WuXi Biologics: New projects exceed expectations, with the core logic of stable long-term development remaining unchanged

The number of new comprehensive projects has reached 61, which is quite remarkable considering the many external uncertainties faced in the first half of this year, exceeding market expectations. Although the year-on-year revenue in the first half increased by only 1%, given the high performance base of WuXi Biologics in the past and the challenging current development environment, the market's expectation should shift from high growth to stable growth. Through steady performance growth, WuXi Biologics has proven the reliability of its "Follow and Win with Molecules" strategy.

From external factors, the significant increase in market expectations for the Fed's "rate cut" this year has gradually improved the primary investment and financing data of the biopharmaceutical industry globally. The recovery of downstream prosperity is now transmitting to the CXO industry, bringing substantial new orders to top CXO companies like WuXi Biologics (02269). This also confirms a viewpoint recognized by many investors today: "As long as the 'water source' is abundant, the growth logic of the CXO industry will continue."

By deconstructing the key financial data disclosed in the 2024 interim report, investors can easily see that WuXi Biologics' mature backend commercial projects, abundant outstanding orders, and substantial new projects are strong support for achieving stable growth in adverse environments, demonstrating the company's strong internal growth and risk resistance capabilities.

Fundamental Stability, Expectation of Internal Growth

Both domestic and foreign innovative pharmaceutical companies, after experiencing the "winter of financing," have a strong demand for controlling research and development costs, and are more inclined to choose cost-effective end-to-end service providers like WuXi Biologics from a budget perspective. This is the core logic behind WuXi Biologics maintaining a stable fundamental base despite continuous external disturbances in the first half of this year.

According to the latest 2024 interim financial report, excluding the impact of the new crown business, the company's revenue still achieved a steady growth of 7.7% year-on-year, reaching 8.57 billion yuan, in line with its initial growth rate expectation of 5-10%. Among them, the revenue from the company's non-new crown late-stage clinical and commercial production projects increased by 11.7% year-on-year. At the same time, the company's adjusted net profit for the period was 2.25 billion yuan, reflecting its strong internal growth and risk resistance capabilities under many uncertainties.

From key financial indicators, WuXi Biologics' fundamental stability remains, indirectly confirming the importance of the company's CRDMO business model and the "Follow and Win with Molecules" strategy in driving long-term sustainability.

In terms of business increment, during the reporting period, driven by the promotion of early research business diversion, the company saw a rapid growth in the number of projects. In the first half of 2024, the company signed 61 new comprehensive projects, compared to 46 new comprehensive projects in the same period of 2023, making it one of the best half-year performances for the company to date. This has brought the total number of ongoing comprehensive projects to 742. This also makes the company one of the industry's largest with a pipeline covering a variety of complex biopharmaceutical products. It is easy to understand the importance of having a rich biopharmaceutical pipeline, as ADCs, bispecific antibodies, monoclonal antibodies, fusion proteins, etc., are all popular forms of drug molecules today. Although the risks of drug development are well known, in a rich project pipeline, there is always the opportunity to develop several multi-billion-dollar drugs Looking into details, WuXi Biologics currently has 359 pre-clinical projects, a year-on-year increase of 25.52%; early-stage (Phase I and II) clinical development projects reached 311 (224 Phase I projects and 87 Phase II projects), a year-on-year increase of 15.6%; while late-stage (Phase III) clinical development projects and commercial production projects have increased to 72 (56 late-stage projects and 16 commercial production projects), a year-on-year increase of 9%.

One prominent feature of the structural changes in WuXi Biologics' projects in the first half of this year is that its pre-IND business growth is significantly higher than other segments. This is closely related to the current trends in the downstream biopharmaceutical market.

According to information from the Wise Finance APP, a recent report released by HSBC Innovation Bank pointed out that in 2023, there were only 161 financing deals totaling $4 billion in the global biopharmaceutical industry, while in 2024 alone, there were 71 deals totaling over $5.2 billion. The report also stated, "In terms of exits or financing deals, the first half of 2024 has already matched the full year of 2023 and is expected to catch up to the level of 2022."

As is well known, a healthy exit mechanism is an important indicator for assessing the health of the biotechnology industry, signaling a gradual recovery in the global biopharmaceutical sector.

According to a recent report by JP Morgan on "US Biopharmaceutical Transactions and Financing in the First Half of 2024," the venture capital activities in the US biopharmaceutical industry showed signs of recovery in the first half of 2024, with the second quarter being particularly active. Large funding rounds have driven investments in biopharmaceuticals and platform research, regardless of the clinical stage of the companies. In addition, biologics and small molecules continue to lead in early-stage investments and licensing transaction values.

The rapid growth of early-stage projects also validates the main logic mentioned earlier, where innovative pharmaceutical companies choose "high cost-effective" service providers based on cost control.

Therefore, having sufficient backlogs of orders is a key reason why top CXO companies like WuXi Biologics have the ability to withstand risks and internal growth momentum.

Data shows that as of the end of June 2024, WuXi Biologics' total backlog of orders reached $20.1 billion, which is almost the same as the first half of the previous year. Among them, the backlog of service orders and potential milestone payment orders reached $13 billion and $7.1 billion, respectively. Over the next 3 years, the backlog is expected to exceed $3.6 billion Furthermore, CEO Chen Zhisheng stated at the interim report performance exchange meeting, "The total amount of unfinished orders in the company mainly reflects the M-end. If we include the R-end and D-end, the company's order income is actually very substantial." This is enough to see that the backlog of orders ensures the stable growth of the company's medium and long-term performance, demonstrating strong risk resistance and internal growth certainty.

Continued efforts in the R-end, certainty from services and processes

At the performance exchange meeting, CEO Chen Zhisheng also mentioned, "In the current noisy environment, we must see certainty. The company's performance in the first half of 2024 remains strong, thanks to the company's unique and efficient CRDMO business model, as well as the successful execution of the 'follow and win molecules' strategy."

From a business segment perspective, unlike the M-end (drug production) business where the threshold is relatively lower for most CMOs, WuXi Biologics' fundamental base lies mainly in the R-end (drug discovery) and D-end (drug development). The strong performance in the R-end business in the first half of this year is a key reason for WuXi Biologics' exceptional performance elasticity.

According to the Intelligence Finance App, in the first half of last year, WuXi Biologics reached licensing and research service agreements with multinational pharmaceutical companies GSK and BioNTech, receiving upfront payments of $40 million and $20 million respectively.

In addition to direct cooperation with multinational pharmaceutical companies, WuXi Biologics is also empowering customers in accelerating their "go global" strategy through technological enablement. Recently, Merck announced the final agreement with BeiGene, acquiring the novel bispecific antibody CN201 for the treatment of B-cell-related diseases for a consideration of "USD 700 million upfront payment + USD 600 million milestone payment" through a subsidiary acquisition of BeiGene.

It is worth mentioning that CN201 was developed by WuXi Biologics' exclusive patent technology platforms WuXiBodyTM, TCE, and WuXiUPTM. The acquisition with "high upfront payment and high milestone payment" by multinational pharmaceutical giants fundamentally reflects the high recognition of WuXi Biologics' research and development technology.

As mentioned earlier, both domestic and international innovative pharmaceutical companies have a strong demand for controlling research and development costs after experiencing a "financing winter." The exclusive and efficient technology platforms and reliable quality management system are important reasons why customers choose WuXi Biologics.

In terms of technology platforms, the WuXiBodyTM as a bispecific platform can save 6 to 18 months of development time for each project compared to some existing bispecific technology platforms, significantly reducing production costs. The bioprocess technology patent platform WuXiUITM launched by the company last year can ensure product quality while increasing the yield of different molecular types such as monoclonal antibodies, bispecific antibodies, and recombinant proteins by 3 to 6 times in the same cultivation time. Compared with traditional fed-batch cell culture processes, this platform can also reduce the production cost of raw materials in disposable bioreactors by 60-80%.

The future development of biomedicine not only competes in innovation but also in the efficiency of innovation, and the role played by WuXi Biologics in this is by no means insignificant.

In terms of quality management, WuXi Biologics has undergone a total of 21 inspections by EMA and FDA, all of which have successfully passed PAI. Since 2023, 14 customer projects have successfully passed EMA inspections, and 4 have passed FDA inspections, directly indicating that WuXi Biologics' global quality system continues to be recognized by authoritative regulatory agencies Quality is the lifeline of drug research and production. Recently, news about some large pharmaceutical companies being affected by production quality issues, impacting the normal approval of drugs for market launch, has highlighted the importance of production partners with a reliable quality system.

In terms of production capacity, WuXi Biologics' continuous expansion of production capacity is a reflection of its advanced technology and reliable quality management system at the production end.

According to the Securities Times app, WuXi Biologics is enhancing its global layout and capacity building. Currently, WuXi Biologics' Ireland base is close to full production by 2025. MFG6.1 successfully completed its first process validation (PPQ) in the first half of this year, and the expansion plan for MFG6.2 is expected to be completed in the fourth quarter of this year. At the same time, MFG7 has also started commercial production. The company expects the Ireland base to enter stable operation by 2026. The integrated CRDMO center in Singapore has also officially entered the construction phase, with planned capacity reaching 120,000 liters.

In summary, supported by leading platform technology and widely recognized international quality systems, WuXi Biologics' unique integrated model and "Follow and Win Molecules" strategy continue to gain momentum. The successful implementation of the dual-drive strategy will also continue to expand the company's differentiation advantage with global leaders.

Combining the growing global CRDMO industry development space, the company's strong competitive barriers, and outstanding order backlog, WuXi Biologics' intrinsic value is expected to continue to be unleashed, with market valuation poised for a steady rebound and rise