WuXi Biologics (Cayman) Inc. (2269) Q2 2019 Earnings Call

0:00 Ladies and gentlemen, thank you for standing by and welcome to the WUSHI Biologics Conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone keypad. Please be advised that today's conference call is being recorded. I would now like to hand the conference over to our first speaker today, Mr. Sean Wu. Please go ahead, sir.

0:25 Good evening and a good afternoon for the people in Europe. Morning for the people in America and a good whatever for everybody else. My name is Shawn Wu. I'm a senior analyst at Morgan Stanley covering greater China healthcare. It's my great honor to have this opportunity to host a conference call for Wuxi Management to talk about that incredible interim results for 2019. Management joining today's call are Dr. Chris Chen, company CEO, Ms. Christine Ruan, CFO, Vice President and Head of Corporate Development, Dr. Michelle Chen, and IR Director, Eileen Wang.

1:10 Management will provide basic updates and give brief also talk about financial performance, of course. They will be followed by Q&A. You may ask management directly or submit questions via email at my email address, sheng.wuwsms.com. Without further ado, Dr. Chen, please start your presentation.

1:39 Thank you, Shang. My pleasure here. Good morning, good afternoon, good evening to those of you who are online, and welcome all of you to join us for this exciting interim results announcement. I'm very pleased to share with you our 2019 interim results and give you an overview of our recent development. as well as discussing the promising future of Wuxi Biologics. I think our main theme today is actually sustainable high growth. Joining me here is Christine Loong, who is going to discuss the financials, and then we'll have a Q&A at the very end. I'm going to slide number four. Most of you have seen this slide before. This is really a snapshot of our current Wuxi Biologics business. I think we're very excited to show this slide.

2:24 We're very pleased to announce that our company has achieved an incredible results in the first half of 2019. We achieved both operational excellence and also exceptional financial performance across all key measures and business lines. Our revenue record high of RMB approximately 1.6 billion, 52% year-over-year increase. The number of integrated projects increased to about 224. We added 32 new projects and also including one late phase. So later in the project now increased to 15, demonstrate our success of our follow-the-molecule strategy. In terms of backlog, our total backlog was $4.6 billion, which set up a solid foundation for the group's strong growth in the future.

3:17 Our manufacturing facility capital expansion is on track. Our total capacity will be approximately more than 280,000 liters after 2022, which is only three years away. We continue to strive for excellence and with efforts, ingenuity, and also dedication of our 4,500 employees. Our adjusted net profit grew around 76% year-over-year to RMB 521.5 million, and adjusted net margin was 32.4%. Actually, this is our record high for the company, also much higher for the industry than the industry. So with that, I'm going to go into a little more details.

4:04 Slide number six. As of June 30th, 2019, we've delivered strong financials and operating results thanks to the strong growth with a number of integrated projects, very solid cost control, Business operation efficiency improvement and also increase, substantial increase of our milestone payment. So to review and to briefly summarize, our revenue grow 52.4% to RMB 1.6 billion. Growth profit increased by around 62% to RMB 671 million. Our gross profit margin is record high, 41.8%. Net profit margin, net profit significantly increased by 80% to around RMB 449 million.

4:56 And our adjusted profit increased by around 76% to about 521.5 million. Lastly, our diluted EPS increased by 79% to RMB 34 cents. Again, for the company, this is actually the best record since the start of the company. Slide number seven, I will give you a little bit more about our current cash positions and capex. Our current bank balance cash and cash deposit amounted to approximately RMB 3 billion. We have no outstanding borrowings, and operating cash flow increased substantially by 82% to around RMB 222 million.

5:49 Our total CapEx in 2019, the first half of 2019 was over RMB 800 million. We'll probably spend another 3.6 billion RMB in the second half of this year. We recently have made an announcement on the vaccine business, but the vaccine business have very limited cash needs this year. So we have very, we have substantial cash and also loans to cover the CapEx for the near term. Slide number eight, most of the investors are very familiar. This is our business model. Our mission is to accelerate and transform how biologies are discovered, developed, and manufactured. Our business model is called Follow the Molecule. As our biological business is very sticky, once we start from the beginning, ideally the project will take it all the way to commercial, from concept to commercial.

6:41 Our revenue will grow exponentially after each molecule progress. Our business model is to take in as many projects as possible and allow each project to move through the natural cycle of product development. For each molecule, revenue will grow exponentially, and hopefully we'll achieve $50 million or $100 million commercial manufacturing revenue for the programs that are successful. Slide number nine. This is a very familiar slide to those investors who have been working with us for a while. And you can see solid business progress. We see extraordinary business progress in the first half of this year. The top left chart demonstrates that we have a significant increase in number of projects.

7:26 So you see a kicker of 44% from 75 projects in June of 2014 now to 224 projects. This probably represents about 15% of global portfolio. Again, basically about one in six projects now is done at Wuxi Biologics. This reflects that we have more and more market share, and we now have more and more trust from our global partners. The number of late phase projects also increased substantially from 10 to 15 in the past year, and also our early phase project now is 102. We have 75 projects in phase one and 27 projects in phase two. Slide number 10 is a different way of describing the current portfolio.

8:15 This is very interesting. You're used to see this funnel, this big funnel, basically highlighting our CDMO model. We have the numbers I already highlighted, the total. So I think I mentioned to investors, if you wanted to know the progress of Wuxi Biologics, you only need to know the three numbers on this page. The first one is total project, 224, as I mentioned, is about 15% of global portfolio. And then, how many projects we added this reporting period? We added 32 projects, 31 in preclinical, one in late phase. A lot of our competitors, they have been operating for 45 to 10 years, and the total project is probably less than what we added in the first half of this year. Our competitors don't even have 32 projects total, and we added 32 in six months. And then the last number is actually the 15 Late Phase Program.

9:08 So as Late Phase Program contribute more and more revenue, and so this number is very critical. So as I will share with you later on, this 15 project amounted to about 28 percent of revenue for this year. This basically showed natural progression of the fall of the molecule, and it showcased our good business strategy. Another number I want to highlight on this slide is in this last period, we actually have more than 30 million milestone payment. which represents a significant increase of 75.9% compared to the same period last year. That's why our net profit margin, our profit margin is highest ever in the business because we have more and more milestone revenue. We continue to expect more and more milestone revenue. That's why we believe the business has very good outlook.

9:58 Slide number 11. their backlog. And so for those of you who actually see, who understand their business, backlog is, we share with you our backlog so that you can see our near-term revenue is very visible. Backlog is not easy to understand. Backlog is very easy to understand. Also, it's not very easy to grow because a lot of backlog get consumed. So you have to make up the different, make up the consumed backlog before you can grow. But we actually still see very exciting backlog growth. You see our service backlog increase by more than 200% to $1.7 billion, comparing to the same period of last year, mainly due to the signing of long-term manufacturing contract. Our upcoming potential milestone fee surged to $2.9 billion, mostly because of IPs, such as Wushibadi, that we signed projects with our own IP, and we are able to collect Potential milestone fees up to $2.9 billion. So historically, the service backlog has a 99% conversion to revenue. And then the potential milestone and milestone fees is subject to project success, subject to commercial success.

11:20 So it's not always converted to revenue. But it has a very high margin. That's why those two P's. So it has a very good complementary effect. Service backlog give you how sure we are we can grow. And then the milestone backlog give us the improvement on the profit margin as the project progress. As I mentioned earlier, the first half of this year, we have more than $30 million milestone payment. That's why our margin is higher in the company's history. Slide number 12 basically showcase our business strategy. I think follow the molecule. basically means that we want to collect as many molecules to this funnel as possible. And then as the molecule progress, the revenue for each molecule grows exponentially. And once the program has hit to commercial manufacturing, we want to build two global sites for them.

12:14 We call it global dual sourcing. This way, we can keep the project from beginning to the end. And our partners, our clients, does not need to go to anywhere else for their biologics needs. This is one of the reasons that we are very confident we can achieve that is because biologics are very sticky. When you transfer from company A to company B, you incur a significant cost, there's a long timeline, and also there is a risk that transfer may not be successful. So far, we have signed two exclusive commercial manufacturing contracts using this strategy, and those are the two out of the 15 that I mentioned earlier. For those two, each of them is actually likely more than a billion dollar revenue in around 10 years of project timeline.

13:01 Slide number 13, because we have that very successful, very exciting business strategy, we need to build capacity to accommodate for the needs of those projects for the portfolio. As we have 224 projects, we expect about 30 commercial projects will be commercialized within Wuqi's platform. That's why we had to build a lot of capacity. So slide number 13 shows the capacity progression. So currently, we have about 50,000 liter capacity. And in the next couple of years, every year, we'll be adding more than 50,000 liter capacity. Slide number 14, again, showcases our follow the molecule strategy. You can see the number of customers we serviced increase substantially over the years. You can also see the average project revenue grow over the years. That's because as the molecule moves to the later phase, revenue goes higher and higher.

13:58 On the bottom left side, you can see our top 10 customer. The revenue grows at a very nice figure of 53 percent. This includes two parts. One is that as the customer work with us, they trust us more. They give us more projects. And secondly, each project moves to a later phase. That's why revenue is higher and higher. The last chart on the slide basically shows our business is actually very diversified. We have a very low concentration risk. So you can see actually in first half of 2019, our top 20 customers, top 10 customers actually had less than 50% of our revenue. So our considering risk is much more reduced comparing to the first couple of years.

14:49 Slide number 15 is a very exciting slide. It actually showcases our business strategy, successful business strategy. So as I mentioned earlier, our CDMO model is basically add many molecules as possible in the earliest stage so that the molecules will convert itself into late stage as the program progress. On the top left side of the slide, you can see our pre-IND revenue has a CAGR of 51% over the past couple of years. But our post-IND revenue, the CAGR is more than 110%. So that's because of natural progression over the fall of the molecule strategy. And on the bottom right side of the slide, you can actually see in first half of 2019, Our post-IND revenue is already close to 49 percent. It's almost half of the current revenue.

15:47 And if you look further, the Phase 3 project accounted amounted to about 28.6 percent of the revenue. Again, this is all the 15 Phase 3 programs and then the one commercial program. So this is truly, this slide truly shows that, you know, our business model works very well. So we added many projects to the early phase and as the Program progressed. The revenue gets higher and higher in late phase. Slide number 16, talk about our three regions of exciting growth. U.S. still is the largest market. We see a 52.7 percent revenue in the reporting period, and the growth is actually still more than 50 percent. Europe, very exciting. Europe is only 7 percent of revenue, but it's growing more than 100 percent. Over the past five years, the kicker in European business actually is more than 185%, very exciting.

16:44 So we continue to believe that we will have more and more revenue from Europe and hopefully eventually will be 10, 20% of our total revenue. China, over the past couple of years, growth has been about 40%. Now we see an acceleration of China. Now this reporting period is 53.7%. So the Chinese revenue, total contribution is actually a little lower than U.S., but it's still very strong, 35.4 percent. Slide number 17 talks about our current pipeline. You actually can see the progress of our pipeline. So you see more and more ADC projects, more and more bi-specific projects. I think this is actually an indication of where the industry is heading. You see our traditional antibody project doesn't grow that fast, and the fusion protein, we see some growth. But a very exciting period is actually the biospecific.

17:36 We almost doubled. So the 10 programs that we accumulated over the past couple of years, we have 10 biospecific programs accumulated over the past couple of years. And now in this quarter, in this reporting period alone, we added nine programs. So essentially, we almost grow the business by 100% just in six months. And we also have 58 first-in-class programs. Those really showcase how solid WC is in terms of handling the difficult projects and also helping global companies with their portfolio. Talent has always been a key. On slide number 18, talent has always been a key to help the business growth. So you see a steady growth of our employees.

18:28 As of now, we have approximately 4,500 people. Now, retention rate is very, very high, 95%, much higher than industry in China, even in the US. And our key talent retention rate is more than 98%. And this talent really is our key advantage compared to our competitors. We can hire people, train them, do very solid work. By end of this year, we expect we'll have 5,600 people in the team. That's probably the largest team in the biologics industry. In terms of recent business highlights, I'm on slide number 19. Most of you know this already on the quality side. We have proven ourselves quality. We have a premium quality system.

19:15 We passed FDA PI inspection two years ago. We passed our first FDA routine GMP surveillance inspection this March. We also passed the EMA inspection. earlier this year. And those basically showcase how Wuxi Quality can help global companies. We have two exciting news to report. First of all, we are able to run disposable bioreactor at 4,000 liter scale. For those of you who know our business, our traditionally, currently our largest bioreactor is 2,000 liter. So with the 2,000 liter, we can compete with anyone with a stainless steel bioreactor, let's say, of 12,000 liter or 15,000 liter. But with 4,000 liters, we can compete with anyone with 20,000 liters or 25,000 liters.

20:00 So that's why it's a key advantage for us to be able to compete with industry leaders who use stainless steel bioreactors. So we have our first facility with a 4,000 liter bioreactor running, and that will be a basis of our future facility design. We also have a facility with a fully automated drug product filling facility. It's called DP4. That's also our future growth area. Overall, our capacity expansion is on track. We announced that we'll be building another facility of 48,000 liters in Chengdu, western part of China. So overall, our goal is to provide a robust and a premier global supply chain that enables our partners to launch their product and come up with a manufacturer with us and eventually benefit patients worldwide. And this goes with our global dual sourcing strategy within Wuxi Biologics.

20:53 Slide number 20, I want to give you an update of our speed. We're actually executing in Ireland, which we're building in Manufacturing 6 and Manufacturing 7. You can see in March, this is still pretty much a plain ground. And then in July, you actually see the shell of the building. End of this year, the building will be weathertight. And hopefully, this time next year, we actually have all the equipment in there. And then this time, 2021, we'll already be making GMP materials. WUSHI speed actually is fully demonstrated in this progression of this Ireland facility. So in section number two, I want to share with you where the industry is heading. I think how WUSHI can benefit from this industry trend.

21:39 First exciting area that industry is heading is actually biospecifics. I think biospecifics may be the next growth wave for biologics, and WUSHI is right on. We actually have the very exciting platform called WUSHI Body. Some of you have been familiar with it. We launched the platform last September. Last year, we have five customers with seven projects. And now, another six months later, we have 10 customers with 15 projects. You see the growth. What's more exciting is actually the number of leads you can see. In China, now we're working with potentially 32 projects. And then in Canada, we have another 21 programs ongoing in negotiation. In Europe, we have 12, and Korea and Japan have another five.

22:25 So we continue to believe that Wushibadi may be the next exciting platform for biospecifics because of the reasons shown on slide number 23. So our current platform seems to be universal. You can give me two sequences. I can make a biospecific for you in six months. If you use a competitive technology, you may need to use 12 months, even 24 months. So we can actually save you 6 to 18 months of time working on engineering the molecules. Once the molecule is engineered, we can express it to 5 gram, 10 gram per liter. And traditional technology probably, you'll be lucky if you get 2 gram per liter or 3 gram per liter. So we can not only have the differentiation, the time saving, but we also have a huge cost saving.

23:12 Because of this, and we have a very strong uptake of WuxiBody. And in the next two to three years, the WuxiBody technology alone will probably contribute to $20 million to $30 million profit in the business of WuxiBiologics. So besides WuxiBody as a platform, another exciting feature for Wuxi is we can continue to expedite how the program can be developed. Slide number 24 talk about a program that we can take from DNA to IND. Essentially someone give us a DNA, how they can start a trial. When we start the business in 2012, our average timeline is 24 months. This year our average timeline is 15 months. In the future, our average timeline is 12 months. So 15 months, it's already the sort of state of the art in the industry.

24:01 And then most of our competitors probably still living with 18 months to 24 months. So working with Wuxi, we can save our clients a couple of months. If you are a small startup company, 12 months versus 24 months make a huge difference. And also, as the current competition is cutthroat, having 12 months of time of edge in timeline really help any company, either a one-person startup company or a large pharma with $40 billion, $50 billion in revenue. So the third exciting technology I want to share with you is actually our manufacturing piece and our productivity improvement. So if you use all the three IPs from Wuxi, if you have a bi-specific program, use the Wuxi body platform, you use our cell line Wuxia, you use our continuous manufacturing platform, we are able to get 35 gram per liter in the industry.

24:56 And this is the highest ever reported in the industry. As I mentioned earlier, traditionally, if you use someone else's technology, you can get two grams per liter. You're talking about two grams versus 35 grams per liter. This is not something that we only achieve in the lab. We are able to scale this process to the GMP facility, and we actually achieved 20 grams per liter in about a 17-day operation. So if you notice, this 35 grams per liter is actually 22 days. So we are able to scale this technology to GMP Manufacturing, and our goal is to have our client find IND end of this year. So Wuxi Up is also the next technology that can help, Wuxi can help the industry.

25:41 Currently, we already have 15 projects ongoing, and we expect two of those projects may be BLA approved in China in the next two years. So Wuxi Up, our continuous manufacturing platform, continues to be very exciting for Wuxi. Slide number 26, companies or investors keep asking, why are you keep gaining market share? So I use these three examples to share with you. So we have the best technology, we have the shortest timeline, so far we have probably one of the best track record in industry in execution, and we have plenty of capacity. That's why we continue to believe that we'll gain market share, and to support our growth. So today, as I mentioned earlier, I think I want to convince you that Wuhan Biologics will have a sustainable high growth in the near future, and that's the main theme of my discussion. With this, I'm going to hand over to Chris Thiem to talk about financials.

26:38 Thank you so much, Chris, for this exciting description with our current growth and the key driver, and also explaining our theme, the sustainable high growth in the first half of 2019. Going forward, I'm going to explain the financial performance for the first half of 2019. Slide number 28. The group has achieved outstanding financial results in the first half of 2019. These charts show the performance of our revenue, gross profit, adjusted EBITDA, and adjusted net profit. In the first half of 2019, the group's revenue increased by 52.4% year-on-year, to RMB 1.6 billion. The major revenue growth drivers were, one, leading technology platforms, competitive timeline, and strong execution track record, contributing to more market share and new integrated projects.

27:43 Two, the group's innovative proprietary technology platforms has been more adopted in the industry. Three, successful implementation of the group's Follow the Molecules strategy gross profit increased by 61.8% year-on-year to RMB 671 million, with gross profit margin up from 39.3% in the first half of 2018 to 41.8% in the first half of 2019, mainly due to, one, the group's strong business growth along with the rapid increase in its number of integrated projects, two, the improved operational efficiency of the group, in particular the fast ramp-up of MSG3, and three, more milestone payments with relative high gross margin received.

28:45 Our adjusted EBITDA increased from RMB 428 million in the first half of 2018 to RMB 747 million in the same period last year, up 74.5% year-on-year. Our unadjusted or GAAP net profit surged by 80.1% year-on-year to RMB 449.5 million in the first half of 2019, with net profit margin up 430 basis points to 28%. The high net profit margin was contributed to one, strong growth in revenue as explained above. Two, cost control and business operation efficiency enhancement.

29:37 Three, other non-operational income recorded partially offset by the increase of administrative expenses and R&D expenses in line with the group's business growth. Excluding the impact of foreign exchange gains and share-based compensations, our adjusted net profit increased by 75.8% year-on-year to RMB 521.5 million in first half of 2019. And adjusted net profit margin went up 430 basis points to 32.4% in the first half of 2019. The reconciling tables are in appendix on slide 40 for your reference.

30:32 Turn to slide 29. As Chris mentioned before, our three region growth engines continued to excel. We are excited for the booming market across all regions. In the first half of 2019, revenue from China and Europe increased by 53.7% and 112% year-on-year, respectively. North America delivered 42% year-on-year growth. Out of it, USA grew 51.7%. Turn to slide 30. For the cost of sales as a percent of revenue in the first half of 2019, direct labor cost, raw material, and overhead accounted for 21.2%, 18.1%, and 18.9%, respectively.

31:32 Even with the ramp-up of new facilities, our adjusted gross profit margin, which excluded share-based compensations, increased from 43.3% to 45.8% year-on-year. reflecting our sales and the improvement of the operational efficiency, and with more milestone revenue received in the first half of 2019. This is the end of the financial section. Chris will conclude our presentation.

32:08 Thank you, Christine. So I think first I want to summarize what we want you to define, to remember about Wuxi Biologics. We want to be a global company with global operations, enable our partner's success. That's why not only we operate in China, we're starting up Ireland side, working in Boston, working in Singapore. We also want to be a company with the best corporate governance, similar to leading global companies. We're very transparent in corporate governance. We're very keen on ESG, environmental social responsibilities. actually using disposable technology, actually help saving water, saving electricity, for making the same biologics product. And, you know, as a service company, we also help saving the resources to help develop product onto the market.

32:56 We have critical roles for women and equality of women in Wuxi Biologics and share with you more. We also want to be a company, not only a good company, but a great company. So I mentioned several times about Wuxi's speed and also Wuxi's quality. I think those two will continue to differentiate how Wuxi is among our competitions. It doesn't matter how big we are. We want to be an entrepreneurial company. We want to be a learning company. We want to be a continuous improving company. That's why we are able to transition from biologics CDMO to a vaccine CDMO relatively quickly, where I can share with you more. So to summarize the first half of the year, we have a very strong growth momentum driven by core competitiveness. Our business model we think is impeccable, very exciting to follow the molecule business model, adding more and more projects, and allow the projects to graduate by themselves.

33:50 And eventually, we have global dual sourcing within WuxiBio. So this business model will actually transform how biologists are discovered, developed, and manufactured. We have very strong technical leadership, expanding capacities, and a good track record continue to allow us to gain market share in U.S., Europe, and in China. And because we're gaining market share, we also see strong growth in all the three regions. Even the trade tension between China and the U.S. does not slow us down, really. We still see the same momentum in U.S., if not even acceleration in U.S., in the new projects. We continue to attract and retain good talents. We are able to expand globally, while hiring is progressing very well in Ireland.

34:36 The IP from Wuxi Body, Wuxia Cell Line, and the Wuxi App actually differentiate us from traditional competitors, what drive us into sustainable high growth. And lastly, we continue to have plenty of capacities. We can start any projects within four weeks. So we don't have capacity bottleneck or limitation. So I mentioned vaccines. I want to share with you a little bit more about the vaccines on page 34. And most of you already seen the news announcement. This is actually a historic moment for Wuxi Biologics. We started the vaccine business planning part in March of last year. And originally, we believe it will be very exciting for us to achieve a milestone in three years, again, signing our first project. We actually did it in less than 18 months.

35:21 So hopefully, our plan is actually to secure the vaccine manufacturing contract to sign the agreement by end of this year. This is a 20-year supply agreement for more than $3 billion. So we'll have some revenue this year, and meaningful revenue next year. And in 2022, the revenue can be as high as $100 million. And again, vaccine is a new area for us. Vaccine manufacturing is extremely difficult. Vaccine manufacturing requires very high quality. All those, the reason the Just a phenomenon that we can sign a vaccine long-term manufacturing contract really differentiates us from our global competitors, showing we have very strong technical strengths, but global premier quality, and we have our transferable skills from biologics can be used in vaccines, in vaccine manufacturing.

36:16 So vaccine will be an exciting growth area for us in the next couple of years. So slide number 35, you have seen this before. I believe Wuxi Biologics is well poised to sustainable high growth. So from 2018 and before, starting last year and before, most of our growth come from one area, antibodies and recombinant proteins. And starting this year, we picked the right timing on biospecifics. We see exciting growth of biospecifics, as I mentioned earlier. Our biospecific project just doubled. The past six months, we added more projects, more biospecific projects than we added in the past three years. And so, very exciting goals for biospecifics. And we also have an opportune timing to launch our Wuxi Body Platform.

37:02 And we believe Wuxi Body Platform will generate $20 to $30 million profit in the next two to three years, and because of the IP we invested in the future. Starting next year, we may have product approval in China and globally, and that will start trickling of varieties coming to Wuxi. And in 2021, vaccine business will be very significant. As I mentioned earlier, 2022, we may be 100 million dollar business. So I think the key message I want you to take home is Wuxi Biologics has been very incredible track record in the past couple of years to grow. And we believe we can sustain the high growth in the next couple of years. Slide number 36, let me show you the business momentum remain very strong in the second half of this year. We continue to expect we can gain more market share We added 32 projects in the first part of the year. We believe we'll add another 20 more in the next six months. And we're currently on track to do that.

38:00 We continue to see, to expect very exciting backup growth for both service and upcoming potential milestone payment. As I mentioned earlier, we expect we'll have no problem or no challenges hiring, including our headcount to 5,600 people by end of this year. That will be the largest team of biologics. And we'll continue to invest in R&D to allow us to develop the next platform, such as the Wuxi Body, to sustain our high growth. Lastly, our capacity expansion is still on track, so to make sure we can execute on our four-of-a-molecule model and with our global dual-sourcing strategy. Slide number 37 talks about the key milestones and catalysts. So we have already achieved those milestones for Q1.

38:47 And in Q3, we have a new 4,000-liter bioreactor online. We have the automated robotic failing system online. And in the next couple of months, the key milestone will be the first IND of Wuxi body, also Wuxi Up. And then hopefully in the next six months, we'll also see our partners file the 1-3 BLAs. And now we're translating to very significant commercial manufacturing revenue for 2020 and beyond. With that, I would like to thank you for your attention. Operator. Certainly, sir. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star 1 on your telephone keypad and wait for your name to be announced. Participants are requested to restrict your questions to two questions at a time to allow everyone to ask their questions.

39:41 We have the first question from the line of Jinsong Du from GSA Capital. Please go ahead.

39:47 Hi. This is Jinsong Du from GSA Capital. Congrats for the results. I just have a question on the CapEx. I understand that you have a guidance on the second half of 2019, but if we take a slightly longer term view, over the next two to three years, you know, how should we think about CapEx and then in relation to that, the free cash flow, you know, given, you know, the potential timing difference, will we expect, should we expect continued positive free cash flow for every single quarter or may that be some period of sizable negative free cash flow?

40:35 I think, yeah, so this year we expect to spend approximately 4.4 billion RMB of cash. Next year is probably around the same range, and we are still working on our CapEx plan for 2021. So I think overall, we build a capacity based on our portfolio needs, and we don't blindly build a capacity and then don't know where the project is. So because of that, we also adjust. If some of the programs run into trouble, we'll actually reduce our capital spending. If the program is going Even faster than we expected, we actually increased the capacity of spending. So overall, I think we believe we have very strong financials to handle the near-term cash needs. We have 3 billion RMB of cash. We also generated very exciting cash flow.

41:22 And lastly, we have about $500 million line of credit. So near-term, we have plenty of cash to fund our operations.

41:33 For this two years, as Chris mentioned, it's about $4.4 billion this year and the next year. But then 2021, as you know, that when we built the site, cash was spent about two years in advance. I anticipate in 2021, the CAPEX for building our CIP, the Construction in Progress Chart, 2021, it will come down a little bit on the capex spending because the site where the cash were used about two years in advance to build. Okay, maybe I'll ask a question from the line.

42:08 Maybe I just quickly follow up on that. Given the capex spending and also a diversification of manufacturing locations. We've got Ireland coming up and potentially other locations, you know, outside of China as well. How should we think about the margins going forward?

42:31 The margin in China certainly is highest. In Ireland, it will be a bit lower than China, and the U.S. and Singapore will probably be lower than Ireland. But overall, I think this is absolutely necessary to sustain our high growth. And also, this is also a way of ensuring our clients stay with us globally. Because if all the operators are in China, they have geopolitical risk. So I think if we operate in Ireland, we'll probably have a very similar margin compared to our industry leaders. Okay,

43:09 Chris. Got it. Thank you. Thank you.

43:11 We have a general question about that. in terms of U.S. dollars for the biological market, CRO versus CMO, and how fast those markets are growing, maybe in China and globally. And also, what is your estimated share of your CRO market as of now, and what are the kind of targets you're setting for yourself?

43:36 I think Sean's question is a very good industry general question. Overall, I think you see more and more companies, more and more startup companies, more and more innovation come from smaller companies. So the CRO and CMO market has always been growing. Based on Frost and Sullivan's numbers, it's growing about 19% to 20%. So the industry is growing about 20%. So we believe Wuxi can grow twice to three times faster than the industry. That's why we believe we can grow, continue to sustain our high growth. But overall, the market size, depending on which number you go with, actually, market size could be as big as about 30 to 70 billion in 2025. It's only a couple years from now. So what's your goal of your market share? I think if you look at our revenue, I think this year we'll probably be globally top three players already. But if you don't have a number of projects we are adding, we are already number one player. So we have the largest market share in terms of number of projects. And if you follow the molecule strategy, so eventually we'll have the largest market, highest revenue. Largest market share will translate into highest revenue in the years to come.

44:49 So you mentioned that you are now taking one out of every six new projects?

44:53 Six projects, exactly.

44:54 Okay. Operator, next question. Thank you. So we have the next question from the line of Jianing Liu from Flowering Tree. Please go ahead. I have two questions. The first one is

45:25 and also you mentioned that there are 12 projects being terminated. So can you tell us more like the reason behind the termination and how shall we expect in the future what percentage of the project in the preclinical stage will be terminated? What will be the long-term trend? That's the first question. is regarding the backlog. I just, because we all know that from phase one to phase two to phase three, there is a probability of success. So when we click the backlog, do we already weighted by the probability of success or we just simply is a arithmetic sum of the potential contract throughout different phase of the project?

46:13 Yep, a good question. The 12 project terminate in preclinical mostly because of technical failures. So the program basically does not run into issues and all around the toxic studies. I think if you look at our current success rate, it's still very high actually. It's more than 85%. So traditionally go from preclinical to phase one, The success rate is probably about 80%. Right now, ours is still a little bit higher than the industry. That's because of the product mix, probably. This is a very typical attrition. So on the backlog, on the service backlog, typically the clients or partners sign the service contract within the next 18 months.

47:00 So that's a pure sum of all the contracts signed. It does not represent the potential service revenue. It's only the next 18 months, the service revenue. So far, our service backlog converting to revenue is almost like 100%. The potential milestones, it's not risk-adjust. It's just add a sum of all the potential. That's why it's called potential milestones. So depending on the progressions, if the program is terminated, all the milestones goes away. So that is not probably adjust. and does not account for attrition. Understood. Thank you very much. Thank you. Thank you, sir. Once again, ladies and gentlemen, it is star one to ask a question.

47:53 Once again, it is star one to ask a question. If you have a question from the line of Scott, from CN Capital. Please go ahead, sir. Hello, can you hear me?

48:09 Yes. Yes, sir. Please go ahead, sir. Okay, okay. Congratulations to the management team for such a great result. I just want to follow up on the, you know, the potential new just filing for the next two years. And you mentioned that there may be two projects from China and then one to two from U.S. Just want to see do you think, you know, Woozie Biologics can get the CMO contract with these drugs because say for example for the case we see that, you know, Woozie Biologics are not the only CMO partner but they chose Samsung Biologics at the end.

48:57 Yes. So that's a good question. So Timad, I want to clarify, the Timad case is clearly, it's not because Wuxi Biologics didn't do well. It's actually clearly purely political reasons. So Timad want to stay away from China. And this is something that they already share with us from the get-go. So in our capacity planning, we do not include Timad product in our portfolio. So when we start the project, they already know that they want to either manufacture in-house or use a global player to manufacture Timad product. So that does not indicate anything related to Wuxi. It's really the business strategy of TiMAT. So for those programs that we have near term, we have product launch. And so far, as I mentioned earlier, we already signed two exclusive manufacturing contracts. Each contract is actually probably going to be more than $1 billion for the next 10 years. So for those two programs, every year we'll probably get to $150 to $200 million revenue.

49:55 For the two programs from China, and revenue is much harder to estimate because of the immunology space, PD-1 and PD-L1, but we believe we'll be the primary supplier for those two programs as well. So near term, for the four programs, we'll be either 100% exclusive suppliers or we'll be the primary suppliers. So that's the success. All those programs will really basically showcase our success of our business strategy for the molecule. All four programs, we started with the DNA. Now we want to take it all the way to product approval. Thank you, Chris. Just to clarify, the revenue number you mentioned is just the DMO revenue without counting the potential royalty from the Chinese projects, right?

50:42 Exactly, yes. It's a service revenue. Okay, great. Thank you. Thank you once again, ladies and gentlemen. It is star one to ask a question.

51:01 Maybe I should ask a question before anyone else comes up. So I have a question for, actually, maybe for Christine. So you have $3 billion of cash on your balance sheet, but you are guiding for $3.6 billion spending in the second half for CapEx. Right. Clearly, there's some kind of shortfall.

51:23 Right. So that's a good question. We are planning to borrow some loans in the second half of 2019. I anticipate about $2.6 billion roughly, depends on the progress of our construction. The reason we have plenty of cash, $3 billion, but cash is so resourceful and it's very useful as a leverage. So I will preserve some cash on hand as a leverage anyhow. So by borrowing $2.6 billion, please anticipate that in the second half of this year, The interest expense will incur. It's about 20 million RMB in expense, interest expense. I want you to build that in model.

52:10 Also the interest income will decrease because first half we only spent 800 million on the CapEx and then 3.6 billion more to go in the second half. So cash that decrease with the interest income will decrease. Also, one more thing is the other income this time. In the first half, we have an AZ of about 14 million RMB of option fee. Those are non-operational. These are also one-off. So in the second half, I wanted to also guide you on some of these one-off items. That's important to put in the model.

52:50 Another question probably related. You were aiming to build eventually a facility total capacity of 280,000 liters. So, I mean, which kind of number we're looking at in terms of CapEx and the people, some people clearly are kind of worried at a certain point that you may have to do more equity raising. And some people actually may want you to buy back some shares because you will be issuing kind of stock options to your employees to retain the best. So how would you can address some of the concerns from the investors.

53:30 Okay. First of all, on page 13, the CIP page, that's where I was. Out of the 280,000 liter capacity, the cash actually were already spent in 2019 and 2020. That's how it works. For the capacity to be in place, we are spending money right now. I think someone's asking as well. And then by 2021, the capex expanding will drop a lot. It will be about half because the money spending in 2019 and 2020 is building for the 280,000 liter. Okay, so that's the first question. And secondly, in terms of cash availability, Chris kind of touched upon that. Right now we have $3 billion of cash.

54:15 We will borrow another about $2.6 billion for the second half. That is $5.6 billion. Then we have $3.6 billion more. So I still have $2 billion left on the bank, right? And then for next year, we will have, right now we already secured $500 million U.S. dollars in the bank loan. Out of this, $300 million were syndicated loans, $200 million are non-syndicated loans. And on top of it, we can top up to another $200 million of bank loans already secured. If we need to, then we can all together have $700 million U.S. dollars of bank loans. It's already in place.

55:02 Right now, I can tap into it in time.

55:05 So we don't have to worry about any immediate kind of equity or anything anytime soon, right?

55:10 Right, for the next two years.

55:11 Okay.

55:12 Let me clarify that.

55:15 So when we have a cash need, we always look at either equity or loan. We'll decide as a company management what's the best way to either borrow or raise equity. So I think I also want to clarify that Christine's mentioned the CapEx in 2021 reduced based on the current scenario. If our business continues to be bullish, we may actually increase spending. So CapEx for 2021 is not planned yet.

55:44 Okay, there's one question about this. I think probably you would like to address that. So, do you think what's the estimate for cost program for the PG-1s from you and from the competitors in some sense?

55:59 That's too confidential information to disclose. But we believe we can be there. We have a technology to produce PD-1 at $50 to $100

56:18 per gram. Okay.

56:20 Lowest in the industry. There are other people? Other people in China, probably $200 to $400.

56:27 Okay. Sir, we have a question. Would you like to take it?

56:34 Yeah. We have a question from the line of Denise Valentine from JP Morgan. Please go ahead.

56:44 I've already had my question answered.

56:50 We have a next question, so would you like to take it? Yes, the last question. This one comes from Naresh Chauhan from Interon Health.

57:06 Hi there. Thanks for taking my questions. Just one on the manufacturing . So it seems that MSG4 is now up and running. To us, it seems like it's on time and on track. Was that in line with your expectations in terms of timing? And in terms of cost, where has that come in relative to expectations? Obviously, you've got a lot more plants set to come on stream. So I'm just trying to get a sense as to whether or not that's the kind of we're still on track for all of those to be on time and on budget. And then secondly, you said that you have some spare capacity and start any project within four weeks, which suggests that there is significant demand, but you're not backed up completely. And you're about to add a huge amount of capacity in the coming years.

57:52 So how are you comfortable that you can fill all of that additional capacity over the next three or four years, given that you already have some latency in the network? Thanks.

58:03 Yeah, that's a very, very good question. First of all, I think currently all the projects finished at Wuxi is on time, under budget. So far, all the manufacturing, one, two, three, four, they're all on time, under the budget. Five, so far, is on track, on time delivery, on budget. So I think we have very good track record. And secondly, in terms of capacity. So, because our business strategy is build capacity only when we need it. So, we can slow down if we don't need the capacity or we can even pause the project if we don't need the capacity. So, our strategy is very different from a traditional CMO. Build the project first and then find the project.

58:48 So, we have our portfolio drive for project needs. So, because of that, so I would believe our manufacturing This year our margin, this last reporting period our margin is very high because of Manufacturing 3 is almost fully utilized now. And then now we're looking at Manufacturing 4. Hopefully next year we'll be very excited to share with you that Manufacturing 4 will be fully utilized. And then we'll talk about Manufacturing 5. So I think the reason we can start any project in about four weeks is because we always reserve In discovery and development, we always have extra capacity because we have a very large R&D team. We can mobilize them to do service work. And in manufacturing, we always design a 20% to 30% extra capacity than our portfolio needs. And that's for optimistic projects to come in.

59:37 Hopefully that answers your question.

59:39 Yes, that's great. Thank you.

59:42 Thanks so much. Thank you. Okay, so we do not have any further questions at this point. Back to you.

59:49 Do you want to make a conclusion?

59:52 I think overall, as I mentioned in the conclusion earlier, the business momentum in the first half is incredible. I believe the momentum continues to be very strong in the second half. I think we are very uniquely positioned to benefit from really the booming biologic industry. I think we're also timely right with the biospecific. I think we're very excited about the company. Again, the key word today is sustainable high growth. Thank you.

1:00:22 Thank you very much.

1:00:24 Thank you, everyone. Thank you. Thank you. Ladies and gentlemen, that concludes our conference for today. Thank you all for your participation. You may disconnect now.