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After months in the doldrums, medical stocks have bounced back to life on a healthy profit outlook, including the sector that develops or manufactures drugs on a contract basis for the pharmaceutical industry.
Among the market standouts is WuXi Biologics (Cayman) Inc. ((OTCPK:WXXWY, OTCPK:WXIBF); 2269.HK), a leader among the so-called “Contract X Organizations”, or CXOs, that provide outsourced drugs services.
The company’s share price has surged more than 80% since early May to climb back above HK$80. And last Tuesday the firm provided another dose of positive news for investors, saying its earnings for the first half of the year would show strong growth.
The company, which makes ingredients for Covid vaccines and anti-viral drugs, said it expected its first-half revenue to have grown between 61% and 63%. Based on the company’s preliminary calculations, net profit was forecast to have risen between 35% and 37%. In absolute terms, its revenue during the first six months is estimated to come in at 7.14 billion yuan ($1.06 billion), with net profit around 2.5 billion yuan.
Shares in WuXi Biologics rallied on the day of the positive profit alert, but only by 1.6%. The rate of earnings growth, while fast, had slowed from the breakneck pace of last year, when full-year profits doubled to 3.39 billion yuan from the prior year and revenue rose 83% to 10.29 billion yuan.
Still, analysts are confident the outlook is bright, with “buy” ratings on the stock from several investment banks. Credit Suisse sees the revenue and profit growth in the first half outperforming market expectations, as the data indicates the company overcame pandemic supply disruptions during the second quarter.
Goldman Sachs is also upbeat, ascribing the first-half profit surge to rapid delivery of Covid-related projects, improved margins, and better use of productive capacity. It increased its target price for the company by 5.7% to HK$117.
WuXi Biologics has been seeking to expand production capacity and strengthen its global supply network, to meet rising demand from pharma firms for outsourced drug production services to fight the Covid pandemic and other medical conditions.
Last Tuesday, it disclosed a plan to build a large-scale center in Singapore where biopharma products can be researched, developed, and manufactured under one roof, known as a Contract Research, Development and Manufacturing Organization (CRDMO) model.
It intends to invest around S$2 billion ($1.44 billion) over the next 10 years in the new base, which it said could create 1,500 jobs in research and production, expanding its biologics production capacity by another 120,000 liters by 2026.
The Singapore facility is not its first overseas investment. With external markets accounting for a growing share of revenue, WuXi Biologics has built production hubs in Ireland, Germany, and the U.S., investing a total of $1.5 billion in the U.S. and Europe by the end of this year.
A chain of facilities around the world can help give global customers closer access to supplies, mitigating the high costs and quality risks of long-distance transport of key product lines such as biologic compounds and vaccines.
The company’s client base has been shifting away from China towards other markets. Last year, North American customers contributed almost 51% of the firm’s revenues, while Europe accounted for around 22%. The share of Chinese customers fell from around 44% in 2020 to just over 24% last year, according to figures in the 2021 annual report.
Broad-based advantage
The company went public in 2017 after WuXi AppTec ((OTCPK:WUXIF, OTCPK:WUXAY); 2359.HK) hived off its biologics business into a stand-alone operation. Biologics are drugs derived from a living source such as human proteins rather being chemically synthesized in the laboratory.
The company’s integrated CRDMO model enables it to offer end-to-end R&D and production of biologics, a broader spectrum of services than typical contract research organizations (CROs) or contract development and manufacturing organizations (CDMOs) companies.
In revenue terms, WuXi Biologics now commands 11% of the global CDMO market, ranking third among providers, according to research from Haitong International Securities.
The life cycle of a drug from concept to commercial mass production is long and complex, involving drug discovery, pre-clinical research and development, clinical trials, end-stage clinical trials, and large-scale manufacture.
WuXi Biologics aims to complete that whole cycle in-house in a strategy it has dubbed “follow the molecule”, generating additional revenue from accelerated commercial production in the latter stages of the process.
By the end of April, the company had undertaken 18 such projects that were generating increasing orders and project value.
In addition, the company also has platforms for developing biologic treatments such as dual-action antibodies that target more than one receptor on the surface of a cell, mRNA vaccines, and a targeted cancer therapy known as antibody-drug conjugates (ADCs).
It has also launched a strategy to get other companies to transfer their emerging products into WuXi Biologics pipelines to complete the creation and commercialization process, a strategy it calls “win the molecule”. From 2018 to 2021, it secured 40 such transfers at different R&D stages from other drug companies and CDMOs, boosting its profits pipeline.
In 2021, its earnings from end-stage clinical trials and commercial production exceeded R&D service revenue for the first time, reaching 4.93 billion yuan, just under 48% of total revenue compared with 19% in 2018. The customer base for biologics tends to be loyal, and, with the benefit of commercial production services, the company is expected to keep growing.
About to emerge from U.S. export checks
However, WuXi Biologics has been under a shadow of uncertainty since its Chinese facilities were added in February to a U.S. “unverified” list for closer trade scrutiny.
The company’s facilities in the cities of Wuxi and Shanghai were placed on the U.S. Commerce Department’s list of firms requiring special licenses in order to import goods from U.S. partners, which also faced the prospect of being investigated.
The company said at the time that the two Chinese facilities had already been built without the need for imported U.S. equipment, but its share price still dropped by nearly 23%.
In early July, the company said U.S. inspectors had finished checks of its Wuxi facility and were about to review the one in Shanghai. Credit Suisse believes the two facilities are likely to be removed from the unverified list later this year after the inspections are completed.
WuXi Biologics enjoys a higher valuation than most of its peers in the business of medical contract services. Its price-to-earnings (P/E) ratio of 85 times is much higher than the 50 times of the CXO leader in the field of chemical drugs, WuXi AppTec, and the 27 times of ASYMCHEM LABORATORIES (OTCPK:ASLTY, 6821.HK) or the 23 times of Hangzhou Tigermed Consulting ((OTCPK:HNGZY, OTCPK:HTMDF); 3347.HK).
By assigning such a lofty value, investors are expressing confidence in the company’s future as a CDMO leader in the business of biologic drugs.
Disclosure: None
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