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Rating Action:

Moody's assigns first-time Baa3 rating to WuXi AppTec; outlook stable

 The document has been translated in other languages

06 Nov 2019

Hong Kong, November 06, 2019 -- Moody's Investors Service has assigned a first-time Baa3 issuer rating to WuXi AppTec Co Ltd. The outlook is stable.

RATINGS RATIONALE

"WuXi AppTec's Baa3 issuer rating reflects its leading market position as a contract research organization with a full-service pharmaceutical research and development (R&D) services platform, its global operations, its solid credit metrics, and the strong growth prospects for the sector in China," says Shawn Xiong, a Moody's Assistant Vice President and Analyst.

WuXi AppTec is a leading contract research organization (CRO) with a full-service pharmaceutical R&D services platform with global operations. The company's research and manufacturing services cover the full spectrum of discovery, development and manufacturing of small molecule drugs, cell and gene therapies. It also provides testing services for medical devices.

WuXi AppTec's reported revenue grew around 23.8% to around RMB9.6 billion for 2018. Such strong revenue growth combined with the company's cost competitiveness has translated into strong operating cash flow generation, with its adjusted EBITDA margin ranging between 30% and 33% over the three years to 2018.

Demand prospects for CRO services are favorable in China and globally over the next 12-18 months, underpinned by (1) the need for pharmaceutical companies to increase efficiency and reduce the cost of R&D activities; (2) the increasing number of biotech companies, with many lacking adequate internal infrastructure; (3) and the fact the percentage of outsourced R&D activities remains lower in China than globally.

As a result, Moody's expects that the company's revenue will grow around 22%-25% over the next 12-18 months, while its adjusted EBITDA margin should also remain around 26%-27%.

WuXi AppTec has a relatively diverse customer base, ranging from top-20 global pharmaceutical companies and large Chinese pharmaceutical companies to smaller biotech companies. Moody's expects WuXi AppTec to benefit from both the gradual increase in R&D outsourcing by large pharmaceutical companies as well as the expected significant growth of biotech companies over the medium term.

"WuXi AppTec's issuer rating is constrained by its small absolute scale when compared to its larger rated global peers, as well as by our expectation that the company will remain acquisitive, and its heavy reliance on income sourced outside of China," adds Xiong.

WuXi AppTec has a relatively small absolute scale, with annual reported revenue of around RMB9.6 billion and adjusted EBITDA of around RMB2.9 billion for 2018. However, Moody's expects the company will rapidly grow its scale over the next 12-24 months, both organically and through acquisitions.

At the same time, notwithstanding the favorable current demand prospects for the CRO industry, the company remains exposed to the risk of early-stage research projects being cancelled relatively quickly in times of economic weakness, or reduced access to capital. These risks are partly mitigated by the current strong funding levels for small biotech companies.

Additionally, despite the company's reasonably diverse customer base, WuXi AppTec still sourced over 77% of its total revenue from customers outside of China in H1 2019. Such customer concentration is partially mitigated by the historical stickiness of WuXi AppTec's customers and the expected growing revenue contributions from Chinese pharmaceutical and biotech companies.

Furthermore, Moody's expects the company to incur significant capital spending over the next 12-24 months as it looks to further grow and enhance its capabilities, particularly in the areas of manufacturing facilities and clinical trials. Moody's expects the company will fund such capital spending through a combination of operating cash flow and proceeds from debt issuances.

As a result, Moody's expects WuXi AppTec's credit metrics will weaken from their current strong levels, with adjusted debt-to-EBITDA likely to rise to 1.2x-1.5x over the next 12-18 months, from 0.4x in 2018.

Moody's also expects the company will continue to pursue acquisitions to grow its market share, increase its geographic diversity as well as enhance its capabilities. Moody's expects the company to pursue any potential acquisitions in a prudent manner both in terms of its financial policy and any potential execution risks. WuXi AppTec's current strong cash balances and its strong operating cash flow generation should provide it with some buffer against these risks.

In terms of environmental, social and governance (ESG) factors, the rating also considers the following.

As a CRO with a full-service pharmaceutical R&D services platform, WuXi AppTec is part of the healthcare value chain, and has limited exposure to environmental risks such as air, water and soil pollution, water shortages and carbon regulation.

From a social risk perspective, it is critical for WuXi AppTec to offer its customers the highest level of intellectual property protection. Additionally, the company needs to ensure its CRO processes and manufacturing facilities are compliant with regulations across multiple jurisdictions, including those of the U.S. Food and Drug Administration, European Medicines Agency and National Medical Products Administration in China. Failure to do so could result in loss of customers and severely restrict its ability to offer some of its services to potential customers. To date, the company has not been found in violation of any regulations.

From a governance perspective, WuXi AppTec has a relatively diverse ownership structure. The group of founding individuals, headed by Dr. Ge Li, exercises about 27.64% of the voting rights of the company, and it also has notable other shareholders, including Boyu Capital, Temasek, Ally Bridge Group, and Hillhouse Capital. Additionally, the 12-member board of directors includes five independent non-executive directors, with two non-executive directors nominated by Boyu Capital and Temasek respectively.

WuXi AppTec's liquidity is excellent. The company's unrestricted cash balance of RMB3.7 billion at 30 June 2019 and Moody's projected cash flow from operations of RMB2.5 billion-RMB3.0 billion over the next 12 months could comfortably cover its short-term debt of RMB1.3 billion and likely capital spending of about RMB3.0 billion over the next 12 months.

WuXi AppTec's issuer rating is not affected by subordination to claims at the operating company level as the company's highly diversified business profile — with a meaningful share of revenue generated outside China and a diversified array of subsidiaries in terms of both numbers and jurisdictions -- mitigates structural subordination risk.

The stable rating outlook reflects Moody's expectation that WuXi AppTec will maintain its leading market position as a CRO with a full-service pharmaceutical R&D services platform and achieve strong growth in its revenue and earnings over the next 12-18 months. Moody's also expects WuXi AppTec will remain prudent in its acquisitions and maintain a strong liquidity profile. Furthermore, Moody's expects the company to adhere to sound corporate governance and regulatory compliance as it expands.

What Could Change the Rating -- Up

The rating could be upgraded if WuXi AppTec (1) sustains its organic revenue growth rate while meaningfully increasing its scale; (2) demonstrates a track record of a disciplined approach towards acquisitions; (3) maintains adjusted debt/EBITDA below 1.5x on a sustained basis; and/or (4) maintains its adjusted EBITDA margin above 20%.

What Could Change the Rating -- Down

Moody's could downgrade the rating if (1) revenue and earnings growth drop significantly below expectations; (2) the company engages in overly aggressive debt-funded acquisitions or encounters significant execution risks; (3) adjusted debt/EBITDA rises above 2.0x-2.5x on a sustained basis; or (4) its adjusted EBITDA margin falls below 20%.

The principal methodology used in this rating was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

WuXi AppTec Co Ltd. is a leading CRO with a full-service pharmaceutical R&D service platform with global operations across the pharmaceutical, biotech and medical device industries.

The company's research and manufacturing services cover the full spectrum of discovery, development and manufacturing of small molecule drugs, cell and gene therapies. It also provides testing services for medical devices.

The company was listed on Shanghai Stock Exchange in May 2018 and Hong Kong Stock Exchange in December 2018.

REGULATORY DISCLOSURES

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The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Shawn Xiong
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Clement Cheuk Yiu Wong
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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