Another Capital Miracle from the Longbridge Dolphin of the Pharmaron Group | Insight Research

WUXI BIO's capital wizardry is at it again.

This time, WUXI BIO has spun off its ADC (Antibody-Drug Conjugate) company, CRDMO, and listed it separately on the Hong Kong Stock Exchange under the name WUXI BIO 合联。

With regards to WUXI BIO's financial techniques, the market is once again abuzz.

A Reduction of 77.3 Billion HKD in 5 Years - WUXI BIO's Ongoing Reductions

One point that has always been criticized by the capital market regarding WUXI BIO is its reductions.

According to statistics, since December 14, 2017, when WUXI BIO's major shareholder first announced a share placement plan, up until the latest share placement reduction in January of this year, Biologics Holdings, controlled by WUXI BIO's actual controller, Li Ge, has implemented a total of 13 share placement plans, cashing out a total of 837 million shares, with a total cash amount of approximately 77.317 billion yuan.

After cashing out 70 billion, is the spin-off of WUXI BIO 合联 another display of financial techniques?

WUXI BIO 合联 Includes Two WUXI BIOs

Since the split from WUXI BIO Kangde, the two companies have achieved complete independence.

However, WUXI BIO 合联， which is being spun off this time, is a joint venture between the two "independent" companies, with WUXI BIO accounting for 60% and Hequan Pharmaceutical, a subsidiary of WUXI BIO Kangde, accounting for 40%.

Why is the equity arrangement of WUXI BIO 合联 like this? This has to do with the characteristics of ADC drugs.

ADC drugs are like a special kind of "guided bomb". They consist of three parts: antibodies (large molecules), toxic drugs (small molecules), and the "bridge" (conjugation technology) that connects them.

1. Antibodies: They act like a navigation system, accurately finding and adhering to malignant cells (such as cancer cells) in the body. They can distinguish between bad cells and good cells, and only act on the bad cells.

2. Toxic drugs: They act like small bombs that can kill bad cells. However, if they wander around in the body, they may harm good cells. Therefore, they need the help of antibodies to accurately find and attack the bad cells.

3. Connecting Bridge: Just like glue, it sticks antibodies and toxic drugs together. This "glue" is specially designed to release the small bomb (toxic drug) only after the antibody finds and sticks to the bad cells.

Therefore, the working principle of ADC drugs is like this: the antibody navigates to the bad cells and then releases the small bomb, precisely killing the bad cells while minimizing damage to the surrounding good cells. This targeted attack method makes antibody-drug conjugates more efficient and less prone to side effects in treating certain diseases, such as cancer.

Understanding the working principle of ADC is essential to comprehend why WUXI BIO and WUXI BIO Kangde jointly invested in WUXI BIO Helian. WUXI BIO specializes in large molecules, while WUXI BIO Kangde excels in small molecules, making this joint venture technology-driven rather than financially driven. Internationally, a collaborative model is commonly adopted for ADC's contract development and manufacturing organization (CDMO) to achieve technological breakthroughs.

Why Choose to List the ADC Business Separately?

From an industry perspective, the rapid growth of ADC is the cornerstone.

Undoubtedly, the emergence of DS-8201 (AstraZeneca/Daiichi Sankyo's HER2 ADC drug) has ignited the ADC field, and due to its astonishing therapeutic effects, the market's expectations for the scale of ADC products continue to rise.

According to Frost Sullivan data, the ADC market is expected to maintain a compound annual growth rate of 30% between 2022 and 2030.

Looking at the current status of ADC, there are currently a total of 15 approved ADC drugs worldwide, accounting for 15.4% of FDA-approved biologics from 2019 to 2022.

From a company perspective, separating and listing the business will make it more independent and have a separate listed entity, which will help raise funds independently and expand market share.

At present, WUXI BIO Helian's ADC business is constrained by the overall capital expenditure of WUXI BIO. The current capacity demand of the joint venture is not within WUXI BIO's previously announced 580,000 L plan, and additional capacity for ADC conjugation and formulation is needed. This is not favorable for a business in its high-growth stage.

For companies with multiple businesses, separating and listing the fastest-growing and most promising business as a separate entity is obviously more attractive to investors. Being within the company would be dragged down by relatively slower or more traditional businesses, resulting in a discounted overall valuation. At the same time, the separation allows for better improvement of incentive mechanisms, which contributes to the growth of the joint venture. From this perspective, it is not surprising that WUXI BIO is separately listed as ADC when it established the ADC sector in 2019. Its system, talent, and management were relatively independent.

From the perspective of the capital market, it is also the most important point. The financing environment for the pharmaceutical market has improved. According to Jefferies data, biopharmaceutical financing in May has increased significantly, rising from $2.897 billion in the same period last year to $6.075 billion, a year-on-year increase of 109%.

It seems that the timing and conditions are right. But what about the people?

Can WUXI BIO replicate the development trajectory of WUXI BIO 6 years ago?

The success or failure of the spin-off listing ultimately depends on whether investors buy it. What are the attractive qualities of WUXI BIO that appeal to investors?

The rapid growth of ADC has become a consensus, but the difficulty of ADC development is evident, and the probability of failure is still high.

If investors want to share the dividends of industry growth, shovel stocks are undoubtedly the best choice. For the ADC industry, CRDMO is undoubtedly the best shovel choice.

This is because ADC drugs require the ability to handle large molecules, small molecules, and conjugation, resulting in an outsourcing rate that is more than twice that of biopharmaceuticals.

According to Frost Sullivan data, as of the end of 2022, the global outsourcing rate for ADC discovery, development, and manufacturing reached 70%, far exceeding the overall outsourcing rate of 34% for biopharmaceuticals. Among the 15 approved ADC drugs worldwide, 13 were manufactured by outsourcing companies.

From 2020 to 2022, the revenue of WUXI BIO was 96.35 million yuan, 311 million yuan, and 990 million yuan, and the net profit was 26.3 million yuan, 54.93 million yuan, and 156 million yuan, respectively. In Q1 2023, the revenue was 488 million yuan, and the net profit was 80.67 million yuan.

Based on the earnings in 2022, WUXI BIO is the second-largest CRDMO engaged in ADC and other biopharmaceutical conjugate drugs globally, second only to LONZA. And based on the total number of projects as of the end of 2022, the company is the largest biopharmaceutical conjugate drug CRDMO globally.

If we compare the growth path, the pipeline funnel of WUXI BIO is obviously similar to that of WUXI BIO 6 years ago when it was spun off, and it even has advantages in terms of customer structure, overseas proportion, and helping domestic customers go global. As of the end of 2020, 2021, 2022, and May 31, 2023, WUXI BIO Alliance had a total of 9, 12, 24, and 28 ADC candidate drugs respectively, which have entered the CMC development stage from the discovery stage. The outstanding orders on hand amount to 373 million US dollars.

In terms of the growth rate of pipeline quantity, ADC has become the fastest-growing category of drug development for WUXI BIO. Since 2022, among the 10 Chinese companies that have authorized their ADC pipelines overseas, eight of them are customers of WUXI BIO Alliance.

And the growth of the ADC market is far from over.

With more ADC products targeting different indications entering clinical trials, the focus of research and development is expanding from existing breast cancer indications to potential indications in digestive system cancers. Furthermore, ADC has enormous potential to expand from the field of cancer to other chronic diseases.

Referring to the above figure, it can be foreseen that ADC will further expand into the "X" DC field, evolving from monoclonal antibodies + drugs to small proteins, peptides, nucleotides, etc., thereby unleashing further growth potential.

Therefore, there is reason to expect WUXI BIO Alliance to replicate the explosive development path of WUXI BIO six years ago.

Intense competition, risks should not be ignored

While expecting the rapid development of Alliance ADC, the market also needs to face the problems brought about by the spin-off.

On the one hand, the side effects of the spin-off on the parent company are obvious, namely, the outflow of funds from the parent company.

Although the company emphasizes that it will better share the benefits brought by the growth of WUXI BIO Alliance, it is more likely that investment in the growth business will flow into the newly spun-off company.

The most obvious example of this is the Hong Kong-listed medical device company, Medtronic, which has a significant discount compared to the market value of its six listed subsidiaries.

In addition, the level of competition in the ADC CRDMO market at present is no longer comparable to that in 2017 when WUXI BIO went public. The competition in the large molecule CDMO market back then was much lower than it is now. In the current domestic ADC market, there are also numerous competitors. Not to mention Boteng and Medici, these big players. There is also Haoyuan Pharmaceuticals, a subsidiary of Rongchang, which is involved in the production of the first domestic ADC drug, RC48. In addition, there are Maibairui, which has just been listed on the Growth Enterprise Market, and Dongyao Pharmaceuticals, which has transformed from ADC drug research and development to CDMO. There is no shortage of differentiated competitors.

Furthermore, the presence of international leader Lonza and other distinctive ADC CDMO companies cannot be ignored, further intensifying the competition. This can be seen from Wuxi Bio-Union's specific fundraising for the construction of production facilities in Singapore.

In conclusion, the growth potential of the XDC market for Wuxi Bio-Union is beyond doubt. In order to enter the fierce market competition, Wuxi Bio is planning to independently list Wuxi Bio-Union through spin-off, aiming to replicate the blueprint of Wuxi Bio in the past. For the market, the next focus should be on pricing.