Date of Report: 2 October 2024
Broker: OCBC Investment Research

Company Overview

WuXi AppTec, founded in 2000, is a leading global contract research, development, and manufacturing organization (CRDMO). Headquartered in Shanghai, the company has grown into an integrated platform with over 30 research and development (R&D) and manufacturing sites across China, the US, and Europe. WuXi AppTec provides a broad portfolio of services, including small molecule drug development, medical device testing, and R&D for precision medicine. It serves over 6,000 active customers globally, including major pharmaceutical, biotech, and medical device companies.

Recent Developments

As of September 2024, WuXi AppTec’s stock saw significant recovery with its H-share and A-share prices rebounding by 59% and 34%, respectively. This resurgence is partly attributed to positive sentiment following the company’s Investor Day on 26 September 2024. Management reiterated its growth outlook for 2024, easing concerns over the potential passage of the US Biosecure Act, which could impact WuXi’s operations. WuXi AppTec’s management remains confident that the Act may not pass this year, as legislative momentum appears to have stalled.

Financial Performance

For FY2024, WuXi AppTec anticipates revenues between CNY 38.3 billion and CNY 40.5 billion, reflecting a growth range from -5% to 0.5% year-on-year. Non-IFRS net profit is projected to be around CNY 10 billion, with stable margins. The company’s gross profit margin is expected to hover between 38.8% and 39.3%. WuXi AppTec achieved a revenue of CNY 40,341 million in FY2023, with net profits at CNY 10,690 million, and continues to demonstrate robust performance despite geopolitical uncertainties.

Key Risks and Opportunities

WuXi AppTec faces several potential risks, including competitive pressures, product development setbacks, and geopolitical risks, particularly concerning US-China relations and the potential passing of the Biosecure Act. The firm’s revenue dependence on the US market contributes to this risk, as approximately 65% of its revenue comes from the US.

Nevertheless, WuXi AppTec sees growth opportunities, particularly in the CRDMO market, driven by increased demand for pharmaceutical R&D outsourcing. The company also expects further growth from its peptide production and testing services, which have seen increasing demand and order commitments on a 12-18 month rolling basis.

ESG and Corporate Governance

WuXi AppTec’s environmental, social, and governance (ESG) ratings are bolstered by strong corporate governance and product quality management systems. The firm’s board is independent of management, with fully independent audit and remuneration committees. Its ESG performance is supported by its governance and social pillars, which contribute significantly to its overall rating. WuXi’s efforts to reduce carbon emissions have also been commended, placing it above industry peers in environmental practices.

Legislative and Geopolitical Considerations

The ongoing developments surrounding the US Biosecure Act (H.R. 8333) present a major area of focus. The Act was passed by the US House of Representatives on 9 September 2024 but faces hurdles in the Senate. WuXi AppTec remains included in the bill, which may affect federally funded projects. However, management believes that the near-term impact is manageable and has seen limited change in client behavior since the bill’s introduction.

Future Outlook

WuXi AppTec aims to achieve a compound annual growth rate (CAGR) of over 12% from 2023 to 2028, despite macroeconomic and geopolitical challenges. The firm expects significant growth in its TIDES business, which specializes in peptide and oligonucleotide therapeutics, with management forecasting 60% year-on-year growth for the division in 2024. Additionally, WuXi is optimistic about maintaining its growth trajectory in the long term, leveraging its integrated CRDMO platform and expanding capacities in new therapeutic modalities.

This comprehensive overview is based on the information from the PDF dated 2 October 2024 by OCBC Investment Research.