for contract research, development, and manufacturing organization (CRDMO) work in Singapore, which will include a large-scale manufacturing facility. Four months later, it acquired an industrial site from HBM Holdings (OTCPK:HBMHF) (2142.HK) in the Eastern Chinese city of Suzhou for 146 million yuan.

Major shareholder cash-out

But the going hasn't been all smooth for the company. A year ago its shares plunged after its subsidiaries in Wuxi and Shanghai were placed on the U.S. Department of Commerce's "unverified list." That meant any of those subsidiaries' U.S. suppliers would require additional licenses to sell to them due to Washington's inability to determine how those suppliers' products were being used. But its stock rallied later in the year in October and December after the two subsidiaries were removed from the list.

Improving market conditions for the CXO industry since last December have fueled a rally for WuXi Biologics stock, providing a windfall for its investors. One of the company's major shareholders, WuXi Bio Holdings Ltd., controlled by Chairman Li Ge, announced a major sale of 56 million shares at HK$71 per share on Jan. 17, cashing out nearly HK$4 billion.

That marked the latest sale by WuXi Bio Holdings Ltd., which has reduced its holdings in WuXi Biologics up to 14 times, from 73.55% to 13.82%, since the company's spinoff and separate listing. That's netted WuXi Bio Holdings some HK$81.4 billion in cash as the stock boomed. While such sales to take advantage of a company's rising stock price are nothing new, the large and frequent reductions by such a key stakeholder may still feel negative for some smaller investors.

Despite that, WuXi Biologics' stock currently trades at a relatively high price-to-earnings (P/E) ratio of about 50 times, representing a significant premium to WuXi AppTec's 27 times. Investors are likely drawn to the company's steady growth, though it will need to show it can return to the high-growth fast lane after last year's modest slowdown.

Disclosure: None

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