Here’s Why WuXi Biologics is a Long-Term Winner for Investors

Recently, demand for healthcare has been rapidly rising as many countries increase their public health expenditure. Biotech companies are in frenzied competition to win the race for a coronavirus vaccine.

Meanwhile, this has led investors to pursue the biotech industry in hopes of yielding higher returns on long term investments.

Within the biotech space, I think investors should buy one stock to tap into this “coronavirus economy”.

Remarkable results

WuXi Biologics Cayman Inc (“WuXi”) (SEHK: 2269) is a leading biologics technology platform that offers one-stop services to its global clients.

Essentially, it means providing services from the initial stage of drug discovery, development, to manufacturing of biological drugs for commercial use.

Reading into the company’s financials as of FY2019, I understand that the company’s growing earnings were generated solely from sales growth. Between FY2018 and FY2019, company’s revenue recorded strong growth of 57% in revenue and 60% in net profit.

Despite such a rapid expansion plan, I believe there is still room for improvement in terms of efficiency and costs management benefitting from economies of scale, including improving its gross profit and net profit margins.

Although WuXi’s price-to-earnings (PE) ratio is currently trading at an abnormal premium at 136x as compare to industry peers of 23.9x, I’m still bullish on this stock in the long term and here’s why.

Follow the molecule

The main contribution to such growth is the significant accumulation of projects over the years. In FY2019, the number of new projects increased by 22% while the number of customers increased by 21%. Both figures represent good organic growth.

The growth in the number of projects all boils down to WuXi’s underlying strategic business model of “Follow the molecule”.

Source: Wuxi Biologics Investor Relations

“Follow the molecule” has successfully demonstrated the effectiveness of its business model – as existing clients contribute to 92% of its revenue stream as compared to 8% for its new clients.

To be precise, such an approach created stickiness as the company provides a full-service platform from the discovery stage to commercial production (see below) which supports clients in each stage of the drug development chain.

Source: WuXi Biologics Investor Relations

As clients complete their projects in each phase, it becomes favourable for clients to naturally “stick” with WuXi’s platform given the convenience, greater efficiency as well as the “KYC” customer-oriented experience.

I believe such a business approach will provide client royalty, and greater attraction to existing clients given the company’s well diverse product range.

This shall also create a clearer and stable source of revenue generation to WuXi to promote sustainable growth going forward.

Global expansion

WuXi has also been staying active in establishing its global presence. The company announced expansion plans abroad in places such as North America, Ireland, and Germany to build manufacturing facilities for R&D enhancements.

It aims to uplift its production capacity to fulfill its target of exceeding production capacity by 28 million litres in 2022.

Furthermore, WuXi continues to expand partnerships with international companies on drug developments. Its latest announcement includes collaboration with global biotech company Vir, in which they shall work together to develop antibodies that might cure Covid-19.

Such expansion strategies will generate competitive advantages against its Chinese peers, as well as attracting more potential collaboration opportunities with international partners. This may bring a significant source of revenue to the company in the long run.

Foolish summary

WuXi Biologics has certainly delivered some beautiful figures in 2019. I remain optimistic on the 2020 outlook in view of the continuous organic revenue growth.

The company’s “Follow the Molecule” business model, and the company’s continuous global expansion amid economic uncertainties will help it emerge stronger.