Wuxi Apptec Co Unsp/Adr

Good morning, and good evening, global investors. Thank you for joining Wuxi App Tech's first quarter 2025 earnings call. This is Li Chen, China healthcare analyst at Goldman Sachs. Before we kick off the session, I would like to highlight that this call is strictly for clients at Goldman Sachs and Wuxi App Tech only, and this conversation is not intended for the media, and it's up the record. Participants will be removed from the call if they cannot be properly identified, and this call is not for the purpose of sharing or receiving non-public, otherwise confidential information. attendees are public-side market participants who may not receive an additional request, non-public or otherwise confidential information about issuers or securities or about the market's securities. We have exposed very strong results overnight, and today we are very honored to have the whole management team attending the call to share their insights and business updates with global investors. Attending today's call, including the co-CEO, Mingzhang Chen, co-CEO, Steve Yang, CFO Florence Shi, General Counsel Howard Wu, Board Secretary Yuan Zhou Zhang, and also our director, Ray Jia Tang. We're going to have the management to share with us their prepared remarks on earnings first. Then we're going to turn to Q&A session. For Q&As, if you have any questions, feel free to raise your hand in Zoom app or type a question into the Q&A box. Now, without further ado, I'm going to turn the call to the management to get started.

Okay, thank you, Zee, and thank you to all the investors and analysts for joining today's earnings call. We're sharing our 2025 first quarterly results presentation, which you can also find on our website. During today's call, we will make forward-looking statements. Although we believe that our predictions are reasonable, future events are uncertain, and our forward-looking statements may turn out to be incorrect. Accordingly, you are strongly cautioned that reliance on any forward-looking statements involves unknown risks and uncertainties. In addition to supplement the company's consolidated financial statements presented in accordance with IFRS, we provide adjusted IFRS financial data. We believe the adjusted financial measures are useful for understanding and assessing our core business performance, and we believe that investors may benefit from referring to these adjusted financial measures by eliminating the impact of certain unusual and non-recurring items that are not indicative of the performance of our core business. However, these adjusted measures are not intended to be considered in isolation or as a substitute for the financial information under IFRS. All IP rights and other rights pertaining to the information and the materials presented are owned by WUSHI APTEC. Audio recording, video recording, or disclosure of such materials by any means without the prior consent of WUSHI APTEC is prohibited. This call does not intend to provide a complete statement of relevant matters. For relevant information, please refer to the company's disclosure documents and information on the Shanghai Stock Exchange, the Stock Exchange of Hong Kong Limited, and the company's website. In today's call, there will be Q&A session after our presentation. Please kindly share with us your name and institution before asking questions. With that, please allow me to introduce our co-CEO, Dr. Mingzhang Chen, to present our 2025 first quarterly results. Mingzhang, please.

Thanks, Rika. Good morning and good evening, everyone. Thank you for joining our 2025 first quarterly earnings release call. We will begin on slide five. In the first quarter of 2025, our revenue and the profit resumed double-digit growth. The revenue from continuing operations grew 23.1% year-over-year to 9.39 billion RMB. The company's total revenue achieved 9.65 billion RMB. representing a 21% year-over-year growth. The adjusted non-IFRS net profit grew 40% year-over-year to 2.68 billion RMB. By the end of March, we achieved a record backlog for continuing operations of 52.33 billion RMB, growing 47.1% year-over-year. Slide six. shows our revenue contributions from customers worldwide. Revenue by region is based on the country or region where our customer's parent company is located, of which revenue generated from the US market grew 28.4% year-over-year. Revenue from Europe grew 26.2% year-over-year. Revenue from Japan, Korea, and other regions grew 3.0% year-over-year, and China showed a slight decline. These diversified revenue streams demonstrate our global footprint and capabilities to enable healthcare innovations, which will also ensure the stability and resilience of our financial performance. Now let's move on to the segment performance. Please turn to page 8. A Wuxi Chemistry CRDMO business model drives continuous growth. In the first quarter, Wuxi Chemistry revenue grew 32.9% year-over-year to 7.39 billion RMB, with continued optimization of production process and improvement in capacity efficiency driven by the growth of late-stage clinical, and commercial projects. First quarter adjusted non-IFRS gross profit margin improved 4.2 percentage point year-over-year to 47.5 percent. Our small molecule drug discovery business continues to generate downstream opportunities. In the past 12 months, we have successfully synthesized and delivered over 460,000 new compounds to customers. an increase of 6% year-over-year, which reflects the continued increase in the industry's early stage R&D and demand for highly efficient services. Meanwhile, as we continue to strengthen the capabilities of our integrated CRDMO platform, we consistently enhance the internal conversion of molecules at different stage as a result. 75 molecules were converted from R to D in the first quarter. Our small molecule D&M business remains strong, and the small molecule CDMO pipeline continues to expand. In the first quarter, small molecule D&M business revenue grew 13.8% year-over-year to 3.85 billion RMB. Meanwhile, the company continued to build small molecule capacity In March, both our Changzhou and Taixing API manufacturing sites successfully passed FDA inspections with no single observation. The total react volume of small molecule APIs is expected to reach over 4 million liters by end of this year. Wuxi Tides, our new modality business, sustains rapid growth with a ramp-up of new capacities released sequentially each quarter last year, Wuxi Tide achieved 2.24 billion RMB revenue in the first quarter, representing a strong growth of 187.6% year-over-year, while remaining relatively flat compared to the fourth quarter of last year. By the end of March, Tide's backlog grew 105.5% year-over-year. The number of Tide's D&M customers increased 14% while a number of TICE DNM molecules increased 25%. We continue to build peptide capacity in Taixin. The total react volume of solid-phase peptide synthesizer is expected to increase to over 100,000 liter by end of this year. Next page, please. Our small molecule pipeline continues to grow, driven by a combination of follow the molecule and win the molecule strategies. This growing pipeline is a demonstration to our customers' full confidence in our technical capabilities, service efficiency, and the quality system. In the first quarter, the number of our small molecule CRDMO pipeline in the R, D, and M stages increased by 6%, 3%, and 17%, respectively. In our stage, we delivered more than 460,000 new compounds in the past 12 months. In DNM stage, we added 203 molecules to our pipeline in the first quarter, including 75 molecules converted from R to D. Currently, our small molecule DNM pipeline has a total of 3,393 molecules, including 75 commercial products, 82 Phase III, 368 phase two, and 2,868 in phase one and preclinical, with an increase of five projects in the commercial and phase three stage during the first quarter. Now I will hand over to co-CEO Dr. Steve Yang to talk about Wuxi testing and Wuxi biology. Steve, please.

Thanks, Min Zhang. Please turn to slide number 10. Wuxi testing revenue was down 4% year-over-year to 1.29 billion RMB in the first quarter. During this quarter, our lab testing revenue reached 0.88 billion RMB, a 4.9% year-over-year decline due to market impact, as pricing impact gradually reflected in revenue, along with backlog conversion. accompanied by a decline in the first quarter's adjusted non-IRRS gross profit margin. Revenue from drug safety evaluation service was down 7.8% year-over-year. Nevertheless, we maintained the industry-leading position in the Asia-Pacific region. Our new modality business continues to develop and sustain its leading position in multiple areas, including nucleic acid, conjugates, MRI, multi-specific antibodies, and peptides. We are committed to actively enable customers' global licensing efforts and collaboration. We have supported about 40% of successful out-licensing deals on Chinese biotech since 2022. Our Suzhou facility has successfully passed four consecutive FDA on-site inspections. In the first quarter, revenue generated from our clinical CRO and SMO business was down 2.2% year over year to 0.41 billion RMB. This is due to market price impact. Among this business segment, SMO revenue grew 5.5% year over year, maintaining our industry leadership position in China. In the first quarter, the clinical CRO business enabled customers to obtain time IND approvals. The SMO business continued steady growth and supported 28 new drug approvals for customers during the first quarter. The SMO team supported 283 new drug approvals over the past decade, maintained significant advantages and differentiations in multiple therapeutic areas. Let's turn to slide number 11, please. Wuxi biology follows the science and continuously strengthens the drug discovery capabilities in emerging technology areas. we generate downstream opportunities for our CRDMO platform by continuously contributing more than 20% of our company's new customers. In the first quarter, Wuxi Biology revenue grew 8.2% year-over-year to 0.61 billion RMB. Due to market pricing impact, the first quarter's adjusted non-IFRS gross profit margin declined 2.2 percentage points year-over-year to 36.3%. We continue leveraging synergies between our in vitro and in vivo capabilities and platforms and support customer demand for the one-stop shopping for the drug discovery biology service. Revenue from in vitro integrated screening platform grew 28.9% year-over-year Revenue from in vivo pharmacology platform grew 9.4% year-over-year, driven by accelerated advancement in focused disease areas. We continue to enhance our competitive advantage in the non-oncology therapeutic area, building a solid foundation for sustainable growth throughout the year. Our new modality drug discovery biology service continue to perform well, contributing more than 30% of Wuxi biology's total revenue. Now I would like to turn the call to our CFO, Florence Shi, to discuss our financial performance. Florence, please.

Thank you, Steve. Please turn to slide 13. Let's recap on the company's financials. In the first quarter, both of our revenue and profit resumed double-digit growth. Since the second quarter of last year, the company gradually released new production capacities to support the growth of late-stage clinical and commercial projects. Meanwhile, the company consistently adopts new technologies and capabilities to improve production and operation efficiency. As a result, Our adjusted NIFS gross profit reached 4.05 billion RMB in the first quarter, with the adjusted NIFS gross profit margin reaching 41.9%. In the first quarter, our adjusted NIFS net profit reached 2.68 billion, with the adjusted NIFS net profit margin reaching 27.7%. Our net profit attributable to the owners of the company was 3.67 billion, making an increase of 89.1% year-over-year growth. This growth outpaced that of our adjusted NIFS net profit, primarily driven by a significant increase in investment income. I'm sure you also noticed that following multiple share repurchase and cancellations last year, our diluted earnings per share reached a 1.2 ARMB, representing a 93.9% growth year-over-year. which exceeds the growth rate of our net profit. The net profit after deducting non-recurrent items was $2.33 billion, growing 14.5% year-over-year, which is lower than that of our adjusted non-FFS net profit, mainly affected by the exchange rate fluctuations among quarters. We continue to enhance our management capabilities and resilience. which has enabled us to achieve strong performance this quarter and maintain very stable profit margins despite external uncertainties. Please turn to slide 14. With the continued business growth, efficient operations, and the constant improvement of financial management capabilities, our first quarter operating cash flow achieved 3.03 billion RMB, grow 41.8% year over year. This is consistent with the trend of our adjusted non-IFRS net profit. Once again, fully demonstrate the high quality of our business growth. We continue to accelerate global capacity expansions as planned and spent 0.73 billion RMB CapEx in the first quarter. As the construction progress advances, CapEx spending will significantly increase in the following quarters. I'd like to hand over to Mingzhuang to share the company outlook. Mingzhuang, please.

As we are facing a very dynamic and a complex global environment, this sets very high standards for the operation capabilities and the resilience of the management team. The company will continue to focus on the CRDMO business model with an emphasis on the old operations. We will strive for the highly efficient and exceptional services and the lean operations. As we continue to focus on our unique integrated CRDMO business, we are accelerating the global DNM capacity expansion. At the same time, the company is continuously improving operational efficiency and making every effort to reduce the potential impact of external uncertainties. Despite the complexity and uncertainties of the global environment, we currently maintain our full year guidance set at the beginning of this year. We expect revenue from continuing operations to resume double digit growth of 10% to 15% year over year, targeting total revenue of RMB 41.5 to 43 billion. Meanwhile, the company will focus on CRDM more core business and continuously improve operational efficiency. Our adjusted non-IFRS net profit margin expects to further improve this year. As we are accelerating our global DNM capacity expansion, CapEx expects to reach 7 to 8 billion RMB. And together with business growth and efficiency improvement, free cash flow expects to reach 4 to 5 billion RMB. The company will closely monitor the changes and the development in the global macro environment and will communicate any changes in a timely manner. Next page, please. While continuously enhancing our capability and capacity, the company remains committed to rewarding shareholders and actively upholding the company's value. The company's board of directors have proposed the following for approval by the Annual General Meeting for 2024, maintaining the 30% annual cash dividend payout ratio of net profit, which is approximately 2.8 billion RMB in total. On top of this, the company will issue an additional one-time special cash dividend of 1.1 1.0 billion RMB and an increased interim dividend in 2025. At the same time, the company will repurchase and cancel 1 billion RMB worth of A shares when appropriate in 2025. To further uphold the company's value and protect shareholders' interest, the company announced a second 1 billion RMB worth of A-share repurchase and cancellation plan on April 8, 2025. The repurchase has now been officially commenced. The total amount of cash dividends, together with the share repurchases and cancellations mentioned above, will exceed 6 billion RMB in total, which already accounts for more than 60% of the company's net profit. attributable to the owners of the company in 2024. In terms of uncertainties and challenges, our continued business growth relies heavily on our management team with strong capabilities and determinations. The company will continue to retain top talents and further enhance the resilience of business operations and management. The company's Board of Directors has proposed the Annual General Meeting's approval for the 2025 H-Share Incentive Trust Plan. Upon achieving 42 billion RMB revenue, 1.5 billion HKD worth of H-Shares will be granted, and an additional 1 billion HKD worth of H-Shares will be granted upon reaching 43 billion RMB revenue and above. This aims to continuously attract and retain top talents who have made significant contributions to the company's business development and long-term growth. Better strengthen the collective capabilities of management team and create long-term value for shareholders. Each shares under this plan will be purchased via open market at the prevailing market prices. so there will be no dilution to existing shareholders. Thanks for your attention, and we are now open for questions.

Thank you, management team. I think that's a very comprehensive introduction of the first quarter results. Now we're going to turn to question and answer sessions. Again, just a reminder, any questions, feel free to raise your hand or type your questions into the Q&A box. I'm going to start with two questions, then we're going to cue in some of the questions coming from online. Well, first of all, first quarter really being above the market expectations, and I think it's over-delivery versus guidance of the 20% of full-year numbers, particularly for the times business almost tripled in the first quarter, and now about 30% of a wishy-cam streak. So we'd like to understand a bit more about, you know, the robust growth in ties. What has been the key drivers? It's more about capacity or it's more about the low base or it's about the client scheduling of the delivery of the shipment. And also given the very solid first quarter, is there any near-term plan to raise your full-year guidance? You know, given the top line, bottom line growth now looks much higher than your full-year guidance. That's my first question.

Yeah, Tide's business had a very strong Q1 with growth of over 180%. So clearly this is a benefit from the JLP business. But one of the reasons is Tide itself grows very strongly, but the other thing is because our new capacity ramping up over last year quarter by quarter. So Q1 this year compared to a relatively low base number Q1 last year, that's another reason we have seen a strong growth. But for the full year 2025, we still maintain what we mentioned earlier, 60 plus percent growth for the tight business.

Yeah, for the company overall guidance, I think last month when we released our annual report, we provided a full year guidance. Today, a month later, we are very pleased that we have a very solid start achieving significant year-over-year revenue growth as planned. So this is not only because the company's CRDMO core business model continuously generating more clinical late-stage commercialization projects, but also thanks to the team's great execution. The additional production capacity, as Mingzhao just mentioned, we began gradually releasing from the second quarter last year, support the growth of the late stage in the commercial projects. And also, I think you also noticed that we complete the divestiture of some discontinued operations in the first quarter this year, which also contributing some profit improvement, which is approximately around like 100 million RMB compared to the same period of last year. I think regarding the full year guidance, there's still like following three quarters, I believe it's still necessary to monitor the exchange rate fluctuations, new order situations, especially for the early stage orders, and the various external uncertainties in current external environment. But currently, I think we maintain our guidance, actually, which reflect our confidence. We believe that by continuously focusing our unique integrated CRDMO core business model. We constantly enhance our ability to meet customer needs and further refine our management process and operations. We have the capability to continuously improve the production operation efficiencies and then effectively addressing various challenges brought by the external environment. So if there is any changes to our guidance, we will communicate to everyone in a timely manner. Thank you.

Great. Well, Florence, since you mentioned about uncertainties, I think the tariff has been the buzzword in the past months. I believe investors would love to hear more from management team on the impact on each of the business segments in terms of the tariff impact, and particularly on exports of APIs, for example, what percentage of revenue, you know, with export destination as US, for example, and also international supply chain exposed to the China impact, China tariff on the US part. So what percentage of your supply chain get exposed to US suppliers?

Yeah. I think in current global trade environment, tariffs have emerged as a systemic challenge rather than isolated issues, right, affect almost all the companies who are operating globally. So the dynamic nature and uncertainty of the tariffs requires to maintain a very high level of agility. Regarding the exports, As a part of the global pharmaceutical supply chain, our shipping destinations are often determined by customers' global supply chain arrangements, and the local customer declaration matters are also handled by the customers. Looking at the actual trade export data to the US in 2024, it accounts for less than 10% of our total revenue. In terms of imports, the implementation of reciprocal tariffs has certain impact on our procurement cost. However, over the past few years, the company continuously optimized and diversified our supply chain system. Meanwhile, we consistently optimize our operations and improve production efficiencies. So we are trying to make every effort to minimize the impact brought by the tariffs. So we are currently maintaining the full-year guidance that was established at the beginning of the year. So this reaffirmation of guidance represents our confidence in our business model management capabilities and operational resilience. At the same time, I think we will closely monitor the developments in tariff policies and their potential impact. on our guidance. So if there is any changes, as I said, we will commit it to everyone promptly.

Great. Thank you. Then we're going to open the live for Q&As. The first question coming from Morgan Stanley Lawrence. Lawrence, please. Lawrence, Could you be a bit louder, raise your voice a little bit? It's my volume.

Okay. Thanks for this opportunity. This is Lawrence from Morgan Stanley. So I have two questions. So firstly, following up on the tariffs question, since you serve most of the major pharma companies in the world, are you seeing a trend of onshoring or reshoring to the U.S.? ? Because from our side, we are hearing some companies, some of the major U.S. pharma companies relocating their factories from Ireland back to the U.S. just in case there's more decoupling between China and U.S. So from CDMO's perspective, I'm interested if that's the case as well. So that's the first question. And my second question is on CapEx. So the projected CapEx is 7 to 8 billion RMB for 2025. That's a jump from 2024. So it sort of kind of peaked at COVID, and then it went down in 2024, and this year it's going back up again. So can you break down for us where that CapEx will be spent in terms of, so by business unit and also by geography? Thanks.

Yeah, OK. So I think the demand for our service and the demand for our capacity, it's real and it's strong. It's there. And this has been demonstrated many times, the demand for. And also, I think just to build the capacity, build the manufacturing capacity, and find enough talent and workforce to start an operation, it will take a very long time. And also, your second question, we are actually actively build and expand our capacity outside China so that we will provide more options to our customers for the supply chain.

For the CapEx distribution, first for the increase of the CapEx, really aligned with what you observed, our business generates more and more DNM downstream opportunities. So we need to capitalize those opportunities. And secondly, which is pretty aligned with the emergence of the new modality growth. In terms of the geographies, you will see that we are expanding our new modality and also the small molecule capacities in Taixing, China. And at the same time, we accelerate our API capacity construction in Singapore and the drug product capacity expansion in Middletown, US. So I think more than 70% of the CapEx contributes to this DNM manufacturing capacity expansion.

OK. Great. Thanks.

Great. Next question coming from UBS Chen Chen. Just a reminder, if you have more than one question, please allow the manager to answer your first question first.

Sure, thanks, Yi. Well, first of all, I also want to follow up on the Tide business. As we can see, the first quarter in 2025 is really encouraging. So can you help us understand more about the Tide CDMO industry landscape? What's the global Tide CDMO industry growth and your market share? And what's your competitive advantages compared with global peers? Yeah, that would be my first question.

OK. So for tides, we had a very strong first quarter. And like I explained earlier, so we had a strong first quarter. But also because of the capacity ramping up, relatively, the Q1 last year's low base number. So we have a very strong growth, but we still expect to have over 60% growth for the Tides business in 2025. GLP-1 actually completely changed this field because in the past, the Tides, especially the peptide drugs, are a relatively small quantity. So the global capacity they build for the peptide drugs the small capacity, and when the JLP came out, the demand for JLP drug is, the existing capacity cannot meet the demand, so then whoever build the capacity ahead of time, and with a large capacity, will have the advantage in the market, and that's what we did. So we, you know, we built, you know, we planted the capacity, built the capacity ahead of the time. So when the GLP came out, we captured the opportunity and win the business.

Well, understood. Thanks. My second question would be on IRA. So we noted that two weeks ago, the President Trump issued a healthcare executive order. And the key change is to extend the market exclusivity, like for small molecule drugs for nine years, like to 13 years before the Medicare price cuts. So this is to align with biologics. So have you noticed that your customers have started to reassess their R&D strategies and shift, for example, like more focused on small burn products and how do you comment on the opportunity associated with the policy change for small molecule CDMOs? Thanks.

We did notice such a policy change, realizing R&D strategy, particularly for some of the largest customer of ours, usually is a very carefully calibrated and validated process. We believe the industry will take both watching closely and also try to adjust, but that will take some time. It is too early for our customers to have any immediate response and also it is equally early for us to see any notable change. Those strategy change usually will take longer. That being said, we certainly welcome any thoughts any initiatives, any opportunities that could allow the drugs to reach patients, and also for effective and safe drugs to continue to be on the market to serve a broader patient population.

Good to know that. That's very helpful. Thank you.

Great. Now we're going to have C.R.S.A., Michael Law. Michael, please.

Okay. Thank you. Thank you, Ziyi, and thank you, management, for taking my question. So my first question is about the pricing of Wuxi testing and Wuxi biology. So as management mentioned, there's a press pressure impact, but when should we expect the pricing could be stabilized? What signals should we expect in the coming quarters? Yeah, this is my first question. Thank you.

Yeah, the pricing impact reflected the market dynamics last year in 2024. We see a gradual pricing decline as the market situation deteriorate. And that will gradually reflected in our income and forecast, at least for this and upcoming quarters. What we try to do is first of all taking a more deliberate strategy in commercial and to focus on contracts and customers and areas that we have differentiation and then so we can win contracts with higher margin and a greater pricing to reflect our competitive advantage. We believe From our point of view, this differentiation strategy will allow us to have improving margin going forward. It will take some time, given the nature of how contracts and orders gradually convert into actual projects delivered and revenue recognized. We are confident and clearly working hard to continue to improve our margin for the coming quarters, and it will be a gradual process.

Thank you, Yangzong. And my second question is about our late-stage CDMO, CMO. So basically, the late-stage CDMO and CMO becomes our key revenue contribution growth driver? And do we have a rough estimate how much of our revenue will be coming from the late stage DNM projects for Wuxi chemistry in the next two to three years? Thank you.

Well, that will be very difficult to give you a specific number, but we have been talking about our CRDMO business model for many years, and it's working, and it's working well now. So the idea is we have a big funnel for the R stage, and then we have many molecules in the early development stage, and they will flow into the late phase and the commercial, which will give us... continue to sustain the bin's growth. And that's what we are getting today. And, you know, specific numbers all depend on which molecules, you know, flow through and to that commercial bucket and how big a contribution that molecule is. But, you know, the specific number will depend on that. It's difficult to give you a specific number, but the model is working and it's working well. Thank you.

Thank you, Shen Zong. Yeah, that's all from me.

Great. Next one, we're going to have CICC Wanhua.

Thank you. I'm Wanhua from CICC. I have two questions. The first question is about the growth rate of new orders in the first quarter and how to understand the difference between the order growth rate and a four-year revenue guidance of 10% to 15%. That's my first question.

I think it is pretty similar as the momentum we saw during the annual report period, right? So the major growth is still driven by the late stage and the commercial projects. And these projects' orders normally take a longer time to convert to the revenue. It will cover like 12 to 18 months revenue. compared with our related business orders. There's not much change. We still see very strong growth. That will give us more confidence and visibility for future business sustainable growth.

Okay. Thank you so much. My next question is about profit margin forecast. Is there any room for margin improvements in subsequent quarters along with the increase in peptide revenue share, as we know that peptide has a higher profit margin than other business. And also, divesting business have an impact on apparent profit. How will it affect in the following quarters? Thank you.

Yeah, definitely we are continuously focused on the process development excellence and also the operational efficiency improvement. But the beginning of this year, actually, our capacity utilization has already been very high. Basically, we fully utilized the new capacities, which gradually released since the second quarter of the last year. But I think you also notice that we are building the new capacity additional 100,000 liters for the tight business by the end of this year. So with the ramp up of the new capacities, there will have some margin pressures. But hopefully, based on our record historical performance, we can try to manage and minimize the impact of the new capacity ramp up. And also it's necessary for us to monitor the effect fluctuations as well. I think our margin is always pretty resilient regardless whether we continue to invest in new capacity or not. So hopefully we can That's why we currently still commit the guidance. I think the margin will still grow higher than the revenue growth.

Thank you. Thank you, Florence. Really clear.

Great. Next one, we're going to have No. 1, Zheng Jialin.

Thank you for taking my question. I have two questions. The first one is regarding your gross margin improvement in the OC chemistry segment. We see quite a big improvement on this segment. Can you walk us through what kind of the drivers behind the gross margin improvement? That's my first question.

Yeah, I think, thank you, thanks for questions. As I just mentioned, the first quarter versus last year, the new capacity gradually released since the second quarter of the last year has already been highly utilized in the first quarter this year. So those commercial, late stage in the commercial projects contribute with the high capacity utilization really contribute the margin improvement.

Okay, thank you for your answer. My second question is regarding the current development for the small molecule oral gel prevent drug. We see quite a positive progress on this molecule from Eli Lilly. So can you help us understand what kind of the impact on your small molecule business as well as the test business going forward regarding this development?

So this is one of the projects that we are working on as a CRBMO business model that falls through our funnel and becomes one of the late phase projects that we are working on. And due to the complex of the process and also the volume So it has clearly, it has and it will have a positive impact on our business.

Okay, thank you.

Great. Next one, Jeffrey, David.

Hi, can you hear me?

Yeah.

Yeah, yeah. Thanks, Ziyi. Thanks, management, for taking my question. I have two questions about the Wuxi habitat. The first one is we see FDA fire a lot of people and also U.S. cause some NIH fundings. So how do you see the impact on our early stage business? That is the first one question.

We clearly have been monitoring the situation very closely. It's a very dynamic situation. We'll continue to watch very closely. We do work with many early stage companies globally that also have an equal focus on this area. We believe that over the long term, Given the science and innovation and basic research continue to take us to new frontier, there will be continued demand for innovation, and then there will be sustainable demand from customers, including both early-stage biotech and those working in the forefront of research. It is too early to assess whether the impact that you referred, either on early-stage funding or other agencies that has direct impact to the business at the moment. We continue to interact with our global customers normally, and we clearly continue to see inquiries and demand for our capacity and capabilities in the early discovery stage. And we will continue to focus on our CRDMO model and continue to enable and accelerate customers' need for drug innovation.

Thank you. Thank you. The second question is about we see a trend, some China biotech companies that are out there. to the MSC players, and also some about the ADCs. We know we have some business in ADC, like doing the small molecule part, the payload part. So how do you see it? How do we benefit China companies licensing out their candidates to leading MSC names? Thank you.

So first of all, we think global cooperation is a huge benefit for our customers and for industry and ultimately to the patient. Secondly, as I mentioned at the beginning of this presentation, we have played a key role to enable such global collaboration and supporting 40% of the customers who are engaging in such global collaboration and licensing effort. This is actually a unique opportunity that highlight the quality of our preclinical platform, our discovery capabilities, particularly related to some of the new modalities that are in high demand, such as ADC that you mentioned. Our part of our early discovery business, namely biology and the testing modality agnostic. So this allow us to work very closely with our business unit teams across both in Wuxi chemistry and also in other part of the ecosystem to enable those new modalities, accelerate early stage in discovery. We believe that our consistent quality is a strong assurance, not only for the success licensing effort, but also for many of the due diligence efforts from larger companies, including some of the multinational companies. So they will also, through those due diligence efforts, have a chance to visit our facility in Suzhou and elsewhere and to assess our capabilities and quality.

Thank you. Thank you. Very clear. Thank you.

Great. Next one, and also the last one of the questions is from Jill.

Thank you very much, Ziyi. Thanks for taking my question. I just want to clarify a few details on tariff. I'm wondering what is the current tariff rate for the commercial stage API or intermediate exports to the U.S. Is it 20% and are these products verified as pharmaceuticals? That is my first question.

I think your understanding is correct, yeah. As I mentioned, the custom declaration in the destination country is actually handled by the customers. So they will follow every country's rule to do the declaration and handle all these kind of matters.

I see. And currently, we have just mentioned that 10% of your revenue comes from exports to the U.S. Is this primarily related to the peptide business? And is there any way to avoid tariffs, for example, through transshipment?

As I mentioned, we are just part of the global pharmaceutical supply chain, so the destination, the shipping destination is actually determined by the customers, not determined by us. I think we just used the 2024 as an example because the different projects may have different arrangements by the customers. Also, I think this is pretty aligned with the The official report, if you see a lot of the official report, that gives you some colors about the source of the APIs from the different countries to the U.S. So actually, China is not the top of the countries. So I think all the data is pretty aligned.

Thanks a lot. I apologize for the details. I just want to clarify the last question is, what proportion of your cost of goods sold is attributed to materials imported from the U.S.? And if the tariffs lead to increased cost, are we able to pass through all the additional cost to our customers? Okay.

It's hard to estimate for the current year because when we purchase the material equipment, it's all based on what's the best material that can fulfill the demand of the customer, right? But actually, in the past few years, we made a lot of efforts to diversify our supply chain system. So that's why we do see the cost impact on our procurement. But we also made a lot of efforts to try to mitigate this risk. So based on the current tariff policies, of course, we are continuously monitoring it. in the development stage, right? But we still currently maintain our guidance.

Thanks very much. Can I also follow on that? What is our headcount plan for this year? That is all my questions. Thanks very much. The headcount...

As we continuously improve the efficiencies, I think we definitely would like to improve the per-cap productivity continuously. But at the same time, because we have the new capacity expansion, so in those new capacities, we are continuously hiring people.

Thanks very much. Congratulations for the good results.

Thank you. Thank you. We only got three minutes left for the call, so we're going to wrap up the Q&A session here. We're going to turn the call back to Dr. Ming-Zhang Chen for final comments.

Thank you all for joining today's earning call. We had a very strong first quarter, and we maintained the full year balance despite the uncertainties externally. The company and the management team is dedicated to do the right thing and doing it right. We will continue to focus on our unique CRDMO business model, drive the company's long-term growth, and create sustained value for our investors. Thank you all.

Thank you, management team, and thank you all the investors for participating in the call. Thank you. Have a good day. We're going to wrap up the call here.