Pharmaceuticals Farming Out R&D Is a Golden Opportunity for This Chinese Firm’s IPO

By November 22, 2018 April 3rd, 2019 The Weekly
Smartkarma Pharmaceutical research outsourcing

When we think of outsourcing, pharmaceuticals and research isn’t the first industry to spring to mind. And yet, it’s one of the fastest-growing markets at the moment with billions of dollars in value.

Take Dr. Li Ge, for example. He started WuXi AppTec in 2000 to do research and manufacturing in the pharmaceutical and medical sectors. Today, the good doctor and Columbia University alum is worth US$3.6 billion, according to Forbes. 不错.

The Shanghai-headquartered firm has gone through an NYSE listing, privatisation, restructuring, and acquisitions of smaller firms in its sector to become the number 1 research-and-development (R&D) services provider in China. It has a 1 percent global market share, as noted by Insight Provider Curtis Lehnert.

Its international backers include Temasek, Hillhouse Capital, and Sequoia China.

WuXi AppTec is now looking to raise US$1 billion in a H-share listing in Hong Kong. It listed on the A-share market in May 2018.

Pharmas Gonna Farm (Out)

It’s a great time for WuXi to raise its profile, along with more capital. More and more pharmaceutical companies are outsourcing research to third-party companies, to reduce costs and help shield themselves from the risks of drug approval processes.

According to data from the Pharmaceutical Research and Manufacturers of America (PhRMA), it costs the pharmaceutical industry an estimated US$800 million to US$1.7 billion to bring a new drug to market. If a drug fails its approval process, that’s a lot of time, money, and effort down the test tube.

Enter contract development and research organisations – companies, like WuXi, that undertake the messy parts of drug discovery and development. Frost & Sullivan reports increased growth in the market, at a compound annual rate of 10.3 percent from 2013 to 2017. It predicts that percentage will rise to 11.4 percent from 2017 to 2022.

“As pharmaceutical companies focus on optimising costs, WuXi AppTec should benefit from increased outsourcing of R&D,” writes Insight Provider Arun George on Smartkarma.

There is also a groundswell in China’s biotech industry, catalysed by policy support, industry deregulation, and a glut of capital. These trends place WuXi in a coveted position indeed.

Frost & Sullivan pharmaceutical R&D outsourcing market

Clouds and Silver Linings

As WuXi prepares for its Hong Kong listing, Insight Provider Ke Yan is fond of the company’s business model, the stickiness of its customers, its expansion potential, and the overall tailwinds in the market.

WuXi’s customers and revenue are increasing, but returning customers generate even more revenue for WuXi. “We believe this is not only enabled by the company’s delivery in earlier contracts but also its full range of services,” he writes on Smartkarma.

One dark spot might be the company’s weaker cash conversion leading to cash burn. In his Insight, George points out that WuXi’s cash conversion declined from 82 percent in 2017 to 32 percent in the first half of 2018. The analyst expected cash conversion to recover “rapidly” in the second half of the year, which hasn’t really come to pass.

Want more IPO coverage? There’s plenty on Smartkarma. Also, dig deeper into WuXi AppTec by exploring some of the investment research network’s Insights listed below.

More Insights by Smartkarma

Sign up or log in to Smartkarma to read more.

Wuxi Apptec 药明康德 IPO: Welcome to the A/​H Universe
Curtis Lehnert breaks down the industry and WuXi’s position in it.

WuXi Apptec (药明康德) IPO: This A+H Listing Will Be Different
Ke Yan analyses WuXi’s financials, market, and valuation.

WuXi AppTech IPO Trading Update: What’s up with the Poor Cash Conversion?
A bearish view where Arun George questions WuXi’s cash conversion recovery.

Get a Different Perspective

Sometimes, it helps to take a step back and take a wider look.

China’s Biotech Revolution
A detailed look into China’s rapidly rising biotech sector.

Pharma R&D Outsourcing Is On The Rise
The whys and wherefores of R&D outsourcing in the pharmaceutical sector.

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