WuXi AppTec
Reliable, low cost pharma R&D and manufacturing. Simple. Profitable.
KEY TAKEAWAY: WuXi AppTec (药明康德, "WXAT") of Shanghai has built a $35 billion market cap business as the largest company focusing on small molecule pharmaceutical ingredient contract research and manufacturing.
Its size and efficiency make it a reliable supplier of low cost ingredients with minimal error, but unlike pure contract development and manufacturing organizations ("CDMO"), it can also be the "arms and legs" of the drug discovery process.
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In recent decades "Big Pharma" - i.e. companies with over $10 billion in revenues - have accounted for a decreasing share of novel drugs, from 70% 40-50 years ago to 30% now in the USA, and 50% in Europe.
Whereas Lonza and Broadcom collaborate with customers to develop cutting edge products and original manufacturing processes in their respective industries, WXAT and others in the small molecule space compete more on absolute reliability and efficiency. Small molecule biochemistry is typically less complex than biologics or leading edge semiconductors.
While biologics have accounted for much of growth in smaller firms, small molecule drugs still make up 70% of new drugs.
On the other hand, WXAT does collaborate with customers on drug discovery and development, as smaller pharma companies often lack the large staff and world class facilities required. It is not a pure pharmaceuticals manufacturer like Siegfried.
Smaller firms dealing in small molecule drugs are able to outsource the labor intensive portions of drug discovery and validation research to contractors like Charles River Laboratories, and manufacturing to contractors like Piramal Pharma Ltd.
With its giant manufacturing capacity, WXAT can offer both big pharma (40% of its revenues), and smaller companies (60%) a more efficient "end-to-end" solution for drugs with mass market potential.
WXAT has grown from a niche player to a global CDMO market co-leader, similar in size as Thermo Fisher Scientific.
Scale and operating efficiency improvements have enabled it to grow its net margin from 16%-17% ten years ago to 23%-25% now, while gross margin has remained steady at 40%.
Market share growth and efficiency improvements have resulted in net income growth in the 27%-30% range in the past decade, with current return on assets of 24%-25%.
Next up, cloud integration.