WuXi AppTec's revenue in 2023 will exceed 40 billion yuan, and the CXO industry has these signs of recovery

On the evening of March 18, WuXi AppTec released its 2023 annual results, stating that the company achieved operating income of 40.341 billion yuan, a year-on-year increase of 2.51%, net profit attributable to the parent company of 9.607 billion yuan, a year-on-year increase of 9%, and non-net profit of 9.748 billion yuan, a year-on-year increase of 16.81%.

This is the first time that WuXi AppTec's annual revenue has exceeded the RMB 40 billion mark. However, after the results were released, the profit growth rate was not as high as the previous peak, which led to some pessimistic views on WuXi AppTec in the market. However, there is a consensus that the current industry has moved away from the COVID dividend, and WuXi AppTec's annual report actually shows the company's strong growth momentum in the post-COVID era.

For example, after excluding the new crown commercialization project, WuXi AppTec's revenue actually increased by more than 20% year-on-year. In addition, the growth rate of the company's core business chemical business segment has reached more than 30% after excluding the new crown dividend, and the growth rate of process research and development and production is above 50%. At the same time, in the CDMO business, oligonucleotides and peptides continued to grow, bringing incremental growth.

In terms of industry, the overseas CXO industry has a recovery trend. However, the industry generally believes that the recovery of the domestic CXO industry will be later than overseas. However, in any case, the global biomedical financing environment is developing towards a warming situation, and it is only a matter of time before the industry comes out of the cold winter.

In the post-epidemic era, the performance growth is stable

It is undeniable that the sudden public health event has raised the demand for drug development to a record high in the short term, thus allowing the CXO industry to experience a round of super-rapid development in the past. WuXi AppTec is also one of the companies that has received dividends from a specific historical period. However, it is clear that the current CXO industry has entered a new phase.

In 2023, WuXi AppTec's revenue increased by 25.6% year-on-year after excluding COVID-19 commercialization projects. At the same time, while the inertia of revenue growth was extended, the fourth quarter was the highest quarter for the whole year, with a revenue of 10.8 billion yuan in a single quarter, which also showed the changes in the industrial environment.

If we take a closer look at WuXi AppTec's major business segments, there are many bright spots in the company's operation. Among them, WuXi AppTec's core business chemistry business segment achieved revenue of RMB29.17 billion in 2023, a year-on-year increase of 1.1%, and a record quarterly revenue scale. Excluding specific commercial production projects, the revenue of the Chemicals segment grew strongly by 36.1% year-on-year.

In terms of business logic, the drug discovery ("R", Research) business is equivalent to a "traffic entrance" for continuous downstream drainage. In the past 12 months, WuXi AppTec has successfully synthesized and delivered more than 420,000 new compounds to customers, a year-on-year increase of 6%, which is likely to be the cornerstone of the company's downstream business unit to generate incremental growth and lay the foundation for the continued growth of the company's CRDMO business (CRDMO business).

In the process development and manufacturing ("D" and "M", Development and Manufacturing) business segment, its business revenue reached RMB21.62 billion in 2023, a slight decrease of 0.1% year-on-year. In the past, this segment was the main beneficiary of Corona commercialization projects.

However, once specific commercial production projects are excluded, the revenue of process research and development and production (D&M) business increased strongly by 55.1% year-on-year, and the revenue scale still came to nearly 6 billion yuan, indicating a good growth trend. At the same time, the number of commercialized molecules in the process R&D and production segment reached a new high.

Specifically, in 2023, WuXi AppTec added a total of 1,255 new molecules. As of the end of 2023, the total number of D&M molecular pipelines reached 3,201, including 61 commercialization projects, 66 clinical phase III projects, 326 clinical phase II projects, and 2,748 preclinical and clinical phase I projects. Among them, a total of 20 new commercial and clinical phase III projects were added.

In addition, as a driving force for the resilience of the CDMO business (referring to the contract development and manufacturing business), the TIDES business (mainly oligonucleotides and peptides) continued to grow in volume, and also reached a record high in the fourth quarter.

In 2023, WuXi AppTec's TIDES business revenue reached RMB3.41 billion, a strong year-on-year growth of 64.4%. As of the end of 2023, TIDES has seen a significant 226% year-over-year increase in orders on hand. During the same period, the number of TIDES D&M customers reached 140, an increase of 36% year-on-year, and the number of service molecules reached 267, an increase of 41% year-on-year.

It is worth mentioning that in 2023, WuXi AppTec completed the capacity expansion project of Changzhou and Taixing bases, and the new capacity has been put into use in January 2024, increasing the volume of the peptide solid-phase synthesis reactor to 32,000 liters. This also helps the sector to continue to grow.

In addition, WuXi AppTec's annual report also shows that in 2023, the revenue from the world's top 20 pharmaceutical companies continued to maintain rapid growth to RMB 16.11 billion, a year-on-year increase of 44% after excluding new crown commercialization projects. During the same period, the company added more than 1,200 new customers, and served more than 6,000 active customers in the past 12 months. As of the end of 2023, excluding the new crown commercialization project, the company's orders on hand increased by 18% year-on-year.

Overall, in the post-COVID era, WuXi AppTec's profit growth index is higher than the revenue growth index, which also shows the company's good operational control. In the final analysis, as an industry leader, the company's ability and scale advantages still exist. At the same time, the idea of continuously optimizing the business model to improve efficiency and focus on operation is also helping enterprises to overcome the precipice of the epidemic as soon as possible.

In terms of industrial value, the value of the pharmaceutical outsourcing (CXO) industry is undeniable. Up to now, the global pharmaceutical industry has formed a system of division of labor and collaboration, and this trend is irreversible. Among them, the main tasks of CXO include three parts, namely, reducing R&D costs, shortening R&D cycles, and sharing risks of pharmaceutical companies, all of which are conducive to drug development.

According to Frost & Sullivan, the total time of the phase I-III clinical trial of CRO service intervention is 244 weeks, which can save nearly 34% of the time compared with the 368 weeks of traditional pharmaceutical companies without CRO services, and the advantages of introducing CRO services are obvious.

At the same time, Frost & Sullivan predicts that the global CRO market size is expected to be about $96 billion in 2024, of which the segmented clinical CRO market accounts for the largest proportion, accounting for about 64% in 2022, and the market size is about $51.4 billion, which is expected to grow to $62.2 billion in 2024. In addition, the growth rate of China's CRO market is higher than that of the world.

There are already some signs of recovery in the industry

In terms of the industrial environment, as of now, the industry has also shown some signs of demand recovery, including the expansion and acceleration of new fields such as peptides.

According to Everbright Securities' January 2024 research report, the financing amount of overseas biotech companies continued to grow quarter-on-quarter from the second quarter to the third quarter of 2023, and the order situation in the overseas preclinical CRO field is improving. Among the many research reports, the improvement of financing and the recovery of the CXO industry are considered to be the factors with a high degree of correlation. The fact that the financing amount of overseas biotech companies continues to grow positively quarter-on-quarter is also considered a positive signal for the global CXO industry.

In addition, from the perspective of performance guidance, CMBI said that in its statistics, the 2024 performance guidance given by overseas CXO companies remains cautious overall, especially on the revenue side, which mainly reflects that the first half of 2024 may continue the weaker market demand situation in the second half of 2023, but on the profit side, almost all companies have better guidance than in 2023.

At the same time, the overseas CXO industry will gradually reach a consensus on demand recovery in the second half of 2024. For the first time, the management of several overseas companies has made it clear that the second half of 2024 will see a recovery in industry demand and company performance.

Among them, the management of life sciences upstream companies and preclinical CRO companies gave the strongest recovery signals. Although such a signal is based on the low base performance of companies in the industry in 2023. On the other hand, it also reflects the inevitability of improved financing expectations and a recovery in early-stage R&D demand as the United States gradually enters a cycle of interest rate cuts.

However, the business structure and operating advantages and disadvantages of different companies are different, so their predictions may not be universal. Nevertheless, CMBI believes that it will take a certain period of time from the improvement of financing to the rebound of CXO performance, and in the second half of 2024, the global CXO industry may usher in an upward inflection point in the demand cycle.

In addition, CMBI believes that according to the performance differentiation of the CXO industry in 2023, the performance of clinical CXO is better than that of preclinical CXO, and the performance of preclinical CXO is better than that of life science upstream, that is, the performance of late-stage CXO is better than that of early-stage CXO.

In the domestic biomedical field, some changes are also emerging. From the perspective of investment and financing, from the first quarter to the third quarter of 2023, domestic investment in the biomedical field as a whole remains cautious. However, the number of government guidance funds and state-owned background funds among investment institutions has increased significantly, from more than 60 in the first half of 2023 to more than 70 in the third quarter of 2023.

In terms of policy, the domestic policy in the field of biomedicine is being adjusted in a direction that is more conducive to the development of innovative drugs. On the one hand, whether it is the medical insurance policy that affects the forward payment of innovative drugs, or the review and approval policy that affects the success rate of listing and the degree of "involution", they are becoming more and more mature, and the development of innovative drugs is more encouraged, which is conducive to re-stabilizing the valuation system of domestic innovative drugs, guiding investment and financing, and activating the industry. On the other hand, domestic innovative drugs have also found a new path at this stage. In other words, it has evolved from a large number of lisence-in to liscence-out and strive for a global market.

Recently, this trend is reflected in the drug dynamics in both the ADC and PD-1 fields. With the continuous strengthening of the thinking and ability of domestic innovative drugs to go overseas, the industrial value-added space of domestic innovative drugs is also improving. This also means that an inflection point in the field of domestic innovative drugs is taking shape, and the CXO industry may be brewing the next spring.

In terms of judging the development trend of the domestic industry, CMBI said that for China's CXO industry, the recovery trend of China's healthcare financing in 2023 is slightly weaker than that of the world, but it will improve in the fourth quarter of 2023. At present, there is uncertainty about whether this means that China's pharmaceutical industry is on the recovery track.

The above-mentioned brokerage expects that the timing of this round of performance deceleration of Chinese CXO companies will lag behind overseas counterparts by about two to four quarters. As a result, the earliest time for major CXO companies in China to enter the performance acceleration channel is in the second half of 2024.

In addition, the valuation premium of Chinese CXOs over pharmaceutical companies has been higher than that of overseas companies for most of the time since 2017. However, this reversed after August 2022 and has since widened the gap further. At present, the valuation premium of overseas CXOs relative to overseas pharmaceutical companies is now significantly higher than that of Chinese CXOs relative to Chinese pharmaceutical companies.