Strong rebound in new projects in 4Q23
- WuXi Biologics added 71 new projects to its pipeline in 4Q23, driven by a global recovery in biotech funding, according to the company.
- It added seven CMO projects in 2023 and the total number of CMO projects reached 25. We believe the rising CMO projects will remain a strong near-term catalyst.
- The microbial business could be a new revenue driver in the long term, in our view.
- Reiterate Add, with an unchanged DCF-based TP of HK$60.16.
New projects rebound in 4Q23
WuXi Biologics has seen a slowdown in new projects since 1Q23 due to global biotech funding slowdown. However, it saw a strong rebound in 4Q23 with 71 new projects. This took the total number of new projects to 132 in 2023. Among the new projects, North America accounted for 55% and China 25%. The strong recovery in projects inflow is in line with the global biotech funding recovery, according to the company. We expect the recovery in new project inflow to continue in 2024F and 2025F.
Near-term catalyst is CMO projects
As of 31 Dec 2023, it had 698 integrated projects and 24 contract manufacturing organisation (CMO) projects. Seven new CMO projects were added in 2023 and two of them were “Win-the-molecule” projects. CMO projects generally have a much higher average service revenue per project and will be a strong revenue contributor for the company, in our view. It has several CMO projects that have the potential to be blockbuster drugs, including cancer bispecific A, cancer bispecific B, bispecific C, FcRn monoclonal antibody, autoimmune program K, cancer ADC Z, and cancer ADC Y. The strong increase in drug substance process performance qualification (PPQ) (+52% yoy) and drug product PPQ (+33% yoy) in 2023 was also in line with the increase in the number of CMO projects. In addition, the scheduled PPQ is an indicator of potential CMO projects in the future. We think the new CMO projects should remain a key revenue growth driver in 2024F and 2025F.
Microbial business: a new growth driver
According to the company, 95% of the revenue was generated from the mammalian cell business, as at end-2023. WuXi Biologics established its microbial platform during the Covid-19 pandemic, and now it has started to attract clients. The microbial platform can be used to manufacture insulin analogs, GLP analog, plasmid DNA among others, according to the company. As at the end of 2023, WuXi Biologics had 25 microbial projects and one of them was a CMO project for long-acting growth hormone (HGH). We believe the microbial platform will create a new revenue growth driver for the company since this year.
Reiterate Add with an unchanged TP of HK$60.16
We reiterate our Add rating with an unchanged DCF-based TP of HK$60.16. We think WuXi Biologics’ promising outlook is supported by 1) the strong recovery in new projects, 2) rising CMO projects, and 3) the share buyback scheme announced in Dec 2023 which will be a positive catalyst for the company’ share price. Our TP is derived from a DCF-based methodology (WACC: 10.8%, terminal growth rate: 4%, risk free rate: 3.0%, market risk premium: 6.3%, beta: 1.40) and we forecast FY23F/24F/25F EPS of Rmb0.99, Rmb1.19 and Rmb1.65, respectively. Downside risks: a) slowdown in biotech funding leading to fewer new projects, b) US$/Rmb fluctuations since overseas business is in the US, and c) ramp-up of new sites leading to lower net profit growth.
