"Water drainer" in the ADC industry: Can Wuxi XDC (02268) achieve a 20-fold growth in 5 years?

The public subscription was nearly 50 times oversubscribed, and the international allocation was nearly 20 times oversubscribed; Group B had a subscription ratio of 76.3 times from 955 accounts, with 25 headhunting transactions... The IPO results of WUXI XDC (02268) feel like a return to the peak period of pharmaceutical IPOs in 2019-2020. Amidst the enthusiastic sentiment, OTC trading surged by 20 points, and the pre-market trading opened high and continued to rise. When officially listed, the stock immediately soared to HKD 28.8, a increase of over 37%, with a market value of HKD 34 billion. Investors began to shout, "WUXI XDC may be the next WUXI BIO, with the potential to achieve a 20-fold return in five years." Similarly, at the listing ceremony, the management team, including the CEO of WUXI BIO and Chairman of WUXI XDC Chen Zhisheng, expressed a positive attitude and confidence in the company's future development. Entering the market without financing In fact, as the subsidiary of WUXI BIO, WUXI XDC was destined to come out strong from the start. In May 2021, WUXI BIO and WuXi AppTec subsidiary Wuhan Jinxin Pharmaceutical announced the establishment of a joint venture company, WUXI XDC. This marked the reunion of the two giants in the domestic CDMO field after their split from "parent-subsidiary" to independent listing as "brothers" in 2017. In order to differentiate the business of the two leading parent companies, WUXI XDC focused on the original "Jin Quan" technical system and part of WUXI BIO's business, mainly engaged in the CRDMO business of antibody-drug conjugates and other bio-conjugate drugs. After its establishment, WUXI BIO invested USD 120 million to obtain 60% equity of WUXI XDC, while WuXi AppTec indirectly held 40% equity through its subsidiary Wuhan Jinxin Pharmaceutical with an investment of USD 80 million. One and a half years later, WUXI XDC submitted its IPO application to the Hong Kong Stock Exchange. It is worth noting that, during the year and a half before listing, WuXi Jinxin did not undergo a new round of financing like other biotechnology companies. The major shareholders nearly "covered it all," running into the market without any financial concerns. In terms of cornerstone investors for the IPO, only seven cornerstone investors were introduced, subscribing a total of approximately HKD 2.346 billion worth of shares. Among them, Invesco subscribed HKD 782.2 million, General Atlantic Singapore subscribed HKD 391.1 million, Qatar Investment Authority subscribed HKD 352 million, UBS Fund subscribed HKD 312.9 million, HongShan Funds subscribed HKD 234.7 million, Novo Holdings subscribed HKD 195.5 million, and Lake Bleu Funds subscribed HKD 78.2 million. Calculated at the midpoint price, this accounts for approximately 64.94% of the shares on offer. Regarding the lack of financing, WUXI XDC's CFO Xi Xiaojie commented, "Considering the company's good profitability and the characteristics of 'scale, profitability, and scarcity' in high-quality assets in the capital market, we do not need external capital to sustain the company's operations before listing." Strong and solid, with a reasonable IPO valuation Of course, the ability to enter the market without financing is closely related to its own solid strength. According to the prospectus, WUXI XDC's revenue in 2020, 2021, the first half of 2022, and the first half of 2023 were RMB 96.335 million, RMB 311 million, RMB 990 million, and RMB 993 million, respectively, with a compound annual growth rate of as high as 220.61%. Meanwhile, the net profit during this period was RMB 26.299 million, RMB 54.93 million, RMB 156 million, and RMB 177 million, respectively, with a compound annual growth rate of 143.34%. In addition, the gross profit margin for the four financial periods was 8.4%, 36.5%, 26.4%, and 23.1% respectively. Comparatively, the revenue and net profit for the first half of this year have already surpassed the full-year figures for 2022, and around 60% of the revenue comes from overseas markets. Based on the 2022 revenue, the company ranks second in the global ADC outsourcing services market, with its market share increasing from a mere 1.8% in 2020 to approximately 9.8%. While the business continues to grow, the cumulative customer base is also increasing. As of June 30, 2023, the company had 110 ongoing projects, including 44 IND-approved projects and 14 Phase II/III clinical trial projects. Meanwhile, the number of customers during the reporting period was 49, 115, 167, and 169, respectively. Surprisingly, WUXI XDC has achieved low costs in acquiring customers, almost like a "zero-cost acquisition." During the period from 2020 to 2022, the company's sales expenses were only RMB 478,000, RMB 2.028 million, RMB 8.769 million, and RMB 2.153 million, with sales expense ratios of only 0.5%, 0.7%, 0.9%, and 0.4% respectively. In comparison, the sales expense ratios of other similar ADC full-service CDMO companies during the same period were 5.16%, 2.58%, and 2.66%. During the past three years of the pandemic, WUXI XDC has shown outstanding performance, with rapid growth in revenue and net profit. At the same time, the company's profitability has been gradually enhanced, much like its parent company, WUXI BIO. Considering the IPO price of HKD 20.6, the market value is approximately HKD 24.27 billion, and based on the net profit for the first six months of 2023, the estimated net profit for this year is approximately RMB 432 million, with a price-to-earnings ratio of about 51 times. From a valuation perspective, WUXI XDC's valuation is not expensive. At the same time, in addition to its three existing production bases, WUXI XDC is further expanding its market presence. It has built a production line (XPLM1) in Wuxi, which includes kilogram-scale connectors and payloads. The XPLM1 facility is expected to commence GMP-compliant operation in the fourth quarter of this year. It also plans to establish a new base in Singapore, with a total area of approximately 18,500 square meters and four production lines.A production base for clinical and commercial production is being established to implement the "Dual Plant Production" strategy and consolidate the leading position in the ADC drug CDMO field.The competition in the ADC market has given CRDMO (Contract Research and Development Organization for Antibody-Drug Conjugates) an opportunity. The ADC market has been fully ignited, as can be seen from the popularity of WUXI XDC. In terms of market performance, ADC drugs have gained significant recognition in the biopharmaceutical industry in recent years, especially in the areas of payload, antibody modification, and conjugation technologies. With targeted conjugation, ADC drugs have achieved a technological upgrade to version 3.0. It is observed that the global ADC market has grown to $7.9 billion in 2022, with a compound annual growth rate (CAGR) of 40.4% from 2018 to 2022. It is further expected to grow to $64.7 billion by 2030, with a CAGR of 30.0% from 2022 to 2030. According to the same source, the market share of ADC drugs in the overall biopharmaceutical market is expected to increase from 2.2% in 2022 to 8.3% in 2030. Digging deeper, for HER2-targeting ADC drugs indicated for breast cancer, gastric cancer, and urothelial carcinoma in China, the market size is expected to reach 3.281 billion yuan by 2024 and further increase to 3.828 billion yuan by 2030. The vast market has attracted numerous companies' entry. There are already over 200 ADC products in clinical development worldwide, forming several tiers of competition. The first tier includes companies like Pfizer, Roche, AstraZeneca, and GSK. These companies have rich experience in ADC drug research and development, and some of their drugs have been marketed globally, such as Pfizer's Mylotarg, Besponsa, Roche's Kadcyla, Polivy, AstraZeneca's Lumoxiti, Enhertu, Seagen/Takeda's Adcetris, Padcev, Seagen/Genmab's Tivdak, GSK's Blenrep, Gilead's Trodelvy, Rakuten Medical's Akalux, and ADC Therapeutics' Zynlonta. The second and third tiers include domestic companies like REMEGEN with their drug Vadastuximab, Sichuan Kelun Pharmaceutical, as well as Xinmao Biotechnology and Puling Biotech. These companies have made certain progress in research and commercialization, but face challenges in research and development and financing channels. On one hand, there is a blue ocean market; on the other hand, there is fierce competition among companies. Faced with concerns about the "post-PD-1 era" in the market, WUXI XDC CEO Li Jincai believes that this belongs to the "era" of ADC drugs and CRDMO: "The fierce competition caused by the excessive repetition of PD-1 indications is obvious. However, the ADC field has just entered an explosive period, and its development potential is enormous." Indeed, as Li Jincai mentioned, the lack of interdisciplinary expertise among many biopharmaceutical companies in developing antibody-drug conjugates has driven the growth of the ADC outsourcing service industry, providing a great opportunity for CRDMOs like WuXi XDC. After all, the global ADC outsourcing service market is currently valued at $1.5 billion, with a CAGR of 34.5% from 2018 to 2022, surpassing the CAGR of 21.8% for the overall biopharmaceutical outsourcing service market during the same period. It is projected to significantly expand to $11 billion by 2030, with a CAGR of 28.4% from 2022 to 2030. From an overall perspective, with the rapid increase in industry demand and the quick release of its performance, WUXI XDC, as the leading player in the ADC drug CRDMO market share, seems to have firmly grasped the opportunity.