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

Good morning, and good evening, global investors. Thank you for joining WuXi Biologics First Half 2024 Interim Results Earnings Call. This is Lai Chen, China health care analyst at Goldman Sachs. Before we kick off the session, I would like to highlight that this call is strictly for clients of Goldman Sachs and WuXi Biologics only, and this conversation is not intended for media and is off the record. Participants will be removed on the call if they cannot be properly identified. And this call is not for the purpose of sharing or receiving them public or otherwise confidential information. Attendees are public side market participants who may not receive and should not request nonpublic or otherwise confidential information about issuers or securities or about markets of securities. Today, we are honored to have Dr. Chris Chen, our CEO of the company; Dr. Ming Tu, CFO of the company; and also Dr. Lina Fan, Head of IR, joining the call to give us a briefing on the first half results and also the outlook. Without further ado, I'm going to turn the call back to Chris. Chris, you can get started.

Thank you, Ziyi. Good morning, good afternoon, good evening, global investors. It's really my pleasure again to share with you our 2024 interim results. As everyone knows, 2024 is a very dynamic environment, but I'm actually very pleased to share that we believe the company has achieved very solid results. If you look at -- this is a very similar chart we update every year when we talk to investors, right? If you look at the number of projects, we actually see a very significant growth year-over-year from 613 assets to 742 assets. So tomorrow, if you hear good news about which molecule are being great -- achieving very successful results, there's 30% or 40% chance that molecule is already enabled by WuXi. And that's how powerful this portfolio is. Looking at 2024, the first 6 months, our non-COVID revenue growth was actually 7.7%, right? So again, excluding COVID, our growth was pretty decent. Despite all those uncertainties, despite biotech funding challenges, despite the geopolitics, we actually added 61 projects, much better than we anticipated because of dynamic environment. We excluded 8 COVID projects and also continued commercial manufacturing project. So our number -- if you do that, our commercial project was 14 last year this time, and now it's 16. So it's still a very healthy growth. Our backlog remained pretty healthy. I'll share with you later on. Our employee number is very steady. Our retention is extremely high. So on the left side, operational metrics, and on the right side is actually the financial results. So as I mentioned earlier, non-COVID revenue growth was 7.7%. But because in the first half of last year, we have very strong -- we have still some decent COVID revenue, so overall, our revenue is flat. If you look at the first half of 2023, that was the best period in the company history. We have a significant R deal with GSK, and with that duality, that give us around more than $300 million of milestone revenue. We have COVID revenue, about 500 million. We have very high utilization rate. So first half 2023 is a very high base to compare from. But despite that, looking at first half 2024, amid all those challenges, we actually we see our adjusted net profit down about 13%. So I mentioned the first half of 2023, we have a significant deal that led to a significant milestone revenue, around RMB 300 million. This year, we didn't have it in the first half. But fortunately, we already had it in this month. So some of you will hear me talk about the Curon-MSD deal. Had that deal happened in June, basically, had that deal happened a few months earlier, our adjusted net profit will almost be flat. So the minus 13% reduction or decrease of the adjusted net profit is actually mostly a timing issue because we have RMB 300 million of the milestone revenue first half of last year, and we don't have it until Q3 of this year. So it's pure timing issue. I think, again, if you exclude the GSK deal from last year or if the Curon-MSD deal happened in Q2, we would have achieved comparable adjusted profit. So that's why amid all the dynamic situation with the geopolitics, with biologics funding issue, with the global ramp-up, we are able to still achieve this result. This is why I'm very happy with the progress of the company. So if you look at adjusted gross profit margin, adjusted net profit margin, adjusted EBITDA margin, even with this financial result, we are actually still one of the best, if not the best in the industry. So moving forward to next slide. Again, looking back in the past 10 years, we actually see tremendous progress of WuXi as a company. Our revenue -- our non-COVID revenue grew at CAGR of 54%, including last year, right? When COVID hit, we felt that globally, we are responsible. We have the global responsibility to help every company achieving their goal, moving their COVID assets to the clinic and to commercial. So as a result, we also benefit financially in a great deal. So that makes WuXi grow much bigger and much stronger. And so now that COVID is over, we are going to resume the growing pattern. So we are -- because of our unique CRDMO model, I'm sure we will continuously deliver sustainable high growth for the global investors. Looking at a little more details in the first half of this year. So looking at the left chart, the said chart, this is already something I mentioned. So overall, the revenue is flat. But if you exclude COVID, it's actually 7% growth. Looking at the second half, the growth will be much stronger. So I'll share with you later on. The growth will be R, D, and M, will both be strong -- will all be strong. Looking at the right side, now you see some interesting sort of segmentation of our results. As I mentioned earlier, last year, we have a very significant milestone revenue of around RMB 300 million, right? If you exclude that, our early phase program, so basically the deep blue actually grew more than 20%. So this shows really a strong recovery of our R&D. And if you look at the top, the light blue, which is actually non-COVID, M. So the deep blue is R&D, and this is the M. We actually see 11% growth as well. So again, if you look at the revenue from project phase, right? So I mentioned to you earlier the milestone is a pure timing issue because we did achieve that in Q3 of this year. And on M side, we see double-digit growth. On the R&D side, actually, we see a 20% growth. Very healthy. So looking forward, the second half, we'll see R&D and M both growing. So we are very happy with the progress of the company despite all those uncertainties. Looking at the revenue by geographic is also -- this is something -- this is not something we manage. This is as a result of our client profiles. So North America actually in the first half of this year was actually more than 58% of our revenue. It's growing 27%. We did not see a major sort of like sort of a rush on the contract that led to the COVID that led to the revenue growth in North America. It's a normal case of our business. So North America, very healthy growth. EU, we had very significant COVID revenue in the past. We also have the mega deal, as I mentioned, on our side, RMB 300 million. So if you exclude that, we actually see a high single-digit growth. But because of the first half of last year, we have very significant, very strong European revenue growth, so now you actually see a minus 27% reduction. But again, if you exclude this sort of timing issue of that discovery deal of our revenue and you exclude COVID, it's still pretty good, high single-digit growth. China. Now Chinese revenue from China, this is probably the lowest percentage in the past 5 years, around 17%, less than 17%, less than 17%. So this is 2 reasons. One is that we do see some weakness in the Chinese market. As everyone know, funding is not strong enough, and the Chinese market is also very small. But also actually, a lot of the top premier assets actually from China now are being acquired by U.S. and European companies. As a result, we actually book revenue in Europe or in U.S. If you exclude that, China would actually be probably down about 10%, which reflects the current Chinese market. Rest of the world, mostly Japan and Korea, we actually see a pretty strong growth. So as I mentioned again, we look at results. This gives me where the direction -- where we should focus our efforts. So we'll continue to focus our effort on U.S., Europe and Japan, Korea and China will wait for the Chinese project to recover. Among midterm and long term, I'm still very bullish on China. I think there is a huge unmet medical need. I think WuXi will be a strong beneficiary of the Chinese growth in that segment. So Slide #9, something every investor is very familiar with. Every time I told investors, I think when you look at WuXi at a high level, this is the only chart really you will see whether will grow or not. I'm actually very happy to announce that despite all those uncertainties, we added 61 projects. This is very comparable in the past 3 or 4 years, actually much better than first half of last year, where the biotech funding was hit the hardest. Among the 61 projects, actually 30% come from the U.S. -- more than 30 projects come from the U.S. Half of the projects come from the U.S., which are, again, saying that WuXi and U.S. biotech community has a very strong tie. Despite all those noise, the U.S. biotech community still rely on WuXi to deliver their programs, okay? As I also mentioned in the last call that because of the geopolitics, we may have -- our Win-the-Molecule strategy may be limited or may have some stronger barriers. We're actually very happy to report we actually -- we are able to overcome this barrier still with an incredible Win-the-Molecule results. We won 9 programs, among them 3 Phase III and 1 commercial. Again, in July, we actually won 4 Phase III, 4 commercial. So Win-the-Molecule will continue to be a sound strategy for WuXi. I mentioned earlier with the opening slide that we actually -- we took the COVID projects out for the commercial. We also took a non-revenue-generating commercial project out. So that's why you see commercial now is only 16 instead of 25. So if we add those numbers, it's like 25. So we removed the other 9 projects from the commercial portfolio. We don't expect to add revenue next year. So I already highlighted Win-the-Molecule has been an incredible strategy. So over the past couple of years, we actually won 78 projects, 78 projects from the global community, from the global peers, from large pharma in-house. And I'm also very happy to share with you, despite all those headlines, so far, we only have one development project potentially will be transferred to a third party because of the geopolitics. So that gives you the context. We won 78 projects in the past 5 or 6 years. But this year, despite all those headline, we only have one project worth about $6 million from a small biotech company that will be transferred to a U.S. CMO because of politics -- because of geopolitics. That gives you a flavor how much the geopolitics has impacted us. So looking at the backlog, I always use -- we are always very proud of the backlog, the backlog for service milestone payment. And I also remind investors that the backlog is so high that actually you don't expect us to see a strong growth in the backlog because it's so big. So I always give the example. I have $20 billion of backlog. If you want me to grow 10%, that's $2 billion. I have revenue of, let's say, revenue in the next couple of years of $3 billion. Basically, I need to sign $5 billion deals to grow backlog by 10%. That's why backlog will be very steady. Another factor in our backlog is actually our revenue -- our contract to revenue cycle, that is a lot more reduced. When we started in this industry, let's say, development for a D project cycle time, 18 months. You see a very strong backlog. Now our cycle time is actually 12 months, even 9 months. Let's say January, we sign 20 projects, right? The average revenue is $6 million for each project. Then January, $120 million. By November, it's $120 million of revenue. So actually, it does not get reflected in the whole year backlog at all. So our backlog is actually very different from traditional CMO. For traditional CMO, you look at 5-, 10-year contract. The backlog is actually very visible. It's very relevant. But for us, R&D now mostly not capture backlog. Also, because of our Follow the Molecule strategy, our clients are not in a rush to give us a 10-year forecast of the programs. So as a result, our current backlog only reflects a fraction of our manufacturing projects and does not reflect most of the R&D projects. So at this point, backlog may not actually be a good indicator for us to share with you how strong our revenue growth can be. So we are constantly looking at new measures to see what -- how can we help investors understand our revenue growth. So now investors ask, what can we do? So the best thing you can look at now is with the project number. So I mentioned that this year, we'll probably sign, let's say, 110 projects. That 110 projects, that give us, let's say, $800 million of contract value. That $800 million may not be captured in the backlog. So every year, in our backlog, we almost need to add almost $700 million, $800 million to the backlog number. That's actually the real backlog. So I'm not sure whether I explained basically our current backlog. Because of how fast we move our revenue in a cycle time of a couple of months, our D revenue is in a couple of quarters, 3 or 4 quarters. So because of the fast pace we will convert contract revenue, actually a lot of the -- close to $1 billion is not reflected in the backlog. So if you look at this 3-year backlog right now for $3.6 billion, but if you add about $1 billion each year, so the 3-year backlog is actually almost $6 billion. And that gives you the assurance that our revenue will continue to grow. So because this is very unique, that's why I spend more time explaining the backlog a little more. So our pipeline continue to be very healthy, very diversified. So as I mentioned earlier, if you hear good news about the molecule, there's 30% or 40% chance that molecule, or 1 out of 3, 30% chance that molecule is WuXi in one of those portfolio, whether it's antibody, whether it's a bispecific, whether it's ADC, fusion protein or vaccine. That's how strong this portfolio is. And we have 281 first-in-class programs. We have 167 ADC programs. So the market share, so the more complex the molecule is, the more likelihood company -- global company will choose to work with WuXi because of technical strength, because of our experience in those assets. Again, who in this community has experience with more than 100 ADC? Who in this community have experience with more than 100 ADC, 150 ADC? And that's the WuXi advantage and that's how we can help the community. That's why I mentioned the pace we convert contract revenue gets faster and faster because we are able to leverage all the experience we gained in the previous project to help the next program be more successful. So I think unfortunately, you guys don't really know our portfolio. But this is the best I can do, I can share with you. We are very excited about our M potential. Despite geopolitics, we are very excited about our future on the manufacturing side. So our R&D is very unique. They are less geopolitics sensitive. Our M is geopolitical sensitive, but we believe we still have a strong value to the global community. So among the portfolio now, I can see actually 20 -- 18 blockbusters, so 18 programs that potentially sell -- global more than $5 billion sales. Among the 18, actually 8 of them could be $3 billion to $5 billion each. And if we become a significant contributor of that program, we'll probably be on the top -- on the left side, left column, each program will probably give us $200 million revenue. Some of them is already -- some of them is actually getting very close, already getting close to $100 million revenue already for us, even though they are still in Phase III or post Phase II. So on the column -- on the left side column, 8 programs are really the heavy weight CMO contribution in the next couple of years. You see them. They're very diverse. You see cancer bispecific. You see other bispecific. You see all the new programs, cancer ADC. Very diverse. We're very happy to report that. So among the 8 programs, 3 of them are already mega blockbuster. So they already achieved more than $3 billion of sales. And then in the middle column, those are the potential blockbusters. So this program will generate about $100 million, $200 million revenue for us. I think among 10 of them, about several of them are already approved or close to approved. And on the right-hand column is additional revenue. Again, if you add those 28 programs together, you almost get more than $3 billion revenue, peak revenue. If every program achieved peak sales, our revenue actually will be $3 billion. So that's why despite the political headlines, we are still very confident our M will become a very strong player in the global community. We may not be able to win every project that we compete, but Follow the Molecule give us strong enough portfolio to make us one of the best or one of the largest CMO players in this company. So with that, I would like to hand over to Ming to talk in more detail about the financials.

Thank you, Chris. Now I'm going to talk about our financial performance. Slide 15 gives us the highlights of our financial metrics for the first half of the year. First, revenue. The first half of this year was a challenging period. However, despite of the geopolitical headwinds, post-COVID slowdown of our revenue continues to grow. As you can see that our revenue exceeded RMB 8.5 billion during the reporting period, a modest 1% increase. But excluding the 0.5 billion of COVID revenue in last year's baseline, our non-COVID revenue grew by about 7.7%, continuing our journey of solid growth over past decade and also proved our resilience under such a tough macro environment. Our revenue growth in the first half was primarily driven by the following factors: first, successful execution of our Follow the Molecule strategies as more and more projects are advancing through our funnel towards the later stages. Now excluding the COVID projects, we have 56 in Phase III and 16 in commercial manufacturing stage. Win the Molecule strategy also added 9 projects to our portfolio with 4 in late phases. Overall, late phase and the commercial manufacturing revenue grew by 11.7%, excluding COVID, and also represented over 40% of our total portfolio during the reporting period. Secondly, in the first half of last year, due to the biotech funding constraints, we only scored 46 new projects. As our typical revenue conversion cycle from pre-IND to early phase is about 9 months to a year, the lower number of the new projects in the first half of last year created some headwind for us for the revenue conversion in the first half of this year. Nonetheless, our pre-IND revenue grew by 9.2%, and early phase revenue was still steady compared to that in the same period last year, enabled by our competitive strength in R&D in our unique CRDMO business model. Also the new exciting growth platforms such as ADC, bispecific contributed significantly to our overall revenue growth during the reporting period. Another factor contributing to the difficult comparison year-over-year is that in the first half of last year, we recorded 2 mega licensing deals under discovery services with a total amount of over USD 52 million. If you exclude these lumpy discovery service deals in the baseline, our pre-IND revenue grew by about 20%, demonstrating our competitive advantage in the pre-IND area. And also, this is proof -- the signs of recovery in biotech funding. The strong pre-IND sales would also provide a strong infusion into our pipeline for early phase revenue growth in the near future. We also have a full pipeline of discovery service deals that are likely to hit in the second half of this year. The announced Curon-MSD deal is just one of them. Lastly, with our capacity expansion globally, we had Dundalk, Ireland, Leverkusen, Germany and Cranbury, New Jersey contributing over $50 million of incremental revenue to our commercial and clinical manufacturing sector. Moving over to gross profit, which decreased about RMB 200 million to approximately RMB 3.4 billion in the first half. The 5.9% decline in the gross profit was primarily attributed to the mix impact from the lower discovery service deals. As I mentioned earlier, we scored 2 mega upfront licensing deals in the first half of last year, contributing roughly USD 52 million or RMB 370 million on top line and over RMB 300 million of GP margin. The absence of the mega licensing deals this reporting period were offset by the revenues from development sector, where the GP margin is roughly half of those from the research segment. The mix impact here is about 250 basis points of the GP margin compression. So that's why Chris said earlier, on the hindsight, if the Curon deal was recorded before June 30, our GP margin will be flat year-over-year. Nonetheless, we still see our GP margin -- we'll still see our GP margin improve once the mega discovery service deals hit our top line in the second half of this year. The second reason for the GP decline was that the plant utilization rate in China in the first half of the year was slightly lower than the same period last year due to the conclusion of the COVID projects, contributing to about 1 point of the GP decline due to the idle capacities. Globally, we're still in ramp-up phase at our new facilities in Ireland, Germany and the U.S. There are some execution delays, but overall impact from the ramp-up losses have been reduced compared to the same period last year. And we are still confident that our Ireland facility will break even and turn profit in early 2025. All of these GP challenges were partially offset by the efficiency improvements from WBS, our lean manufacturing implementation, which gave us about 1 point of the margin lift. Excluding share-based compensation, our adjusted gross profit margin stands at 44.4%, still one of the leading positions in the industry. Adjusted EBITDA, which is a proxy of our operating cash generation, declined about 6.5% to RMB 3.6 billion during the reporting period due to the same reasons I mentioned earlier under the GP discussion. However, compared to our global peers, the adjusted EBITDA margin of 41.6% is still one of the highest in the CRDMO industry. Adjusted net profit is the IFRS-based net profit excluding the impact of foreign exchange gain and losses, share-based compensation, fair value gains and losses from our investment portfolios and also the XDC IPO-related onetime listing expenses. This is the proxy of our business profitability and continuous operation. As you can see that the adjusted net profit exceeded CNY 2.5 billion in the first half. The adjusted net profit largely moved in tandem with adjusted gross profit year-over-year. The additional RMB 200 million decline was due to the increase of SG&A expenses as we build the stand-alone capabilities for XDC, which is now a publicly listed company. And also, we continue to invest in global footprint for our future growth. Next page, please. Slide 16 shows our profitability metrics over the past decade, including IFRS-based net profit, net profit attributable to owners of the company, earnings per share and also adjusted earnings per share. You can see that our net profit has grown at a CAGR of 63.8% between 2014 and 2022 and exceeded CNY 3.5 billion last year. In the first half of this year, our IFRS-based net profit was about CNY 1.8 billion, roughly 23.9% lower than that in the first half of 2023. The CNY 500 million decline in the IFRS-based net profit was primarily due to the following factors: first, the onetime unrealized foreign translation impact of over CNY 200 million. As we continue to invest in our global footprint in Europe, the net euro exposure on our balance sheet now is about CNY 1.1 billion. The 150 bps of euro depreciation from 1/1/2024 to the end of first half created this unrealized translation loss of CNY 126 million. But compared to the CNY 100 million gain last year, it was a CNY 226 million swing year-over-year. Again, this is an unrealized accounting paper loss once euro appreciates against RMB, our investment in Europe will be translated into FX gains. This fluctuation in the unmaterialized gains and losses in FX translation fundamentally won't bring any impact to our underlying operations. Secondly, as I mentioned earlier, there was about 200 million increase in SG&A expenses as we continue to invest in our global footprint and building XDC's stand-alone capabilities as a publicly listed company. Net profit attributable to owners of the company and the earnings per share moved in tandem with each other. Compared to the IFRS-based net profit, there is a 9 to 10 points of negative impact from the minority interest pickup year-over-year as XDC's net profit increased almost threefold compared to that in the same period last year. The minority interest pickup between consolidated net profit and net profit attributable to the owners of the company amount to over RMB 200 million. This is -- there is also some dilution impact as during XDC's IPO in November last year, we offered a 16% of the shares for public floating. If we exclude share-based compensation, investment gain and loss, foreign exchange translation impact, the adjusted EPS is about CNY 0.55 per share, roughly 19% lower than that of the same period last year. Again, the most important message here is the adjusted EPS, and it strips out the onetime noncash impact, and it is a better performance indicator of our continuing operations. Chris, next page, please. Slide 17 gives us more insights into our gross profit and cost of sales. In the first half of -- our gross margin was up 29.1%. Excluding share-based compensation, our adjusted gross margin was 44.4%, still one of the highest in the industry. Compared to the first half last year, our adjusted GP margin had roughly 2.6 percentage points of compression, largely due to the mix impact. As I mentioned earlier, in the first half of last year, we recorded 2 mega discovery service deals that earn us upfront licensing payment of over USD 52 million. The accounting profit associated with these upfront payments are over 90%. This year, we also have a full pipeline of the discovery service deals with a similar magnitude, but they're likely to be booked in the second half of this year. The absence of the lumpy upfront payment deals in the first half created a mixed impact of 250 bps in the margin compression. The manufacturing facility utilization in China was also slightly lower in the first half of this year than last year as we had about 0.5 billion of the COVID sales in the first half of last year. This was why compared to the same period last year, labor and fixed overhead as a percentage of the revenue was slightly higher. Compared to earlier years like 2022, our GP margin had roughly 5 percentage points of compression temporarily, largely due to ramp-up impacts of our new manufacturing facilities in the U.S. and Europe. As we disclosed in the past, the fed batch and the perfusion facilities in Dundalk, Ireland, the drug product facilities at Leverkusen, Germany and also the clinical manufacturing facilities at Cranbury, New Jersey were in various stages of ramping up. In the ramp-up phase, we usually have the step changes in manufacturing costs as labor and overhead hit the ledger at once, but the revenue increase are usually linear. Hence, most of the biologics facilities will incur a loss at the initial start-up stage and turning a profit as the utilization gradually improves towards a steady state. In the first half of 2024, this new facility ramp-up created about RMB 350 million of the headwind or 5 percentage points of the GP compression compared to our normal operations. The good news is that the negative impact from the ramp-up is smaller than last year as new sites improve their operations and utilization. Also, we have WBS, our lean manufacturing and productivity improvements, to provide partial offsets. You can see the composition of our cost components in the stack bars below with roughly 20% in labor costs, 19% in material and 22% in overhead, which includes maintenance, utilities and depreciation of the manufacturing facilities. The higher overhead costs were primarily driven by new facilities coming online as we expanded our global capacity from 156,000 liter at the beginning of 2023 to about 300,000 liter at the end of first half this year. The new capacities brought on more depreciation, utilities, maintenance and other overhead charges. Next page, please, Chris. Slide 18 presents us the IFRS-based net profit walk year-over-year. As you can see that IFRS net profit in the first half of 2023 was about CNY 2.3 billion. We lost about CNY 200 million due to the GP compression largely due to the mix impact. With the discovery service deals that are going to hit in the second half, the mix impact will swing the other way in the second half. And they gave us a lift in the net profit margins for the second half and total year. We spent CNY 200 million more SG&A to build stand-alone capabilities for XDC as a public company and to extend our global footprint for BD coverages and operations. Also due to the euro depreciation from 1/1/24 to 6/30/24, we had unrealized FX translation loss, about CNY 200 million. But it is accounting paper loss. Once the euro rebounds against RMB, we'll get it back. So that's why you can see a lot of these net profit declines in the first half are temporary, and then we can get it back in the second half. Next page, please. Page 19 is about liquidity. At WuXi Biologics here, we have a strong balance sheet and a solid cash position. As of the end of the first half, we have CNY 9.5 billion cash, sufficient funding to support our global growth. As a result of our long-term conservative funding strategies, we only had about CNY 2.2 billion of debt, 30% of which are working capital facilities. And our gearing ratio, which is defined as interest-bearing debt over equity, is nearly 4.8%. At the same time, we have about CNY 5 billion of the bank credit facilities we can tap into if we need. Our CapEx spending in the first half was about CNY 1.9 billion, mainly for the capacity expansions in the U.S. and Singapore for both biologics and XDC, much lower than the CNY 3.6 billion adjusted EBITDA generated in the first half. The reason we had CNY 0.6 billion of free cash outflow in the first half was due to the working capital occupation and tax payments. Specifically, our AR and inventory increased as we grew our global operations. Our goal is to continue to deliver positive free cash flow for the year with more focuses on the efficiencies in operating cash flow generation and also CapEx discipline. Now I'm going to pass the baton back to Chris to share more insights into the business operations. Chris?

Back to me, yes. [indiscernible] global investors are keen on update on BIOSECURE Act. So we are continuously working with the legislators to ensure they understand our business model and we do not cause any type of security concern. In terms of the current status, as everyone knows, there's a chance that there will be a more stand-alone bill. And there's also a chance that this will still be part of the NDAA. But I think overall, I think the project from U.S. government may be a project funded by U.S. government. They may be impacted, but they will also have a grandfather period that allow them to continue through 2025, 2027, too. I think this prohibition will not extend to others being funded with private or other source of capital. So this is very clear. Only the U.S. federal funding are impacted. That's why overall impact to the program is actually fairly limited. We remain committed to work with the global clients to make sure that they understand our position. We also want to clarify this with all the legislators to ensure they understand what is our business model. I think so far, the majority of our global clients are committed to navigating through this challenge with us and as you see from the final results. Slide 22 to have a lot of details talking about what we do and how we navigate the geopolitical uncertainty together with our clients. So I am going to skip through the slide with many details. I think our business strategy is to build parallel supply chain for R, D and M in 3 regions. We have very strong R, D and M in China already. We'll start to build R, D and M in the U.S. And 3 or more years later, our target is to have steady 70% of R, D and M in China and 20%, 30% of R, D and M in Singapore and Europe and then maybe 5% of R, D and M in U.S. This, we believe, is the perfect structure for us to be able to target every market and work with every company in this community. So just to give you more detail and update on every facility that we recently invested in, Ireland is Ireland is getting into a pretty decent shape. We're almost fully booked next year. We completed our first PPQ campaign successfully, and then we have 2 more ongoing. I think we are -- our breakeven for Ireland is delayed to about first half of next year, but next year will also be the first year where Ireland will be profitable. I think the site is going to be achieving steady-state operation in '26. So this is the M in global community, and the R part -- the D part in the U.S., Cranbury, manufacturing 18 is also doing very well. We have run about 9 batches with 100% success, and we have 30 programs ongoing. We're trying added capacity in China, in Hangzhou, where MFG20 is. And we're building our site in Singapore. And those are the new investments that we're working on right now. So in the next slide, I'll give you an exciting update on our D and M. On R part, we mentioned this MSD-Curon deal a few times already. This actually the most exciting event in a way because it is the most exciting event for WuXi Biologics history. The asset use all our WuXi platform. The CD3 is a key program [indiscernible]. CD3 is probably the best in the industry. The bispecific platform is WuXiBody, and the manufacturing process is the WuXiUP continuous processing. So we actually built this asset together with a startup company in China. And now this asset is part of MSD. So if this program is successful -- if this program is successful, we will receive a 50 million of our milestone payment and 6% to 10% royalties. So again, because this is kind of a huge role to play, hopefully, the [indiscernible]. And if MSP have a big sale of 5 wins on the spot, we may be receiving $500 millions royalties along on this program. That's why I said this is probably the best [indiscernible] We also mentioned this deal was signed in August. If this deal was signed in June 30, our adjusted net profit would actually be flat compared to last year, where last year in the first half of 2023, as I said, the best record in company's history. So if this -- again, if this deal happened 2 months earlier, then I would also claim first half of 2024 will be the best in the company history. That's how the timing of this event changes dynamics of the probability of the company quite a lot. So that's a very excited update on our part. Now we continue to deliver incredible success. Now we have already had 562 molecules more independent because of the WuXi, right? Last year was a slow year in new projects, but we still deliver 123 molecules to the clinic. And that's why I said tomorrow, there is a good news about the molecule. There's a 30% chance that molecule is part of [indiscernible] and WuXi will benefit from that program. So this continues to be exciting part of our team. So I mean R&D and that' impact. On the other part, we continue to see strong growth of the PPQs, which is an indicator for success. Our [indiscernible] success rate is still the best in the industry, 97%. I think this despite the uncertainty, that's why companies -- I mentioned in the first 7 months of this year, we signed up 4 Phase III programs and 4 commercial programs. So we have 8 PPQs in the next year or 2 that from those contract signed first 7 months alone, 8 figure we're gonna deliver in the next year or 2. I think that give us a strong momentum, continuous manufacturing revenue. On the other part, we are -- WuXi is also very proud, right? We are probably one of the few companies who can deliver 100% successful BLA. A lot of these probably read about Regeneron, received a complete response letter FDA because their CDMO could not deliver on black bonds. But you probably heard other company has a similar issue who are our peers, but so far, WuXi is very positive. We have had a 100% success on BLA. Basically, every time FDA, EMA, Chinese agency comes to us, we pass. Every time Chinese FDA, EMA, FDA comes to us, we pass. And we have done that 37x. So among that 21x from U.S. FDA and EMA. I think this -- earlier this year, EMA comes to inspect for products. If you imagine, only large pharma has this type of scale of inspection. Most of times, EMA CMO, probably with 1 product, 2 products, EMA to a come to us inspecting products. And recently also FDA came to us with 2 PLI inspection at the same time. I think that, again, that really add value for WuXi to become a commercial partner for our group community because so far, we are one of the few, if not the only one with 100% success. So we -- as I mentioned early, now we have 37 specs with 100% passing results. Almost all are GMP certified by the global community. Why do I have something covering according to the [indiscernible], because we have a very strong leading indicators. We monitor every site and we monitor every client come to audit us. So on average, we had 144 audits in the first half of this. If you think about it, if you double that, basically 300 audit each year. Every day, there's an audit going on at one of our sites and WuXi is also very keen learning organization, all the lessons learned from one side, but we quickly coming into next one. That's why we believe we have -- we are the strongest in this aspect. So we are not the CMO with longest history. Now in China, we get the best track record in quality. So as some of you may have already read through the different news that we released, we actually have a very exciting future position as well. So some of the leaders who have been with us for 10 years, 20 years, they getting to retirement age. Now we have a young talent, really young talent who have to work with us [indiscernible] for the next decade. I think all those -- planning are planned. And I'm also very proud our bank standing incredibly strong. All the leaders come from our own training. [Foreign Language] at WuXi. CMO 10 years at WuXi. Most of the MIT chemical teams that are quality [indiscernible] 6 years with us. So I think we now have an organization that's kind of a strong leadership for the next decade. So every time I will share with the investors, I also will give you a couple of examples how well we are. In this case, we acquired a very -- Tier 2 CDMO, Tier 2 Chinese CDMO back in 2024 during COVID. [ Sitare ] 4 years later, we actually convert that facility into a world-class facility. That shows the WuXi culture, the WuXi execution right? in wood that's shown the culture, that we executed, right? So for this facility for this type of productivity, we actually have an average revenue of almost 0.5 million per person with a 60% gross margin. This is a -- again, this used to be a factory that losing much as one of our peers, and we acquired to make them to make the most profitable facility in this global community. So just to give you the concept, most of our peers, the gross margin will probably be 40% or even 30% in the global community. We are able to have 60% gross margin. That again show our execution. How can we do that? We did actually whole -- over of the whole system, we look at with the WPS with the digital with an agile organization with automation to put all those tools together. This actually turnout in 3 years. We convert a mediocre or maybe a Tier 2 facility in China. We convert them into one of the best, one of the most profitable opportunity in this community. I think lastly I also want to share with you, there are many programs from acquisitions of biotech by large pharma. I think we have -- now have 66 assets acquired from biotech company acquired by large pharma. On average, any time this acquisition, we actually get certain additional companies, [indiscernible] additional companies. Not only those large pharma acquire transfer project away from WuXi, they actually add projects to us. I think that's the beauty of our execution. So every client, first class. So some of large pharma now look at due diligence among some of large pharma they are looking at acquisitions, some companies, 50% of them working by WuXi. Other companies at 75% of working by WuXi. And that also continues to bode well for us for the next couple of years. With M&A [indiscernible] in our industry. So most of you already know about advocacy performance. I just want to share with you, as we still consolidate on the revenue. I think advocacy portfolio is very, very exciting, 167 projects, year-over-year growth of 52%. Those are fully event projects. So with that, I would get into the section where every time I meet with you, I also want to highlight some of the technologies. I think, as I mentioned, the [indiscernible] deal already is a highlight our best-in-class CD3 industry molecules. So our CD3 platforms now have 2 multinationals with the 5 programs. Again each program received $100 million of milestone payment and potentially single-digit or even high single-digit royalties. I think that this project, our business is actually becoming very tangible. I think this will be a huge contribution to our top line and bottom line in the next couple of years. So I really use the MSP program as an example, we could see $500 million worth of royalties if this program turned out to be a mega blockbuster. And we continue to work with the community. Hopefully, next time when I update you, this 5 become 7, 8 and we believe our CD3 best in the class. This CD3 franchise not only generate part of payment royalties, but also downstream, develop manufacturing. This is the beauty of CDMO business model. Bispecific, both of those technology, we invested back in 2016. Right now, I can start to bear through the to the strategy at WuXi is incredibly strong. 2016, 2017, we invested in CD3. We invested in WuXi Bio. Now they're on to get business on revenue for us. So if you look at ROI investment, you mention product technology, both of those technology probably invest in less than $1 and now 5, 7, 8 years later, they have generally probably $100 million of revenue per year and at a point, even $100 million of profit per year. On the ADC side, [indiscernible] technology is very similar as well. And the other manufacturing side, now we have the nex gen manufacturing process that can really give our clients 3 to 6x more productivity. So my 2,000-liter reactor could produce the same amount of material as someone else 12k or 15k and my 5k or 6k can produce the same thing as someone else, 25k. This is how technology can enable us. I think I said over and over again, the technology-wise, cost-wise, we are already -- we can compete with any company with a large set of skills. I think now under 6,000-liter scale, 12,000-liter scale, we have already have 100 batch data in China and basically say cost is very comparable. In China, we can technically do it cheaper. So looking in the past couple of years, we have been really seeing tremendous growth. We also start to implement our own manufacturing system for WuXi business system. I think you already heard from me and we expect to achieve at least 100 bps improvement this year because as of [indiscernible]. And I give you example is also because of our business system. We are very keen on ESG. I think we are also working on our great CRDMO. We want to make an every type of our business green. The research part, the develop part, the manufacturing part. We also won global ratification because of efforts in the year, right? So we are probably one of the best companies in this community that CRDMO community on our ESG efforts, as most of you already heard about. I think that's a good update on the business. I think in summary, we remain firm believers that CRDMO business model is the most efficient model. The R that transform innovative about that concept from across the globe into reality. Again, as an example, worked with us asset in 2021. Now 4 years later, the company acquired with $1.3 billion acquisition and WuXi will benefit from the R&DNM. And that's a very good example of how our trade into the space. And despite all those concerns, we signed singular projects. To move this program going forward with excellent execution and it was the best time line in our industry. That's how we add value With M, our goals provides competitive service to patients worldwide. That's why we said we want to build a technology to have 4K that produce as much as much material as someone else. We want to make sure cost is competitive. So you have seen over and over again, WuXi execute, WuXi deliver because of our people, because of our technology, because of our quality and our strategy. So I think our goal again, to make sure that we can serve the global committee faster, better and cheaper. So with that, I want to share with you our 2024 outlook. So on the first half of this year, again, if you look at our corporate revenue, now corporate revenue is actually up 7.7%. Our adjusted profit is down 30%. But if you include the mega deal from pure GSK, if you move that deal back to the first half of this year, our adjusted profit will be actively almost flat. So revenue -- the profitability decrease is mostly a timing issue. It's mostly a timing issue. We are able to just buy -- so second half of this year, our probability will be much better, and that will more than compensate this type of lag in the profitability in the first half. So as I mentioned earlier, so far, only project that worth about $6 million from a biotech company has customer out, and that's the direct impact of the BIOSECURE. So we believe our CRDMO business model is very unique and is very difficult to replicate. We are working actively to mitigate the impact organic impact of proposed BIOSECURE Act. We still want to make sure we're committed to maximize shareholder value. So I'll give more summary on the each aspect on the R&D side. On the R side, we have [indiscernible] of deal. We expect several deals like [indiscernible] in the next 18 months as well. And for the D part, more than 60 projects signed, [indiscernible] will be 61. And so you don't see the strong impact from the global headwind. On the M part, we have many programs. We have a [indiscernible] will generate in it revenue [indiscernible] getting to the final state and we will benefit from that. So despite external challenges, we are cautious, optimistic that second half of this year will be much better than first half. So you'll see a strong growth in R and in P and in F. You will see a margin improvement overall as well. I think we have private investors, global investors that our overall margin will improve by about 100 bps almost every year. So with all those excitement in the past couple of months, we will maintain our 2024 full year outlook for both revenue and profitability. So in summary, our business fundamentals remain very strong. Our business model is very unique. Our technology is strong. Our technical capability and excellent execution enabled by our people and culture are very difficult to replicate. So we have a very strong ecosystem. That ecosystem will drive to deliver sustainable high growth. Thank you.

Thank you very much, Dr. Chen and also Mr. Tu about the very comprehensive introduction of the official half results and very detailed WuXi's operation. We can start the Q&A session now. Just to recap that if you wish to ask questions, you should raise your hand is our priority choice. [Operator Instructions] So start with Chen Chen form UBS.

Can you hear me?

Yes, please.

My first question is for the upcoming '26 blockbuster and potential blockbuster CMO projects. You miss it just now. will suggest that you will be their primary supplier. And I would know that in the industry, normally, what percentage of manufacturing would be assigned to the primary supplier and the secondary supplier, respectively. That's my first question. And my second question is you mentioned that a biotech client is considering to transfer one project to third parties. So is that project from window molecule or follow molecule strategy? And if a client decided if the client decided to transfer out eventually, how long that it takes to do the transfer? And what is the rough cost for the client?

Let me answer the second question [indiscernible] this is a project for us minutes the DNA ID. So because of Vascular Act, this company, this [indiscernible] coming in -- is the amount of the 700 assets, no other company are concerned, except this company. We're excited to [indiscernible]So they have a transfer I think the company they transfer to does not have the track record among the 78 [indiscernible] the model projects, a lot of them come from the company. So we still mixed talked by the company, the customer will stay so and so far main yet. But as [indiscernible] so about the second and 742 assets. This is the only one that's because others being transferred. So you say [indiscernible] half project. And I give you this number because half of this project [indiscernible] out of 742 is being cancelled. I think that's why that probably did a quantifying number. So about the 26 program, we believe, even with the current environment, a majority of the WuXi, and then when the product is approved, they may consume [indiscernible] supply of [indiscernible] income, again, because WuXi with the execution is the best, right? Because again, so far, every program regarding. So our PQ successful event in the industry. Our FDA approved was the best industry. Our time line is the best in industry right? With this [indiscernible] staying with that, in fact is still the best option we have. So even this year, in the past 6 months, we have 2 covenants, deciding to stay with us to launch 2 U.S. companies with the [indiscernible] So this product was that $5 billion sale. And they still stick with us because [indiscernible] switch to a third party to our peers, they may be the program backed I think. So that's WuXi had a lot of value because our track I guess update us [indiscernible] if you're getting a fair of the delay by our quality is higher industry 20% success in rejecting cost after 2 years. And so those spent $2 billion [indiscernible] If you think about for [indiscernible] large pharma 3 years back in value tier focus plan. That's why we're still [indiscernible]

Any follow-up questions, Chen Chen?

Yes, makes sense. Well, I think you would agree that the current share price is undervalued. So can we expect more share buybacks?

Yes, we will.

Great. Next one coming from Morgan Stanley.

Okay. This is Daisy from Morgan Stanley asking in behalf of our team. I have 2 questions here. The first one, yes, how does a reported first half results compared to your internal budgets, I mean such a challenging backdrop? And what gives you confidence for second half [indiscernible] full year guidance. And the second question is about China capacity utilization rates. [indiscernible] contribution this year, how can we improve utilization in China? And how fast the utilization rate is going to ramp up in Europe. That's the 2 questions from me.

Yes. Great question. I forgot the mention. The first half, although investors do not like the news today. But I think we -- think this is exactly we actually build our budget. So that's why I'm very happy that we are able to chooses. The second half will the best basis I mentioned earlier, where we have -- we already had [indiscernible] of MSC deal. That was generally more than 300 of it for RMB profit for us for the second half. So that's why if you want that Q1 or Q2 achieve the best first half in the company industry. In terms of the -- we have seen as I said in this slide, we are able to -- we can see growth in R&D [indiscernible] in the second half to unless there are additional Blackstone event that happen in second half we will be delivering our margin will be maintaining, we're achieving pricing digit growth on both top line and bottom line. So on the China capacity side, we are slightly lower than last year, but it's still getting around 6% [indiscernible] And we hope that validated pre ramp-up Europe is also getting close to 40% company 60% next year. I think that's why I'm able to give you the guidance that every year our gross profit margin will be improved by 100 to 150 bps.

Yes. Chris, very clear.

Next one, Cede from Harding London.

Thank you, Dr. Chen. This is concern on the market that the mini CDMO priority, especially biologics companies have been building capacities, there may be the concern of overcapacity on the horizon. So if you look at 2025 or the overall industry pipeline, do you see the utilization rate coming down as a whole industries? And how do you think about some of your competitors capacity building exercise, [indiscernible] competitors, European competitors. Will they finally [indiscernible] supply demand balance on that. So that will be my first question.

Thank you, Cede. I think we talk about the capacity because our business model right I would say R&D side, our capacity buildup is still very defined on R&D side. So we are still a very strong players. And even if they don't capacity, so there capability is almost like 5, 3 years ago right? So you're talking about further competition from India from China. So because on R&D part, it means that those capacities are almost like 5 or 3 years ahead of our ourselves 5 years ago. So then we're still way ahead. So it's still unlikely to the impact on our business. But if you talk about right, where quite a few players are doing capacity, but the value and in incredibly strong, right? You probably read in risk in market [indiscernible] the FDA under are last year [indiscernible] so quality is actually newly reported quality pattern. And not a mid company can do that, right? So we believe this is the industry is still in the market. So 4, 5 or 7 maybe bigger players probably take a share [indiscernible] market share. So the marine of the fact although everyone might get in, right? So WuXi has been successful in the past 10 years because we found ways to serve small component our peers have not been successful because they build large scale class. And so both of those are -- where most of us see. There's a need in the market. Now the market is telling right? So if you want to come in, you can with [indiscernible] If you want to come in with an app, the company [indiscernible] probably 5, 10 companies will take over this market instead of surgical. So because of that, I think it's still very healthy competition. We don't see a price war at all in our in industry, does that answer your question?

Second part is sort of another reputable topic. So the new company want to diversify your procurement sources, both on the equipment side and the consumer side. I wonder if you can share some update on the progress. I guess the general trend is you're making progress, but I wonder if there is still some last sticking point that's but much harder to diversify or localized to prepare yourself for any extreme long-term event.

Yes. I think we always want to make sure we have a very strong supply chain. So I used to say that I mean 2.5 supply [indiscernible] and then the China is higher. If they're not ready to [indiscernible] So our procurement [indiscernible] steady but it won't be as -- I mean with this search environment, I don't see geographic will play into this field. So we are still very common maybe 80% from global and 20% China. And right now, it's probably like [indiscernible] 30% on China. So I think we've already been getting to where we want to be in a sort of a balance.

Okay. One last quick one. So we talk about rivalries, specific in Samsung do you see their capability in sort of -- some of the key measures, if you can observe on outside, getting closer, surpassing the level of side, you find an interesting noteworthy. We don't comment on the company, [indiscernible] we are the globe number one player.

In the amp, are also getting close to where they stay. I think it's very clear. But our business model I think a lot of investments unnerved, for example, [indiscernible] a billion deal. I have all $4 billion [indiscernible] in that market. They go back to that page. Our backlog, that's not been flat on our potential competition because [indiscernible] by the slide. So our -- many Slide #17 or yes. So any of that could have given me a trick but right off the program [indiscernible] So our business model is very different from Samsung where but when you [indiscernible] with the molecule. So then you need to tell the next 5 years [indiscernible] But especially on sentiment deal. Don't warrant a decade for right? So they just say when WuXi [indiscernible] That's why our [indiscernible] very different. So we don't really -- we have not really been competing with Samsung and that and many programs at all. Because our [indiscernible] of CMO contracts already, right? So as I said earlier, on the top -- on the left side, every color, every program could give us a speed [indiscernible] in terms of pricing right? So on the #1, #2, #3 program, we decided the manufacturing contract. Currently, each of them is about -- is about $300 million of signed right now because they are again 5 years, even 10 years come probably 700 million. So it's a matter of time. So I think that's why our backlog does not capture sort of the value of personal value other revenue from this, that's why I shared with you this slide. So WuXi insist getting so complex in to actually point in that for outside the much harder [indiscernible] because how is comparable. You see it is getting better pre-transition, some reflecting the backlog and you have no idea what program WuXi is working on, right? I think that's why [indiscernible] I think I did -- one program or 2 programs, but overall trend will be there. You will see many back of blockbuster. You all see many [indiscernible] balance being very successful. So again the funnel is our most valuable asset. But again tomorrow if [indiscernible] the volume. But tomorrow in FCR [indiscernible] franchise. I have that tomorrow. I have -- I think that is -- our business model. This is a gold mine that I don't know how to describe to only may [indiscernible].

Great. We're probably going to run very quick on some of the question pending online. Well, [indiscernible] on CapEx. One is about well, given the uncertainties both by Secure Act, why company still decided to keep expanding aggressively in terms of the capacity every single year, about $5 billion to be invested there. And also on higher net facility what has caused the breakeven point to be postponed to early 2025 from previous guidance second half 2024. And all the new facilities, including those in the U.S., in the Ireland and Singapore, getting online will be impacting your margin trend over the next few years.

Yes. That's a good question. So overall, why would I see [indiscernible] believe in the end, I think we have overcome the biosecure act. We can overcome the sort of geo political as I said earlier, our goal is [indiscernible] we have some [indiscernible] the U.S. and mostly as a closest customer, attract customers into WuXi and then deliver the work is in Singapore and China, right? And then the China part will give us the best margin profile of the site and it gave us a very strong [indiscernible] delivery and also very competitive cost to serve global committee. And then Singapore in between to serve those markets while very geo politic business to supply chain and that would be we are very expected by mitigating the geopolitic ones. I think that's why our board is still very comfortable on our last investor. Go back to the Ireland, I think the delay of a breakeven price [indiscernible] we have programs that we run into a tax issue, but we solicit that will delay the revenue by -- to push revenue to 2025. Yes. So I think the visual to adapt to you earlier, as an example, shown you before, our mature at the site has 3 years of history almost every site can achieve this type of operation like [indiscernible] our China can achieve and focus are factoring when [indiscernible] and then so -- that's the beauty of the LEAN as of digital and automation. So emphasizing China achieves improved margin and then that will our cushion for the global side. So that's why I said every year, we'll see about 100 to 150 bps improvement. So our expected state gross margin will be around 50%. China will be higher and the European [indiscernible] I think we have seen right job, I have 20 facilities among [indiscernible] achieve this type of profile. The other one is to ramp up to fill the capacity. So basically, we have a way to make sure every becoming more and more efficient. I think that's something that's very hard to replicate. I attribute that to our culture and to our people who the company may take a long time to learn. Again, for this type of product, both coming TP market for it, we're able to 60% GP mark synced right? And so that requires an execute excellence is actually part of [indiscernible] I share with you a management during COVID, almost every manufacturing facility achieving this type of engage. And that's why while we are investing for the future, we still achieve see gross margin.

Got it. And also, you have a breakdown by different stages of the revenue by different stages. Why did the revenue from the early-stage projects declined by 3% and is that because of slower project investments or because there has been increasing in activity of those -- some of the early stage projects.

It's probably both of them and most imported probably sign last pain first half of last year, that means our reservoir more. And so they don't have a smaller base growth.

Great. Well, I think the last question, I think we're pretty much running the call for 1.5. So the last question about the human resources because if we compare the headcount by end of first half versus end of last year, we actually see a bit of a decline, and we actually look at business they are still expanding. And also they are still expanding to add about 500 to 600 more people by the end of this year. So how should we think about WuXi Biologics? And this kind of environment, the hiring strategy going forward?

Because of WBS and every year, we probably can improve point by 5%. And then with the current base from people. And then those people move to [indiscernible] also a European side. And that's why we don't see a dramatic increase in telecom instead. Telecom is very steady. Very steady. All improved improvement that so the [indiscernible] then to most cannot set some new business like HPC, like Global Site.

Great. I think that's all the questions. I know that some investors might still have more questions, but let's keep that offline. And if you have any follow-up questions, then a question to [email protected]. I think I'm just going to be happy to answer that. Lastly, any wrap-up comments from you Dr. Chen?

[indiscernible] Global investor again, so if you look at -- so again, hypothetically, the of [indiscernible] the first car would actually have a flat revenue, flat net adjusted profit compared to last year which is tremendous a good half, right? So I think that is all. To tell you how good the company is. We want to navigate through the complex the environment. I think in the hand, I think we will win in delivering advertising for clients. I think that's why I said open, we are a firm believer of our CID and more very difficult to replicate so we will still want to deliver constant sustainable high growth to the global community.

Great. Thank you, WuXi Biological Management Team for answering all the questions. And thank you for participants, investors and analysts spending the past 1.5 hr with us. We're going to wrap up the call here. Have a good day. Thank you.