In the competitive world of pharmaceuticals, two giants are on a collision courseAs of 2024, the obesity drug "Semaglutide" produced by Novo Nordisk has recorded staggering sales of $29.3 billion, which, when converted to Chinese RMB, exceeds 200 billionThe gap in sales figures with top oncology medications has narrowed to less than $2 billion, a remarkable feat that reflects the booming market for pharmaceutical sales.

This surge in revenue urges us to look beyond just the end-products and consider the upstream research and development (R&D) outsourcing companies that provide essential services to pharmaceutical giantsAlthough Chinese pharmaceutical companies might not reach the same dizzying heights of sales, R&D outsourcing firms in the country can still reap benefits from the global market's growth.

Take WuXi AppTec, for instance, a leading player in China’s pharmaceutical contract development and manufacturing organization (CDMO) segmentAs of the end of the third quarter in 2024, the company had an impressive backlog of orders amounting to 438 billion RMB.

But what does a backlog of 438 billion RMB truly signify?

This amount surpasses the revenue that WuXi AppTec reported for the first three quarters of 2024, accounting for 109% of its 2023 revenueWith such expansive order support, WuXi AppTec has climbed to become one of the largest enterprises in China’s pharmaceutical industry, even exceeding revenue figures from other notable companies such as Hengrui Medicine and BeiGene.

How has WuXi AppTec managed to secure such a substantial volume of orders?

1. Client Accumulation

In the world of medical R&D outsourcing, having the right clients is essentialBy the end of the third quarter of 2024, WuXi AppTec maintained a robust active client base of 6,000, spanning over 30 countries and regions globally.

Since the company’s inception, it has consistently grown its client count, which helps ensure a steady stream of orders and performance improvements

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Between 2018 and June 2023, the number of active clients soared from 3,500 to over 6,000, consistently retaining top 20 global pharmaceutical companies as clients.

When compared with competitors, WuXi AppTec stands outCompanies like Chuzhou Titan, Kintor Pharmaceutical, and Tigermed have significantly fewer active clients, with numbers reported at 2,800, 1,100, and 2,800 respectively—far below WuXi's impressive tally.

Moreover, in a fashion reminiscent of automobile or aircraft component manufacturers, WuXi AppTec engages deeply in client projects, which generates high conversion costs that strengthen client relationships and improve the longevity of order contracts.

2. Exceptional R&D and Production Capacity

The core reason behind WuXi AppTec's ability to attract clients lies in its robust research and production capabilitiesFor quite some time, when discussing Chinese R&D outsourcing firms, the narrative often centered around the advantage of a skilled engineer workforce and lower production costs, helping them compete against foreign rivals.

By 2023, WuXi AppTec's revenue reached approximately 40.34 billion RMB (around 8.44 billion USD), ranking as the third-largest globally in this sector.

Amidst the backdrop of general lower production costs, WuXi AppTec has emerged as the only Chinese entity within the top ten medical R&D outsourcing firms in the world, underscoring its strength and prowess in the industry.

The company has built the largest integrated R&D and production platform (CRDMO) in China and boasts a comprehensive portfolio of molecular types, establishing a dominant presence in numerous therapeutic areas.

In fact, WuXi AppTec exhibits research and production capabilities that sometimes rival those of pharmaceutical companies themselvesCurrently, the firm leads positions in chemical drugs and laboratory testing sectors, although its biological business is less extensive compared to WuXi Biologics.

Nevertheless, WuXi AppTec has developed one of the world’s most extensive biological discovery platforms

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This front-end drug discovery service has significant potential to drive business diversification, potentially leading to more valuable downstream servicesIn the first three quarters of 2024, its TIDES (which mainly revolves around oligonucleotides and peptides) business recorded revenues of 3.55 billion RMB, signifying a robust 71% year-on-year growth propelled by its biological discovery platform.

Given such impressive order volumes, can we presume WuXi AppTec's growth trajectory is secured for the foreseeable future?

That's clearly not the case.

In the first three quarters of 2024, amidst high base figures due to previous “mask”-related orders and uncontrollable factors within the pharmaceutical investment landscape, WuXi AppTec witnessed declines in both revenue and net profit by 6.23% and 19.11% respectively when compared to the same period last year.

In light of these challenges, the company has initiated two critical measures to mitigate performance risks:

First, divestment of loss-making assets.

In recent years, WuXi AppTec has faced adversities due to a challenging pharmaceutical investment environment, resulting in some new business ventures underperforming and leading to sustained losses.

As a response, the company has expressed intentions to sell the WuXi ATU unit, dispose of a 7.17% stake in its joint venture WuXi HeLien, as well as two overseas medical device testing facilities, with WuXi ATU being the largest loss-generating project for the company.

In the first half of 2024, revenue from WuXi ATU stood at 570 million RMB, yet its gross profit was in the negative, tallying at -171 million RMB.

Thus, it's anticipated that shedding these loss-making units will significantly enhance the company's profitability.

Moreover, the divestment of WuXi HeLien could translate into a profit boost of 720 million RMB and 1.297 billion RMB for the years 2024 and 2025 respectively, providing substantial support to the company's overall performance.

Second, aggressive overseas capacity expansion.

While divesting, WuXi AppTec remains steadfastly committed to expanding its global production capacity

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On January 15, 2025, at the global JPM conference, the company announced that, backed by sufficient cash flow, it plans to accelerate its construction of global capacity, with expectations that R&D and production capital expenditures will double.

This strategy of asset divestiture alongside capacity expansion raises questions about WuXi’s motivations.

There are two main reasons:

One, to better mitigate “potential” risks. The 2024 "Safety Bill" has left an indelible impact on WuXi AppTec and the outsourcing R&D sector, particularly concerning gene therapy-related businessesBy divesting WuXi ATU, the firm can foster closer ties with its major global clients.

Constructing overseas production bases allows the company to fortify relationships with its clientele.

Currently, it's reported that WuXi AppTec is in the process of establishing six operational bases worldwide.

Two, to prepare for the next growth phase. Despite facing challenges from global public health events and pressures within the pharmaceutical industry, there hasn't been a total cessation of industry growth.

Following years of dedicated R&D efforts, innovative Chinese pharmaceutical companies are rising, while their foreign counterparts are poised to tackle upcoming “patent cliff” challenges, accelerating their product strategies often through large-scale mergers and acquisitions.

To facilitate long-term growth, WuXi AppTec is amplifying its investment into key business areasWhile this may seem like a contraction at first glance, it’s essentially a strategy aimed at fostering a stronger expansion in the future.

In summary, while WuXi AppTec currently confronts pressures from performance-related growth concerns, the company still commands a substantial order bookRecent divestments and expansion efforts indicate that their core competitive advantages may escalate, preparing the stage for the next chapter of growth.

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