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On the evening of July 29, as the leader of the CXO (pharmaceutical R&D and production outsourcing) industry,WuXi AppTec(603259.SH, 02359.HK) announced its semi-annual results.

Although WuXi AppTec's net profit showed a double-digit decline in its semi-annual report, from a single quarter perspective, its net profit has increased month-on-month for two consecutive quarters. Does this mean that the industry is improving?

What is the impact of the draft Biosafety Bill?

The semi-annual report shows that in the first half of this year, WuXi AppTec achieved operating income of 17.24 billion yuan, a year-on-year decrease of 8.64%; net profit attributable to shareholders of listed companies was 4.24 billion yuan, a year-on-year decrease of 20.2%. If the COVID-19 commercialization project is excluded, the company's revenue in the first half of this year fell slightly by 0.7%.

WuXi AppTec's operating income mainly comes from the chemical business, testing business, biological business, high-end therapeutic CTDMO (contract development and manufacturing organization) business, and domestic new drug research and development service department. Among them, the chemical business accounts for the largest share. In the first half of this year, the segment achieved revenue of 12.21 billion yuan, a year-on-year decrease of 9.34%. If the new crown commercialization project is excluded, the segment will still increase by 2.1% year-on-year.

The biggest "grey swan" event for WuXi AppTec this year is the controversy over the draft of the US Biosafety Act, which wants to prohibit the US federal government from signing contracts with certain biotechnology providers that have ties to foreign competitors, and the company is involved. Whether the bill will be implemented is still undecided.

Judging from the semi-annual report, the draft has brought certain impacts to WuXi AppTec.

In the first half of this year, the company's high-end treatment CTDMO business achieved revenue of 575 million yuan, a year-on-year decrease of 19.43%. This business mainly involves cell therapy business. Regarding the decline in revenue, WuXi AppTec said that first, the high-gross-profit project will be completed in 2023; the commercialization project is still in the early stage of volume expansion; second, some projects are delayed or cancelled due to customer reasons; and due to the impact of the proposed US bill, new orders are insufficient.

The semi-annual report shows that in the first half of this year, WuXi AppTec's revenue from US customers was 10.71 billion yuan, a year-on-year decrease of 1.2% excluding specific commercial production projects; revenue from European customers was 2.22 billion yuan, a year-on-year increase of 5.3%; revenue from Chinese customers was 3.40 billion yuan, a year-on-year increase of 2.8%; revenue from customers in other regions was 910 million yuan, a year-on-year decrease of 17.4%.

When will the industry emerge from the trough?

Over the past year or so, with the decrease in revenue from COVID-19 projects and the slowdown in biopharmaceutical investment and financing, the performance of many CXO companies has slowed down. In addition, a price war has also occurred in the CXO industry. Recently, a CXO company official told the First Financial reporter that the industry's price war is more concentrated in domestic orders.

In its semiannual report, WuXi AppTec stated that in the first half of this year, the company's main business gross profit margin was 39.36%, thanks to the continuous improvement in operating efficiency. However, due to changes in the project portfolio and the combined impact of the market, the gross profit margin fell by 1.16 percentage points compared with the same period last year.

Although the company's overall net profit growth rate in the semi-annual report is still declining, the company's net profit has been increasing on a month-on-month basis for two consecutive quarters.

According to calculations by Yicai Global, WuXi AppTec's net profit increased by 18.54% in the second quarter of this year, compared with a 26.25% increase in the first quarter. In the third and fourth quarters of last year, the company's net profit decreased by 11.96% and 44.43% respectively.

The semi-annual report shows that by the end of June 2024, WuXi AppTec had orders worth 43.1 billion yuan, a year-on-year increase of 33.2% excluding the COVID-19 commercialization projects.

Judging from the semi-annual performance forecasts released recently by some other CXO companies, some showed signs of improvement in the second quarter.

likeKailaiying(002821.SZ, 06821.HK) expects the net profit attributable to shareholders of the listed company in the first half of this year to be between 480 million yuan and 550 million yuan. Combined with the company's first quarter report, the net profit in the second quarter is expected to increase by between 71.43% and 96.43% month-on-month.

For exampleKanglong Chemical(300759.SZ, 03759.HK), the company expects net profit attributable to shareholders of listed companies to increase by 34% to 45% year-on-year in the first half of this year. In its performance forecast, the company said that in the second quarter of 2024, with the initial recovery of investment and financing in the global biopharmaceutical industry, the company's operating income is expected to increase from the first quarter of 2024 and increase slightly year-on-year from the second quarter of 2023. In terms of sectors, laboratory services benefited from the recovery of new orders, with revenue hitting a record high in the second quarter; CMC (small molecule CDMO) service revenue increased from the first quarter, and more projects are expected to be delivered and revenue recognized in the second half of 2024; clinical research service revenue, large molecule and cell and gene therapy service revenue increased both month-on-month and year-on-year.

However, whether the CXO industry will see a real recovery still needs to be revealed by more corporate financial reports.

Currently, WuXi AppTec stated in its semi-annual report that in 2024, the company expects to achieve annual revenue of 38.3 billion to 40.5 billion yuan, and the adjusted non-IFRS (non-International Financial Reporting Standards) net profit margin attributable to shareholders will remain the same as last year.