On the evening of July 29, WuXi AppTec (603259) released its semi-annual report for 2024. The company achieved a revenue of approximately 17.241 billion yuan in the first half of the year, a year-on-year decrease of 8.64%. The net profit attributable to shareholders of the listed company was approximately 4.240 billion yuan, a year-on-year decrease of 20.20%. After excluding non-recurring items, the net profit was 4.4 billion yuan, down 8%. Cash flow from operating activities was around 5 billion yuan. The net assets attributable to shareholders of the listed company were approximately 55 billion yuan.

This marks the first time in five years that WuXi AppTec has recorded a decline in its semi-annual performance. This is partly due to factors such as the industry's downward cycle, increased internal competition, and declining profit margins on orders. Since last year, leading CXO companies like WuXi AppTec and Kailaiying have experienced a profit decline for the first time, while mid-sized companies like JOINN Laboratories have posted their first losses.

From the interim report of WuXi AppTec and the interim report performance forecasts of several other CXO companies, it is challenging to precisely predict when the industry will hit bottom. However, marginal effects are improving, and there is an overall positive trend, although some common challenges in industry development persist.

Positive Signals and Challenges from Order Diversion

As of the end of June 2024, the company had orders on hand totaling 43.1 billion RMB, representing a 33% year-on-year increase after excluding specific commercial production projects. The company added over 500 new clients in total.

Revenue from the world's top 20 pharmaceutical companies was approximately 6.6 billion RMB, accounting for about 25% of total revenue, with a 12% year-on-year increase after excluding specific commercial production projects. This indicates that orders from large companies are also increasing, reflecting the continued influence and reputation of leading CXO companies. The reliance of major pharmaceutical companies on stable partnerships has not diminished.

Despite the heightened activity surrounding sanctions laws over the past six months, WuXi AppTec's orders have continued to grow. Revenue from Chinese clients amounted to 3.4 billion RMB, while European clients contributed 2.2 billion RMB, both showing a growth trend. In the first half of 2024, revenue from U.S. clients was 10.7 billion RMB. Although there were slight reductions in revenue excluding specific commercial projects, U.S. clients still accounted for more than half of the company's revenue. The diversification of overseas markets is gradually bringing new growth drivers to CXO companies while also mitigating risks.

Revenue from the U.S. market declined by 1.2%, and there was a significant drop in revenue from Japan, South Korea, and other regions. This may be due to the impact of biosafety laws and the diversion of CXO services in Japan and South Korea.

According to the interim performance forecasts from companies like Kailaiying, analysts at Xueqiu believe that there is a trend of U.S. biotech clients avoiding Chinese companies for orders, which could potentially lead to a decline. However, multinational corporation (MNC) clients are expected to remain stable, as they are unlikely to easily change partners and have a more rational assessment of the situation (most believe it is unlikely for the law to come into effect this year and that there are grandfather clauses). European client orders are growing, while Chinese clients are still in a challenging situation. Although leading CXO companies can contribute to performance growth in the domestic market (as seen with WuXi's growth in the first and second quarters), whether this can benefit more CXOs depends on the recovery of investment and financing.

Improved Marginal Effects, Tougher Survival for Smaller Players in a Consolidating Market

From a revenue perspective, the second quarter saw a 16.0% quarter-on-quarter growth, with adjusted non-IFRS net profit attributable to shareholders increasing by 28.5% quarter-on-quarter. This trend aligns with the positive development seen in the second-quarter results of other companies like Kailaiying and JOINN Laboratories, indicating that the industry's marginal effects are improving.

The interim report provides a guidance range for 2024 full-year performance, with projected revenues of 38 to 40 billion RMB, representing a growth of approximately 3–8% after excluding specific commercial production projects. The gross profit margin has remained around 40%, with a slight decline.

In the first half of the year, revenue was 17.2 billion RMB, with the chemical business contributing 12.2 billion RMB, a 9% year-on-year decline, but a 2.1% increase when excluding specific commercial production projects. Specifically, WuXi AppTec successfully synthesized and delivered over 450,000 new compounds for clients in the past 12 months, a 7% increase year-on-year. In the first half of 2024, 644 new molecules were added, bringing the total number of small molecule D&M (Discovery & Manufacturing) projects to 3,319. This includes 67 commercial projects, 74 Phase III clinical projects, 353 Phase II clinical projects, and 2,825 preclinical and Phase I clinical projects. There were 14 new additions to the commercial and Phase III clinical projects during the reporting period.

The TIDES segment (oligonucleotides and peptides) within the chemical business maintained rapid growth, contributing 2.1 billion RMB in revenue, a 57% increase year-on-year. The rapid scaling of the peptide CDMO business highlights the importance of pursuing precision, segmentation, and specialization for CXOs to thrive. This focus remains a key area for WuXi's expansion efforts.

Biology services generated 1.17 billion RMB in revenue. Revenue from new molecule-related services grew by 8.1% year-on-year, increasing its share to 29.0% of the biology services segment. The number of clients and projects related to nucleic acid new molecule platforms continued to rise, with services provided to over 260 clients and more than 1,200 projects delivered since 2021.

Revenue from high-end therapy services was 570 million RMB, down 19% year-on-year. Domestic new drug research services under DDSU generated 260 million RMB, a decline of about 25%. This indicates that the domestic innovative drug market remains sluggish, awaiting a revival in investment and financing. The underperformance in this segment is primarily due to: (1) commercial projects still being in the early stages of scaling up; (2) delays or cancellations of certain projects due to client-related issues; and (3) insufficient new orders, influenced by proposed U.S. legislation. As of the end of June 2024, the company was providing process development, testing, and production services for a total of 64 projects, including 2 commercial projects, 5 Phase III clinical projects (2 of which are preparing for marketing approval), 8 Phase II clinical projects, and 49 preclinical and Phase I clinical projects. The reporting period also saw the addition of a world-first innovative tumor-infiltrating lymphocyte (TIL) commercialization project from a U.S. client.

The testing business reported revenue of 3.02 billion RMB. Laboratory analysis and testing services generated 2.12 billion RMB, down 5.4% year-on-year, while the drug safety evaluation business decreased by 6.3% year-on-year due to market conditions.

Overall, the growth points and challenges are clear. Given the potential for order diversion in overseas markets, particularly the U.S., and declining orders from Japan, South Korea, and other regions, the reliance of leading CXOs on the domestic market is likely to increase. At least based on the first-half interim report for 2024, WuXi AppTec's domestic market revenue continues to grow and exceeds that of Europe.

Leading CXOs' increased focus on developing the domestic market could lead to greater differentiation within the domestic CXO industry. Top-tier CXOs may absorb orders from second and third-tier companies, putting survival pressure on the latter. While price competition may occur, most clients prioritize factors beyond cost, such as IP protection, success rates, and delivery efficiency. Additionally, with smaller innovative pharmaceutical companies and third-tier CXOs facing "tight capital" constraints, industry partnerships will likely be more cautious, considering "enterprise development stability and cash flow." As a result, superior resources may increasingly concentrate on leading companies (as evidenced by WuXi's strong operating cash flow growth of 48%), making the competition for survival even more intense.