Bulging order book for bioconjugates lifts WuXi XDC profits

The provider of outsourced pharmaceutical services has delivered unexpectedly strong half-year earnings and has launched its first overseas production hub

Key Takeaways:

• WuXi XDC began operations in August at a site in Singapore, boosting its biologics manufacturing capacity beyond China
• After the earnings stoked a share price rally, another company in the WuXi group sold part of its stake in WuXi XDC, unsettling investors

By Molly Wen

China’s pharmaceutical outsourcing sector has boomed and buckled over the past few years, but signs of a sustained rebound have now emerged.

Industry leaders including WuXi AppTec (603259.SH; 2359.HK) and Asymchem (002821.SZ; 6821.HK) have generally returned to steady revenue growth, although the picture is patchy across other parts of the industry.

Mature businesses such as service providers for small-molecule drugs are still under pressure to cut excess capacity, while the broader market for biocoupled drugs is facing a surge in orders and profits, led by antibody-drug conjugates (ADCs), a class of dual-action therapies designed to target cancer cells.

WuXi XDC Cayman Inc. (2268.HK), a global leader in developing and manufacturing ADCs on a contract basis, logged an unexpectedly strong rise in earnings for the first six months, citing buoyant orders from some of the world’s biggest pharmaceutical companies.

The ADC specialist, which is part of the wider WuXi pharmaceutical group, reported that its revenue jumped 41.5% to 3.70 billion yuan ($550 million) in the first half from the year-earlier period, excluding the impact of currency fluctuations. Adjusted net profit rose 37.4% to a record high of nearly 1.03 billion yuan, while adjusted net profit margin held steady at 27.8%. The upside earnings surprise sent WuXi XDC shares surging nearly 15% on Aug. 25, when the stock touched an intraday peak of HK$80.5, its highest level in nearly a year.

The momentum came from a growing customer base, which reached 814 by the end of June, including 15 of the world’s top 20 pharmaceutical companies as major partners. The service orders placed by clients but not yet shipped, known as the backlog, jumped 50.4% to just under $2 billion, while another backlog measure including potential milestone payments reached about $2.17 billion, up 62.2% from the same period a year earlier.

Order backlog is considered a core metric in the drug services industry as it dictates the pace at which revenue will be captured over the next two to three years. Data released by WuXi XDC indicated that the quality and value of the order book were also increasing, as more projects advance from early-stage R&D into late-stage trials and commercial manufacturing. As of June 30, the company had 21 projects at the process performance qualification (PPQ) stage in the transition from development to manufacturing, and two commercial-stage projects were also underway. The company expects cumulative deliveries of more than 30 PPQ components by the end of this year, and aims to submit four to six applications for biologics licenses. It projects PPQ deliveries to exceed 45 in 2027, with seven to 10 license bids.

Singapore site comes on stream

WuXi XDC has already delivered strong results from commercial manufacturing in China, but the key to future growth and resilience lies in expanded capacity overseas. In August the company officially launched its first biomanufacturing base outside of China, when its facility in Singapore was formally cleared to start production. The site in Singapore’s Tuas Biomedical Park will offer overseas customers greater flexibility to meet localized manufacturing needs.

The site covers about 25,000 square meters, with integrated manufacturing capabilities for monoclonal antibody intermediates and bioconjugate drug substances at up to 2,000 liters per batch, as well as annual production capacity for 8 million vials of bioconjugate drugs. Few other ADC providers can match that scale, giving WuXi XDC the chance to grab an early lead in commercial output of the drugs overseas. WuXi XDC has already expanded its domestic capacity by completing the purchase of a controlling stake in Chinese biologics supplier BioDlink in March. The company’s delivery network now links Singapore, Wuxi and Suzhou, with greater scope to take on big orders from multinational pharmaceutical companies.

However, rising industry competition and international tensions pose clear risks. With global ADC development in full swing, dozens of drug candidates aimed at key targets such as TROP2 and HER2 cell proteins are already in mid- to late-stage trials. Major providers of development and manufacturing services including Switzerland’s Lonza (LONN.SW) and South Korea’s Samsung Biologics (207940.KS) have recently invested heavily to expand their manufacturing capacity for bioconjugates. As new overseas capacity comes online in the next two to three years, price competition in the ADC outsourcing market could intensify.

Meanwhile, some drug companies may review their supply chain resilience when placing orders for early-stage pipelines, considering the risk posed by U.S. biosecurity restrictions and the potential for other disruptive policies. The fallout from rivalries between economic powers could make it harder for WuXi XDC to win some new overseas orders.

The company currently trades at a price-to-earnings ratio of about 50 times, well above the roughly 34 times for its controlling shareholder, WuXi Biologics (2269.HK). However, just as the strong results drove up WuXi XDC’s share price, another stakeholder, WuXi AppTec, sold around 53.52 million shares on Aug. 26 for about HK$3.92 billion ($500 million), equivalent to around 4.23% of WuXi XDC’s total share capital. The sale has inevitably made investors wonder whether WuXi XDC’s lofty valuation may be too high. As the industry cycle turns, time will tell whether the company can continue to justify the expectations for high growth. 

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