The Good And The Bad For WuXi Biologics

seekingalpha07-16

The good things to note about WXIBF is that the outlook for biotech funding is favorable, considering expectations of a rate cut this year, and the stock's potential buyback yield is appealing.The bad...

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(OTCPK:WXIBF) (OTCPK:WXXWY) [2269:HK] stock. My previous April 24, 2024 write-up assessed WuXi Biologics' financial outlook and valuation metrics. The company describes itself as \"a leading global Contract Research, Development and Manufacturing Organization (CRDMO)\" on its corporate website. This current update highlights the company's negative US market prospects in the face of geopolitical risks, and the positives relating to buybacks and a recovery in biotech funding. WXIBF is rated as a Hold, taking into consideration both the good and bad regarding the stock. Investors should be aware that they can buy or sell WuXi Biologics' shares on the OTC market and the Hong Kong equity market. The three-month mean daily trading value for the company's Over-The-Counter shares was decent, at around $0.5 million, according to S&P Capital IQ data. But WuXi Biologics' shares listed on the Stock Exchange of Hong Kong are relatively more liquid, with an average daily trading value of approximately $80 million (source: S&P Capital IQ) in the last three months. US brokerages such as Interactive Brokers and Hong Kong brokers like Boom Securities allow their clients to trade in Hong Kong-listed shares. US Market's Prospects Are Unfavorable Earlier in mid-May this year, WuXi Biologics disclosed in an announcement that \"the revised version of\" the Biosecure Act \"includes the Company’s name in the proposed definition of the term \"biotechnology company of concern.\" According to L.E.K. Consulting's July 2024 research report analyzing this new legislation, the Biosecure Act will \"impact any company that does (or wants to) receive US federal government contracts (i.e., most global pharma companies), and restrict them from partnering with companies of concern.\" WXIBF earned 47.3% of the company's revenue in the most recent fiscal year from the North American geographical region, as per its 2023 annual report. WuXi Biologics' prospects in its key US market could possibly be affected by its inclusion in the list of \"companies of concern\" for the Biosecure Act. Firstly, a recent survey conducted by L.E.K. Consulting suggests that a meaningful proportion of US biopharmaceutical companies are evaluating their current supply partnerships with Chinese companies. As per the chart presented below outlining L.E.K. Consulting's survey of biopharmaceutical companies, close to a third or 32% of US respondents \"have started to evaluate options to shift away from our current Chinese partners.\" The Results Of L.E.K. Consulting's June 2024 Biosecure Act Survey L.E.K. Consulting's July 2, 2024 Research Report It is reasonable to assume that some of WXIBF's clients, especially those reliant on the US government for funding or new business, could be contemplating a diversification of their supply chains in the face of heightened geopolitical risks. Secondly, WuXi Biologics seems to be moderating its pace of investments in the US market. A June 18, 2024 Yicai Global news article mentioned that WuXi Biologics recently notified the \"government of Worcester, MA\" that the company \"would suspend a USD300 million local expansion project, first announced in January.\" Also, another Chinese CRDMO company WuXi AppTec (OTCPK:WUXIF) (OTCPK:WUXAY) was also reported to have reduced its staff strength in the US in May this year. It won't be a surprise to see WuXi Biologics and its peers pull back on investments in their US operations, if the outlook for this market has gotten dimmer. Thirdly, WXIBF's Chinese peers have recently issued negative financial guidance. Joinn Laboratories China [6127:HK] announced on July 10 that the company's top line is expected to decrease between -4% YoY and -29% YoY in 1H 2024, and it anticipates that it will remain loss-making. On the other hand, Asymchem Laboratories (Tianjin) [6821:HK] revealed on the same day that its 1H 2024 core net income could fall by 69%-73% YoY. It is unlikely to be a coincidence that two Chinese CRDMO players have both disclosed unfavorable guidance at the same time. To sum things up, the outlook for WuXi Biologics' US operations is unfavorable. The Biosecure Act could potentially prompt some of its clients to switch to non-Chinese partners. Chinese CRDMO players have either scaled down their operations in the US or guided for weaker financial performances. Biotech Funding Recovery And Attractive Potential Buyback Yield Are Key Positives A potential recovery in biotech funding and the company's continued buybacks are the bright spots for WuXi Biologics amidst geopolitical concerns. In my earlier May 8, 2023 article, I noted \"a rising rate environment\" might suggest that \"WuXi Biologics' customers get into financing issues\" which \"could translate into below expectations sales.\" In other words, weak biotech funding constrained by high interest rates was a headwind for WXIBF in the past. But there is hope that things will get better on this front. Seeking Alpha's Sentiment Survey indicates that close to 80% of respondents believe that a rate cut will materialize before the end of 2024. Lower interest rates are most probably going to drive a recovery in biotech funding, which will boost the outlook for CRDMOs in general and WuXi Biologics. Separately, WuXi Biologics' continued share repurchases suggest that the stock's potential buyback yield (buybacks divided by market capitalization) for 2024 might be appealing. The company has spent an estimated HK$1,355 million (equivalent to 3% of market capitalization) on share buybacks in the first half of 2024. Assuming that WuXi Biologics continues repurchasing its own shares at a similar pace in the second half of this year, its 2024 buyback yield could be as high as 6%. In a nutshell, WXIBF's actual financial performance might exceed expectations on the back of a recovery in biotech funding supported by rate cuts, while its enticing buyback yield offers some form of valuation support for the company's shares. Closing Thoughts I have a mixed view of WuXi Biologics as a potential investment. The stock's buyback yield is attractive, and the company will likely benefit from a more favorable rate environment which is supportive of biotech funding. But WuXi Biologics was recently named as a \"company of concern\" in the Biosecure Act, which has negative read-throughs for its US market outlook. The company's shares are also reasonably valued based on the Price-To-Earnings Growth or PEG metric of 0.91 times. The stock's PEG ratio is calculated based on its consensus next twelve months' normalized P/E of 10.5 times and its consensus FY 2024-2028 normalized EPS CAGR projection of +11.5% (source: S&P Capital IQ). A rule of thumb suggests that a stock with a PEG of close to 1 is trading at a fair valuation.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2451526519"}