How does the ceiling of the CXO industry push up?

On August 12, WuXi AppTec announced the 2021 semi-annual report.
The first half of the year achieved strong growth.
Operating income was 10.
537 billion yuan, a year-on-year increase of 45.
7% ; net profit attributable to the parent was 2.
675 billion yuan, a year-on-year increase of 55.
8%; operating cash flow 2.
143 billion yuan, a year-on-year increase of 49.
3%
.

As the leader of China's pharmaceutical CXO (R&D and production outsourcing services), WuXi AppTec's outstanding performance in the first half of 2021 will undoubtedly add fuel to the already fierce CXO industry

Operating income was 10.

Source: Company announcement, Zhongkang Industrial Capital Research Center

Looking back at 2018Q1~2021Q2.
WuXi AppTec has maintained a quarterly year-on-year growth rate of around 30% for 14 consecutive quarters .
Even in 2020Q1, when the new crown epidemic is severe, it still maintained a double-digit level (15.
1%)
.

Not only is the year-on-year growth gratifying, the company continues to maintain quarter-on-quarter growth, and only in 2020Q1 will it decline (-11.

For 14 consecutive quarters, quarterly year-on-year growth has remained at a high level of around 30%

Chart 2.
WuXi AppTec's quarter-on-quarter growth and year-on-year growth from 2018Q1 to 2021Q2 (click to enlarge)

Source: Company announcement, Zhongkang Industrial Capital Research Center

Main business and income

Main business and income

Currently, most pharmaceutical R & D services industry (CXO) is a company focused on the stage of drug development, such as drug discovery CRO, preclinical CRO, Clinical CRO, CDMO, CMO and so on
.

WuXi AppTec has one of the few "integrated, end-to-end" R&D service platforms that can provide one-stop new drug R&D and production services for global pharmaceutical, biotechnology and medical device companies

Unique integrated CRDMO (contract research, development and production) business model

Figure 3.
Business scope of major companies in China's pharmaceutical CXO industry (click to enlarge)

Source: Corporate Announcement, Zhongkang Industrial Capital Research Center

WuXi AppTec’s main business can be divided into China laboratory services, U.
S.
laboratory services, contract manufacturing research and development (CDMO) services, clinical research and other CRO services.
The first two are basically drug discovery CROs and preclinical CROs.
, Named because its execution scene is mainly a laboratory
.

The company's business covers the entire process of innovative drugs from concept generation to commercial production.

Figure 4.
WuXi AppTec's revenue by business segment in 2021H1

Source: Company announcement, Zhongkang Industrial Capital Research Center

CDMO

CDMO

The company's CDMO service revenue was 3.
599 billion yuan in the first half of 2021, a year-on-year increase of 66.
5%
.

Relying on the advantages of the integrated service platform, the model of "follow and win the molecules" is adopted to continuously promote the expansion of the product pipeline

The "follow and win molecules" model continues to promote the expansion of the product pipeline

The total number of molecules in the product pipeline of the company's CDMO business reached 1,413, with 341 new molecules added, of which 20 molecules were obtained through the "win strategy"
.

As of 2021Q2, there are 4278 small molecule innovative drugs in the clinical stage worldwide, and WuXi AppTec's service product pipeline includes 602 clinical stage small molecule innovative drugs, accounting for 14.

WuXi AppTec's service product pipeline includes 602 clinical-stage small molecule innovative drugs, accounting for 14.

Source: Company announcement, Zhongkang Industrial Capital Research Center (IDSU, International Drug Development Service Department; CSU, Chemical Service Department)

Laboratory services in China: market demand continues to grow rapidly

Laboratory services in China: market demand continues to grow rapidly

The company's laboratory services in China had revenue of 5.
487 billion yuan in the first half of 2021, a year-on-year increase of 45.
2%
.

On the basis of strengthening customer penetration and expansion, business lines such as small molecule compound discovery services, drug analysis and testing services, and preclinical integrated R&D services for domestic customers have all achieved strong growth

In terms of small molecule compound discovery services, the company helps global customers develop preclinical candidate compounds and apply for patents; by integrating DNA-encoded compound libraries (DEL), protein production, and protein structure-based drug discovery platforms, the company builds an integrated target to hit compound ( Hit) Discover the platform
.
In the first half of 2021, the integrated discovery platform has cumulatively served more than 2,200 global customers, and has become an important "flow portal" for downstream business departments (clinical research, commercial production)
.

Integrated target to hit compound (Hit) discovery platform

In terms of drug analysis and testing services, the company provides a series of related businesses in pharmacokinetic and toxicology testing, biological analysis services, analytical chemistry and testing services
.
More than that, the company has created a WIND (WuXi IND) platform that provides integrated services for new drug R&D and global notification , covering API synthesis, formulation development, drug efficacy, pharmacokinetics, safety evaluation, and application data writing and submission, including through The eCTD (Electronic General Technical Document for Medicines) method is for domestic and foreign customers to declare IND to the FDA
.
In the first half of 2021, the WIND platform signed 81 service projects, and the average project income reached 1.
1 to 1.
5 million US dollars
.
Revenue from toxicology services increased by 85% year-on-year, making the company a leader in China's drug safety review industry
.

WIND (WuXi IND) platform that provides integrated services for new drug development and global declaration

The company provides domestic customers with integrated pre-clinical R&D services, obtains milestone share for future external authorization of products and post-market sales revenue share , and shares the successful benefits of new drugs through win-win results with customers
.
As of June 30, 2021, the company has assisted customers in completing IND applications for 126 projects, and obtained clinical trial approval (CTA) for 99 projects.
Currently, there are 68, 12 and 2 clinical trials in Phase I~III.
a
.
78% of the molecules entrusted for research and development rank among the top three of the same kind of molecules under research in China according to the clinical development speed, demonstrating the strong research and development strength and competitive advantage of WuXi AppTec
.

Provide pre-clinical integrated R&D services, obtain milestone share for future external authorization of products and share sales revenue after product launch

Figure 6.
Number of innovative drug projects covered by integrated pre-clinical R&D services and R&D stage

Source: Company announcement, Zhongkang Industrial Capital Research Center

Clinical research and other CRO services: The epidemic slows down and promotes growth

Clinical research and other CRO services: The epidemic slows down and promotes growth

In the first half of 2021, the company's revenue from clinical research and other CRO services was 783 million, a year-on-year increase of 56.
5%
.
In 2020, the company's clinical research execution and new order signing in China and the United States will be severely affected by the new crown epidemic
.
In the first half of 2021, the epidemic in most parts of China has basically subsided.
On the one hand, the original clinical research has resumed, and on the other hand, the rising popularity of domestic innovative drug research and development has brought new demand for clinical research services
.

In the first half of the year, the clinical development service team provided services for more than 170 projects in China and the United States, completed 3 drug registration trials, and supported 5 ADC drugs to reach development milestones
.
The Chengdu base began to provide clinical phase I trial services, and revenue increased by 162% year-on-year
.
In the first half of the year, the field management service (SMO) business grew rapidly.
The team grew by 43% year-on-year to about 4,000 people, distributed in about 960 hospitals in 147 cities across the country
.
The SMO business maintains the No.
1 market share in China and is expected to increase to 30% by the end of 2021
.

SMO business maintains No.
1 market share in China

Laboratory services in the United States: the impact of the epidemic has not been lifted

Laboratory services in the United States: the impact of the epidemic has not been lifted

Among the main business sectors, only the US laboratory service revenue decreased by 15.
7% year-on-year to 659 million yuan, which was mainly affected by the new crown epidemic
.
Laboratory services in the United States mainly include cell and gene therapy (CGT) testing, development and production integration services (CTDMO), and medical device testing services
.
The Philadelphia base in the United States provides services for 38 CGT projects, including 22 clinical phase I trials and 16 clinical phase II/III trials
.
CTDMO services were affected by a number of factors, including the temporary decline in operating efficiency of local laboratories and factories, delays in submitting listing applications by some customers, and a phase III clinical failure of a customer, resulting in a 10.
7% year-on-year decrease in revenue
.

The epidemic caused a one-year extension of the EU Medical Device Regulation (MDR) effective timetable, which affected the medical device testing service business, resulting in a year-on-year decrease of 14.
7% in revenue
.
As the MDR has officially entered into force on May 26, 2021, this negative impact factor has been lifted
.
It is expected that medical device testing services will gradually recover in the second half of the year and achieve growth in 2020
.

The ceiling, cycle, and growth model of China's CXO industry

The ceiling, cycle, and growth model of China's CXO industry

Global scientific and technological progress, economic development, population growth, and increasing aging have led to continuous growth in health demand and medical and health expenditures.
It is expected that the global pharmaceutical market will continue to grow for a long time and become a "sunrise industry that never ends
.
" According to public data, the global pharmaceutical industry R&D investment will increase from US$224.
1 billion in 2021 to US$312.
9 billion in 2026, a compound annual growth rate of approximately 6.
9%; China’s pharmaceutical industry R&D investment will increase from US$29.
8 billion in 2021 to US$312.
9 billion in 2026.
US$55.
1 billion, a compound annual growth rate of approximately 13.
1%
.

Under the dual pressure of the low rate of return on R&D and the patent cliff, large pharmaceutical companies promote R&D projects more through external R&D service organizations, thereby improving R&D efficiency and reducing R&D costs
.
Small and medium-sized pharmaceutical companies do not have the time and/or sufficient capital to build R&D laboratories and/or production facilities on their own, and often seek outsourcing services to speed up R&D and expand production capacity
.
According to public data, the proportion of global pharmaceutical R&D investment outsourcing will increase from 43.
0% in 2021 to 52.
7% in 2026, and the proportion of China's pharmaceutical R&D investment outsourcing will increase from 39.
4% in 2021 to 49.
9% in 2026
.

Combining the amount of R&D investment in the pharmaceutical industry and the proportion of R&D outsourcing, we can get the amount of outsourcing investment in pharmaceutical R&D, which is basically the ceiling of the global CXO industry
.
Because R&D investment in general only accounts for a part of the revenue of the pharmaceutical industry, the scale of the CXO industry is much smaller than that of the pharmaceutical industry
.
It should be noted that CXO’s revenue does not come solely from outsourcing services.
Some will, like WuXi AppTec, have in-depth cooperation with innovative drug R&D companies to obtain milestone share and post-market sales revenue share for the product’s future external authorization.
High the ceiling of the CXO industry
.

Because R&D investment in general only accounts for a part of the revenue of the pharmaceutical industry, the scale of the CXO industry is much smaller than that of the pharmaceutical industry

Chart 7.
Global and Chinese pharmaceutical industry R&D outsourcing investment forecast

Source: Public data, Zhongkang Industrial Capital Research Center

So, how long can China's CXO industry maintain its prosperity? Is there a development cycle? Looking at foreign countries, R&D investment in mature pharmaceutical markets continues to grow, and the industrial chain continues to shift to emerging markets
.
Looking back at the domestic market, China's pharmaceutical industry is undergoing a strategic shift from imitation-oriented to innovation-oriented
.
China's drug review and approval system reforms, innovative drug medical insurance negotiations, marketing authorization system (MAH), generic drug centralized procurement and a series of policies will promote the continuous growth of domestic innovative drug R&D and production market demand
.
It can be foreseen that China's CXO industry will continue to be prosperous for a long time to come
.

It can be foreseen that China's CXO industry will continue to be prosperous for a long time to come

Given the good situation, what kind of strategy should Chinese CXO companies adopt to achieve long-term performance growth? This can be seen from WuXi AppTec
.
On the one hand, it strengthens global new capacity recommendations, on the other hand, it accelerates global capacity expansion
.
In terms of CDMO business, WuXi AppTec has deployed new technology areas.
The number of oligonucleotide and peptide drug molecules increased by 129% year-on-year, and the number of antibody-conjugated drug (ADC) customers increased by 57% year-on-year
.
In June 2021, the company cooperated with WuXi Biologics to establish WuXi Helian to provide integrated end-to-end CDMO services for ADC and peptide-conjugated drugs (PDC)
.
At the same time, the company is expanding its production capacity worldwide
.
In terms of laboratory services in the United States, in the first half of the year, it acquired the British company OXGENE and obtained cutting-edge technologies TESSA (adeno-associated virus production) and XLenti (lentiviral vector production)
.
The CTDMO plant for cell and gene therapy in Lingang Shanghai is expected to be completed by the end of 2021
.

Figure 8.
WuXi AppTec's CDMO business global layout and capacity expansion (click to enlarge)

Source: Company announcement, Zhongkang Industrial Capital Research Center

Concluding remarks

Concluding remarks

For a long period of time in the future, the CXO industry will follow the pharmaceutical industry to usher in continuous growth and share the benefits of the growth of the pharmaceutical industry
.
For CXO companies, more comprehensive capabilities and stronger production capacity will be the magic weapon for future competition
.
As the binding between CXO companies and innovative drug R&D companies deepens, CXO companies will rely on their in-depth understanding of the innovative drug industry far beyond ordinary R&D companies and investors to discover opportunities earlier and more accurately, and promote the further development of the CXO industry Growth
.