WUXI XDC reaped the benefits of the ADC industry | Insight Research

The heat of ADC is also reflected in the financial report of WUXI XDC.

Net profit increased by 175.5% year-on-year, with outstanding orders growing by 105% year-on-year, surpassing the previous market's pessimistic expectations.

Industry beta drives growth, while the company is also striving to acquire more customers

On the evening of August 20, 2024, WUXI XDC released its 24H1 financial report, announcing that the company achieved operating income of RMB 1.665 billion, a year-on-year increase of 67.6%.

The high revenue growth is attributed to the industry beta, mainly driven by the growth in ADC and general conjugate drug outsourcing demand, as well as more projects entering the late-stage development phase.

During the same period, the company's gross profit increased by 133.4% year-on-year to RMB 535 million, with a gross profit margin of 32.1%, an increase of 9.0 percentage points from the same period in 2023.

The growth in gross profit is due to revenue growth, capacity ramp-up, cost control, and optimized procurement strategies.

Of particular note is that the company's net profit exceeded the market's pessimistic expectations, reaching RMB 488 million, a 175.5% year-on-year increase; the net profit margin was 29.3%, an increase of 11.5 percentage points from the same period in 2023. Adjusted net profit increased by 146.6% to RMB 534 million, with an adjusted net profit margin of 32.0%, an increase of 10.2 percentage points from the same period in 2023.

The net profit growth far outpaced the group's revenue and business growth, mainly benefiting from rapid revenue growth, further improvement in operational efficiency, and more effective cost control. As a result, the group's net profit margin was 29.3%, an increase of 11.5 percentage points from the same period last year.

New projects and customer data have also made breakthroughs.

As of the end of the reporting period, WUXI XDC's global customer base increased to 419 companies, with 71 new customers added in the first half of 2024. Among the top 20 large pharmaceutical companies globally, 13 have collaborated with the company on projects. In terms of revenue contribution, the proportion of North American customers increased from 37% last year to 49.4% this year. The company stated during the conference call that the proportion of North American projects for the whole year will be above 40%.

The strategy of "empowering, following, and winning molecules" has successfully driven the continuous rapid growth of projects, with the total number of projects increasing to 167, including 26 new comprehensive projects signed in the first half of 2024.

The number of later-stage projects contributing more to performance (Phase II and III clinical stages) increased to 29, with 9 of them being PPQ (Process Performance Qualification) projects that have the potential to submit BLAs in 2024 and beyond, potentially bringing more approved ADC products.

It is worth mentioning that in the conference call, the company mentioned that out of the 9 PPQ projects, there is a project called "Winning Molecules" (the initial development was not with WUXI XDC, but later they won this project).

The backlog of unfinished orders increased by 105% year-on-year to USD 842 million. Based on the order completion cycle calculation, it is expected to ensure at least double-digit growth in the next two years.

However, the company did not provide a specific breakdown of the sources of new signed orders, nor did they give specific guidance. Nevertheless, the management believes that the growth trend will continue, and the company's market share in the CMC phase should be the highest globally.

The strong momentum of ADC continues

In the first half of 2024, there are over 700 ADC/XDC projects in global phase 2 clinical trials and beyond, with 4 of them submitting BLAs (Biologics License Applications), over 130 in phase 3 clinical trials, and 540 in phase 2 clinical trials. Especially in phase 2, more target products are rapidly advancing, driving the surge in demand for ADC outsourcing.

Furthermore, the combination therapy of IO+ADC is also accelerating the demand for ADC products.

A concrete manifestation of the industry's high momentum is the continuous recruitment of company employees. As of June 30, 2024, WUXI XDC had 1,496 full-time employees, a 72.2% increase compared to June 30, 2023.

The company expects to increase its workforce to over 2,000 by the end of 2024. The previous guidance in the annual report aimed for a workforce of 1,600-1,800 by the end of 2024. The upward revision of the employee count expectation indicates that the global demand for ADC is exceeding expectations.

WUXI XDC also revealed that the growth of ADC is comprehensive from R&D to manufacturing.

One detail reflecting the industry's upcoming trend is that WUXI XDC CEO Li Jincai mentioned that although there have been no new ADC products approved globally for about a year and a half, a large number of pipelines have reached the later stages, leading to a significant increase in demand for the manufacturing end. The upcoming demand will be even stronger, potentially resulting in a capacity gap.

In response to this, it can be seen from the capacity planning perspective that WUXI XDC will accelerate capital expenditures in the second half of the year to meet customer demand.

Based on the guidance provided by the management at the beginning of the year, the company's annual capital expenditure is around USD 1.5 billion, with USD 500 million spent in the first half of the year, leaving around USD 1 billion for the second half.

Specifically, WUXI XDC is further expanding its capacity at the Wuxi site. The new mAb/DS dual-function production line (BCM2 L2) is expected to start operations in the fourth quarter of 2024. The construction of the biolinked drug production line DP3 is underway and is expected to start operations in the second quarter of 2025

At the same time, the production base of the Singapore group located in Singapore has started construction in March 2024, and is currently progressing smoothly. It is expected to be put into operation by the end of 2025/early 2026, with a production capacity of 8 million bottles of coupling agents.

The impact of the Biosafety Act is not significant, no order transfer seen at the moment

Regarding the impact of the Biosafety Act, the company stated in a conference call that they have not seen any customers transferring orders for this reason. The company is also continuously communicating with customers to make them aware of the dynamic changes in the situation.

Currently, the number of new orders signed in the first half of the year is still rapidly increasing, especially in the second quarter, which is the first full quarter after the introduction of the Biosafety Act. The high growth in new orders also confirms that the current impact is minimal.

According to the company's announcement, the group has completed over 110 GMP audits from global customers in the first half of the year, including 11 audits from European Union Qualified Persons (EU QP).

In addition, the Wuxi base of the company has also achieved a 100% success rate in delivering to global customers. High-quality production capacity and reliable delivery will be the foundation for the company to continue acquiring customers in the background of the act.

The performance of WUXI XDC not only reflects significant profits brought by the overall industry growth, but its key operational indicators also show a trend superior to the industry average. Although concerns about the external environment may persist in the market, based on the company's actual performance, overly pessimistic sentiment seems no longer reasonable