WuXi Biologics Faces Black Swan Event: Hundreds of Millions in Losses, Downgraded Forecasts Amid Persistent Margin Pressures

　　"Port Commercial Observer" Huang Yi

December 4,WuXi BiologicsWuXi Biologics (02269.HK) released a "Business Update" stating that the company has three business growth engines, including R (Research), D (Development), and M (Manufacturing). Due to the decrease in revenue from the D and M segments, the overall revenue of the company will not meet the previously expected 30% growth, with an anticipated revenue increase of 10%.

Previously, Samsung Biologics (referred to as "Samsung Bioepis," 207940.KR) achieved its highest-ever revenue in the third quarter of this year, leading investors to question whether WuXi Biologics' revenue decline is related to the competition.

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　　Black Swan Event Leads to $100 Million Loss, Rating Downgraded

WuXi Biologics noted in its "Business Update" report that revenue growth from the drug development business segment was lower than expected,Mainly due to the company's 2023 target of adding 120 new projects being overly aggressive during the downturn cycle; the slowdown in biotech funding has led to a reduction in new projects, with 40 fewer projects compared to last year, implying a revenue decrease of approximately $300 million; recovery is underway but varies across different regions; optimizing resource allocation through WBS to enhance efficiency and develop next-generation advanced technologies.

Meanwhile, the decline in production revenue is mainly due to the fact that the main surprise in the second half of this year was the lag in regulatory approvals, with three blockbuster drugs from major pharmaceutical companies being delayed, impacting WuXi Biologics' revenue by approximately 100 million US dollars; COVID-19 production revenue accounted for about 35% in 2022, and this year non-COVID projects have filled most of the void left by the decline in COVID-related revenue, thus keeping this year's production revenue basically flat.

WuXi Biologics also mentioned that the company invests in global capacity to support future growth.The capacity ramp-up at these global bases led to a $100 million gross profit loss in 2023. The new capacity ramp-up and the slowdown in revenue growth will both lead to a decrease in the company's profits.

On December 7, WuXi Biologics held a communication meeting, during which Chen Zhisheng, CEO of WuXi Biologics, responded to the issues mentioned in the "Performance Update."

Among the statements, Chen Zhisheng mentioned, "The decline in WuXi Biologics' performance forecast this time has nothing to do with competition from Samsung Bioepis. Samsung Bioepis mainly focuses on manufacturing (M), with almost no business in development (D) or research (R). If the company competes with Samsung Bioepis, it would primarily be in manufacturing. In the past, the company lacked manufacturing capacity and has only recently started to directly compete with Samsung Bioepis. Currently, manufacturing business accounts for half of the company's revenue, with a global market share of about 7%, while Samsung Bioepis holds approximately 20% of the global market share."

On the issue of price wars, Chen Zhisheng stated, "The biopharmaceutical industry overseas has never experienced price wars, and WuXi Biologics has never participated in price wars either. Under normal circumstances, prices increase by 3% to 5% annually. The main impact on the industry is the reduction in demand, with fewer startups and mid-sized companies cutting back on internal project pipelines." As for the current state of market demand, Chen Zhisheng pointed out,"The reason for the shrinking demand is that the cost of capital in the U.S. is too high. Biotechnology investment carries risks, leading to a decline in investment willingness. As biotech companies struggle to secure financing, they have no projects to collaborate on with WuXi Biologics."

Chen Zhisheng said, "The main reason for this performance shortfall is the industry impact. The current revenue is $400 million less than expected, with $300 million due to a slowdown in biotech financing leading to fewer new projects, and $100 million attributed to black swan events — production delays of three blockbuster drugs from large pharmaceutical companies. WuXi Biologics' mistake was underestimating the extent of the industry adjustment."

In other words, Chen Zhisheng believes that the overall downward trend of the industry has led to WuXi Biologics' failure to meet expectations.

For reference, in the first half of 2023 and the third quarter, Samsung Bioepis Co., Ltd.'s revenue reached 866 billion KRW (CNY 4.752 billion) and 1.03 trillion KRW (CNY 5.672 billion), respectively; the net profit after tax was 185 billion KRW (CNY 1.014 billion) and 240 billion KRW (CNY 1.319 billion), respectively.

Bank of America Securities issued a report stating that WuXi Biologics held a conference call on Monday to disclose the latest business updates. The management revised its guidance for 2023 to 2025, expecting a 36% increase in non-COVID project revenue this year, while adjusted net profit will see a single-digit decline. Both revenue and adjusted net profit are forecasted to grow by double digits next year, with 30% growth expected across the board in 2025. However, these projections are lower than the original guidance for this year, primarily due to a slowdown in biotech financing, leading to weaker-than-expected revenue from the company’s drug development (D-end) and manufacturing (M-end) segments.

　　BofA Securities cut WuXi Biologics' revenue forecasts for 2023 to 2025 by 15%, 26%, and 26%, respectively, and lowered its gross margin forecast for this year based on the company's new production base in Ireland. Given the sensitivity of biotech financing to the macro interest rate environment, the industry is expected to remain under pressure in the coming months. However, if the Federal Reserve begins cutting rates in June next year, the industry is believed to ultimately benefit. The bank reduced its target price for the company from HKD 76.7 to HKD 34.8 and downgraded its rating from "Buy" to "Neutral."

　　Haitong InternationalWuXi Biologics' revenue for this year is projected at 16.86 billion yuan, with an annual growth rate of 10%. Excluding COVID-19-related business, the annual growth rate is 36%. The adjusted net profit is expected to be 4.68 billion yuan, representing a 5% decline year-over-year. Revenue forecasts for next year and the year after are 19.39 billion yuan and 25.21 billion yuan respectively, with annual growth rates of 15% and 30%. Net profits for the next two years are estimated at 5.57 billion yuan and 7.24 billion yuan, reflecting year-over-year increases of 17% and 30%, respectively.

Before this adjustment, Haitong International estimated that WuXi Biologics' revenue for this year to the next three years would be RMB 19.87 billion, RMB 25.85 billion, and RMB 33.71 billion, respectively, with annual growth rates of 30%, 30%, and 30%. The adjusted net profits are expected to be RMB 6.21 billion, RMB 7.79 billion, and RMB 9.9 billion, with annual growth rates of 26%, 26%, and 27%, respectively. The bank lowered its target price for WuXi Biologics from HKD 79.39 to HKD 42.65, maintaining an "Outperform" rating.

CICC issued a report stating that due to WuXi Biologics' contract development and manufacturing organization (CDMO)/contract manufacturing organization (CMO) business underperforming expectations and a decline in industry growth rate, it has lowered the adjusted earnings per share forecasts for this year and next year by 25% and 28%, respectively, to RMB1.1 and RMB1.3. It maintains an "outperform" rating and lowers the target price by 30.5% to HKD57.

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　　The performance of the semi-annual reports in the past three years has been poor, with significant declines in both gross profit margin and net profit margin.

In fact, WuXi Biologics' overall revenue in 2023 fell short of expectations, which can be partially seen from the earnings reported in the half-year report.

In the first half of 2023, WuXi Biologics' operating revenue reached 8.492 billion yuan, representing a year-on-year increase of 17.84%. The pre-tax net profit was 2.529 billion yuan, down 13.7% year-on-year; the net profit was 2.338 billion yuan, a year-on-year decrease of 10.8%, with a net profit margin of 27.5%; the adjusted net profit was 2.926 billion yuan, up 0.4% year-on-year. The gross profit margin was 41.9%.

Comparing the semi-annual reports over the years, from the first half of 2020 to the first half of 2022, WuXi Biologics' gross profit margins were 40.50%, 52.12%, and 47.36% respectively; net profit margins were 37.59%, 42.72%, and 36.37% respectively. It can be seen that after a brief increase in 2021, both figures started to decline continuously, and this year, the drops in gross and net profit margins have been quite significant.

Although revenue grew year-over-year, both gross margin and net profit margin continued to decline.

WuXi Biologics noted that the growth in revenue was mainly attributed to the execution of the Group's "Follow and Win with Molecules" strategy, driving revenue growth through technical platforms, industry-best project delivery timelines, and a proven track record of project execution; expanding the scope of services provided to the biopharmaceuticals industry, as well as technical platforms (including ADC and bispecific antibodies), which enhanced the Group’s revenue; an increase in royalty income generated by the Group’s various technologies; and leveraging existing and newly expanded capacity, including the ramp-up of overseas production bases. This growth was partially offset by a decline in COVID-19 related revenue.

Regarding the decline in gross margin, WuXi Biologics attributed it to the impact of expected capacity ramp-up at new production facilities (especially overseas entities), a slowdown in biotech financing in China leading to fewer new projects, and necessary scheduled shutdowns for maintenance at existing facilities. This was partially offset by efficiencies gained through WBS and other continuous improvement initiatives.

The decline in net profit margin was due to the reduction in gross profit margin; increase in sales and marketing expenses, administrative expenses, and R&D expenses; and fair value losses on investments caused by capital market volatility.

In addition, the semi-annual report shows that the majority of WuXi Biologics' revenue comes from services provided to customers headquartered in North America, Europe, and China. Among them, revenue from North America accounted for 46.3%; revenue from Europe accounted for 30.0%; and revenue from China accounted for 21.1%.

Meanwhile, continuous external business has also led to a sustained increase in WuXi Biologics' sales and marketing expenses.

Comparing the semi-annual reports over the years, from the first half of 2020 to the first half of 2022, WuXi Biologics' sales and marketing expenses were 48.5 million, 60.4 million, 67.1 million, and 105 million, respectively, with year-on-year growth rates of 84.4%, 24.5%, 11.1%, and 57.1%.

And the reason for the increase in this expenditure in the semi-annual reports over the past four years has been similar, mainly due to the enhancement of global business development capabilities and the amortization of customer relationships.

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　　Can the stock price reverse its decline after plummeting for more than a month?

In addition to the overall revenue falling short of expectations and the unsatisfactory profit in the first half of the year, WuXi Biologics also conducted a spin-off listing of its subsidiary in the middle of this year.

On July 9, WuXi Biologics announced the spin-off proposal, suggesting the separation of WuXi XDC Cayman Inc. (WuXi XDCWuXi Biologics (Shanghai) Co., Ltd., a subsidiary of WuXi Biologics (02268.HK), and its shares were independently listed on the Main Board of the Stock Exchange. According to the 15th Application Guideline, the independent listing of the spin-off company's shares on the Main Board of the Stock Exchange constitutes the Company's spin-off of these spin-off companies.

On November 17, WuXi XDC officially went public on the Hong Kong stock market, closing with a 35.92% increase on its first day of trading. On the day of the IPO, Chen Zhisheng mentioned, "WuXi XDC currently accounts for approximately 7%-8% of WuXi Biologics' revenue. After WuXi XDC's listing, WuXi Biologics will hold more than 50% of its shares, and WuXi XDC will continue to be a consolidated subsidiary of WuXi Biologics. We hope that WuXi XDC can replicate WuXi Biologics' high growth performance."

Chen Zhisheng also stated, "After WuXi XDC goes public, its revenue and profits will still ultimately be calculated into WuXi Biologics. All of WuXi XDC's revenue counts as WuXi Biologics' revenue, and 50% of WuXi XDC's profits are counted towards WuXi Biologics' profits (before the IPO, it was 60%). Since WuXi XDC's profits currently only account for 5% of WuXi Biologics, the impact on WuXi Biologics' profits after WuXi XDC's IPO is 0.5%. However, after the spin-off, WuXi XDC’s management team will have sufficient motivation, allowing the company to grow faster."

However, WuXi Biologics' performance in the capital market has also been far from optimistic. Public data shows that, from mid-November to December 28, the company’s stock price plummeted by 42.66%, showing a cliff-like drop.

　　Regarding the recent series of situations with WuXi Biologics, Shen Meng, Executive Director of Chanson & Co., stated, "For a company, if its revenue falls short of expectations, there are two possibilities: the first is overly optimistic forecasts, and the second is significant adverse impacts from the market environment. Currently, the entire economy is in a downturn, which has greatly impacted the demand for pharmaceuticals, affecting the operating performance of pharmaceutical companies. Insufficient demand will drag down corporate growth, including passively reducing aspects such as valuation. Additionally, many factors influence how well newly listed stocks perform, and it doesn't necessarily mean they are stronger than existing stocks. Therefore, comparing WuXi Biologics to newly listed stocks should be observed over a longer period."

Editor: Zhang Qian