The Motley Fool

Why Wuxi AppTec Has More Than Doubled Since 2018

Wuxi AppTec Co Ltd (SEHK: 2359) is a leading contract research firm that serves pharmaceutical, biotech, and medical device organisations of all different sizes.

Over the past decade, contract research organisations, which do everything from conducting clinical trials to contract manufacturing, have experienced secular growth.

By outsourcing to companies that have a readily available workforce and experience, many pharmaceutical companies save money and potentially accelerate clinical trial speed by not having to hire workers to do the less-critical R&D work.

Other biotech and medical device companies hire contract research organisations to save on operating costs so they don’t need to raise as much capital.

In general, it’s a win-win for both parties. Given the cost effectiveness of the outsourcing and the rapid growth in the biotech, medical device, and pharmaceutical sectors, Wuxi AppTec has also “won” in the stock market.

Its shares have more than doubled since December 2018. Wuxi AppTec stock has risen from around HK$48 to HK$107 as of early May.

Given that it recently reported its earnings, here’s how the company did for the first quarter of 2020.

First quarter of 2020

For the first quarter, WuXi AppTec’s sales increased 15.1% year-on-year to RMB 3.19 billion (US$449.9 million) and adjusted net profit attributable to owners of the company rose 10.8% year-on-year to RMB 576 million.

For the three months, the company added over 240 new customers as WuXi AppTec’s active customers exceeded 3,900.

Wuxi AppTec’s CEO Ge Li said:

“The fundamentals of our business remain very strong. Our laboratories and facilities in China are fully operational and we expect to deliver a strong second quarter.”

In contrast, the firm’s adjusted net profit attributable to owners of the company grew 38.2% and revenue rose 33.9% year-on-year for 2019.

One reason WuXi AppTec’s first-quarter profit didn’t grow as fast as it did for all of last year was due to Covid-19.

The pandemic disrupted activity in the company’s Wuhan branch for around two months. For the second quarter, WuXi AppTec expects the pandemic to disrupt its US operations.

The company remains very heavily research and development orientated. As of March 31, 2020, it had 22,233 employees, of which 7,482 had either a master’s degree or higher degree.

Is the stock a buy?

One thing to watch out for is the trade tensions between China and the US. Because much of Wuxi AppTec’s business is global, the company could be affected if the US were to make cross-country business substantially more difficult.

Although it didn’t show much weakness when the relationship between the two countries worsened in 2018 and 2019, things could always change in the future.

If the trade tensions don’t worsen considerably, Wuxi AppTec has substantial potential for more growth given the long growth runways for the Chinese pharmaceutical, biotech, and medical device sectors.

If the market continues to judge the firm on growth and how the company executes (which so far has been the case), Wuxi AppTec looks like a good bet that its stock will go higher.

Foolish conclusion

Wuxi AppTec’s stock has done well due to the secular growth in the contract research organisation sector which generally saves money for pharmaceutical companies.

Due to the future growth potential in China’s pharma, medical device, and biotech sectors, Wuxi AppTec has a lot of growth potential left.

Here's 1 China stock that's riding the long-term growth in a MASSIVE US$400 billion industry. Find out why we think this market is so exciting and how investors can benefit, right here.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Jay Yao doesn’t own shares in any companies mentioned.