Insight into WuXi AppTec's interim report: The biopharmaceutical industry's recovery is on the way | Jianzhi Research

WuXi AppTec has released its interim report, maintaining unchanged full-year performance guidance.

Overall, despite the impact of the Biosafety Law, it is very clear that the current impact is far less than the market's pessimistic expectations.

Of greater interest is that the interim report reveals a more important trend, a clear recovery in overseas biopharmaceuticals. As a leading company in the industry, WuXi AppTec is expected to benefit significantly from the industry's recovery and continue to maintain its leading position in the industry.

1. WuXi AppTec's Q2 report, new orders significantly exceed expectations

In terms of WuXi AppTec's performance in the second quarter of 2024, revenue increased by 16% quarter-on-quarter to reach RMB 9.26 billion, in line with market expectations and consistent with the performance forecasts previously released by Kanglong Huacheng and Kellyen.

It is worth noting that WuXi AppTec's quarter-on-quarter growth rate is still higher than Kanglong Huacheng's 4.8%-11.2% and Kellyen's slight growth.

WuXi AppTec's adjusted Non-IFRS net profit attributable to owners of the parent increased by 28.5% quarter-on-quarter to RMB 2.46 billion, higher than the revenue growth, mainly due to better cost control.

Due to the characteristics of the CRO industry, the conversion of orders on hand into performance is relatively predictable, so this part basically meets expectations. Compared to the same period last year, the quarter-on-quarter growth in the second quarter has already surpassed domestic peers, demonstrating the resilience of the leading enterprises.

However, the most eye-catching data this quarter, and the most exceeding market expectations, comes from the growth of new orders on hand (excluding COVID-19 business) by 33.2%, reaching RMB 43.10 billion as of the end of June 2024.

This data is surprising because even the most optimistic investors find it difficult to anticipate a growth of more than 10% in new order amounts under the current impact of the Biosafety Law.

According to the order funnel chart,

• R (Research Services) order quantity increased by 7%
• D (Development Services) order quantity increased by 18%
• M (Manufacturing Services) order quantity increased by 20%

The growth in the quantity of these three parts is all less than the 33% growth in amount, indicating that new orders are still mainly "high-value large orders".

The company stated: "Relevant orders will be converted into performance within 18 months. At the same time, some customers have signed long-term agreements using grandfather clauses, which do not meet our definition of orders on hand and are therefore not included in orders on hand."

Regarding full-year performance, the company further stated: The performance guidance for this year remains unchanged, and the guidance for 2025 will depend on the growth of orders in the second half of this year, which will be disclosed in the annual report It is worth mentioning that the TIDES business, which is the most market-focused (mainly including peptide drugs for weight loss), continued to maintain high-speed growth in the second quarter.

As of the end of the second quarter, the business's backlog orders increased by 147% year-on-year, with 288 service molecules, a 39% year-on-year increase.

Regarding the future outlook of the TIDES business, the company stated during the conference call: TIDES will become an important growth engine for the company in the future, with an expected growth of over 60% in 2024 and maintaining this growth rate in 2025.

In terms of production capacity planning, the company had a capacity of 32,000L in January this year and stated it will continue to increase investment to further expand peptide production capacity to meet customer demand.

Additionally, WuXi AppTec disclosed that customer revenue from the world's top 20 pharmaceutical companies reached RMB 6.59 billion, with a year-on-year growth of 11.9% excluding new crown commercial projects. Against the backdrop of major customers adjusting research and development pipeline priorities due to the impact of the Inflation Reduction Act (IRA), this growth demonstrates the company's business resilience.

At the same time, overseas markets, especially the European market, contributed significantly to the growth.

2. WuXi AppTec's Performance Confirms Industry Recovery Trend

It is worth noting that the second-quarter orders that exceeded expectations were not only WuXi AppTec. Previously, Kaleon and Kanglong Chemical, which disclosed performance forecasts, also provided order growth data that exceeded expectations.

Kanglong Chemical disclosed in its performance forecast:

"The amount of new signed orders in the first half of 2024 increased by more than 15% year-on-year, with laboratory services growing by more than 10%, CDMO growing by 20-30%, clinical research services growing by 10%, and large molecule CDMO growing by more than 10%."

Kaleon disclosed in its announcement:

"The amount of new signed orders in the first half of 2024 increased by over 20% year-on-year, and there was a significant increase in the second quarter compared to the first quarter, with order growth from European and American market customers surpassing the overall company order growth rate."

Especially, Kaleon directly pointed out that the order volume from European and American customers exceeded the overall company growth rate, confirming the recovery trend in the overseas pharmaceutical market.

According to the latest pharmaceutical financing data from Jefferies, despite follow-on financing (FO) dragging down overall quarter-on-quarter growth, the second quarter still achieved a 35% year-on-year growth. Of particular note, in the first half of 2024, the financing amount for American biotech companies increased significantly by 72% year-on-year. While interest rates in the United States remain high, the biopharmaceutical financing market has gradually returned to pre-tightening levels. Once the U.S. market achieves a rate cut in September, biopharmaceutical financing is expected to further increase.

The significant recovery in the biopharmaceutical financing market has also led to an increase in orders in the CXO industry. Not only have the orders of the three Chinese companies mentioned above exceeded expectations, overseas giants have also disclosed positive order signals from the industry recovery in their recent interim reports.

LONZA reported in its half-year report that due to the improved financing environment in the U.S. and European biopharmaceutical markets, the company's biologics CDMO business performance exceeded expectations (2% growth), and the core EBITDA exceeded expectations (6% growth).

In a subsequent conference call, LONZA optimistically stated, "There have been more early-stage inquiries in the second quarter, which stem from the industry recovery rather than spill-over orders from the biologics safety act."

"There has been a significant increase in early-stage RFP (Request for Proposal) demand. We believe this is more attributed to the improved financial conditions in the biotechnology sector rather than the impact of the biologics safety act. Compared to the same period last year, the financial conditions of biotechnology companies have significantly improved, with funding in the first half of the year increasing by almost 30%. Therefore, the market environment has undergone significant changes."

LONZA further stated that it takes 6-9 months for these funds to translate into company orders. At the same time, there will be no price reductions for CDMO this year.

Another industry giant, IQVIA, also achieved a historic high in backlog orders in the second quarter, with all forward-looking indicators showing growth trends.

As of the end of the second quarter of 2024, the company's backlog order amount reached $30.6 billion (7.7% year-on-year growth, adjusted for exchange rates; 8.1% unadjusted for exchange rates).

In describing the improvement in the biotechnology financing environment, IQVIA's views align with those of LONZA.

IQVIA stated:

"The biotechnology financing amount in the first half of 2024 was approximately $70 billion, almost equivalent to the total for the entire 2023, which is undoubtedly a positive signal for the company's order growth."

However, IQVIA also pointed out another trend in the pharmaceutical industry: large pharmaceutical companies are readjusting their project portfolios, cutting costs in response to the Inflation Reduction Act (IRA), and focusing their funds on the most attractive projects.

This may bring more order opportunities for large CXO companies, with outsourcing expected to help large pharmaceutical companies reduce costs, but attention should also be paid to potential price competition.

IQVIA stated that it will further reduce costs and improve efficiency through AI automation to gain a competitive advantage.

Thermo Fisher Scientific also stated in its second-quarter conference call,

"Biotechnology customers have changed their pessimistic attitude from last year in the first half of this year, showing significantly increased confidence in funding, which will translate into early order indicators for Thermo Fisher. This situation is expected to continue to improve in the second half of the year." Danaher expressed the view from the perspective of production capacity that demand will continue to increase:

In the market, especially in commercial production and clinical Phase III production, there is a need to increase capacity. In the long term, the capacity of large pharmaceutical companies or CDMOs is insufficient, and we are optimistic about the growth of equipment orders.

3. Significant Differences in the Impact of Biosafety Laws on Different Business Segments

Similar to what Thermo Fisher Scientific expressed in the conference call, WuXi AppTec also highlighted the concerns of large customers regarding supply chain resilience.

WuXi AppTec stated: Against the backdrop of biosafety laws, the company's second-quarter chemical business orders continued to grow, with TIDES and small molecule DM still growing well. The main reason is that customers' demand for high-quality compliant capacity continues to grow, which is also the company's competitive advantage in uncertainty.

Currently, the Testing and Biology segments are mainly affected by pricing, with only a small portion of early-stage research being affected. The contribution of orders from Europe and the United States is similar to previous proportions, with no significant changes.

The most severely affected department is the ATU division (mainly involving cell and gene therapy), which is also the part of the company's presentation materials that indicates that revenue and profits are lower than expected due to the impact of the law. Due to its special product requirements, customers are most concerned, and the restrictions on new products are the greatest. Currently, the company will strive to complete the orders in hand.

It is worth mentioning that at the end of the conference call, an analyst optimistically asked whether the company would raise its guidance for this year, which also reflects some changes from the extremely pessimistic market expectations earlier.

The company's response to this was that they are confident in achieving the full-year guidance this year, with a delivery coverage rate of 85% for the year, which is basically consistent with previous years. Performance guidance for next year will be disclosed in the annual report based on the second-half order situation.

Conclusion

From the performance of global CXO leading companies, the industry has shown some positive changes. After the biotechnology companies' financing environment improved in the first half of 2024, it is expected that capital expenditures will gradually increase in the next 18 months, which will further promote the performance of other companies in the industry chain.

This is also a change that biopharmaceutical investors need to continue to pay attention to in 2024