WuXi AppTec's steady growth in the first three quarters: The CRDMO-driven business model continues to be validated

Benefiting from its unique integrated business model, WuXi AppTec recently disclosed its third-quarter report and achieved steady growth from a high base in the previous year. According to the financial report, in the first three quarters of this year, WuXi AppTec achieved operating income of 29.541 billion yuan, excluding new crown commercialization projects, with a year-on-year increase of 23.4%; The net profit attributable to the parent company after deducting non-profits was 7.709 billion yuan, a strong growth of 23.7% under the high base in the same period of the previous year; In the first three quarters, the adjusted non-IFRS net profit attributable to the parent company was 8.167 billion yuan, a year-on-year increase of 20.6%.

As a leading international CXO company, WuXi AppTec has grown rapidly with an annual growth rate of more than 20% in the past seven years. In particular, in 2022, WuXi AppTec's revenue increased by 71.84% year-on-year, benefiting from the impact of new crown commercialization project orders. However, with the decrease in the proportion of new crown commercial orders, WuXi AppTec must further promote the volume of conventional business if it wants to continue its high growth curve.

The good news is that WuXi AppTec is once again on the move.

WuXi AppTec's TIDES business (related to new molecule classes) is mainly peptide and oligonucleotide CRDMO. According to the third quarterly report, WuXi AppTec's TIDES business increased by 38.1% year-on-year, which is more significant than that of other businesses. It is the GLP-1 target drug that is now exploding that has pressed the accelerator button.

The annual revenue will exceed 40 billion for the first time, and the TIDES business has become a strong growth point

At present, most pharmaceutical R&D service companies in the world focus on a certain stage of new drug research and development, such as preclinical CRO, clinical trial CRO, CDMO, etc. WuXi AppTec has innovatively built an industry-only "integrated, end-to-end" CRDMO R&D service platform, which can provide customers with one-stop new drug R&D and manufacturing services.

In terms of business segments, WuXi AppTec's business operation efficiency continued to improve, with revenue of RMB21.24 billion in the first three quarters, a strong year-on-year growth of 31% excluding specific commercial manufacturing projects, and an adjusted non-IFRS gross margin of 45.7%, an increase of 4.5 percentage points year-on-year.

WuXi AppTec segmented its chemistry business into two segments: Small Molecule Drug Discovery ("R") and Process Development and Manufacturing ("D" and "M"). On the "R" side, WuXi AppTec's small molecule drug discovery business can continue to attract traffic to its downstream business, and lay a solid foundation for the sustained and rapid growth of its CRDMO service revenue through the implementation of the "follow the customer" and "follow the molecule" strategy. According to the disclosure, WuXi AppTec has successfully synthesized and delivered more than 420,000 new compounds to customers in the past 12 months, a year-on-year increase of 11%, creating a continuous "traffic entrance" for downstream business units.

In terms of D&M, WuXi AppTec achieved revenue of RMB15.63 billion in the first three quarters, with a strong year-on-year growth of 48.2% in process R&D and manufacturing business, excluding specific commercialization projects. In addition, WuXi AppTec added a total of 926 new molecules in the first three quarters, bringing the total number of D&M molecules to 3,000 for the first time to 3,014 molecules, including 58 commercialization projects, 61 Phase III projects, 316 Phase II projects, and 2,579 preclinical and Phase I programs.

Looking forward to the fourth quarter and the full year, WuXi AppTec said in its performance presentation materials that it expects all of the company's revenue in the fourth quarter to come from non-COVID commercial projects, and the revenue of non-COVID commercial projects in a single quarter will exceed 10 billion yuan for the first time, and is expected to achieve a growth of 29%-34%. At the same time, the annual revenue will increase by 25%-26%, and the overall revenue will exceed 40 billion for the first time.

Based on the above financial data, it is not difficult to judge that WuXi AppTec's regular business has been able to maintain a stable growth curve that is rare in the industry with extraordinary tenacity and vitality after the revenue from new crown commercial orders is gradually digested. With the continuous introduction of the integrated CRDMO model, WuXi AppTec is able to establish close contact with customers in the early stage of drug development, and once new explosive targets such as "GLP-1" appear, WuXi AppTec can also take the lead in benefiting and usher in explosive growth.

In its 2022 annual report, WuXi AppTec disclosed for the first time the separation of the TIDES business, which revealed the company's firm confidence in this business. The results also lived up to expectations, with TIDES orders in hand increasing by 245% year-on-year as of the end of September 2023. And WuXi AppTec expects its TIDES business revenue to grow significantly in the fourth quarter, with a full-year growth rate of more than 60%.

In the first half of 2023 alone, WuXi AppTec has 11 GLP-1 products in its TIDES business, 10 of which are in the clinical stage (4 peptides, 6 small molecules) and 1 is in commercial manufacturing. In the future, with the expiration of domestic patents for GLP-1 products such as semaglutide and liraglutide, the R&D boom of peptide generic drugs will further boost the market demand for upstream peptide APIs.

Why did WuXi AppTec benefit again?

Since the birth of Novo Nordisk's semaglutide, GLP-1 has quickly become one of the hottest tracks in the field of biomedicine with its weight loss indications. JPMorgan Chase & Co. expects annual sales of GLP-1 receptor agonist-related drugs to exceed $100 billion by 2030, while the size of China's weight-loss drug market is expected to reach $14.9 billion. The industry generally believes that weight loss drugs have both medical and consumer attributes, which is expected to drive the continuous growth of market demand for GLP-1, thereby further driving the demand for upstream peptide APIs.

It should be pointed out that GLP-1 is a peptide drug with high barriers to large-scale production, and pharmaceutical companies usually choose to cooperate with CXO companies in the early stage of research and development. On the one hand, it is to save R&D funds, and on the other hand, the particularity of the peptide production process makes it impossible to use the R&D and production equipment of small molecules or biologics, so outsourcing has become the best choice.

In fact, even multinational pharmaceutical companies such as Novo Nordisk and Eli Lilly are far from keeping up with the growing demand for drugs, and drugs such as semaglutide and tirpatide are out of stock in China, the United States, Australia, Europe and other countries and regions.

The shortage of global production capacity for GLP-1 is a major bottleneck for the further development of the peptide drug market, and it is also a profit opportunity for CXOs. At present, the shortage of downstream demand for GLP-1 has caused CXOs to start to deploy relevant production capacity, but the production capacity cannot be built in one day. As early as 2018, WuXi AppTec began the layout of oligonucleotide and peptide drugs, and continued to promote the construction of related production capacity, and even built an oligonucleotide and peptide R&D team of more than 1,000 people. It is precisely because WuXi AppTec foresaw the demand earlier and made an advance layout that when the demand really explodes, only WuXi AppTec is naturally able to undertake it.

In the short term, the explosion of diet pills is the catalyst for this wave of market. Long-term logic should be more thoughtful, why WuXi AppTec again? Throughout WuXi AppTec's history, almost every major strategic decision it has made has been consistent with the direction of the industry. To be clear, from 3CL targets to GLP-1 targets, WuXi AppTec's accurate prediction of the industry is no accident. In fact, this is mainly due to the ability and scale of WuXi AppTec's "R" end, which enables it to reach the customer's cutting-edge needs and new molecules at a very early stage, and make a forward-looking layout in advance.

On September 27, WuXi AppTec announced that its subsidiary, WuXi STA Pharmaceuticals, will increase its peptide production capacity by 60%. After the completion of the expansion, WuXi STA will add a number of peptide solid-phase synthesis production lines, which are expected to be put into use in December 2023, when the volume of the peptide solid-phase synthesis reactor will increase from the original plan of 20,000 L to 32,000 L.

According to WuXi AppTec, this move will significantly increase its peptide production capacity and WuXi TIDES platform capabilities, consolidate and enhance WuXi AppTec's global market competitiveness, better meet the growing needs of global partners in peptide drug development and manufacturing, and bring more innovative therapies to patients.

Both the new crown commercialization order and the weight loss drug outlet, both verify the sustainability of WuXi AppTec's CRDMO business model-driven growth: benefiting from the continuous capacity and scale building, as well as its own rich and high-quality pipeline reserves, WuXi AppTec is expected to take on the leading position whenever new molecules in huge demand appear.