Earnings Call: H1 2019

Aug 19, 2019

Ladies and gentlemen, thank you for standing by, and welcome to the Wuxi Biologics Conference Call. At this time, all participants are in a listen only mode. After the 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, Sean Wu. Please go ahead, sir. Good evening and good afternoon for the people in Europe and good morning for the people in America and good whatever for everybody else. My name is Sean 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 their incredible interim results for 2019. Management joining today's call are Doctor. Chris Chen, company's CEO Ms. Christine Lu Wang, CFO Vice President and Head of Corporate Development, Doctor. Michelle Chen and IR Director, Eileen Wang. Management will provide a brief update and give a brief also talk about the financial funds, of course. There will be followed by Q and A. You may ask management directly or submit questions via e mail at my e mail address, shaun.wums.com. Without further ado, Doctor. Chen, please start your presentation. Thank you, Sean. My pleasure here. Good morning, good afternoon, and 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 Lau Ong, who is going to discuss the financials and then we'll have a Q and A at the very end. On Slide number 4. Most of you have seen this slide before. This is really a snapshot of our current WuXi Bao business. I think we're very excited to show this slide. We're very pleased to announce that our company has achieved incredible results in the first half of twenty nineteen. We achieved both operational excellence and also exceptional financial performance across all key measures and business lines. Our revenue record high of RMB1.6 billion, 52% year over year increase. The number of integrated projects increased to about RMB224. We added 32 new projects and also including 1 late phase. So late phase project now increased to 15, demonstrating our success of our Follow the Molecule strategy. In terms of backlog, our total backlog was up US4.6 billion dollars which set up a solid foundation for the Group's strong growth in the future. Our manufacturing facility capital expansion is on track. Our total capacity will be approximately more than 280,000 liters after 2022, which is only 3 years away. We continue to strive for excellence and with efforts in generality and also dedication of our 4,500 employees. Our adjusted net profit grew around 76% year over year to RMB521.5 million and adjusted net margin was 32.4%. Actually, this is a 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. Slide number 6. As of June 30, 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 grew 52.4 percent to RMB1.6 billion. Gross profit increased by around 62% to RMB671 1,000,000. Our gross profit margin was very record high 41.8%. Net profit margin net profit significantly increased by 80% to around RMB449 1,000,000. Our adjusted profit increased by around 76 percent to about RMB521.5 million. Lastly, our diluted EPS increased by 79% to RMB0.34. Again, this is for the company, this is actually the best record since the start of the company. Slide number 7, I'll give you a little bit more about our current cash positions and CapEx. Our current bank balance, cash and cash deposit amounted to approximately RMB3 1,000,000,000. We have no outstanding borrowings and operating cash flow increased substantially by 82% to around RMB222 1,000,000. Our total CapEx in 2019 the first half of twenty nineteen was over RMB800 1,000,000. We'll probably spend another RMB3.6 billion in the second half of this year. We recently have made an announcement on the Vaccine business, but vaccine business have very limited cash needs this year. So we have substantial cash and also loans to cover the CapEx for the next for near term. Slide number 8, Most of the investors are very familiar. This is our business model. Our mission is to accelerate and transform how biologics are discovered, developed and manufactured. Our business model is called Follow the Molecule. As our biologics 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. And our revenue will grow exponentially after the each molecule progress. So our business model is to take in as many as projects as possible and allow each project to move through the natural cycle of product development. And then revenue for each molecule, revenue will grow exponentially and hopefully will achieve $50,000,000 to $100,000,000 comforter manufacturing revenue for the programs that are successful. Slide number 9, 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 first half of this year. The top left chart demonstrates that we have a significant increase in number of projects. So you see a CAGR of 44% from 75 projects in June of 2014 now to 224 projects. This probably represents about 15% of global portfolio. Again, basically about 1 in 6 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 is now 102. We have 75 projects in Phase 1 and 27 projects in Phase 2. Slide number 10 is a different way of describing the current portfolio. This is very interesting that you're very used to see this funnel, this big funnel basically highlighting our CDMO model. We have the numbers where 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 last this reporting period? We added 32 projects, 31 in preclinical, 1 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. So some of my our competitors don't even have 32 projects total and we added 32 in 6 months. And then the last number is actually the 15 late phase program. 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, these 15 projects amounted to about 28% of revenue for this year. This basically show a natural progression of the fall of the molecule and it showcase our good business strategy. Another number I want to highlight on this slide is, in this last period, we actually have more than RMB30 1,000,000 milestone payment, which represent a significant increase of 75.9% comparing to the same period year. That's why our net 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. Slide number 11, this is the backlog. And so for those of you who actually see who understand the 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 not easy to understand. Also, it's not very easy to grow because a lot of backlog gets consumed. So you have to make up the difference, make up the consumed backlog before you can grow. But we actually still see very exciting backlog growth. You see our service backlog increased by more than 200% to CNY1.7 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 RMB2.9 billion, mostly because of IPs such as Wuxi Body that we signed projects with our own IP and we are able to collect potential milestone fees up to RMB2.9 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. So it's not always converted to revenue, but it has very high margin. That's why those 2 pieces, 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. So as I mentioned earlier, the first half of this year, we have more than $30,000,000 milestone payment. That's why our margin is higher in the company's history. Slide number 12, basically showcase our business strategy. I think our 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 grow exponentially. And once the program hits to commercial manufacturing, we want to build 2 global sites for them, called 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 need. And 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, it incur a significant cost. There's a long time line and also there is a risk that transfer may not be successful. So far, we have signed 2 exclusive commercial manufacturing contracts using this strategy and those are the 2 out of the 15 that I mentioned earlier. For those 2, each of them is actually likely more than $1,000,000,000 revenue in the around 10 years of project time line. 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 WuXi's platform. That's why we have built 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 showcase our follow the molecule strategy. You can see the number of customers we serviced increased 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 grow higher and higher. On the bottom left side, you can see our top 10 customer. The revenue growth has a very nice CAGR of 50 3%. This has included 2 parts. One is that as the customer work with us, they trust us more, they give us more projects. And secondly, the project each project move to later phase. That's why revenue is higher and higher. The last chart on the slide basically show our business is actually very diversified. We have a probably we have a very low concentration risk. So you can see actually in first half of twenty nineteen, our top twenty customers, top 10 customers actually have less than 50% of our revenue. So our constrained risk is much more reduced comparing to the 1st couple of years. Slide number 15 is a very exciting slide. It actually showcase 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 later 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 of the fall of the molecule strategy. And on the bottom right side of the slide, you can actually see in first half of twenty nineteen, our post IND revenue is already close to 49%, it's almost half of the current revenue. And if you look further, the Phase III projects accounted amounted to about 28.6% of the revenue. Again, these are the 15 Phase 3 programs and then the 1 commercial program. So this is truly this slide truly show that our business model works very well. So we add many projects to the early phase and as the program progress, the revenue get higher and higher in late phase. Slide number 16, talk about our 3 regions of exciting growth. U. S. Still is our largest market. We see a 52.7 percent revenue in the reporting period, and the growth is actually still more than 50%. Europe, very exciting. Europe is only 7% of revenue, but it's growing more than 100%. Over the past 5 years, the CAGR in Europe European business actually is more than 185%, very exciting. So continue to believe that we'll have more and more revenue from Europe and hopefully, eventually, it will be 10%, 20% of our total revenue. China, over the past couple of years, growth has been around 40%. Now we see acceleration of China this reporting period of 53.7%. So the Chinese revenue total contribution is actually a little bit lower than U. S, but it's still very strong, 35.4%. Slide number 17, talk about our current pipeline. You actually can see the progress of our pipeline. So you see more and more ADC projects, more and more bispecific projects. I think this is actually an indication of where the industry is heading. You see our traditional analytic project doesn't grow that fast. In the fusion protein, we see some growth, but a very exciting period is actually the bispecific. We almost doubled. So the 10 programs that we accumulated over the past couple of years, we have 10 bispecific programs accumulated over the past couple of years. And now in this quarter, in this reporting period alone, we added 9 programs. So essentially, we almost grow the business by 100% just in 6 months. And we also have 58 1st in class programs. Those really showcase how solid OCE is in terms of handling the difficult projects and also helping global companies to with their portfolio. Talent has always been a key. I'm on Slide number 18. Talent has always been a key to help the business growth. So you see a steady growth of our employees. And 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 U. S. And our key talent retention rate is more than 98%. And this talent really is our key advantage comparing to our competitors. We can hire people, train them to 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 Wuxi quality. We have a premium quality system. We passed FDA PII inspection 2 years ago. We passed our 1st FDA routine GMP surveillance inspection this March. We also passed the EMI inspection early this year. And those basically showcase how WuXi Quality can help global companies. We have 2 exciting news to report. First of all, we are able to run disposal by reactor at 4000 liters scale. For those of you who know our business, traditionally currently our largest bioreactor is 2000 liter. So with the 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 liter, we can compete with anyone with 20,000 liter or 25,000 liter. So that's why it's a key advantage for us to be able to compete with the industry leaders who use stainless steel bioreactors. So we have our first facility with a 4,000 liter bioreactors running and that will be the 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 liter in Chengdu, Western part of China. So overall, our goal is to provide a robust and a premier global supply chain that enable 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. Slide number 20, I want to give you an update of our speed we're executing in Ireland, which we're building manufacturing 6 and manufacturing 7. You can see in March, this is still pretty much a playing ground. And then in July, you actually see the share of the building. End of this year, the building will be weather tight. And hopefully, this time next year, we actually have all the equipment in there. And then this time, 2021, we already be making GMP materials. So Wuxi's speed actually is fully demonstrated in this progression of the island facility. So in Section number 2, I want to share with you where the industry is heading, I think how we should benefit from this industry trend. First exciting area that industry is heading is actually bispecifics. I think bispecifics maybe the next growth wave for biologics and WuXi is right on. We actually have the very exciting platform called WuXi Body. Some of you have been familiar with it. We launched the platform last September. Last year, we have 5 customers with 7 projects. And now another 6 months later, we have 10 customers with 15 projects. You see the growth. What's more exciting is actually the leads number of leads you can see. In China, now we're working with potentially 32 projects. And then in U. S, Canada, we have another 21 programs ongoing in negotiation. Europe, we have 12 and Korea and Japan of another 5. So we continue to believe that Usibody may be the next exciting platform for bispecifics because of reasons shown on Slide number 23. So our current platform seems to be universal. You can give me 2 sequences. I can make a biophilic for you in 6 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 and nearing 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. Because of this, and we have a very strong uptake of Wuxi Body. And in the next 2 to 3 years, the Wuxi Body technology alone will probably contribute to $20,000,000 to $30,000,000 profit in the business of Wuxi Biologics. So besides Wuxi Body as a platform, another interesting another exciting feature for WuXi is we can continue to expedite how the program can be developed. Slide 24 talks 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 time line is 24 months. This year, our average time line is 15 months. In the future, it's average time line is 12 months. So 15 months is already the sort of state of the art in the industry. 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 time line really help any company, either a 1 person startup company or a large pharma with $40,000,000,000 $50,000,000,000 in revenue. So last the 3rd exciting technology I want to share with you is actually our manufacturing piece and our productivity improvement. So if you use all the 3 IPs from Wuxi, if you have a bi specific program, use the Wuxi Body platform, use our cell line, Wuxia, use our continuous manufacturing platform, we are able to get 35 grams per liter in the industry. This is the highest reported ever reported in the industry. As I mentioned earlier, traditionally, if you use someone else technology, you can get 2 grams per liter. Talking about 2 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 17 day operation. So if you notice, the 35 grams per liter is actually 22 days. So we are able to scale this technology to GMP manufacturing and we are our goal is to have our client find R and D end of this year. So Wuxi up is also the next technology that can help Wuxi can help the industry. Currently, we already have 15 projects ongoing, and we expect 2 of those projects maybe BLA approved in China in the next 2 years. So Wuxi App, our continuous manufacturing platform, continues to be very exciting for Wuxi. Slide 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 time line. So far, we have probably one of the best track record in the 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 WuXi 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' team to talk about the financials. 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 twenty nineteen. Going forward, I'm going to explain the financial performance for the first half of twenty nineteen. Slide 28. The group has achieved outstanding financial results in the first half of twenty nineteen. These charts show the performance of our revenue, gross profit, adjusted EBITDA and adjusted net profit. In the first half of twenty nineteen, the group's revenue increased by 52.4 percent year on year to RMB1.6 billion. The major revenue growth drivers were: 1, leading technology platforms, competitive time line and strong execution track record contributing to more market share and new integrated projects. 2, the group's innovative proprietary technology platforms has been more adopted in the industry 3, successful implementation of the groups that follow the molecule strategy. Gross profit increased by 61.8% year on year to RMB671 1,000,000 with gross profit margin up from 39.3% in the first half of twenty eighteen to 41.8% in the first half of twenty nineteen, mainly due to: 1, the group's strong business growth, along with the rapid increase in its number of integrated projects 2, the improved operational efficiency of the group, in particular, the fast ramp up of MSG 3 and 3, more milestone payments with relative high gross margin received. Our adjusted EBITDA increased from RMB428 1,000,000 in the first half of twenty eighteen to RMB747 1,000,000 in the same period last year, up 74.5% year on year. Our unadjusted or GAAP net profit surged by 80.1 percent year on year to RMB449.5 million in the first half of twenty nineteen with net profit margin up 4.30 basis points to 28%. The high net profit margin was contributed to: 1, strong growth in revenue as explained above 2, cost control and business operation efficiency enhancements 3, other non operational income recorded, partially offset by the increase of administrative expenses and R and 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 percent year on year to RMB521.5 million in first half of twenty nineteen, and adjusted net profit margin went up 430 basis points to 32.4 percent in the first half of twenty nineteen. The reconciling tables are appendix are in appendix on slide 40 for your reference. Turn to slide 29. As Chris mentioned before, our 3 region growth engines continued to excel. We are excited for the booming market across all regions. In the first half of twenty nineteen, 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 twenty nineteen, direct labor cost, raw material and overhead accounted for 21.2%, 18.1% and 18.9%, respectively. Even with the ramp up of new facilities, our adjusted gross profit margin, which excluded share based compensation, increased from 43.3 percent 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 twenty nineteen. This is the end of the financial section. Chris will conclude our presentation. Thank you, Christine. So I think first, I actually I want to summarize with what Wuxi what we want you to define to remember about Wuxi Biologics. We want to be a global company with global operations, enable our partner success. That's why not only we operate in China, we are starting up Ireland site, 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 and social responsibilities. Actually using disposable technology actually help saving water, saving electricity for making the same biologics product. And as a service company, we also help saving the resources to help develop product onto the market. We have critical roles for women and equality of women in WuXi Biologics and I'll 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 2 are kind of differentiating how WuXi is among our competitions. It doesn't matter how big we are, we want to be an entrepreneurial company, it will be a learning company, it will be a continuous improvement 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 a lot of projects to graduate by themselves and eventually have global dual sourcing within WuXiBio. So this two model this business model will actually transform how biologics 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're able to expand globally, while hiring is progressing very well in Ireland. The IP from Wuxi Body, Wuxia Cell Line and Wuxi App actually differentiate us from the traditional competitors, will drive us into sustainable high growth. And lastly, we continue to have plenty of capacities. We can start any projects within 4 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. As most of you have 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. Originally, we believe it will be very exciting for us to achieve a milestone in 3 years, again, signing our first project. We actually did it in less than 18 months. So hopefully, we'll 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 $3,000,000,000 So we'll have start ups on revenue this year and very meaningful revenue next year. And in 2022, the revenue can be as high as $100,000,000 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 the phenomenon that we can sign a vaccine long term manufacturing contract really differentiate us from our global competitors, showing we have very strong technical strength, but global premier quality and we have our transferable skills from biologics can be used in vaccines in vaccine manufacturing. So vaccine will be an exciting growth area for us in the next couple of years. So Sverdrup 35, we have seen this before. I believe WuXi Biologics is well poised to sustainable high growth. So from 2018 and before, last year and before, most of our growth come from one area antibodies and recombinant proteins. Starting this year, we picked the right timing on bispecifics. We see exciting growth of bispecifics, as I mentioned earlier. Our biosimilars project just doubled. The past 6 months, we added more projects, more bisonic projects than we added in the past 3 years. And so very exciting growth for bisonicics. And we also have an opportune timing to launch our Wuxi Bali platform. And we believe Wuxi Bali platform will generate $20,000,000 to $30,000,000 profit in the next 2 to 3 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 our royalties coming to Wuxi. And in 2021, vaccine business will be very significant. As I mentioned earlier, 2022, we may be $100,000,000 business. So I think the key message I want you to take home is Wuxi Biologic 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 36. Let me show you the business momentum remained 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 1st part of the year. We believe we'll add another 20 more in the next 6 months, And we're currently on track to do that. We continue to see to expect very exciting backlog growth for both service and upcoming potential milestone payment. As I mentioned earlier, we expect we'll have no problem or no challenges hiring increase 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 and D to allow us to develop the next platform, such as Wuxi Body, to sustain our high growth. Lastly, our capacity expansion is still on track. So to make sure we can execute on our follow the molecule model and with our global dual sourcing strategy. Slide number 37, talk about the key milestones and catalysts. So we have already achieved those milestones for Q1. And in Q4, Q3, we have a new 4000 liter bireactor online. We have the automated robotic feeding 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 6 months, we'll also see our partners file 1 to 3 BLAs and that will translate into very significant commercial manufacturing revenue for 2020 and beyond. With that, I would like to thank you for your attention. Operator? We have the first question from the line of Jinsong Du from GSI Capital. Please go ahead. 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 twenty nineteen, but if we take a slightly longer term view over the next 2 to 3 years, how should we think about CapEx? And then in relation to that, the free cash flow, given the potential timing difference, will we expect should we expect continued positive free cash flow every single quarter or may that be some period of sizable negative free cash flow? I think, yes. So this year, we expect to spend approximately RMB4.4 billion of cash. Next year, it's probably around the same range. And we are still working on CapEx plan for 2021. So I think overall, we build the capacity based on our portfolio needs and we don't blindly build the capacity and then don't know where the project is. Because of that, we also adjust. If some of the program run-in trouble, we'll actually reduce our capital spending. If the program is going even faster than we expected, we actually increase the capacity spending. So overall, I think we believe we have a very strong financials to handle the near term cash needs. We have RMB3 1,000,000,000 of cash. We also generated very exciting cash flow. And lastly, we have about $500,000,000 line of credit. So near term, we have plenty of cash to fund our operations. Just one point to answer for this 2 years, as Chris mentioned, is about RMB 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 2 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 2 years in advance to build. Okay. Maybe I'll take a question from the line. Maybe I just quickly sorry, just quickly follow-up on that. So given the CapEx spending and also a diversification of manufacturing locations, we've got an island that's coming up and potentially other locations outside of China as well. How should we think about the margins going forward? Yes. The margin in China certainly is highest. In Ireland it will be a bit lower than China and then U. S. And Singapore 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, right? Because if all the operators are in China and they have geopolitical risk. So I think if we operate in Ireland, we'll probably have a very similar margin comparing to our industry leaders, right? Okay, Chris. Got it. Thank you. Yes. I have a general question about what's the size 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? I think Sean's question is very good industry general question. Overall, I think you see more and more companies more and more start up companies, more and more innovation come from smaller companies. So the CRO and CMO market has always been growing. Based on Frost and Sullivan numbers growing about 19%, 20%. So the industry is growing about 20%. So we believe WuXi can grow twice to 3 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 grow with, actually market size could be as big as about RMB30 1,000,000,000 to RMB70 1,000,000,000 in 2025, which is only a couple of years from now. So what's your goal or your market share? I think if you look at our revenue I think this year we'd probably be globally top 3 players already. But if you look at the number of projects, we're adding are already number 1 player. So we have the largest market share in terms of number of projects. And if you believe follow the molecule strategy, so eventually we'll have the largest market highest revenue, the largest market share will translate into highest revenue in the years to come. So you mentioned that you are now taking one out of every 6 new projects? The project, exactly. Operator, next question. Thank you. So we have the next question from the line of Jianming Lu from Flowering Tree. Please go ahead. Yes. I have two questions. The first one is in the PPT 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. The second question is regarding the backlog. Just because we all know that from Phase 1 to Phase 2 to Phase 3, there is a probability of success. So when we calculate the backlog, do we already rated by the probability of success or we just simply is arithmetic sum of the potential contract throughout different base of the project? Yes. Good question. The 12 projects terminated in preclinical mostly because of technical failures. So the program basically does not run into issues and all run the talk studies. I think if you look at our current success rate is still very high, actually it's more than 85%. So traditionally, go from preclinical to Phase 1, the success rate is probably about 80%. Right now, ours is still a little bit higher than the industry just because of the product mix probably. So this is a very typical attrition. So on the backlog, on the service backlog, typically the clients or our partners typically sign the service contract with us in the next 18 months, or the 18 months. So that's a pure sum of all the contracts signed. It does not represent the potential service revenue. It's only in the next 18 months, the service revenue. So, so far, our service backlog converting into revenue is almost like 100%. The potential milestone is not risk adjusted. It's just add a sum of all the potential that's why it's got potential milestones. So it will depend on the progressions or if the program is terminated, all the milestone goes away. So that's it's not probably adjust and does not account for attrition. Understood. Thank you very much. Thank you. Thank you, sir. We have a question from the line of Scott from Centimeters Capital. Please go ahead, sir. Team for such a great result. I just want to follow-up on the potential new drug filing for the next 2 years. And you mentioned that there may be 2 projects from China and then 1 to 2 from U. S. Just want to see, do you think WuXi Biologics can get the CMO contract with this drug? Because say for example for the Timex case we see that with the Biologics are not the only CMO partner, but they chose Samsung Biologics at the end. Yes. So that's a good question. So Timex I want to clarify the Timex case is clearly it's not because Wuxi Biologic didn't do well. It's actually clearly purely political reasons. So Time Med 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 Timex 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 Timex product. So that does not indicate anything related to Wuxi, it's really the business strategy of TimeAd. So for those programs that we have near term, we have product launch. And so far, as I mentioned earlier, we already signed 2 exclusive manufacturing contracts. Each contract is actually probably going to be more than $1,000,000,000 for the next 10 years. So each every year probably you have for those 2 programs, every year, we'll probably get to $150,000,000 to $200,000,000 revenue. And for the 2 programs from China and as in revenue is much harder to estimate because of the immuno oncology space, PD-one and PD L1, we believe will be the primary supplier for those 2 programs as well. So near term for the 4 programs will be either 100% exclusive suppliers or will be the primary suppliers. So that's the success that all those programs will show we 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 CMO revenue without counting in the potential royalty from the Chinese projects, right? Exactly, yes. It's service revenue. Okay, great. Thank you. Maybe I will ask a question before anyone else comes up. So I have a question for actually maybe for Christine. So you have RMB3 1,000,000,000 of cash on your balance sheet, but you are guiding for RMB 3,600,000,000 spending in the second half for CapEx. Clearly, there's some kind of shortfall there, right? So that's a good question. We are planning to borrow some loans in the second half of twenty nineteen. I anticipate about RMB2.6 billion roughly depends on the progress of our construction. The reason we have plenty of cash, RMB 3,000,000,000, but cash is so resourceful and is very useful as a leverage. So I will preserve some cash on hand as a leverage anyhow. So by borrowing RMB 2,600,000,000, please anticipate that in the second half of this year, the interest expense will incur. It's about RMB 20,000,000 in expense interest expense. I want you to build that in model. Also, the interest income will decrease because first half, we only spent $800,000,000 on the CapEx and then $3,600,000,000 more to go in the second half. So cash that decrease with the interest income will decrease. Also one more thing is other income this time. In the first half, we have AZ of about RMB14 1,000,000 of option fee. Those are non operational. These are also one offs. So in the second half, I wanted to also guide you on some of these one off items that's important to build in the model. Just another question probably related. You're 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 kind of worry that at certain point 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 address some of the concerns from the investors? Okay. First of all, on Page the CIP page, that's what I was saying. Out of the 280,000 liter capacity, the cash actually were already spent in 2019 2020. That's how it works. For the capacity to be in place, we are spending money right now, as Xin Sheng was asking as well. And then by 2021, the CapEx spending will drop a lot. Will be about half because the money spending in 2019 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 RMB3 1,000,000,000 of cash. We will borrow another about RMB2.6 billion for the second half. That is RMB5.6 billion. And then we have RMB3.6 billion more to spend. So I still have RMB2 billion left on the bank, right? And then for next year, we will have right now we already secured US500 $1,000,000 in the bank loan. Out of this, US300 $1,000,000 dollars 200,000,000 dollars bank loan already secured. If we need to, then we can altogether have $700,000,000 of bank loans. It's already in place. Right now, I can tap into it anytime. So we don't have to worry about any immediate kind of acquisition anytime soon, right? Right. For the next 2 years. Let me clarify that, Ai Xing. 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 raise it to either borrow or raise equity. So I think I also want to clarify that Christine mentioned CapEx in 2021 reduced in fact based on the current scenario. If our business continue to be bullish, we may actually increase spending. So CapEx for 2021 is not planned yet. 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 PD-1s from you and from the competitors in some sense. That's too common information to disclose. But we believe we can be there we have the technology to produce PD-one at $50 to $100 per gram. Okay. So the other people in the industry. Other people in China, probably 200 to 400. Okay. Operator. Sir, we have a question. Would you like to take it? Yes. We have a question from the line of Dennis Valentine from JPMorgan. I've already had my question answered. We have a next question. So would you like to take it? Yes. The last question. All right. This one comes from Naresh Chauhan from Intron Health. Please go ahead. Hi there. Thanks for taking my questions. Just one on the manufacturing work. So it seems that MFG 4 is now up and running. To us, it seems like it's on time and on track. Was that in line with your expectations and the 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 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 within 4 weeks, which suggests that there is significant demand, but you're not kind of backed up completely. And you're about to add a huge amount capacity in the coming years. So how do you how are you comfortable that you can fill all of that additional capacity over the next 3 or 4 years given that you already have some latency in the network? Thanks. Yes. That's a very, very good question. So first of all, I think currently all the product finished at Wuxi is on time, on the budget. We actually so, so far, all the manufacturing, 1, 2, 3, 4, they're all on time under the budget. 5 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 even pause the project if we don't need the capacity. So our strategy is very different from a traditional CMO. Build the capacity first and then find the project. 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 the 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 4 weeks is because we always reserve in discovery and development, we all have extra capacity because we have a very large R and 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 opportunistic projects coming in. Hopefully, that answers your question. Yes, that's great. Thank you. Yes. Thanks so much. Thank you. Okay. So we do not have any further questions at this point. Back to you. You want to make a conclude? Yes. I think overall, I think as I mentioned in the conclusion earlier, the business momentum in the first half is incredible. I think we believe the momentum continues to be very strong in the second half. I think we are uniquely positioned to benefit from the really the booming biological industry. I think we also timed it right with the bispecific. So I think we're very excited about the company and about the again, the keyword today is sustainable high growth. Thank you. Thank you, everyone. Thank you. Ladies and gentlemen, that concludes our conference for today. Thank you all for your participation. You may disconnect now.