WuXi Biologics: Consider Proposed Legislation And Financial Prospects

seekingalpha09-27

I award a Hold rating to WuXi Biologics after evaluating the impact of the draft bill for the Biosecure Act and the company's financial outlook for the current year.The grandfather clause in the draft...

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On one hand, WXXWY's revenue derived from existing US projects is unlikely to be affected by the Biosecure Act. On the other hand, the company's FY 2024 results are expected to be inferior to that of FY 2023, which could limit its re-rating potential in the absence of financial improvement catalysts. WXXWY's \"negative US market prospects in the face of geopolitical risks, and the positives relating to buybacks and a recovery in biotech funding\" were the subject of my earlier July 16, 2024, article. Readers should know that the company's shares are traded on the Over-The-Counter market and the Stock Exchange of Hong Kong. The average daily trading values for WuXi Biologics' OTC shares and Hong Kong shares were $300,000 and $150 million, respectively for the past 10 trading days according to S&P Capital IQ data. The company's shares listed on the Hong Kong equity market can be bought or sold with US brokers like Interactive Brokers. A Bright Spot Amid The Gloom My prior July 16, 2024, update highlighted that \"WuXi Biologics was recently named as a 'company of concern' in the Biosecure Act, which has negative read-throughs for its US market outlook.\" WXXWY published an update in the early part of the current month indicating that \"the Draft Bill (H.R. 8333) (for the Biosecure Act) was considered and passed by the U.S. House of Representatives after a vote on September 9, 2024.\" The next step is for the draft bill to be voted at the Senate. The latest version of the draft bill of the Biosecure Act still refers to WuXi Biologics as a \"company of concern.\" The most updated version of the draft bill mentions that the Biosecure Act will not be applicable to \"biotechnology equipment or services produced or provided under a contract or agreement, including previously negotiated contract options, entered into before\" January 1, 2032. This \"grandfather clause\" is consistent with Biotechnology Innovation Organization's May 2024 survey suggesting that \"biopharma companies\" will \"need up to eight years to switch manufacturing partners.\" Taking into account the recent development, WXXWY will likely be able to move ahead with its existing programs that have received US government funds in the next eight years or up to 2032. At its most recent Q2 2024 analyst call, WuXi Biologics acknowledged that the \"projects funded by U.S. government\" could be \"impacted\" by the Biosecure Act, but the company emphasized that these projects will \"have a grandfather period that allows them to continue through 2032.\" North America represented 58% of WuXi Biologics' top line for the first half of 2024 as per its interim report disclosures. The risk of a sharp drop in WXXWY's US revenue in the coming years is reasonably low, considering the \"grandfather clause\" of the Biosecure Act. This is a bright spot amid the gloom for the company, as WuXi Biologics' existing US revenue is \"secured\" although the outlook for the US business relating to new programs is still unfavorable. WXXWY Still Faces Prospects Of Slower Revenue Growth And Weaker Profitability WuXi Biologics' 2024 interim performance was weak, and the full-year prospects for the company are poor. The company's normalized net income fell by -21% YoY and its revenue increased modestly by +1% YoY in 1H 2024 as per its interim results announcement. Looking forward, the sell side is anticipating that WuXi Biologics' normalized net profit will decrease by -13% to RMB 4,110 million for full-year FY 2024 as per S&P Capital IQ data. The analysts have assumed a moderation in WXXWY's top-line expansion from +12% last year to +5% this year and a -4.6 percentage points YoY contraction in net margin for FY 2024. WXXWY's domestic or China business is facing headwinds, and this has affected its top-line performance, even though its existing North American projects shouldn't be affected by the Biosecure Act as detailed in the previous section. Revenue generated by WuXi Biologics' operations in the Chinese market dropped by -21% YoY for 1H 2024, which the company attributed to \"ongoing (my emphasis) constraints in China biotech funding\" in its results presentation slides. Therefore, the underperformance of WuXi Biologics' China business is likely to hurt its overall top line for the current year. On the other hand, WuXi Biologics' normalized net margin contracted by -7.2 percentage points from 33.4% in FY 2023 to 26.2% in FY 2024. A decrease in the overall utilization rate for the company's facilities will be a drag on its profitability in the near term. WXXWY mentioned at its Q2 2024 analyst briefing that it is \"still in ramp up phase at our new facilities in Ireland, Germany and the U.S.\" and also noted that \"the manufacturing facility utilization in China was also slightly lower\" in 1H 2024 vis-à-vis 1H 2023. In other words, WuXi Biologics' profit margins are impacted by the revenue decline for its domestic Chinese operations and the lower initial utilization rate for new production sites in international markets. Conclusion There is a positive development pertaining to the Biosecure Act's \"grandfather clause\" which protects WXXWY's existing US revenue. On the flip side, WuXi Biologics' prospects for the current year are unexciting, taking into account the slower growth for its China business and a lower facility utilization rate. Also, a stock is typically seen to be trading close to fair valuation if its earnings multiple is equal to or near its bottom-line growth rate. This is the case for WuXi Biologics with its consensus next twelve months' normalized P/E of 12 times and its consensus FY 2024-2027 normalized EPS CAGR forecast of +11% based on S&P Capital IQ data.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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