WuXi Biologics (Cayman) Inc. (2269) Earnings Call Transcript & Summary

Good morning, everybody and for the people who are dialing in from the U.S. and good evening for everybody in [ Asia ]. Thank you very much for participating in today's WuXi earnings conference call. My name is Sean Wu. I cover China Health Care at Morgan Stanley. Today, it's my great honor to host that earnings conference call for 2022 Annual Results. As you can see WuXi Bio delivered another very [ satisfactory ] results. I think today's WuXi management all will discuss things in detail, and they are also going to provide the outlook. Today, with you on today's call, company CEO, Chris Chen; Company's CFO, Tu Ming; and IR Director Eileen Wang. So this conference will be conducting in English, and it will be followed by a Q&A session. You can put it into your question into the left-hand corner box. Without further ado, I'll pass over to Dr. Chen, you can start your presentation.

Sean, thank you. Thank you. It's a really great to be here again, share with you our exciting 2022 annual results. Yes. So this is how I'm going to present. I'm going to cover the annual results. And then I really wanted to introduce to investors our WuXi operating system, WBS, as you will continue to see the benefit from the WBS that we have been implementing in the past 2 years, and then we'll cover briefly ESG, our CFO will cover the financial review, and we'll end with a summary and growth outlook. To most investors, this is to be a very familiar slide. I want to use 1 slide to summarize what we have achieved in 2022. On the left side is the operational metrics, on the right side is exactly the financial. On the left side, you can see, despite all the headwinds we have last year, I think 2022, we delivered still incredible results from operational side. Our number of projects grow from 480 to 588 in the largest portfolio and our non-COVID we actually -- the project non-COVID traditional business delivered 62.8% growth. We added 136 projects and the record high. If you exclude COVID, 127, actually, that's the highest ever for internal number of projects. Our commercial project grow from 9 to 17, also very exciting. And our total backlog I always advise investors that don't count on us to deliver a strong growth in backlog because it is very, very hard. But yet, we actually last year, we delivered -- our backlog grew from $13 billion -- more than $13 billion to more than $20 billion, so incredible growth because of our CMO late-phase and CMO contracts. And as a result of the exciting portfolio growth, we are increasing our capacity from 156,000 liters to 262,000 liters. And big -- a significant portion of this capacity increase is at the outside of China. In U.S. in Cranbury and in Ireland, near Dublin. So we continue to be able recruit and retain best people for our business. So on the left side is the operational metrics, on the right side is financial. So you see our revenue on top line growth of 48%, very exciting, adjusted gross profit margin is very, very stable. And adjusted net profit growth 47% from $3.44 billion to $5.05 billion. And again, adjusted net profit margin also very stable, 33.4% to 33.1%. So our EPS still show a very exciting growth of 31%. I think we summarized all those results in this slide as well. What I want to highlight is really the adjusted EBITDA margin, right? I think we continue to be able to maintain a very high, very similar EBITDA margin of 44.9% last year. And then our adjusted net profit margin was 33%. On the financial side, we also have plenty of cash as of end of last year, we have RMB 8.7 billion of cash. Our total liability to equity ratio is also very healthy at 36.9%. We do have sufficient funds to -- for capacity expansion from our own operations. So as I will -- I'll talk about later on that we actually achieved free cash flow positive, so that we have sufficient funds from our internal operations to fund our CapEx and future expansion. So in terms of loans, we have a very decent number of loans, RMB 2.8 billion borrowing and our operating cash flow, a very healthy growth 61.5%. Again, that actually enabled us to achieve free cash flow positive. Last year, we actually completed about $800 million share buyback, equivalent to about almost 96 million shares. I think those are equivalent to about 3 years of a total RSU issued. I think that really help on the EPS growth side. In terms of CapEx, our last year CapEx grew CNY 5.4 billion. We managed it very carefully of all those capacity expansions in Europe, in the U.S. and in China. And continuing forward, we still have maintained a very healthy CapEx investment about RMB 6 billion, this year and next year to continue -- we continue to see the great demand for our business and for our services. That's why we continue to invest in the capacities. I think last year, if you look at all 3 segments that we operate in, is actually showing very exciting growth. Our pre-IND revenue grew 45.8% very healthy growth considering how much market share we already have, how big our operation is, right? As you know this is -- so this is a very exciting growth. And our mid-phase, basically the program in Phase I and Phase II actually delivered a fantastic result, almost more than exactly doubled basically from 2022 to 2021. We addressed this to the program that was affected by COVID, start to resume trial activities -- training activity programs start to move from Phase I to Phase II, from Phase II to Phase III. I think this is a very exciting growth. This is also the first time in our company's history we see that this segment grew faster than the pre-IND or this [indiscernible] CMO. Typically, if you look at the 3 segments, typically the pre-IND grow very fast and then the late-phase grow also very fast. And the middle one is typically mediocre growth. But this is actually the first time we see very exciting growth in the phase program in Phase I and Phase II, right? So from this, we don't really see the impact of biotech funding, you see exciting acceleration of the program in Phase I and Phase II. I think that basically means we'll have more Phase III programs and hopefully more commercial programs down the road. And lastly, the Phase III in CRDMO program, we see is you see a very strong growth of 39%. But if you take out COVID, the growth is actually even more exciting, like a 78%. And so when you look at the right side, you see what it meant. But overall, our overall non-COVID business growth 62.8%, of COVID because of a very large base in 2021 grew only 12%. And then most of the COVID programs are in the Phase III and CRDMO program. And that's why you go back to the left side, again, right? You see if we have 3 engines, right, the pre-IND traditionally is very strong growth, we have a very high market share already. We still very -- enjoy very healthy 45.8% growth. The mid Phase, the Phase I and Phase II very exciting, doubled in that period, and that will give us more Phase III programs. And then the Phase III in commercial, we do see a very exciting growth as well. If you take out COVID, 78% growth in that segment. And this is -- this slide gives you a similar message basically saying that our non-COVID revenue actually will drive the growth with very strong momentum. But on the left chart, you see basically with the number of projects we added and total projects, but if you take out the COVID project, we still added 124 non-COVID project in 2021. We added 127 last year. Again, last year, there were so many headwinds that you talked about biotech funding, you're talking about zero-COVID policy in China that clients couldn't visit us for the past 3 years and you're talking about UVL talking about global and the headlines in our daily life, right? So despite all those headwinds, we actually still achieve a record number of projects in terms of 127 non-COVID programs. And on the right side, you see our -- the growth. Again, in 2021, we delivered a non-COVID revenue growth of 64.2%, in 2022 it was 62%. And this year, we still expect a 60% growth on our traditional non-COVID revenue business. And that basically means our 3-year CAGR of our non-COVID revenues is exactly 62%. So we're reaffirming that we can deliver 62% CAGR growth for our non-COVID business. I think we are one of the companies that benefited from the COVID revenue quite a bit in the past 3 years but also emerging from the post-COVID era with still very exciting growth of 62% CAGR in the past 3 years. Most of you are already familiar with that WuXi we call ourself CRDMO. You know CMO, you know CDMO. I think we start to apply this business model for CRDMO couple of years ago. Now I think we got another validation, another confirmation that this building model is the right way. Earlier this year, we had a very good deal with GSK, where GSK licensed our platform for 4 more molecules. And if all 4 programs will be successful, we're actually going to be receiving about $1.46 billion of milestone payments. And on top of this, we still have tiered royalties, and we already received $40 million upfront payment for this program. This is a good demonstration or validation of our platform. And for those exciting platform, behind these are 2 key technologies. One of these is a service-specific platform is called WuXiBody, one of them is our CD3 molecule that we optimized and developed. Just those platform took us probably about 4 years. We started working on those back in 2014. We had very good results back in 2018. And in the past couple of years, we keep optimizing, improving it. And finally, this year, we get a validation from a global MNC chain that our platform may be best in class. They're willing to work with us. Pay us a very good business deal for those -- for our platform. As this continues to show our RDMO model. For those R, for example, the program is -- again, if all 4 programs are successful, and we'll actually receive more than -- almost $1.5 billion worth of milestone payment. On top of that, we have royalties and this R will also lead to D, basically all the 4 programs would be developed under WuXi and hopefully, some of the product will be manufactured at WuXi. What's more exciting is actually, if the program is successful, the royalties from this program could eventually be even higher than the profit from manufacturing. This showcase our business model is really different from a traditional CMO model, right? So everyone knows CMO, very exciting. And WuXiBody the CDMO, very exciting. D will lead to M. Now on our part, we're actually adding another growth element into our business, basically saying we'll have -- continue to see more milestone payment, more royalties down the road. This is a slide I already shared earlier this year at the JPMorgan conference, but I continue to see the importance of this. I always tell investors, if you look at WuXi, you only need to know these 4 numbers. How many projects we added last year? 136, record high, right? And how many commercial programs? 17. How many programs in Phase III? 37. How many total programs? 588. I think as long as we see the growth of those numbers, the business will actually follow. Because WuXi, we have already proven ourselves, we can execute. But once the project comes in, we can deliver. So project will be -- once the project comes in, we will convert it to revenue, will convert the R into D, what kind of converting D into M. I think that's our business model, Follow the Molecule, Win the Molecules. I think it's very exciting. I think what's more exciting actually is our late phase and commercial program is coming at a faster pace than we are planning. So right now, even the first 3 months of this year, we have already added 3 Phase III programs, and we are talking another -- we negotiate another 4 Phase III program and 2 commercial project. As early as April, we will be able to sign another 6 programs. That basically means on the first 4 months of this year, we actually added 9 programs in late phase. We currently only have 37, right? Cumulative. I think this shows you really our late phase at CMO accelerate, and that will contribute to near-term in a strong growth. And that's why I said when you look at WuXi, you only need those 4 numbers. I have always been very proud of our backlog. As you see this tens of billions of our backlog between service and milestone payment. I have always advised that in backlog actually very hard to increase unless we have a hugely large sum of our contracts. But this year was -- last year was exception. You see our backlog actually grow from $13.6 billion to actually $20.6 billion. So our backlog actually grew $7 billion. That's because the program we're signing, a lot of late phase and commercial programs we're signing. We are looking at a long-term commitment from our clients. They're willing to work with us for the next 5 years or even 10 years for the manufacturing. That's why you see a huge boost of our backlog. And again, this is a strong evidence, a strong demonstration that our business will continue to grow. WuXi Biologics will deliver sustainable high growth for our investors because you see -- again, I advise you, saying the backlog wouldn't grow, but our product backlog grew almost 50% last year, so incredible. And just this backlog 5-year contract, 10-year contracts, even if you only look at 3 years, our backlog still grew a very healthy 30% from $2.8 billion, $2.9 billion to actually $3.6 billion in there. If you look at our portfolio, it's very exciting. You see a very good growth of bispecific antibody, grow 37%. ADCs grow an amazing 57%, vaccines grew more than 100%, more than double, right? So this is the largest portfolio of any company in the space. And we have 211 first in class programs, we have 99 bispecific programs, we have 94 ADC programs. For bispecific and ADC, I think we have more portfolio than any companies in either as a pharma company or as a service company, basically any company in this space. And that bodes very well. Basically, if you think this is the industry for the future, if you think this segment will come in more blockbusters for both bispecific and ADC, WuXi Biologics will most likely benefit because we have the largest portion of the portfolio. I just want to give you one example. Last year, U.S. FDA approved 20 INDs. We're actually come in with 8 of them, so 40% market share in the U.S. around ADC-INDs. And it should be very similar for our bispecifics, a very high market share. So for those newer modalities, for those more exciting modalities, bispecific and ADC, we actually have higher market share than traditional or [ overall biologies ]. I think again, that's the additional growth driver for the company to deliver value to our investors. So again, last year, I mentioned we have so many headwinds, but our Win-the-Molecule business continues to do well. Again, if you read the headlines, that make it very difficult for WuXi Biologics to win projects but in the results actually show that we still won 5 late phase and 3 first Phase I and Phase II. As I mentioned earlier, this year, actually, our pace actually accelerate. So the first half of this year we won at least at 10 projects. And then most of them -- all of them actually are most of them are Phase III and commercial. And so when the molecule continue to be complementing our Follow the Molecule strategy give us more near-term boost on late-phase programs, and that will also give us a stronger growth in the near term. And if you look at our Follow the Molecule and Win the Molecule strategy, it has been driving very robust growth. Right now, as you see, the total number of projects, if you look at our number of projects, we actually -- you see before COVID, on average, we are getting about 60 projects a year. And then post-COVID on average, we're getting 120. So actually during COVID time, we were able to deliver so many COVID projects to our clients at incredible speed, at 100% success rate, very good execution. Because of that, we actually -- we got more trust from global companies looking at WuXi. I think that's why you see new projects added continue to double, again last year with all those headwinds. So this year, we continue to believe that we will add another 120 projects to the overall portfolio. And you see, as I already mentioned. So Follow the Molecule project, most likely will accelerate this year. So we continue to be able to add that the same amount of projects in the past couple of years on the new projects and our Win the Molecule, we are actually accelerating. Next slide. On the commercial side, this is also a very exciting part. So back in 2017, we only have 1 commercial projects. Now last year, we already have 17. This year, we believe we have additional 4 to 6, so that will bring us to 21 to 23. This will give us very obvious growth. I think FDA is coming to visit us in a couple of weeks, and we are actually doing -- expecting 2 product approvals once following those inspections. So I think -- so in all those rapid growth of the commercial manufacturing, will really drive us near-term growth, give us near-term growth. So we're expecting our commercial program will also almost double from here. So last year, was 17 programs and in 2025, we are expecting 32 to 38 programs, very exciting. So Win the Molecule and Follow the Molecule, both of them are actually driving the CMO growth. If you look at the -- this is really the customers are -- a deep dive on our customer data, looking at the past 8 years, right, you see with every year, we continue to add new clients. Even at the current pace, we are still adding about 130 clients a year, again, with all those headwinds, right? So if you look at our new clients added every year, almost equal to our total clients back in 2015. The average revenue from top 3 customers continue to improve because every program, the program is going to a later phase and the client is giving us more projects. Our client diversification is very good. The top 20 clients only account for 52% of revenue. And then average revenue from every project also increased because of the complexity of the projects or the biggest programs move to later phase. So I think all those metrics continue to do well. I think -- again, that's showing the right business model we have been implementing. During COVID, we are very excited to announce that we -- COVID actually did not disrupt our supply chain. So we are able to deliver all those revenue, COVID or non-COVID? What's the reason behind that is because we have built a very robust global network. Now we have 2 research centers globally. We have 8 development centers globally, now we have 9 manufacturing. So when Shanghai was locked down last year, and our business was not affected at all, because we have 7 other development centers. We can move the business from Shanghai to Wuxi City, from Hangzhou to Suzhou or even to Cranbury, New Jersey. And the commercial manufacturing, we building 9 of them, including Ireland, Germany and U.S. I think that -- and basically Singapore. Again, that will give us enough diversification to mitigate the risk that all of us are facing in this current environment. I'm very pleased to share with you that during COVID, the past 3 years, we have built an end-to-end supply chain in U.S. and Europe. So if a client wants to do a project with us and if -- we can actually do it without operations in China at all. We can start a project in Cranbury, New Jersey on the first segment, it's called MFG18, where we can start with DNA to IND. And then we can move the project to Ireland or Germany for manufacturing. Ireland. So I will start with MFG18 first. MFG18 is a clinical manufacturing facility with R&D. We started the operation about 3 years ago when we acquired a facility. We built a lab. Now actually, last year, we are already attracting more 10 new clients to WuXi Bio. Also, operating wise, we're very progressing very well. We already achieved almost a breakeven at GP level. I think we're expecting very strong growth in 2023 this year and next year. The [indiscernible] commercial manufacturing facility near Boston called Worcester, Massachusetts, and this facility will be ready in 2025. This again, eventually, we'll be able to do end-to-end in U.S. by 2025. But right now, we complement the early phase activity in U.S. for the late-phase and commercial program in Ireland and Germany. So Ireland we'll make a big investment. Ireland, we're building 2 manufacturing facilities in there. I'm very happy to report to you that we actually have 5 late-phase programs signed in Ireland. We're probably targeting another 4 next year. It's a very strong endorsement from the global community. I think the 5 programs, 3 of them actually is a [indiscernible] position within WuXi. Basically, we already have manufacturing for them in China, and we want to double basically cover 100% of the volume by supplying them from Ireland as well. And then the 2 additional program actually is a win the molecule from clients directly. The remaining of 4 or all of them are Win the Molecule program, basically, the clients actually coming to WuXi for the first time with a new program, either in-house or from another CMO. So right now, we're looking at probably 60% utilization by 2025 and about 1 year earlier -- about 1 year earlier than we have budgeted and planned. And once we settle the Ireland facility, we also shift the focus with Germany, where we're building -- we already have a 12,000 unit capacity, but double the capacity to 24,000 by next year. I think we already have a commercial -- we already have a late-phase program started, and we'll be doing that new run next quarter. And once we -- that's the Drug Substance, and our Drug Product Facility in Germany is already fully licensed. We actually have multiple projects ongoing. So again, during COVID, we actually achieved a lot. We actually build a whole entire end-to-end supply chain during COVID in U.S. and Europe and now start to benefit from those. This is the most exciting slide I want to share with you, I think on entire slide deck. I think if you look at look at last year, we have sustainable -- sustained high growth in every region. North America, we actually -- our revenue percentage this year is higher than last year, and is higher than probably than last 2 years. And we achieved 55.6% of revenue. Our growth is fantastic, 62.5% in growth. When you look at this number, you don't see biotech funding slowdown. You don't see the impact of UVL but you don't see the headline, the differences between China and the U.S. And certainly, without the China, U.S. tension, we could even do even better. But despite all those headwinds, we actually delivered 62.5% growth in North America. But Europe now account for a bigger percentage, 16.7%, previously low as around 10%. Now it's getting to 17%. If you look at overall Europe growth is not a very exciting, 11%. But 2021 was a big base because we delivered hundreds of millions dose of vaccines for AstraZeneca. And if you take out the COVID revenue, our Europe growth is actually 150%, 150%. Basically Europe is actually -- we will continue to see strong growth in Europe. So our non-COVID revenue grow 150% last year in Europe. Our number of projects -- the number of projects we signed last year versus year before is actually 3x growth. And now Switzerland become our third largest market, and the U.K. is our fourth largest market. So I'm expecting Switzerland will assume overtake China to become our second largest market. That's how exciting it is from Europe to WuXi Biologics. So we expect a continued strong performance in Europe from the European market. In China last year, we delivered a fantastic 48% growth. This is mostly because of COVID vaccine revenue. And rest of the world, very small, 3% revenue, but we see a very strong growth also because of CMO projects and in Japan. We have another CMO project in Korea. So we're expecting this year, our international, basically rest of the world, Japan, Korea will also grow, continue to grow very strong growth. That's why I said this is a very exciting slide. Now if you look at almost every segment, right, we see a shining point to highlight in every segment. You don't see all those headlines in those numbers, and you don't see the impact of biotech funding, you don't see the impact of the COVID policies in China, the COVID lockdowns in China impacting our clients and so our revenue growth. So very exciting. We believe this will continue. U.S. market will continue to be very strong. The European market will grow faster than every other market. China will be strong, but will probably be slowest among all the segments. And Japan and Korea, as I mentioned, we're coming to have more commercial project from Japan and Korea, and that segment will grow as well. So essentially, all 4 engines are firing. Although U.S. and Europe are actually firing at faster rate than the other region this year. So if you look at the past 5 or 6 years, it's a very exciting for WuXi Biologics. Let's look at the right side first. Now we started with about 2.4% market share when the IPO in Hong Kong back in 2017. Now 6 years later, right, the 5 years later, we are already -- our market share increased 5x, almost more than 5x to 12.8%. It will become global, number 2, as in terms of the biologics market share, right? Again, when we IPO, as a top 6 companies, probably only account for about 30% market share at that time. So we see a huge consolidation towards the top players. So now last year, you think the top 6 players already account about 66% market share. We are expecting the top 6 will contribute to 80% market share in the next couple of years. And this is a winner-take-all market. I think the top 6 players eventually will take 80% market share in the next couple of years. Does not bode well for us, for WuXi Biologics, for all those companies in top 6, especially all of us will be getting -- continue to gain more market share from the market. If you look at our operations, if you look at every metric, it's as exciting last year as the year before. It's probably more exciting in many ways. Last year, we actually delivered 123 INDs. That basically means 123 new drugs was moving to the patient because of WuXi Biologics. But if you look at the global competitors, a lot of those couldn't even deliver 23. Basically, we deliver 123. Most of our competitors delivered less than 23. That's how strong we are in the D part, CRDMO , the D part. We are the strongest in that segment. And we delivered more than 3,000 kilograms of COVID antibodies, I mentioned already. That's a treatment for 3 million patients. And all those metrics you look at on R&D part is actually very exciting. In the manufacturing part, it is as exciting, right? We delivered so many campaigns at a 100% success rate. And that's why, despite all those headwinds, WuXi Biologics continue to win business is because of our track record, right? If you look at this page, no other competitor can have this track record. And because of this track record, client feels, WuXi despite the risk, WuXi Biologics still the preferred player, preferred partner for biotech companies and for large pharma. I think Morgan Stanley did a survey earlier this year. We come out as a top choice for biotech company. We took them all, in the top 4 choices as large pharma. We continue to believe that our position in large pharma will improve, because we've been only working with large pharma for the past couple of years and most have been significant. I want to give you a couple of updates on the very exciting growth area. I mentioned bispecific, very exciting growth. and a WuXiBody play a key role in that. Again, we launched this WuXiBody platform back in 2018, now we have 39 programs in this, as in GSK, part of those in WuXiBody platform. So let's go back to our strategy and always being right. When the industry needs a new technology, we have it, and we have it at the right timing. As you just go back to our strategy, go back to our execution, go back to our investment. Looking back, we made it right back, the price is right, nit will be a key modality for new projects. And then the same thing for ADC. We made a bet a couple of years ago to invest in ADC capabilities, as I mentioned earlier, last year, we had 40% U.S. market share on the U.S. IND. And we have 94 programs in total. We're working with 265 companies globally. So on ADC, on [ cumulative ], we are actually the global premier leader in this space. On vaccines, we continue to do well as the -- back in 2019, we have 1 project. Now we are working with 21 companies on 44 projects. That's some very exciting growth. [ Earlier ], I already mentioned that we delivered hundreds of millions of doses of COVID vaccines for AstraZeneca. With all the previous success, including Following the Molecule strategy or Win the Molecule strategy for our global clients on CMO, quality is actually the baseline of the foundation. So we have already passed 27 regulatory inspections. As of now, we already passed 28 because we have 1 inspection from China earlier this year, and we expect 2 more in the next couple of weeks. So by end of this year, this number hopefully will grow to more than 30, more than [ 30 ]. I think this will form a strong foundation for us to attract new business or CMO. Again, those quality contracts take years to build. For us, on the CMO part, it took us 5 years to get here today. And for new companies in the space, probably take even 10 years to get to where we are today. So quality becomes a huge barrier for our competitors, that's why in this market, the winner take all because the top company has access to clients have access to capital, have access to talent and have strong quality barriers for others to follow. If you look at talent has always been a key prerequisite for our success. We have been very pleased when we started 11 years ago, I have 70 people. Now we have 12,000 people. Our retention rate -- overall retention rate is 91% overall and 95% for our key talent. So we have -- really, we have the culture to recruit, develop and retain top pallets. I think that's the foundation for our future success. Lastly, I want to give you an update on the UVL. I think everyone of you know that we were following UVL last February and 10 months later, we will successfully remove both entities. I think through the process, we actually established making them to our direct dialogue with the BIS. I think this is something we did not have before. So this is probably one of the good results coming out from the UVL. I think the successful delisting from UVL also demonstrated that WuXi Biologics does have global standards and a global practice. So our compliance system is very strong. The reason we are on UVL is because the U.S. could not inspect us because of COVID. So that's the update I want to give it to you. And I want to introduce you a very exciting business system that we have developed over the past 2 years is called WBS, WuXi Business System. I think as the company grow from 70 people to 12,000 people, we have always been looking at how can we improve efficiency. We are a decent company now. How do we learn from companies with a good operations, right? So we learned from Toyota, we learned from General Electric who was a pioneer and lead culture. I will learn a [indiscernible] DBSs [ Digital Bank System ] is really the world leader. And we learn from all those pioneers in the industry to give our own system for the WuXi Business System. So really looking at every area to build a lean culture, lean mindset and with the toolbox to improve our operations. I think the toolbox, you probably -- most of you probably know some -- know about those is a Kaizen, the value matching is standard work is 5s. But in the end, I think what we want to do is actually we want to stimulate every employee's potential. We want to deliver on value. We want to really be good at everything we do. Be efficient, be lean. We have only been doing this for about 1.5 years, and we actually achieved incredible results. So we've probably seen about 100 basis point improvement on our P&L last year because of WBS. And this year, we have even more ambition. We actually wanted to deliver 300 basis points improvement, for our own operations. So I think this is a very ambitious target. I think -- but I think in WBS, WuXi Biologics I tell every employee at WuXi Biologics that WBS is not an option. It's how we -- it's our way of working, it's our culture, it's how we work to improve our -- and drive business success. So I think this year, we hope to achieve 300 basis point improvement on our baseline on our P&L based on WBS. And next year and the next 3 years, we hope to achieve at least 100 basis points every year on top of those. So in -- by 2025, hopefully, we'll be very lean, but we'll be one of the best companies that people can be very proud of. Our operations are very lean and efficient. In the next segment, I want to spend a couple of minutes on ESG. ESG are very important to us. I think we want to be a global leader, and we also need to be a leader in ESG. I think if you look at all the 2022 deliverables, I think we are making great progress, and that's recognized in all the awards that we received from global communities. So we have improving our governance, enabling clients, I'm not going to spend too much time on it. Empowering people, 47% of managerial positions are already female in the company. And comparing about maybe 25% a couple of years ago, 53% of the employees are female. Our company now have 49 nationalities, [ DEI ] that cost us empowering people. And greening our business, we continue to see our 18% of we're cutting -- 18% reduction of our water intensity, 50% reduction of our green gas emission and 10% reduction of our waste in all those -- in the end, our business goal is to green our business. So we also set up a net-zero policy, by 2025 we will achieve our target and if you ever spent time in China or in Ireland, I strongly encourage you to visit our facility, our -- newest facility in China. Our facility in Ireland, our newest facility globally and as WuXi Biologics, we have a philosophy, every new site will be greener than the previous site. So that's why I wanted you to visit, some of you investors already visited our facility near -- MFG8 in Hebei. And some of them -- some of you already visited Ireland facility, you're probably be very amazed. It's state-of-art technology, very good people, very good execution, but also is greener. Our Ireland facility is probably greenest in any global facility in terms of -- because Ireland is already using renewable energy, because of a design, a lot less water, a lot less detergent, a lot less chemicals and our output is great. So our Ireland facility may be in the greenest facility -- greenest biologic facility you can ever see. When you tour our facility in Hebei near Beijing, you'll see every batch we produce, we can actually show you what's our emission, how much carbon emission we have, how much electricity, how much carbon emission and how much waste we actually generate through every batch. And lastly, we are very happy to report to you that we actually achieved a bronze medal in EcoVadis. EcoVadis is a couple of large pharma. They form alliance to say, to help ESG, to help green the community, how do we -- what do we ask our supplier? So certainly this is a minimum requirement for all the partners who work with large pharma and this is what we need to do. If we stay on EcoVadis score, and we will not be able to work with all those companies that are listed below, right? So this actually becomes a huge barrier for a lot of new CMOs because EcoVadis has very high standard. We are very happy that we actually achieved EcoVadis' bronze medal. That basically means we already met the minimum criteria to work with all those companies in terms of ESG and will continue to improve, hopefully, will become silver medal, and eventually gold medal. But I think this is -- this actually becomes a barrier for new entries, also a very good incentive for WuXi Biologics to continue to invest in ESG. And with this, I'll hand over to Ming to talk about our financials.

Thank you, Chris. Now I'm going to talk about our financial performance. Our revenue and profitability continued to grow into the record territory. Page 41 gives us the financial highlights in -- Page 40 gives the highlighting -- the financial highlights in 2022. First, revenue. As you can see that the last year, our revenue exceeded CNY 15.2 billion, a 48.4% increase over the fiscal year 2021, continuing our journey of exponential growth over the past 9 years with a CAGR of 61.4%. The 48.4% revenue growth last year was primarily driven by the successful execution of our Follow & Win the Molecule strategy with more customers, more projects and more revenue per project as more and more projects are advancing from the early stage to later stages and also the early stages becomes more complex. Secondly, the significant growth of revenue from the late phase and the commercial manufacturing contributed significantly. Now they represent almost half of our portfolio. The 46% increase in our pre-IND revenue enabled by the R of our unique CRDMO model, the 100% growth in early phase revenue powered by our biologics development activities. The 63% revenue surge from the non-COVID sector, while the demand from COVID sector is still strong, albeit growing at a decelerating phase. Also, the exciting new growth platforms such as ADC and bispecifics also contributed significantly to our robust growth in 2022. And of course, our capacity expansion and the integration of the acquired assets are also key enablers for us to achieve this significant growth on our top line. Gross profit increased by more than 39% to approximately RMB 6.7 billion. The increase here in gross profit was primarily attributed to the robust revenue growth, the high utilization of our existing and new manufacturing facilities. The high productivities from our development sector despite of the COVID constraints. And of course, our constant improvement of the operations efficiencies with WBS as our lean culture. The group's revenue growth exceeded the gross profit growth in the reporting period due to a higher CMV-related items such as share-based compensation, material inflation and also new sites ramping up impacts as we continue to invest in talent acquisition and retention, capacity expansion, R&D and also global footprint extension to assure the long-term sustainable growth. Excluding the share-based compensation, our adjusted gross profit grew about 47%, in line with our top line growth. Adjusted EBITDA, which is a proxy of our operating cash generation capability increased by more than 49% to RMB 6.9 billion. The adjusted EBITDA margin was just shy of a 45%, a 30 bps expansion year-over-year. Adjusted net profit is the GAAP-based net profit, excluding the impact of foreign exchange gains, share-based compensation and also fair value gains from our investment portfolio. This is the proxy of our business profitability under continuous operations. As you can see that the adjusted net profit increased 47.1% from CNY 3.4 billion in 2021 to CNY 5.1 billion in 2022. The increase in adjusted net profit margin was primarily contributed by the certain gross profit and was partially offset by the increases in R&D, SG&A and the tax expenses. Next page, please. Slide 41 illustrates our consistent growth over the past 9 years. On GAAP basis, net profit -- net profit attributable to the owners of the company, earnings per share and also adjusted earnings per share. You can see that our net profit has grown more than 108x between 2014 and 2022 and exceeded CNY 4.5 billion last year. The RMB 1 billion increase was about 30% year-over-year. Net profit attributable to shareholders also increased 30.5% during the reporting period to reach CNY 4.4 billion. Diluted earnings per share increased by more than 31% year-over-year to exceed RMB 1 per share, and adjusted EPS on a diluted basis increased to 50.7% to RMB 1.13. Again, the most important metric here is the adjusted earnings per share as it strips out share-based compensation, foreign exchange hedging results, investment gains and loss impact, it is a true indicator of our sustainable operating performance. Next page, please. Slide 42 gives you more insight into our gross margin. In 2022, our gross margin was about 44%. Excluding share-based compensation, our adjusted gross margin reached 50%, one of the best in the industry. You can see the composition of our cost components in the stack bars below, with roughly about 20% in labor cost, 21% in material and about 15% in the overhead, which includes maintenance, utilities and depreciation of the manufacturing facilities. Compared to 2021, labor cost as a percentage of revenue increased by about 3 points, largely driven by the increase of the share-based compensation due to the RSU distributed stock units amortization cycle. Our CMB as a percentage of revenue improved with the productivity gains throughout the year. Material cost as a percentage of the revenue decreased 1.6%, largely driven by the project mix at different life cycle with the early phase projects growing a little bit faster than the late phase ones. The continuous material usage improvement, near perfect execution in our batch success rates also contributed to the reduction of the material costs and offset inflationary impacts. Our overhead increased 1.3 percentage points due to the new capacity coming online and also the depreciations associated with the capacity expansion, with the ramping up of the utilization rate at the new facilities and also the weight of the depreciation in our cost structure will gradually decrease over time. Next page, please. Page 43 presents us the evolution of our return on equity over the past 6 years. In 2017, our year of IPO, our return on equity was only 6.3%. And over the years of improvement, our ROE reached 10.7% in 2021 and further surged to 12.6% last year. On the right-hand side of the page, you can see the reported ROEs of our 3 global peers in the CDMO industry. As you can see, at WuXi Biologics with an ROE of 12.6%, we're leading the industry now. The reason our ROE historically was in the upper single-digit range was because of the consistent -- or I should say, persistent investment in our people, capacity, technology and global footprint. Take drug substance capacity as an example. We increased our capacity eightfold from 35,000 liter in 2017 to 262,000 by the end of last year. Biologics industry is such a long-cycle business that it could take [indiscernible] 2 years to go from DNA to BLA to commercialization. Similarly, building a world-class biologics facility is also a journey, -- from engineering study to construction to mechanical completion to GMP certification. It can take 2 to 3 years. And after that, commercial arrangements, customer acceptance, quality certifications and gradually climbing the utilization curve could also take another 2 to 3 years or even longer. That's why our ROE was lagging our investment when we were expanding. The good news here is that now with our profitability continuing to surge, while our CapEx stabilizes, we can reap the fruitions of the past investments and see our ROE surpass our peers and maintain at a range of 12% to 15%. Secondly, as we all know, ROE is also a function of our leverage ratio. Ever since our IPO, we have been following a very conservative funding strategy with very limited debt funding. Hence, our ROE might appear lower without leverage, but it brings us more financial stability and the flexibilities in the long run. Next page, please. Page 44 is about free cash flow. Last year, at WuXi Biologics, we achieved a positive free cash flow, a critical milestone in our company's growth. As we just talked about, ever since our IPO in 2017, we have been consistently investing in our capacity to build a world-class CRDMO. At the same time, we grew our operating cash flow 14x to reach CNY 5.5 billion last year and financed our CNY 5.4 billion CapEx with our own operating cash inflow. Cumulatively, we have spent over USD 4 billion on CapEx during the past 6 years to support the business growth. As Chris mentioned earlier, we will continue to strengthen our global manufacturing footprint in the U.S., Ireland, Germany and Singapore. Our targeted CapEx for 2023 and 2024 will be about RMB 6 billion. Our goal this year is to continue to deliver positive free cash flow using our own cash inflow here. So I'm now going to pass the baton back to Chris to summarize our achievements and also talk about our future.

Thank you, Ming. I think this is an industry report talking about our space, basically Global Biologics CDMO, how the market is going to grow. We are very excited. So Ming has already presented to you, over the past 8 years, we are growing twice -- more than twice faster than the industry. So our top line growth was 60%, whereas the industry growth was only less than 20%. So we've been growing almost like 3x the industry. So in the next couple of years, when the industry is growing probably around 14% to 18%, so our goal is still to maintain this momentum to grow twice the industry. How can we do that, right? How can we grow even with the current size, with the 12.8% of global market share, with the globally #2 business, how can we still grow twice the industry? We believe our business model, the CRDMO really is a key, right? So being a pure CMO, right? So being a pure CMO, the demand -- the company may be subject to the demand. Also, when you put a new facility online, the margin will fluctuate quite a bit, right? But we have the D part to complement that. The M, as soon as you put new facility online, your margin will be impacted by it. So I'll talk about Ireland facility later on when we put it online. So -- so being a CMO, the margin will always be sort of up and down, up and down, be somewhat cyclical, right? With the CDMO, the D part always gives us a very stable margin. And with WBS actually improved margin year-over-year. And we see RDMO, the R will give us a milestone and royalties, although small, but the R part will actually have a big impact on the P&L or the probability of the company. So we believe we have a perfect business model with CRDMO, right, each balance each other. So our business overall, we continue to see some year, D will be driving the business, some year, M will be driving the business. Some year, maybe eventually R will actually be a big driver as well, right? So you see for the first 10 years of the -- for the past 12 years, the first 7 years, D is the main driver. For the past 5 years, M starts to be the driver. Starting this year, R will play a bigger role as well. So the CRDMO model will really be perfect in terms of delivering sustainable high growth. And what's more exciting, we have already demonstrated over and over again, D will lead to M, right? That's our Follow the Molecule strategy. And now when we move upstream, R will also lead to D. With the GSK deal, the full program, we'll also be doing the D, and we'll also be doing the M. And actually, for most of the R programs, we actually have the option to sign exclusive manufacturing deals. So far, we have 6 programs where 100% manufacturing will be done in WuXi, most of them already end up in our R. With our R, we manage 100% D and eventually possibly 100% M. I think now you see the building of the CRDMO model. That's why I have the confidence to say that even with the current size, we'll still be growing twice the industry. So I want to give you a very brief summary. I think, again, despite all the external challenges, the business and financial metrics in 2022 was actually the best ever, right? We achieved free cash flow positive, we can fund our own operations with the growth. We can invest $1 billion every year, that will generate about $1.5 billion revenue in 3 to 5 years with our own operations. If you take out the COVID, we actually added the highest number of projects last year. And our Win the Molecule continues to accelerate. So as I mentioned last year, we won 11. This year, the first 4 months, we won 9, most or all of them are actually, basically in commercial. If you include the early phase program, we have already achieved -- the first 4 months we achieved every single one in 2022. And that's the acceleration. And if you still remember the first slide, the second -- the first -- one of the earlier slides where we talked about all 3 phases, the pre-R&D phase, last year the growth was 48%. The clinical phase, growth was 100%. And the Phase III and commercial, if you take out the COVID, growth was 78%, right? So it's -- and again, pre-IND grew 48%, clinical growth 100%, and the Phase III and commercial non-COVID growth, 78%. So growth -- again, if you look at all those, very exciting. So I just already highlighted to you that you need CRDMO model. And lastly, over the past 10 years, you have seen us with very good execution. You have seen us with very good M&A strategy. All M&A has been proven to be successful out of WuXi. And when we invested in WuXiBody, you know we invest in bispecific, you know we invest in ADC before industry needed, right? So we have really a very good strategy. So count on WuXi Biologics to do the right thing and do it well. And with this, I want to give you the growth outlook. I think we are still very confident that 2023 will deliver very strong top line and bottom line growth, despite all the challenges, right? For the past 3 years, most of our facilities are 100% utilization. We really need some time to tune the facilities and also to overcome the potential issues from that -- from the headline. We actually bring online Ireland -- specifically, Ireland, Germany and U.S. at the same time. And when you bring online a new facility, the utilization is always lower because you need to ramp up slowly to make sure that everything is done well, right? So I think despite all those factors, we are very confident our top line will grow 30% this year. Our adjusted net profit will grow 26% this year, more than 26%. And the -- I think I mentioned that we're operating online Ireland, Germany, U.S. all at the same time. Just this 3 facility alone will reduce our margin by 450 basis points this year. But I think this year, we'll hit it harder. And next year, we're actually seeing 150 basis point improvement on the margin just because of the better utilization of this facility. And the year after another 200 basis point improvement. So basically, all those facilities, you will see a minimal impact to our margin and more contribution actually when we go to 2025. So again, I have already mentioned we want to continue sustainable high growth in the next couple of years. For 2023, 2025, we still are aiming for 2x industry growth. So our target on top line is 30% growth and on the adjusted net profit is still 26%, basically high 20s. I think with the current size, I'm hoping that investors, you're still convinced that WuXi Biologics can deliver sustainable high growth. But I also want to point out to you that after 3 years of super growth, the past 3 years super growth, capturing all the COVID opportunities, COVID antibodies, COVID vaccines, our team really need to transition from a high COVID revenue to a low COVID revenue. As I mentioned, some of our facility hasn't been shut down for a while. We need to go fix the facility. We need to go improve the facility. We also learned a lot about how to operate the facility during the peak time. So again, we have been operating facilities at 100%. So we need some time to improve the facility, that will happen in the first 6 months of this year. And to make it harder for us, in the first half 2022 is also a record period for the company in terms of financials, right? And that's where we -- all our facilities are 100% utilization. Every employee is contributing a lot more than typical. I think -- so we have a very strong first half of 2022 as a baseline. So that's why you see our first half 2023, you'll see a slower revenue growth and profit growth. But I think overall, second half 2023, our growth will accelerate. So full year, again, we'll still achieve 30% top line, more than 26% adjusted net profit growth. And for the next 3 years, we are maintaining the same guidance, a 3-year CAGR of top line 30% and profit growth of 26%. Thank you for your attention.

Thank you, Chris, I mean, for this very comprehensive presentation. And it's always very exciting every time I hear Dr. Chen giving presentation that I'd like to rush out and buy some shares. Unfortunately, we're not allowed to do that. So let's now start our Q&A session, and I see a lot of questions online. Unfortunately, we may not be able to go through all the questions one by one because of the time constraints.

So let me start a quick question. Maybe then I will go through some of your questions. So as Chris probably mentioned earlier, Morgan Stanley released a second round of CDMO survey last year and found actually at least by 2025 with all the new entries issued a significantly higher growth of demand for CDMO balance, CDMO supply. So I think we are in good shape here. And also, we found that WuXi Biologics now the most used CDMO lender by the biotech companies. Maybe Chris can share with us why you are so attractive to the biotech companies, and also like what do you see the competitive dynamics evolving with new entrants like [indiscernible] and also like more an investment from Fujifilm. And also what's going to drive the demand for CDMO, like outside [indiscernible] go like bispecific and anything like that.

Thank you, Sean. I think as Sean mentioned that in Morgan Stanley survey, WuXi Biologics is actually the most trusted partner for biotech companies. And even for large pharma, we're in their top 4-- so I think that's really happy to see this result. It is in line with what we have heard from our clients. I think if you look -- most of the investors already know, we haven't talked about our business model for a while, integrated, one-stop shop. I think we actually cater to outside companies more than anyone else in this space, right? The one-stop shop, we make biotech so much easier. Before WuXi Biologics, typically, they need to work with 2 CDMOs and sometimes even 3. So with WuXi Biologics, our one-stop shop, they only need to work with us. Once they find our business model very exciting, they found out we have good execution. We have many about biotech companies that put every program out of WuXi. We have exclusive programs, companies like [ ARCA ], like Inhibrx, like Amicus, they put every biologics program within WuXi. And TESARO, Momenta, some of those companies already acquired by Janssen and GSK, right? So we cater to biotech companies. We provide one-stop shop service. We help them be really successful. We're also very flexible working with them, it's very easier said than done. So our business model, we basically we tailor to every client's request, we truly make the service fully become a service. I think, service attitude, service mindset, I think that's in our gene. So that's why over the past, I would say, over the past 5 years, we have always been the preferred choice for biotech companies. I think -- and now we also become the top 4, #1 preferred choice for biotech and the #4 total for large pharma. But I think our ranking for large pharma is going to increase as well. I think Sean also mentioned the capacity increase by the global competitors. I mentioned earlier, we believe this industry is a winner take all. The top 6 companies will actually get more market share. So new vendors actually will have a much harder, much harder time in getting more market share in this space. So I think -- because probably the current leaders already have access to clients, have good track record, have good quality system, have the capital and have the talent. But if you're a new entry, it's much harder to do than covering our business model. So I'm very confident that the top company will continue to do well in this space.

Let me ask you the first question, a big one. So Chris, you mentioned that the employee and the [ factory ] are going on vacation and the refurbishing then in the first half of this year. How much capacity is expected to be affected?

It's a rotational program. It's like every facility needs to be maintained, so it's not every facility is maintained at the same time. Yes. Because of COVID, our facilities I think has been like close to 100%. So now this year, the first half, you probably only see us in driving close to 70%, 80%, because we have -- we need to leave room for maintenance. We also need to leave room for training the people and fixing the facility where we have the issues and also improving the facility to be able to do different projects, so all those transitions.

Okay. So next question is could you verify your long-term gross margin target with overseas expansion? In your previous call, you said overseas operation is more expensive. And hence, you expect a long-term gross margin to exceed the 40% at the steady state. Is this 40% for the reported gross margin or adjusted gross profit margin?

I think our adjusted growth -- adjusted gross margin will be high 40s, as the net margin will -- Ming, maybe you can comment on that.

Yes. For our global facilities, basically, we're looking at about 40% of the net margins -- not net margins, the gross margins on a GAAP basis at a steady state. And then on an adjusted basis, without stock-based compensation, it should be in the mid-40s. And then in our existing facilities here, we're talking about 50%. So in the long run, there will be about a 10 percentage difference between the China facilities and global facilities. And then our combined gross margin adjusted basis will be over 45%.

Okay. That's great. Next question. So I think that's about the project. Are you seeing any increased like cancelations or delay? We hear of biotech and large pharma companies prioritizing their program to conserve cash and only focus on the most promising molecules. You may have seen some like in China. How do you assess the urgency of backlog conversion?

Yes. So what we have seen is actually just the opposite, right? As I mentioned to you on the page, our Phase I and Phase II program, actually, the revenue actually doubled. That basically means the program actually move into the next phase. So I think the -- probably 2 ways to explain this. One is actually -- most of the companies work with us are top companies. So they may be impacted a little bit less by the funding constraints. And that's probably one reason. The other reason is some of the delays may not be reflected last year. It may be happening this year. But I think overall, again, because our pipeline grows, it still continues to be very strong, so we have early phase, middle phase and late phase. So the middle phase growth was double last year. This year, even if we see some slowdown, but our late phase, the commercial will continue to accelerate. And that's why we are still so confident that we can deliver 60% growth on the traditional business, non-COVID.

Okay. So -- what is your CMO commercial stage only revenue contribution expectation in 2023 into 2026, I suppose late 2023 and 2024? Can you give us some color, the annual revenue [ achievable ] target. Can you touch on the 11 non-COVID projects? I think you mentioned some could be like CNY 2 billion, CNY 3 billion total sales. Can you provide some kind of color on what those targets for oncology, for [indiscernible], things like that or like your extensive commercial CMO contribution in the next couple of years.

Yes. We don't guide on the specific segment. So again, because we have -- we believe, overall, we have early phase, middle phase and late phase, all those combined will give us very strong growth, but we don't guide each per segment, it's very hard to guide. But last year, our Phase III in COVID, all combined is about 45% revenue. The year before it's 49% revenue. So it's still incredible. It's still half of -- it's almost like half of the total revenue. I think again, if you look at the half revenue, I think I already mentioned to you that -- if you take out COVID, the traditional business, the Phase III and the commercial growth was actually 78%, growth was 78% last year. But we don't guide because this is not something we can control. We would rather guide the overall business.

Okay. Okay, so I think -- so do you have any color on current rate of project termination and the cancellation? And the upturn signals from stock ops and the biotech, any kind of like signal turnaround, how does the current level look like compared to the near historical level and longer historical level?

Yes. You do see -- I don't know whether you can see the slide. You do see a significant higher termination of the project in this -- this is probably the highest during the last -- I didn't highlight this, though, when I present, right? If you look at the slide, we actually have 28 projects terminated during the last period. I think this is actually very high. Typically, we only see around 10, 15. So we see 28 projects terminated. So we do see a higher percentage of termination is either for a business reason or also for funding reason. But I think our overall portfolio growth is still very healthy. Even with this 28 termination of overall projects, still growth of 588.

Okay. That's good. So I think the people clearly are struggling with how to assess the impact of the U.S./China conflict on your business. Although it appears you haven't seen much pro forma at all. So I think I will have to answer this question. You may take this opportunity to clarify. So if you have to quantify the impact about U.S./China tension, what would be the impact for WuXi Bio, than probably in short term? And If this tension persist at all longer term, how much is the revenue data that you will last year actually impact? So that's the first question from this investor. Another one is, do you see margin pressure as the COVID and related projects decelerate?

No, we don't see the margin pressure from the funding deceleration. We -- our margin will be -- our overall margin will probably be 150 basis points lower this year because we put so many new facility online right? So I think fortunately -- just Ireland, U.S. and Germany alone, will reduce our gross margin -- gross profit margin by 400 basis points. But fortunately, we have WBS, we are improving our operation in other sites. We actually increased our margin by 300 basis points. That's why overall, this year, we only improved -- we expect our margin to be reduced by 150 basis points. And next year, actually, if we can continue to improve, our margin will actually be even recovering by 200 basis points. So I think overall margin, I don't think this is a big issue for us. It's very hard to quantify the China-U.S. relationship. As you -- as I mentioned earlier, if you look at the numbers, right, if you look at the numbers, you don't see much negative impact at all. But I'm sure, right, if there is no headlines, our U.S. revenue will grow even faster, right? So I think basically what it meant is despite all those challenges, we can still deliver 62% revenue growth in North America last year. And U.S. overall market -- overall contribution to the company actually increased by 3 basis -- 300 basis points. I think our revenue the year before was around 51 or 52. Now it's almost 55, 56. So I think, again, I think WuXi has figured a way to navigate the China-U.S. relationship and provide value to our clients, right? I think that has been key. I think I'm very confident that our U.S. market continue to be strong. And if you look at our backlog, if you look at the backlog, of most figures last year, we added $7 billion to our backlog, and most of those actions still from U.S. companies. That basically means the next couple of years, U.S. companies will probably continue to see increased revenue and faster growth.

Okay. I think this question may be better addressed by Ming. So what is the expected taxability in 2023 and beyond? And maybe also with more like overseas facility going to open, some of them will be starting doing businesses. Does this offer you opportunities for some tax planning type of situation. Ireland, companies that pick Ireland as a tax haven, which of course, is now getting more difficult?

Yes, I understand. Basically, for 2023, our effective tax rate, we're still targeting about 15% because our major operations in China here, we enjoy a high-tech tax status here. We pay about 15% CIT. And then globally, we're still not at sort of a profit stage. So we're going to leverage so-called DTA, deferred tax asset here, to take the benefit in the future. In the past years, Ireland do offer us a lot of the tax advantages here in terms of the R&D tax credit here and also in terms of accelerated depreciation for tax shielding. One thing here that with the implementation of the BEPS 2.0, there is basically the 15% minimal corporate income tax, Ireland is going to adopt that 15% in 2024. So the current 12.5% CIT nominal rate will increase to 15%. But a lot of the tax advantages are granted to us, like the R&D tax credit and the accelerated depreciation will stay there intact. So overall, we're still confident here we can achieve 15% effective tax rate for 2023 and beyond.

Thanks. So finally, what is the milestone fee in 2022? And is the guidance on royalties in the future. Are you going to provide any kind of guidance? I suppose it's very difficult if you don't know the sales context.

Yes. Milestone and royalties are very hard to guide, and that's why we don't want to guide. I think the milestone revenue was around $30 million last year. But this year, with the GSK project alone, which -- that's why it's because milestone by definition depending on the progress. But I think the good thing is the more program we sign, the more will be -- but eventually, this will be $100 million a year of milestone plus royalty. I think we hope to get there in the next couple of years.

Okay. Excellent. So I think this question is interesting. So quite unique. So looking at the difference between reported gross margin and adjusted gross margin, it has increased from 2% to 3% to 6%. How should investors think about the trend for this gap? That is meaning you need to spend more share-based compensation to retain talent, particularly overseas talents in the future. Eventually, the share base transition should be considered as expense once that [ figures ]. How will that impact your margin cash flow ROIC in the future? You mentioned you spent quite a bit of money to buy back shares to kind of blunt the dilution effects from these concessions. So can you comment a bit on that?

I think the -- I think SBC is a key part of our strategy to recruit, retain the best talent. I think one of the key success of this is like that. So our SBC scheme is actually very back-end loaded. So for example, for every RSU is a 5-year program, the first year is 0% invested. Second year, 20%. Third year, 20%. Fourth year, 20%. And last year, 40%. So it's all back-end loaded. But financially, the cost actually hits a year -- the first year hits harder than the second year. So there is a mismatch between the sort of the RSU we issue and the cost of the company. But this is just the financial system. But what we believe because we have been issuing RSUs in the past couple of years, cumulatively, you see the gap become bigger and bigger. But as the revenue grows, I think starting in 2025, you'll see it becomes shrinking again. So this has happened to be the period that we -- the impact for RSU getting bigger. And I think this year may be the biggest. I think we'll start to see the gap getting smaller and smaller, starting in '24, '25, '26, I think as our revenue grows. I think this is the nature of the company.

If I may add here, to Chris' comment, our RSU has a 5-year cycle. So basically, vesting cycle is 0, 0, 20, 20, 40. In other words, 5 years, say 100%, right? So it's more towards the later end. And then from an accounting standpoint, it's 30, 30, 20, 13, 8. So that's basically how the RSU expenses are amortized. That's why in the first 2 years, because of the cycle, you see a higher expense. But it's all paper money, fundamentally say the number of the shares, as we talked about in our -- the latest tool, share buybacks offset all our RSU issuance in the past 3 years. So there is a minimal dilution impact.

Okay. That's good. I think I'll read the question. Significant increase in stock-based compensation in fiscal year 2020. Should we expect the same levels for fiscal year 2023? What's the overall salary increase expected for 2023?

Ming, why don't you comment?

Yes. Okay, the overall SBC as a percentage of revenue is at a peak at 2023 is about 8%. And then this number in 2024 is basically the second year of the last tranche is probably going to stay at there. And then after 2024, '25, '26, '27 is going to decrease by about 2% to 3% as a percentage of revenue a year. And then from the merit increase standpoint, this year we gave about 7% total increase to the CMB here. 5% is on the salary increase. The other 2% is basically like a merit adjustment promotion, et cetera, is not guaranteed. So overall, now you can take a 5% CMB increase as a guideline for the modeling.

Okay. Thank you, Ming. So why have past CMO project [ confidence ] projections proven to be conservative? So what could be the potential upside from your calendar 2025 CMO expectations?

Can you repeat your question? I didn't get the question.

Just like your number of commercial CMO actually have increased quite a bit actually, and beaten your expectations by quite a bit. So the investor was asking whether there may be some kind of sustained upside to your 2025 projection of 32 to 38.

It could be. It could be. I think the -- I think right now, this is -- I think this number, if you see the slide I presented 2 years ago was significantly lower. I think we have been revising up those numbers every time we meet. Every time I spoke with investors, this number gets higher and higher. We started to report this number 2 years ago. I think at that time, 2025 was 20 programs. Now it's almost like 32 programs. So I think this is an exciting -- most exciting part of our business. Essentially, in CMO, now we start to become a global top leader, well recognized by biotech and large pharma, right? I think this is probably the most exciting, most exciting recognition from the global community in the past couple of years, just because of how well we did on delivering COVID projects, right? We delivered 3,000 metric tons -- 3,000 kilograms of COVID antibody for GSK and AstraZeneca, and we delivered millions of doses of vaccine for AstraZeneca. I think everyone in the global community has seen that, right? And we delivered in a very fast speed, with a very high quality, with 100% execution, and with the very affordable cost of goods, I think. So you're saying, our CMO was proven during COVID. Now with both Follow the Molecule and Win the Molecule, I believe this will continue to be the case. So I think we will likely have upside given all those numbers.

That's very good. So I think this question is probably more about the financials. Can you talk about your ROE trend given expansion of facilities outside of China? So you -- I know it's long term, you want to see that 12% to 15%. But this year, you got to 12%. So what's the impact from like overseas expansion in the next couple of years?

Okay. So for overseas expansion, now it represents about 60% to 65% of our overall CapEx. So for example, this year, we're going to spend CNY 6 billion and the overseas is going to be about CNY 3.5 billion, CNY 3.6 billion. So because our overall expansion strategy here is going to be overseas to mitigate any potential geopolitical risk. And then from a return on investment standpoint, basically, for overseas, say from a profitability gross margin standpoint, because labor cost is a little bit higher and also in the CapEx, the total investment is also higher than China. So we just talked about here, say from a GP standpoint, it's going to be 10 percentage points lower. So return on investment is going to be a little bit lower than China. But overall, we have demonstrated about 12.6% of the ROE here. And overall, as our policy to stick to a positive free cash flow, so we are going to continue to build this equity and then continue to have our earnings exceeding the equity. So that's why we see -- we expect our return on equity will maintain at the 12.6% and gradually approaching 15% in the next 2, 3 years.

Is getting quite a…

There was a related comment about why I mentioned that every dollar will be met as the CapEx that will probably bring $1.5 revenue down the road. There was a question about clarification on that. It is really because of blend. Every dollar we invest in China will generate actually $2 revenue, $1.8 to $2 revenue. Every dollar we invest outside of China probably generate maybe about $0.8 to $1. And if you blend our capacity, that's $1.5. And that's why -- so because we have a very high CapEx efficiency for operating in China. That's why every dollar we invest will generate higher revenue than our global peers.

So it has been a long day for Chris Chen and his team. So I'll finish this Q&A with this final question from Chen Chen of UBS. So what do you think are the biggest challenges for biologic CDMO industry and then WuXi Bio in the next 3 years? And what's your edge compared with peers such as Lonza and others?

I think our competitive advantage is still our business model, right? I think it's very clear, right? Our business model is -- we have a very strong arc, and we have the globally leading team right? So I mentioned last year, we delivered 123 projects to the [ clinic ]. And most of our global peers delivered less than 22, and that's a huge contrast. So -- and so that -- so we continue to be very strong indeed. And if you believe the stickiness of D, that will lead you to M. I think -- and that's why I don't worry about the capacity because the D project will need capacity and eventually we'll be able to retain most of the M and now will require capacity. And now our R part will also continue to be benefiting that. So that's why I believe our competitive advantages, the CRDMO model and our execution. We have a perfect track record in delivering. I think that's why, again, if you look at last year, there are so many headwinds, right. We still delivered because the company trust us. When they give the project to WuXi, they know. If we said we're going to deliver everything by Christmas, we'll be there before Christmas Eve. I think that's an assurance every client wants to have and WuXi is probably the only company that gives them that assurance. And that's why despite all those challenges, we continue to gain more market share. But I didn't highlight this during the presentation, we added 136 projects last year, it's actually a higher market share than before. Because of [ buyback ] funding issue, the pie is smaller, right? Despite the price model, we still add more projects, that basically means we are getting more higher market share and despite all those headwinds. I think go back to the challenges, I think -- I think most of the challenges are still internal, right? And we have Ireland, German, U.S. facility, how do we quickly bring those facilities online and deliver the same track record that a facility in China can deliver? If we can make the Ireland facility go to a 40% GP margin in the next couple of years, our business model can continue to expand very quickly. So I'll tell you something we can control is the challenges, something I have very strong confidence that we can deliver.

Thank you very much. So before we conclude this conference call, Dr. Chen, do you have any concluding remarks?

I think, again, I think you have seen -- if you -- again, if you look at the number that Ming presented, right? So from 2016 to 2022, in the 6 years, our top line grew 15% -- at 15x, 15 times. Our bottom line grew 22x. And the next 3 years we continue to believe that we can grow 30%, twice the industry. And our adjusted net income will be -- still high 20s. I think we are the preferred choice for -- we're the #1 choice for biotech despite all those headwinds. And we are the top 4 choices for large pharma. I think so, if you continue to trust us, I think WuXi Biologics will be delivering consistent, sustainable high growth for our investors as we must. Give us time. We are proving -- everything that we have said will be proven right in the next couple of years, proven correct.

Thank you very much for WuXi management to share a valuable time with our investors. Thank you, everybody. Have a very good day.

Thanks so much. Have a good morning, good afternoon, good evening.

Bye now.

Goodbye.