WuXi AppTec released an interim report and maintained its full-year guidance unchanged.
Overall, although the impact of the biosecurity bill exists, it is clear that the impact at this stage is much smaller than the pessimistic expectations of the market.
What is more noteworthy is that there is a more important trend hidden in the report, and overseas biomedicine has obviously picked up. As an industry leader, WuXi AppTec is expected to benefit significantly from the recovery of the industry and continue to maintain its leading position in the industry.
1. WuXi AppTec's second quarterly report showed that new orders exceeded expectations
In terms of WuXi AppTec's Q2 2024 results, revenue increased by 16% QoQ to RMB9.26 billion, in line with market consensus expectations and in line with the previous earnings forecasts released by Pharmaron and Gloria.
Notably, WuXi AppTec's sequential growth rate is still higher than Pharmaron's 4.8%-11.2% growth and Gloria's slight growth.
WuXi AppTec's adjusted non-IFRS attributable to the parent company increased by 28.5% sequentially to RMB2.46 billion, outperforming revenue growth, mainly due to better cost control.
Due to the characteristics of the CXO industry, the conversion of orders in hand into performance is more predictable, so this part is basically in line with expectations. On a year-on-year basis, the quarter-on-quarter growth in the second quarter has surpassed that of domestic peers, demonstrating the resilience of leading companies.
However, the brightest data for the quarter, and the one that exceeded market expectations, came from a 33.2% increase in the amount of new orders on hand (excluding the new crown business), which was RMB43.10 billion as of the end of June 2024.
This is a surprising figure, as even the most optimistic investors can hardly anticipate an increase of more than 10% in the value of new orders under the current biosecurity law.
According to the order funnel chart,
- R (Research Services) orders up 7%
- D (Development Services) order book up 18%
- 20% increase in the number of M (production services) orders
The volume growth of these three parts is less than 33% of the value growth, which means that the new orders are still dominated by "high-priced large orders".
"The order will be converted into results within 18 months," the company said. At the same time, some customers use grandfathering clauses to enter into long-term agreements, which do not meet our definition of orders in hand and are not counted in orders in hand. ”
For the full-year results, the company further stated that this year's performance guidance remains unchanged, and the 2025 guidance still needs to pay attention to the order growth in the second half of this year, which will be disclosed in the annual report.
It is worth mentioning that the business of TIDES, which has attracted the most attention in the market (mainly including peptide drugs for weight loss drugs), continued to maintain rapid growth in the second quarter.
As of the end of the second quarter, the business had a 147% year-on-year increase in orders on hand, and the number of molecules served reached 288, a year-on-year increase of 39%.
Regarding the future outlook of TIDES business, the company said on the conference call that TIDES will become an important growth engine for the company in the future, and it is expected to grow by more than 60% in 2024 and maintain this growth rate in 2025.
In terms of capacity planning, the company's production capacity was 32,000L in January this year, and said that it will continue to increase investment to further expand peptide production capacity to meet customer demand.
In addition, WuXi AppTec disclosed that customer revenue from the world's top 20 pharmaceutical companies reached 6.59 billion yuan, a year-on-year increase of 11.9% after excluding new crown commercialization projects. This growth demonstrates the company's business resilience as major customers reprioritize their R&D pipelines due to the impact of the Inflation Reduction Act (IRA).
At the same time, overseas markets, especially the European market, contributed considerable growth.
2. WuXi AppTec's performance confirms the recovery trend of the industry
It is worth noting that WuXi AppTec is not the only one that saw the unexpected increase in orders in the second quarter. Gloria Ying and Pharmaron, which previously disclosed their performance forecasts, also gave orders growth data that exceeded expectations.
In its earnings forecast, Pharmaron disclosed:
"In the first half of 2024, the amount of new orders signed increased by more than 15% year-on-year, of which laboratory services increased by more than 10%, CDMO increased by 20-30%, clinical research services increased by 10%, and macromolecule CDMO increased by more than 10%."
Kailaiying disclosed in the announcement:
"In the first half of 2024, the number of new orders signed increased by more than 20% year-on-year, and the second quarter increased significantly compared with the first quarter, of which the growth rate of orders from customers in the European and American markets exceeded the company's overall order growth level."
In particular, Kailaiying directly pointed out that the order volume of European and American customers exceeded the overall growth level of the company, which confirmed the recovery trend of the overseas pharmaceutical market.
According to Jefferies' latest pharmaceutical financing data, the second quarter still achieved a year-on-year increase of 35% year-on-year, although refinancing (FO) dragged down the overall sequential growth. What is more noteworthy is that in the first half of 2024, the financing amount of United States biotechnology companies increased by 72% year-on-year.
While interest rates in the United States remain high, financing in the biopharmaceutical market has gradually returned to pre-rate levels. Once the United States market achieves a rate cut in September, the financing of the biopharmaceutical market is expected to further increase.
The significant recovery in the biopharma financing market has also led to a rebound in order intake in the CXO industry. Not only did the orders of the above three Chinese companies exceed expectations, but the overseas giants also disclosed positive order signals brought by the recovery of the industry in their recent interim reports.
LONZA SAID IN ITS SEMI-ANNUAL REPORT THAT DUE TO THE IMPROVED FINANCING ENVIRONMENT IN THE U.S. AND EUROPEAN BIOPHARMACEUTICAL MARKETS, THE COMPANY'S BIOLOGICS CDMO BUSINESS PERFORMED MORE THAN EXPECTED (UP 2%), AND THE COMPANY'S CORE EBDA EXCEEDED EXPECTATIONS (UP 6%).
In a subsequent conference call, Lonza was even more optimistic that there were more early inquiries in the second quarter, which were due to the recovery of the industry, rather than the overflow of orders from the biosafety Act.
"In the early stages, the demand for RFPs (Requests for Proposal) has increased significantly. We believe this is due more to the improved funding position in the biotechnology sector than to the impact of the Biosafety Act. Compared to the same period last year, the funding position of biotech companies has improved significantly, with funding increasing by almost 30% in the first half of the year. As a result, the market environment has changed significantly. "
Lonza further said that there is a lag period of 6-9 months for these funds to be converted into corporate orders. At the same time, CDMOs will not see price cuts this year.
Another industry giant, IQVIA, also hit an all-time high in orders on hand in Q2, while all forward-looking indicators showed an upward trend.
As of the end of the second quarter of 2024, the company had orders on hand of $30.6 billion (up 7.7% year-on-year, Fx adj.; 8.1 percent, unadjusted for exchange rates).
IQVIA and Lonza share the same view on the improvement of the biotech financing environment.
IQVIA said:
Biotech financing in the first half of 2024 is about $70 billion, almost equal to the entire 2023 combined, which is undoubtedly a positive sign for the company's order growth.
However, IQVIA also points to another trend in the pharmaceutical industry: Big Pharma is realigning its project portfolios, cutting costs, and focusing on the most attractive projects in response to the impact of the Inflation Reduction Act (IRA).
This may lead to more order opportunities for large CXOs, and outsourcing is expected to help big pharma reduce costs, but at the same time need to be aware of possible price competition.
IQVIA said that it will use AI automation and other methods to further reduce costs, improve efficiency and gain a competitive advantage.
Thermo Fisher also said in a second-quarter conference call,
In the first half of this year, biotech customers have changed their pessimistic attitude from last year and have significantly increased their confidence in funds, which will translate into early order indicators for Thermo Fisher Fisher, which is expected to continue to improve in the second half of the year. Large customers are really concerned about supply chain resilience and want to be able to deliver products stably.
Danaher expressed the view that demand will increase from a capacity perspective:
Capacity in the market, especially for commercial production and Phase 3 clinical trials, needs to be increased, and in the long term, large pharma or CDMOs are not enough, and we are optimistic about the growth of equipment orders.
3. The impact of the biosecurity law on different business sectors is significantly different
Similar to what Thermo Fisher expressed in the call, WuXi AppTec's earnings call also expressed the concern of large customers about supply chain resilience.
WuXi AppTec said: In the context of the biosafety bill, the company's chemical business orders maintained a growth trend in the second quarter, and TIDES and small molecule DM continued to grow well, mainly due to the continuous growth of customers' demand for high-quality and compliant production capacity, which is also the company's definitive competitive advantage in the face of uncertainty.
At present, the testing and biology sectors are mainly affected by prices, and only a small part of the early stage R&D is affected, and the proportion of orders from Europe and the United States is similar to that of the past, with no special changes.
The most severe impact was on the ATU division (which is mainly involved in cell and gene therapy), and it was also the part of the company's presentation materials that explained that the impact of the bill on revenue and profits was lower than expected. Due to its special product requirements, customers have the highest level of concern, and new products are the most restricted, and the company will strive to complete the orders in hand.
It is worth mentioning that at the end of the call, some analysts optimistically asked whether the company would raise its guidance for this year, which also reflected some changes in the market's previously extremely pessimistic expectations.
The company's answer to this is that it is confident that it will meet its full-year guidance this year, with a delivery coverage rate of 85% for the year, which is basically the same as in previous years. Next year's guidance will be disclosed in the annual report based on orders for the second half of the year.
summary
Judging from the performance of the world's leading CXO companies, the industry has shown some positive changes. Biotech companies are expected to gradually increase capital expenditures over the next 18 months after the financing environment improves in the first half of 2024, which will further boost the performance of other companies in the value chain.
This is also a change that biopharma investors need to continue to pay attention to in 2024.
This article is from Wall Street News, welcome to download the APP to see more