WuXi Biologics Hatches New Baby With ADC Drug Unit IPO

The WuXi PharmaTech family of publicly listed companies, emerging as global leaders in outsourced contract services for drug developers, is about to gain a new member.

That latest addition comes from the antibody-drug conjugate (ADC) space that is fast emerging as a major new hot spot following the big success for PD-1 antibodies. Both traditional drug giants and biopharma startups are piling into the space, boosting demand for outsourced services from contract research, development and manufacturing organizations (CRDMO) with ADC expertise.

Seizing on that opportunity, WuXi Biologics (Cayman) Inc. (OTCPK:WXXWY) (OTCPK:WXIBF) (2269.HK), a medical outsourcing services (CXO) leader for biomacromolecule drugs, announced a spinoff plan last week for its CRDMO business focused on ADCs and other bioconjugates, aiming to separately list the unit in Hong Kong. The same day, WuXi XDC (Cayman) Inc., the new business entity, submitted its own listing application, becoming the latest member to strike out on its own from a growing family of drug service companies based in the Eastern China city of Wuxi.

WuXi Biologics’ shares rose 3.8% to HK$39.25 in early trading the day after the news, but gave most of that back and ended up just 0.53% for the day.

WuXi Biologics said that following completion of the spinoff, it would count WuXi XDC as a consolidated subsidiary. The separate listing acknowledges the recent rapid rise of the ADC and bioconjugate market, and is aimed at boosting awareness and recognition of the hot new drug category.

WuXi XDC was established in late 2020 by WuXi Biologics and sister company WuXi AppTec’s (OTCPK:WUXIF) (603259.SH; 02359.HK) WuXi STA subsidiary. WuXi Biologics provided $120 million for 60% of the company, while WuXi STA provided $80 million for the remaining 40%.

Despite the company’s relative youth, the “WuXi family” has been working in this field for a long time. In 2013, WuXi Biologics established a dedicated CRDMO business unit for ADCs. As the market rapidly advanced, WuXi Biologics established a separate and dedicated ADC facility in Wuxi in 2018. WuXi STA also has laboratories in Shanghai, Jiangsu and elsewhere that can produce ADC drugs for contract customers.

Its backing by two giants from the “WuXi family” has helped WuXi XDC quickly carve out a major place in the bioconjugate drug market. According to research cited in the prospectus, WuXi XDC was the world’s second largest CRDMO engaged in ADC and other bioconjugate drugs last year, with 9.8% of the global market. It had 94 projects in progress at the end of last year, accounting for more than 35% of the total for global bioconjugate drug outsourcing projects that year.

‘Biological missiles’

ADC drugs consist of a specially designed linkers, which connect small molecule drugs, such as cytotoxic payloads, to biological components, such as antibodies. They combine the advantages of highly specific targeting and toxic abilities to precisely and efficiently kill cancer cells, giving them the nickname “biological missiles.” Compared with current standard cancer treatments, ADC drugs are more precise and have fewer side effects.

The world’s first ADC drug was approved in 2000. But the category has only risen to prominence in recent years with technological improvements. ADC drugs accounted for 15.4% of biological agents approved by the U.S. Food and Drug Administration (FDA) between 2019 and 2022, including some that have shown good clinical results.

One case is Enhertu, an ADC drug targeting HER2+, which achieved sales of more than $1.2 billion in its third year on the market. Such success has fueled a goldrush into the space not only by startups, but also global pharmaceutical companies that have begun accelerating their R&D efforts for ADC drugs. More than 500 clinical trials were ongoing worldwide at the end of March, of which 222 – or nearly half – were ADC candidates.

According to a report cited in the prospectus, the global market for ADC drugs reached $7.9 billion last year, and it is expected to grow to $64.7 billion by 2030, representing a compound annual growth rate of 30% over that period.

Because they involve the coupling of small-molecule drugs and biological carriers, interdisciplinary expertise covering both large and small molecules is required to make ADC drugs. The R&D is relatively complex and has high technical barriers, forcing most pharmaceutical companies to rely on outsourcing partners for ADC development. In 2022, the outsourcing rate for global ADC development and production will be as high as 70%, much higher than the 34% rate for general biopharmaceuticals.

Such a confluence of factors has fueled a business boom for WuXi XDC, propelling the company’s revenue by a factor of 10 from 96 million yuan in 2020 to 990 million yuan last year. Its profits have grown almost as fast, rising from 26.3 million yuan to 156 million yuan over that period. Of the 10 biopharmaceutical Chinese companies that have licensed ADC technologies from overseas partners since 2022, eight are WuXi XDC customers.

“WuXi family” gains strength

Biopharmaceutical companies generally spin off and separately list their businesses to boost those units’ financing capabilities to support their R&D. But WuXi XDC is already quite profitable and has yet to take on external investors, and thus faces no such pressure to go public. WuXi Biologics’ revenue totaled 15.27 billion yuan last year, with an adjusted net profit of 5.05 billion yuan.

Revenue from WuXi XDC accounts for only 6.6% of WuXi Biologics’ total. But WuXi Biologics is probably moving now to give the unit its own independent platform to finance its growth, hoping to attract investors with the big potential for the global ADC market.

Among listed biopharmaceutical companies, the “WuXi family” is a force to be reckoned with. Its biggest members include WuXi AppTec, which focuses on chemical drugs and small molecule drug outsourcing services; and WuXi Biologics, which focuses on the biopharmaceutical outsourcing business. WuXi Biologics became a listed company after WuXi AppTec spun off its macromolecule business in 2017. The two are independent, but share the same main stakeholders.

JW (Cayman) Therapeutics (OTCPK:JWCTF) (2126.HK) was jointly established by WuXi AppTec and U.S. company Juno in 2016, and is regarded as the third listed member of the “WuXi family” after listing in Hong Kong in November 2020. But despite big early hopes, JW Therapeutics’ stock has fallen for two years on lack of major progress in the commercialization of its products. Its current stock price of less HK$3 is down nearly 90% from the IPO price of HK$23.80. WuXi AppTec has significantly reduced its holdings in the company, and is no longer a major shareholder.

From a valuation perspective, WuXi Biologics currently trades at a price-to-earnings (P/E) ratio of about 35 times, compared with 19 times for WuXi AppTec. A successful new listing by WuXi XDC, including the potential for big new fundraising to financing its growth, could provide new growth momentum for WuXi Biologics as well.

Disclosure: None.

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