On October 28th, WuXi AppTec released its third-quarter report for 2024. Following the trend from the second quarter, WuXi AppTec continued to maintain a growth of over 10% quarter-on-quarter in the third quarter, with quarterly revenue once again exceeding one billion.
Apart from the solid performance, what is more noteworthy is that as the third quarter sought legislation under the proposed &#34;Biosecurity Act,&#34; WuXi AppTec saw an accelerated year-on-year growth in its backlog orders to 35.2% by the end of the third quarter, with new signed orders in the first three quarters growing by over 25%.
As short-term uncertainties in the external environment have gradually become more consensual, the market's focus will shift back to industry and company fundamentals.
<h2>Stable Billion-dollar Quarterly Revenue, Strong Growth in Backlog Orders</h2>
In the third quarter of 2024, WuXi AppTec achieved a revenue of 10.46 billion RMB, a 13% increase quarter-on-quarter, with a 14.6% year-on-year growth excluding the commercialization projects related to COVID-19; the adjusted Non-IFRS net profit attributable to shareholders was 2.97 billion RMB, a 20.9% increase quarter-on-quarter.
At the same time, WuXi AppTec disclosed the backlog orders for the first time in its third-quarter report. As of 2024 Q3, WuXi AppTec's backlog orders reached 43.82 billion RMB, a significant year-on-year increase of 35.2%, reaching a historical high. Considering that the conversion time for most backlog orders is generally between 12 to 18 months, it can be seen that despite the short-term uncertainties, WuXi AppTec's mid-term visibility is gradually becoming clearer.
In the first three quarters, the revenue from the Small Molecule D&amp;M business was 12.47 billion RMB, with a 7% year-on-year growth excluding specific commercial production projects.
The TIDES business (mainly oligonucleotides and peptides) performed even more impressively, with TIDES business revenue reaching 3.55 billion RMB in the first three quarters, a strong year-on-year growth of 71.0%; it is expected that the full-year TIDES revenue growth will exceed 60%. By the end of September 2024, the backlog orders for TIDES grew by 196% year-on-year. The number of TIDES D&amp;M service customers increased by 20% year-on-year, and the number of serviced molecules increased by 22% year-on-year.
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By the end of 2024 Q3, WuXi AppTec's D&amp;M molecule pipeline totaled 3,356, including 68 commercial projects, 79 Phase III clinical projects, 357 Phase II clinical projects, and 2,852 pre-clinical and Phase I projects. Among them, a total of 20 new commercial and Phase III clinical projects were added.
Additionally, WuXi AppTec announced its full-year performance guidance for 2024, expecting to achieve revenue of 38.3-40.5 billion RMB, free cash flow of 6-7 billion RMB, and maintaining the adjusted non-IFRS net profit margin at a level similar to the previous year.
The impressive growth rate of backlog orders and the better recovery trend in the D&amp;M segment in WuXi AppTec's third-quarter report represent the current structural changes in the pharmaceutical industry.
<h2>Global Pharmaceutical Industry Facing Structural Changes</h2>
The global pharmaceutical industry is undergoing profound structural changes at its core. On one hand, the implementation of the &#34;Inflation Reduction Act&#34; (IRA) will lead to accelerated price reductions for several blockbuster drugs;
On the other hand, multinational pharmaceutical companies are about to face a concentrated period of patent cliffs, with significant risks of declining commercial revenues.
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Under the IRA Act framework, small molecule drugs and biologics will initiate price negotiations 9 and 13 years after market launch, respectively, prioritizing drugs with high Medicare D expenditures. This policy significantly shortens the peak return period for blockbuster innovative drugs of multinational pharmaceutical companies (MNCs), prompting them to change their previous business strategies, shift towards developing differentiated niche products, and accelerate the pace of mergers and acquisitions for products nearing commercialization.
Against this backdrop, it is particularly important to strategically position innovative drugs with clear expectations of market launch. Recent research by Ernst &amp; Young (EY) shows that the top 25 pharmaceutical companies globally currently hold approximately $1.6 trillion in potential merger and acquisition capital. As pointed out by Arda Ural, Managing Director of Healthcare Investments at EY in the United States, companies actively engaged in asset portfolio management have a 67% higher investor return rate than conservatives.
Large pharmaceutical companies have been reducing early-stage research and development investments, redirecting more funds towards the commercialization end. Under the pressure of the IRA and patent cliffs, finding and positioning commercial projects with blockbuster potential is more strategically significant than ever before.
This new industry landscape will bring about structural recovery for CXO industries. For example, biotech financing data has recently begun to show overall growth again. Additionally, according to forecasts from foreign investment banks, industry mergers and acquisitions will accelerate again after the U.S. election.
This industry trend can be seen in the financial reports of WuXi AppTec, Lonza, and BoTeng shares, with rapid prosperity in the D&amp;M end, especially in commercialization.
During a conference call last week, BoTeng shares mentioned that for overseas customers, they value the entire service and delivery quality more than price.
<h2>Breaking the &#34;impossible triangle&#34; of cost, quality, and efficiency, how did WuXi AppTec achieve it</h2>
As proposed by BoTeng, at this stage, large pharmaceutical companies should focus on the expected industry recovery, with a central focus on quality and stability. This year, there have been incidents where the development of blockbuster products was hindered due to quality audits of third-party manufacturers. Two examples have been widely discussed in the market.
One is the blockbuster ADC drug Patritumab Deruxtecan by Merck and Daiichi Sankyo, used for the treatment of non-small cell lung cancer (NSCLC), which received priority approval at the end of last year but was rejected by the FDA in June.
According to industry insiders, the third-party manufacturer of Patritumab Deruxtecan is a large Swiss CDMO company, and the key reason for the rejection was manufacturing equipment issues.
Another example is the BCMAxCD3 TCE bispecific antibody Linvoseltamab by Regeneron. Previously, the FDA granted Linvoseltamab additional fast track designation for the treatment of multiple myeloma. It was disclosed that the FDA's rejection this time was also attributed to third-party manufacturing issues
Regardless of whether the subsequent rectification results can be smoothly approved, it is obvious that the development plans of the two products have been severely affected, unnecessarily prolonging the product's commercial return cycle.
WuXi AppTec has always been known for its industry-leading quality standards and manufacturing management. According to the company's disclosure at the investor open day, its WuXi Chemistry sector alone underwent 11 global regulatory audits and 415 customer audits from 2023H2 to 2024H1. Since 2009, it has successfully undergone over 130 regulatory inspections worldwide. In addition, it has been exempted from pre-listing inspections by the FDA and EMA over 20 times.
This means that almost every day, various factories under WuXi AppTec undergo quality and safety reviews, achieving 100% compliance with audit requirements and no major findings. Globally, this represents the highest level of safety assurance.
The certification process for big pharma is strict and cumbersome, making it difficult and lengthy for suppliers to join the supply list. However, once in, major clients rarely make drastic adjustments to production schedules—they value the quality of the entire service itself, ensuring rapid and reliable completion of research and delivery.
In the global clinical stage of drugs, 1 out of every 6 projects is supported by WuXi Chemistry of WuXi AppTec. Since 2022, the number of molecules supported by WuXi Chemistry in Phase 3 clinical trials and commercialization has increased by 32%, with corresponding revenue more than doubling. This reflects an increasing quality of molecules served, as well as a closer and deeper collaboration.
In the first half of 2024, a total of 14 advanced small molecule drugs were approved by the FDA, with 3 supported by WuXi Chemistry, accounting for 21%. In the second half of this year, it is expected that several new drugs supported by the company will also have the opportunity to be approved.
WuXi AppTec globally assists clients in commercializing blockbuster drugs. Among the top 10 small molecule drugs in global sales in 2023, 4 were produced with support from WuXi Chemistry under WuXi AppTec. Furthermore, in related businesses supporting earlier stages of research and development, WuXi AppTec has also achieved significant results, successfully synthesizing and delivering over 450,000 synthetic compounds in the past 12 months, providing strong support for global pharmaceutical research and development.
During the investor open day event held this year, WuXi AppTec stated that with scientific breakthroughs, drug structures are becoming increasingly complex and difficult to synthesize. The growth in compound deliveries is not only in quantity but also in the increasing difficulty of meeting quality requirements
Against this backdrop, relying on advanced technological capabilities, WuXi AppTec's position in the global pharmaceutical supply chain will be further strengthened.
<h2>TIDES becoming a future growth highlight, how does WuXi AppTec seize every blockbuster product in the future?</h2>
With technological breakthroughs, industry demands are becoming increasingly complex, leading to a continuous increase in delivery difficulty. Therefore, WuXi AppTec's TIDES (peptides and oligonucleotides) business has become another focus of attention. In the first three quarters, TIDES achieved over 70% growth once again attracting market attention.
For example, in the past 12 months, the WuXi Chemistry business sector has made remarkable achievements in the popular GLP-1 field. The number of GLP-1 related clinical projects has increased from the original 10 to 18, far exceeding the industry's 55% growth rate. Currently, there are 47 global peptide GLP-1 clinical projects, with WuXi Chemistry participating in 8 of them; there are 32 small molecule GLP-1 drugs in clinical trials, with WuXi Chemistry also involved in 10 of them. These data reflect WuXi AppTec's absolute leading position in this field.
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In the past year, WuXi AppTec has shown strong growth and huge potential in the field of peptide and oligonucleotide production. Another clear example is that the company's TIDES solid-phase synthesis reactor capacity will reach 41,000 liters by the end of this year, doubling its capacity in less than 12 months. According to the Investor Day presentation materials, the plan is to achieve a production scale of over 100,000 liters per year after 2025.
At the same time, in order to meet customer demands for globalized services, WuXi AppTec has also established an overseas TIDES (peptides and oligonucleotides) supply chain in Singapore to respond quickly to customer needs.
In the coming year, WuXi AppTec's Capex in D&amp;M will continue to grow rapidly. Recently, the company successfully issued a $500 million 1-year zero-coupon convertible bond overseas, with the initial conversion price reaching the level at the end of last year when WuXi AppTec had not yet been affected by the proposed Biosecurity Law. This also reflects overseas investors' recognition of the company.
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Currently, the global pharmaceutical giants are still intensifying their competition for peptide production capacity, with additional demand for diversified supply chains.
For example, in the GLP-1 receptor agonist market, Lilly's dulaglutide competes directly with Novo Nordisk's semaglutide. Meanwhile, Roche is also developing similar anti-obesity drugs. In this rapidly growing treatment field, production capacity bottlenecks and clinical effectiveness are equally decisive factors in market competition
In the first half of the year, Novo Nordisk announced a $10.6 billion acquisition of the global leading Contract Development and Manufacturing Organization (CDMO) Catalent. This week, Roche and Eli Lilly raised objections to this acquisition deal. The opposition from both companies is mainly based on concerns that the merger may affect Eli Lilly's existing order fulfillment and also worries that this integration may impact the capacity and supply chain distribution of the GLP-1 weight loss drug market, creating an unfair competitive environment.
Meanwhile, Eli Lilly announced this month a $1.5 billion investment in expanding its weight loss drug production scale in Suzhou, China, to meet the demands of the Chinese market and export to the European market.
Clearly, for MNCs, diversified production capacity and supply chain demands are becoming the norm. On the other hand, new drug structures are becoming increasingly complex and difficult to synthesize, which is forcing more specialized parties to join the supply chain. WuXi AppTec has simultaneously laid out peptide production capacity domestically and overseas, embedded in the global supply chain, and is expected to continue benefiting in this context.
Regarding WuXi AppTec's TIDES business, the growth potential goes far beyond GLP-1 weight loss drugs. The TIDES platform has been under construction since 2018 and has experienced rapid development. In 2020, the platform's revenue reached 300 million RMB, with an expected annual growth rate exceeding 60% by 2024, and is projected to maintain a growth rate of over 60% next year. WuXi AppTec has created a unique comprehensive research and production advantage by combining the capabilities of small molecules, peptides, and oligonucleotides to address the most complex molecular structures in the industry.
The evolution of WuXi AppTec's products from small molecules to peptides and oligonucleotides has led to extremely complex molecular structures. The difficulty in research, design, and production is definitely not a linear change of 1+1=2. Involving the synthesis and production of up to 40-50 amino acids is like playing with high-dimensional Lego blocks, where each additional step introduces a higher level of complexity, requiring corresponding high-level precision operations.
The success of WuXi AppTec's TIDES business lies in its deep know-how and technological accumulation. Behind this success is a keen insight into industry trends, strategic research and development investments in multiple key areas, and corresponding capacity layout. These actions are built on over 20 years of collaborative experience. The company's unique CRDMO model, through the integration of research (R), development (D), and manufacturing (M) capabilities, can quickly initiate and efficiently execute projects, ensuring a competitive edge in the market. The company's understanding of drug innovation trends in the research and development end leads to a huge volume of subsequent orders, not only encompassing biology and full testing but also bringing a large flow of customers to the development and manufacturing stages.
By 2023, WuXi Chemistry under WuXi AppTec has successfully delivered over 900 batches of commercial products worldwide, demonstrating outstanding production capacity and strict quality control. In 2023, the total amount of peptide products delivered by WuXi AppTec reached 17 tons, with an expected increase to over 35 tons in the coming years
<h2>Conclusion</h2>
The vulnerability of the global pharmaceutical industry supply chain has been exposed in recent years, prompting industry participants and regulators to pay attention to diversification strategies for the supply chain. These strategies are not new, as they have existed for a long time before the epidemic, but their priority at the execution level has significantly increased after experiencing public health events.
In addition to the &#34;Biosecurity Act&#34; and similar legislation, the global pharmaceutical industry landscape is undergoing profound changes. However, scientific issues always need to return to science. Regardless of how the external environment changes, the main participants in the innovative drug industry always focus on creating value for themselves and realizing the external capabilities that create value. The delivery capabilities of CXOs are always seen as a key value factor, determining the core decisions of pharmaceutical customers. Just as a leading Biotech company said, globally, no company can immediately assemble a team of over 200 scientists for a project. This is where the advantage of WuXi AppTec's full industry chain service capabilities lies.
Maintaining excellent quality and delivery commitments in their respective fields is the top priority for CXO companies today, and it is also the dominant advantage of WuXi AppTec

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It's time for pharmaceutical investors to refocus on CXO fundamentals

- WuXi AppTec reported a revenue of 10.46 billion RMB for Q3 2024, marking a 13% quarter-on-quarter increase, with a significant order backlog growth of 35.2% year-on-year.  
- The global pharmaceutical industry is undergoing structural changes due to the Inflation Reduction Act and impending patent cliffs, prompting companies to shift focus towards innovative niche products.  
- WuXi AppTec's TIDES business, particularly in peptides and oligonucleotides, is expected to see over 60% growth, reflecting its strategic positioning in a complex and evolving market.

Breaking the "impossible triangle": Behind the rapid growth of orders at WuXi AppTec