With the expected failure of the US Biosafety Act, just like Godot who will never show up, industry and capital participants have to think about the real role and value provided by CXO in the industry during the long wait. This experience is not only a test of patience, but also prompts everyone to think deeply.

Just as people were speculating on the direction of the bill under the new government and the new Congress, WuXi AppTec (54.570, -0.92, -1.66%) unexpectedly began to sell assets frequently. First, on December 24 last year, it announced the sale of two cell gene therapy companies in the United States and the United Kingdom; then it sold part of its shares in WuXi Helian for more than 2 billion yuan; on January 18 this year, WuXi AppTec announced again that it would sell its US medical device testing platform to the US medical device testing company NAMSA.

According to the data of WuXi AppTec's third quarter report in 2024, it has a cash balance of 14.052 billion yuan, and has created a continuous and stable positive operating cash flow for many years. Why does WuXi AppTec, which has such abundant cash flow, continue to sell assets? This may be the question in the minds of many investors.

Those who are good at planning plan for the situation, and those who are not good at planning plan for the sons. If investors want to accurately understand the purpose of WuXi AppTec's actions, they must not focus on one place like a glimpse of the leopard in the tube, but should think about the problem in all aspects in combination with the macro situation, industry trends, and corporate models.

As a weather vane of China's biopharmaceutical industry, WuXi AppTec represents the upper limit of this industry, and its strategic planning can also show the trend of the future evolution of this industry.

Macro situation: 2025 continues to find the bottom

2025 is likely to be a year when the economic cycle continues to find the bottom.

Whether it is the Kondratieff cycle, the Kuznets cycle, the Juglar cycle, or the Kitchin cycle, it indicates that 2025 is destined to be difficult. The world is trying to adapt to a new environment, just like China is experiencing a low interest rate environment for the first time. How to adapt to such an unfamiliar environment will be a challenge for everyone, and this round of economic cycle may be longer. In fact, the leading companies in various industries have begun to learn to accept such a cyclical situation. At the turn of the new year, these leading companies are doing one thing-focusing on the main business.

At the just-held Tencent Group Annual Meeting, Tencent Chairman and CEO Ma Huateng delivered a speech, "Focusing on the main business, reducing costs and increasing efficiency" is the core keyword of this speech. Looking back at the development history of Tencent, the reason why it has been able to develop from a social software to today's business empire is precisely due to the use of diversified layout to the maximum, but Tencent, which is so good at diversified operations, has also begun to stop and rethink the problem.

Coincidentally, another Internet giant Alibaba is also "focusing on the main business" in an all-round way. In the past two months, Alibaba has successively sold Intime Department Store and Sun Art Retail, and is gradually withdrawing from new retail and returning to the e-commerce business with Taobao as the core. The sale of Intime Department Store and Sun Art Retail may only be the first step for Alibaba to correct its deviation. Alibaba may continue to divest non-core assets in the future.

In addition to the Internet industry, giants in the physical industry are also continuing this trend. For example, Midea Group (73.000, -1.40, -1.88%), Haier Group, and BOE in the traditional home appliance industry; Vanke, Country Garden, and Gree Real Estate (5.970, -0.13, -2.13%) in the trough; Suning, Gome, and Yonghui Supermarket (5.880, 0.09, 1.55%) in the retail industry.

With the convergence of economic growth, there are no longer so many market opportunities for companies to capture. As the internal circulation in various industries continues to accumulate, the core requirements for companies are also continuously improving. How to seek growth in a slow economy is a test question given by the times, and excellent companies from all walks of life have given the consensus answer of "focusing on the main business".

The sun has powerful energy, but sunlight is almost non-destructive. When people use a lens to focus the scattered sunlight, the energy generated can even melt steel. This simple case is enough to illustrate the problem. It is undoubtedly a smart move to choose to focus on the main business in the bottoming cycle.

Understanding this principle, investors can roughly understand what WuXi AppTec wants to do, focusing on its successful CRDMO business model and further expanding its existing competitive advantages based on CRDMO.

02
Industry Trends: Lagging Behind the World
WuXi AppTec focuses on its proven and effective business model, concentrating resources on core businesses while nurturing new momentum.
At the JPMorgan Healthcare Annual Meeting (JPM Conference) on January 15, WuXi AppTec answered the question at the beginning of the article to the outside world: With the support of growing cash flow, WuXi AppTec will continue to accelerate global capacity construction, and it is expected that D&M capital expenditure will double in 2025, with 6 bases under construction worldwide at the same time.

Focusing on the present, the global economy is also facing a big test. Under the dollar cycle, the double tightening of commodities and currencies directly leads to risk spillover. The appreciation of the US dollar has led to capital outflows from emerging countries, which has led to an increase in global financing costs, and then commodity tightening has led to a decline in global demand.

Based on this era, the world's leading pharmaceutical companies have actually begun to improve their internal strength and continuously consolidate their basic foundation.
As early as last year's interim report, IQVIA and Medpace, the leading US CXO companies, had already begun to lower their performance expectations. The reason for their doing so is simple, that is, MNCs have already begun to reorganize and divest marginal assets, and many orders have been canceled or postponed in the process. In addition, China's innovative drug pipelines have been returned by MNCs in succession in 2023, and investors can clearly see that MNC's strategic layout has actually shrunk significantly.

But contraction is not the ultimate goal, but the focus on the main business is. In fact, whether it is BMS, GSK, Merck, or Johnson & Johnson, they will face severe patent cliff tests in the next five years. How to make up for the vacancy of the expiration of core product patents will be a problem that these MNCs need to think about urgently.

Therefore, after contraction, there will inevitably be a new round of layout. For example, Johnson & Johnson announced at the JPM conference that it would acquire Intra-Cellular Therapies, a company specializing in the treatment of central nervous system diseases, for $14.6 billion; Eli Lilly also announced a few days ago that it would acquire the anti-cancer company Scorpion for $2.5 billion. Throughout 2024, the global pharmaceutical industry has seen a number of large-scale mergers and acquisitions, and MNCs are taking advantage of the asset low tide to strengthen their fundamentals.

At present, although the Chinese pharmaceutical industry has also felt the chill of winter, the entire industry has not begun to take action. In other words, although we are in the same cold winter, our preparations for the cold are obviously lagging behind.

WuXi AppTec took the lead in taking action and doubled its investment in core assets, which released an extremely obvious signal: China's pharmaceutical industry must think about how to adapt to such an unfamiliar environment.

03
Enterprise model: D and M are about to be released
Research capabilities have always been the core of WuXi AppTec valued by investors. WuXi AppTec's research capabilities are indeed very strong, but if we attribute all the value that WuXi AppTec can provide to research, such an understanding is obviously one-sided.

Unlike ordinary CRO companies, WuXi AppTec promotes the "CRDMO" model, an integrated solution covering the entire life cycle of drugs, which covers R-end research, D-end process development, and M-end production. Looking back at WuXi AppTec's 25-year development history, the key to its popularity among customers is that it can solve all problems in customers' new drug research and development and provide stable quality, which is crucial to customers, and quality also generates efficiency.

The ability to take into account this entire link is obviously not comparable to a single focus on the R-end. For WuXi AppTec, a molecule synthesized in the early stage may become a customer of the subsequent D-end and M-end. Applying the Internet thinking, the R-end is equivalent to a traffic entrance, helping WuXi AppTec's entire ecosystem to continue to acquire customers, while the subsequent D-end and M-end are real value conversion. For new drug research and development participants, they will also be happy to achieve their goals in such an ecosystem that takes into account efficiency, quality and cost-effectiveness.

Looking at WuXi AppTec's "CRDMO" layout, it has created a high-quality business line that meets the international quality system. Take the first half of 24 years when the biosafety law on the other side of the ocean was the most fierce. WuXi AppTec still accepted 404 quality reviews from global customers and regulatory agencies, and 38 information security reviews from global customers. This is equivalent to an average of more than 2 quality reviews per day and more than 6 information security reviews per month, with a pass rate of 100% and zero major discoveries. At present, WuXi AppTec has 32 operating bases around the world, covering Asia Pacific, North America, and Europe, and the three major service ends of "R", "D", and "M" are distributed in various regions. In fact, this is also in line with the coexistence of globalization and regionalization of biomedicine.

Today, the context of WuXi AppTec's CRDMO business model is clear enough, and the early R end can continuously accumulate new momentum for the back end.

To cite a recent hot case, telpotide and semaglutide set off a wave of GLP-1 research and development. In the hottest GLP-1 track, WuXi AppTec has actively laid out its layout to seize the opportunity before the demand exploded with its unique perspective on the R end. According to the materials disclosed by WuXi AppTec at the JPM conference this year, the production capacity of its peptide solid phase synthesis reactor has reached 41,000L at the end of 24 and will exceed 100,000L at the end of 25, by which time the production capacity should be ranked first in the world. In terms of the number of pipelines, the number of GLP-1 drugs entering the clinical stage worldwide increased from 62 to 85 last year, an increase of 37%; while WuXi AppTec's GLP-1 drugs in the clinical stage increased from 13 to 20, an increase of 54%, far exceeding the industry growth rate.

It is worth noting that the molecules here also include small molecule drugs. The month-on-month data just disclosed by Eli Lilly seems to give the market a signal that the peak sales of peptide GLP-1 drugs will initially appear, but everyone does not seem to realize that the current rapid increase in the manufacturing capacity of peptide drugs has enabled injectable preparations to quickly reach all new patients in need, but what will happen to patients after a few months or years of injection? In the future, continuous treatment will become normalized, which also means a more convenient option-oral administration. Oral drugs require a higher dose than subcutaneous preparations to achieve the same effect, and the production process will make production capacity a challenge again. Solving such a production process, especially in the small molecule scenario, may only be a few capabilities that can solve such a challenge worldwide.

Back to WuXi AppTec's R-end capabilities, as of the end of September 2024, in the past 12 months, WuXi AppTec's small molecule business has delivered more than 450,000 compounds to customers on the "R" end, and a total of 3,356 pipelines on the "D&M" end.

From the perspective of transformation, in the first three quarters of 2024, of the 915 new molecules added to the D-end and M-end pipelines, 268 molecules came from the "R" end. On the "D" end, 96 molecules successfully entered the next stage. Six "D"-end molecules were approved as new drugs, entered the "M" end, and became commercial products. Comprehensive coverage of drug research, development, production, and creating an integrated solution is the ultimate pursuit of WuXi AppTec's CRDMO model.

In the past two years, the number of WuXi AppTec's late-stage molecules has increased from 107 to 147, an increase of 37%, and the revenue brought by them has doubled. This also fully demonstrates that the later the clinical progress of the molecule, the greater the value, and the complexity and quality of the molecules supported by WuXi AppTec are improving.

At the same time, with the increase in WuXi AppTec's investment in the D-end and M-end, the growth rate of these two businesses is significantly faster. From 2018 to date, the compound growth rate of WuXi AppTec's orders on hand is 35%, while the compound growth rate of orders on hand for the D-end and M-end during the same period is 55%, and the proportion of total orders on hand has increased from 35% to 70%. The R-end orders have doubled, but the D-end and M-end orders have increased 12 times.

With the competitiveness of the R-end already strong enough, what WuXi AppTec needs to do in the future is to further enhance the monetization capabilities of the "high-value" D-end and M-end, and ensure the continued expansion of existing advantages by further focusing on the main business and using counter-cyclical expansion.

04
Waiting for the next flower to bloom
Any cycle is cyclical, without any exception. The reason why the US pharmaceutical industry is so strong is not established in one day, but accumulated in cycles again and again.

Frankly speaking, China's pharmaceutical industry is still too young, and capitalization is seriously lacking in experience. In this context, the entire industry needs more companies like WuXi AppTec that can accurately understand the operation of the cycle. Only by accurately understanding the pulse of the cycle and the development of the industry can we find the growth code of the enterprise with half the effort.

Looking through the phenomenon to the essence, WuXi AppTec's revenue pillars can actually be divided into two parts: R-end, D-end and M-end. The R-end is easily affected by industry financing, so it shows a certain volatility; the performance of the D-end and M-end will lag behind the R-end, forming a certain hedge against the cycle.

At this stage, WuXi AppTec is no longer blindly seeking growth on the R-end, but rapidly improving the capabilities of the D-end and M-end, thus forming a cycle of two major revenue pillars, and ultimately achieving the goal of stable crossing of the cycle.

There will be a time for the waxing and waning of the moon, and the rotation of feng shui has never stopped. The pharmaceutical industry will not be depressed forever. When the entire industry picks up again, WuXi AppTec's R-end growth will be released rapidly again. Now the improvement of the capabilities of the D-end and M-end may achieve explosive growth at that time.

Cycles are not terrible. Whether it is pro-cyclical or counter-cyclical, companies can maintain growth. As long as companies learn how to use insightful vision to plan and figure out what to do now, they can achieve long-term growth that transcends cycles.

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