WuXi Bio prescribes share buyback to relieve revenue pain

The pharma services provider has shocked investors with a steep downward revision of its earnings outlook, slashing its full-year revenue growth forecast to just 10% from an initial 30% and predicting a profit drop

Key Takeaways:

• After its shares plunged more than 30% in a week, WuXi Bio announced a buyback of 10% of its shares, saying the battered price did not reflect the company’s value or business prospects  
• The company blamed the weaker revenue outlook on a financing slowdown in the biopharma industry and regulatory delays in launching star drugs

By Molly Wen

After five years of explosive growth, one of China’s leading providers of outsourced drug services delivered an earnings bombshell last week and had to scramble to contain the damage.

WuXi Biologics (Cayman) Inc. (2269.HK) was a high-flying star during the biotech boom years and the rush for Covid remedies. But last Monday it suddenly issued a statement about its full-year earnings falling short of expectations amid leaner times for the drugs industry. WuXi Bio’s share price went into freefall, plummeting 32.5% in a week and wiping more than HK$37.4 billion ($4.79 billion) off the company’s value.

“This year is the hardest year in the history of WuXi Bio, and we have never experienced this kind of winter,” said CEO Chen Zhisheng. The numbers were indeed chilling for investors.

The giant in the field of pharmaceutical outsourcing predicted revenue growth for 2023 at just 10%, down from a 30% estimate at the beginning of the year. Drug development, one of its two core business, was predicted to grow 3% to 5%, while revenue from drug production was forecast to fall between 3% and 6%. Profits for the year were estimated to drop by a single-digit percentage.

WuXi Bio was spun off from WuXi AppTec (2359.HK; 603259.SH) and listed independently on the Hong Kong Stock Exchange in 2017, riding a wave of biopharma innovation and Covid demand to deliver annual revenue growth rates of about 40% to 80% from 2017 to 2022.

But in 2023 a harsher reality set in. The company’s core business declined, capping the revenue growth rate and pushing profits down. The downward revision to the earnings outlook tipped many jittery investors over the edge. On the morning of the release, WuXi Bio’s shares fell 23.8%, forcing the company to announce a suspension of trading, yet the nosedive resumed the next day, reaching 30% in 48 hours.

On Dec. 6 WuXi Bio acted to brake the fall, announcing a buyback of 10% of its shares for a total outlay of no more than $600 million. In its announcement, the company said it sought to demonstrate confidence in the outlook after the share price deviated from what it considered to be an accurate value. The company also said it had the resources for a buyback “while maintaining a solid financial position.” Chen added that the company had the funds and the strength for a buyback, otherwise it would not be in a position to repurchase the shares, however cheap the price.

WuXi Bio’s earnings record backs up that view. The industry leader can still count on sufficient cash flow, even though its income may fall short of expectations. At the end of June 2023, the company had 7.6 billion yuan ($1.06 billion) in cash on hand, according to its half-year earnings report. The biotech has also spun off its Contract Research, Development and Manufacturing Organization (CRDMO) service, which focuses on antibody-drug conjugates (ADCs) and other bioconjugates. That subsidiary, WuXi XDC (2268.HK), listed on the Hong Kong Stock Exchange in November this year raising HK$3.48 billion.

An industry crisis?

WuXi Bio talked up its performance and prospects relative to the rest of the industry, which has been grappling with waning demand and tight funding. 

“We are the last to feel the cold winter, but we have begun to feel the arrival of spring in the industry,” Chen said in a media interview, adding that the firm’s new projects may reach 100 this year, accounting for more than half of global R&D in the sector. The company expects its business to increase steadily in 2024 and return to strong growth in 2025 and beyond.

These positive sentiments are still to be tested. After all, in a news conference at the end of October Chen had renewed a commitment to a goal of developing 120 new projects this year, and many fund managers raised their bets on the ambitious drug producer in the third quarter. The sudden announcement of an impending earnings miss was a damaging blow to investor confidence.

What is the reason for the deceleration? WuXi Bio said a financing slowdown in the biopharma industry had translated into around 40 fewer new drug projects for the company than last year, with lost revenue of about $300 million. Meanwhile, delayed production of three star drugs after a lag in regulatory approvals in the second half erased about $100 million in revenue.

WuXi Bio is not alone in wrestling with a shrinking number of new drug projects. China’s economic downturn has exacerbated a harsher investment climate for the biopharma industry, affecting many of WuXi Bio’s peers. Asymchem Laboratories (6821.HK; 002821.SZ) reported revenue of only 6.38 billion yuan in the first three quarters, down 18.3% from the same period of last year and compared with a growth rate of around 167% a year earlier. During the same period, Hangzhou Tigermed (3347.HK; 300347.SZ) logged revenue of 5.65 billion yuan, a year-on-year increase of 4.5% but much lower than last year’s growth rate of 59.2%.

However, at a global level one company is managing to withstand the cold. Samsung Biologics (207940.KS), another leading contract manufacturer in the drugs sector, is still maintaining a high growth rate. The company’s revenue exceeded 1 trillion won ($760 million) in the third quarter, with net profit up 86% from the same period last year. And its revenue guidance for 2023 has been revised upward to growth of more than 20% from a range of 15% to 20%. Chen said the South Korean company was relatively stronger than WuXi Bio in drug production, which was less affected by biotech financing and investment conditions.

WuXi Bio is still actively seeking to expand its production base. It has announced plans to invest $3 billion in building factories in Europe, the U.S. and Singapore, aiming to take its overseas production close to 40% of the total by 2026. However, the expansion is also a drag on earnings in the short term, lopping $100 million off gross profit in 2023.

Competition is also heating up, as many pharma companies that focused on anti-Covid drugs during the pandemic are now muscling into the contract market for other drugs. However, overall demand for pharmaceutical research, development and production services is also set to rise, with progress on ADCs and other promising new drugs such as GP-1 pills to combat diabetes and obesity. WuXi Bio’s price-to-earnings (P/E) ratio has fallen to 28 times, but that is still higher than WuXi AppTec’s 23 times.

If 2024 does herald a new spring for the drugs industry, investors may want to give the company a fresh look.

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