WuXi AppTec Posts Lower Profits But Avoids More Share Price Pain

Key Takeaways:

• U.S. sales dipped slightly, with limited impact for now from a proposed law that could limit Chinese access to the U.S. drugs market, where WuXi AppTec makes nearly two thirds of its revenue
• China’s drug services companies are cutting prices in a battle for business, eating into profit margins

By Molly Wen

Drug services giant WuXi AppTec Co. Ltd. still faces a threatened ban on doing work for U.S. federal agencies, and its Covid-related business has taken a dive. Profits and revenues are both down, and price pressures are mounting.

This hardly seems like a formula for a share price rally. But investors saw enough positives in WuXi AppTec’s half-year earnings report last week to administer some pain relief to the company’s battered stock.

The provider of outsourced drug services to the global pharmaceutical sector logged revenue of 17.24 billion yuan ($2.38 billion) in the first six months of the year, 8.6% less than in the same period a year earlier, while net profit sank just over 20% to 4.24 billion yuan. It marked the first time in five years that the top and bottom lines both fell. Still, using other measures the figures look a bit healthier. Excluding projects related to the Covid pandemic, revenues slipped just 0.7%, while net profit on an adjusted basis fell around 14% to 4.37 billion yuan.

It was enough to perk up the share price, which rose as much as 7% in early Hong Kong trade after the results came out, before closing with a gain of 3.8%. The stock was perhaps ready for a modest rebound after a 58% plunge from HK$74 at the start of the year to levels around HK$31.

The data also showed signs of a return to growth in the company’s core business after the distortions of the pandemic. In the second quarter, WuXi AppTec’s operating revenue rose 16% from the first three months. At the end of June, the company had orders on hand worth 43.1 billion yuan, an increase of around 33% excluding pandemic-related projects, which essentially assures a revenue stream for the next 18 months.

The company predicted its revenue would reach 38.3 billion yuan to 40.5 billion yuan for the full year, despite what it called the uncertainties in the external environment, translating into growth of up to 8.6% if Covid-linked business is excluded from the equation.

The WuXi chemistry division, which provides drug discovery, development and manufacturing services, is the main earnings engine. The business generated revenues of 12.21 billion yuan in the first half, about 70% of the total. But the turnover for non-Covid related projects grew just 2.1%, slowing sharply from a rise of around 36% on an equivalent basis in the first half of 2023.

Revenues fell in the smaller parts of the drugs powerhouse that handle clinical testing or focus on developing biological agents such as enzymes or hormones for use in medical treatments.

The testing business posted a 2.4% drop in revenues while turnover at WuXi’s biology division fell 5.2%. The company insisted that overall demand was firm, blaming investment and financing factors for canceled customer contracts.  At WuXi’s advanced therapies unit, one of its smaller segments, revenue fell just over 19% in the first half to 570 million yuan. The company said the business, which focuses on gene and cell therapies, suffered from projects being in their infancy or contracts being postponed or canceled by customers. Another factor was proposed U.S. biosecurity legislation, introduced earlier this year, that the company said had limited new orders.

The cross-party “Biosecure Act” aims to prohibit biotech companies from obtaining U.S. taxpayer funds through federal contracts, grants or loans when the firms are deemed to be controlled by a “foreign adversary”, have military links or collect data that could pose a risk to U.S. national security. The draft law names WuXi AppTec, WuXi Biologics (2269.HK) and other Chinese biotechs as being such companies of concern.

Investors have been fretting about the potential impact of the bill, if it passes into law, on the Chinese drugs outsourcing business, in which WuXi AppTec is the market leader.  But for now, the drugs giant has felt few ill effects, judging from its latest earnings report.

The company said it had added more than 500 new customers in the first half of 2024, on top of its existing client base of more than 6,000. Revenue from the U.S. market was holding up despite the legislative uncertainty, slipping just 1.2% to 10.7 billion yuan and still accounting for 62% of total revenue, while income from the domestic market rose 2.8% to 3.4 billion yuan..

Price war

However, Chinese providers of outsourced drug services are locked in a price war, amid a scramble for waning financing and fierce competition for new business. WuXi AppTec’s gross margin fell 1.2 percentage points to 38.9% in the first half of the year, and rivalry in the Chinese market will inevitably heat up if the U.S. business shrinks.

In the earnings conference call, WuXi AppTec said it was adopting a strategy of flexible pricing, depending on the segment or customer group, to cope with strong domestic competition while keeping overseas prices stable.

It said future expansion would focus on oligonucleotides and peptides, complex molecules known collectively as “TIDES” that are used in advanced therapies and ground-breaking diabetes drugs. Revenues from the TIDES business jumped around 57% to 2.08 billion yuan in the first half.  In recent years, peptide-based drugs to control blood sugar and promote weight loss have become the new stars of the pharmaceutical industry. Novo Nordisk’s diabetes drug Semaglutide ranked second in global sales in 2023 and is expected to be part of a host of new blockbuster products that could mean big orders for the Chinese drug industry. As of the end of June, WuXi AppTec’s TIDES orders on hand were up 147% on the same period a year earlier.

In the results, WuXi AppTec said it had a peptide production capacity of 32,000 liters as of January this year, putting it way out in front of its rival Asymchem Laboratories (6821.HK), with an expected volume of 14,250 liters as of end-June. With increased investment, peptides look set to be a key driver for the company going forward. WuXi AppTec estimated that its TIDES revenue would grow more than 60% in 2024 and 2025.

The company trades at a price-to-earnings (P/E) ratio of 9 times, slightly higher than Asymchem’s 8 times. The latest earnings may provide some grounds for optimism, but investors still need to keep a close eye on policy risks.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.