【Company Research】WuXi Biologics (2269 HK) – Growth on track

FY19 earnings beat. WuXi Biologics reported FY19 revenue of RMB3.98bn, up 57% YoY, 5% above our estimate. Adjusted net profit was up 60% YoY to RMB1.2bn, 4% above our estimate. Meanwhile, attributable net profit increased 61% YoY to RMB1.0bn, 4% above our estimate.

“Follow the molecule” strategy proved successful. As of end 2019, WuXi Biologics worked on a total of 250 integrated projects (+22% YoY), including 121 projects in pre-clinical development stage, 112 projects in early-phase (phase I and II) clinical development, 16 projects in late-phase (phase III) development and one project in commercial manufacturing. As each project progresses from early stage of development to late stage and even commercialization, revenue from single project also increases. According to our calculation, average revenue per project rose by 26% YoY to RMB18m in FY19 because of higher single project income from late-stage projects vs early-stage projects.

Significant market share gain in past years. Frost & Sullivan estimates that WuXi Biologics ranked third in global biologics outsourcing market with 5.1% market share in 2019 vs 3.2% market share in 2018. We expect the Company to continue to gain market share from global competitors thanks to the Company’s advanced technology platforms in cell line development, bispecific antibody development, ADC development, OMT technology, perfusion manufacturing, etc. Benefiting from cheap labor costs and rich talent pool in China, WuXi Biologics provides high quality services with competitive costs to its customers. WuXi Biologics’ fast expanding manufacturing facility enables the Company to meet the growing demand in biological CDMO worldwide.

Milestone and royalty fees contribute additional high-margin income. Milestone income reached US$55m in FY19, up 84% YoY, contributing 10% of the total revenue. WuXi Biologics has US$3.4bn milestone fee backlog as of end 2019, up 70% YoY. Nevertheless, due to the lengthy process for drug development, the milestone fee backlog may be realized in a prolonged time period. Meanwhile, total backlog surged from US$3.6bn by Dec 2018 to US$7.9bn by Mar 2020.

We lift our DCF-based TP from HK$106.18 to HK$111.93 (WACC 10.17%, Terminal growth rate 5%). To reflect the impact from COVID-19, we tuned down FY20E/21E net profit forecast by 8% and 11%, respectively while we think consensus numbers have not figured in COVID-19 impact. We expect WuXi Biologics’ revenue to increase 32.5%/40.1%/32.6% YoY in FY20E/21E/22E and adjusted net profit to grow by 29.0%/40.6%/33.5% YoY in FY20E/21E/22E, respectively.