API rose sharply three times, why did overseas orders become the "limit code" of pharmaceutical stocks?

The API was completely on fire.

The COVID-19 era has entered its 3rd year. During this period, from alcohol and protective masks to new crown vaccines and new crown oral drugs, the capital market staged countless myths of market value expansion.

Among them, the most powerful and long-lasting stimulus is the progress of oral covid-19 drugs. On February 12, China had the first imported new crown oral drug in the true sense. On this day, in accordance with the relevant provisions of the Drug Administration Law, the State Food and Drug Administration announced that it would conditionally approve the import registration of Pfizer's new coronavirus treatment drug Nematvir tablets/ritonavir tablets combination packaging (Paxlovid) in the form of emergency review and approval.

Since the first stock trading day since then, listed companies in the field of innovative drugs and CRO have ushered in a sharp rise in stock prices. More than 10 individual stocks, such as Boteng Shares, Chengda Pharmaceutical, Yaben Chemical, Tuoxin Pharmaceutical, And Hanyu Pharmaceutical, have successively and repeatedly jumped up and stopped. Just on February 16, Chengda Pharmaceutical and Yaben Chemical once again sealed the up-and-down board.

In fact, the capital market outlet brought about by the new crown epidemic has also blown up many times since 2022.

For example, on January 21, the stock prices of Brilliant Pharma and Fosun Pharma both rose and fell. The reason behind this is that a day earlier, the Pharmaceutical Patent Pool (MPP) had reached an agreement with Merck to authorize 27 generic drug manufacturing companies to use Merck's newly approved COVID-19 oral drug Moldupiravir without paying patent royalties.

Five Chinese pharmaceutical companies, including Fosun Pharma, Brilliant Pharma, Longze Pharmaceutical, Disano and Langhua Pharmaceutical, are listed among them, while the first 4 pharmaceutical companies are licensed to produce both APIs and finished drugs, and Langhua Pharmaceuticals is allowed to produce APIs.

Another example is that on January 13, Jiuan Medical harvested its 26th stop-and-go board since November 2021. Behind this is a multibillion-dollar order for iHealth kits from the U.S. government. According to the announcement of Jiuan Medical, its U.S. subsidiary and the U.S. ACC signed a "Procurement Contract" on January 13, 2022 local time, and won a total of 2.1 billion yuan in orders from the U.S. Department of Health of the New York State Department of Health and the Executive Office of the Massachusetts Department of Health and Human Services.

The COVID-19 pandemic has changed the lives of many people and profoundly changed the global supply chain of healthcare. Many domestic medical companies that have benefited from this have adjusted to a relatively extensive business mode, but the madness of secondary market sentiment has also magnified the growth boundary within the reach of the business itself to a certain extent.

A world of pharmaceutical factories in flux

When it comes to the global pharmaceutical industry, one first thinks of India, the largest supplier, which provides 60% of the world's pharmaceutical preparations.

But if you go further up the industrial chain of the Indian pharmaceutical industry, you will find Chinese companies. The data shows that India, as the continent's largest API export market, 70% of its APIs come from China. In the field of RAW Materials that are almost chemical, these enterprises from China's coastal cities are a force that cannot be ignored in the global pharmaceutical industry in those years when domestic pharmaceutical policies and ecology were not perfect enough.

In the 1990s, europe and the United States and other mainstream pharmaceutical industry mature countries, with the pace of globalization, the high pollution, high energy consumption of the chemical manufacturing industry to the third world. China just caught up with the reform and opening up, it undertook part of the production capacity of chemical RAW materials, in order to better export, a large number of production bases are not placed in the inland transportation town, but the eastern coastal cities by the sea. Subsequently, Haizheng, Huahai, Xianju, Tianyu, Sitaili and other early pharmaceutical enterprises representing the company sold the RAW Materials produced to all over the world.

By 2017, a data from the State Food and Drug Administration showed that China had become the world's second largest pharmaceutical consumer market and the largest exporter of APIs. At that time, there were nearly 5,000 API and preparation enterprises in the country, and the annual main business income of the pharmaceutical manufacturing industry exceeded 2.5 trillion yuan and the profit amount exceeded 270 billion yuan, becoming one of the few industries that exceeded the GDP growth rate.

Proportion of overseas revenue of domestic specialty API listed companies in 2019 (%)

At the same time, with the continuous improvement of the domestic pharmaceutical ecology, the business capabilities of API suppliers continue to extend to downstream preparations and CDMO, and they will also pose higher barriers to ordinary enterprises in terms of preparation registration and certification capabilities, process development capabilities, GMP systems, etc. According to data, nearly 50 preparation companies have passed certification or inspection in Europe and the United States, and the export value of pharmaceutical manufacturing products has exceeded 13.5 billion US dollars. Among them, Huahai Pharmaceutical's losartan, Hengrui Pharmaceutical's cyclophosphamide, etc., have successively become popular products in the US market.

Although the limited imagination space that upstream manufacturers can bring is not enough to make people excited at the moment when innovative drugs are constantly emerging, continuous changes are changing the industry and its position in the global industrial chain.

On the one hand, in recent years, head enterprises are also exploring automation, intelligence, continuity, miniaturization of production, as well as the iteration of cutting-edge technologies such as enzyme catalysis and photochemistry, in order to achieve better product quality and lower manufacturing costs. The FDA has also issued a continuous manufacturing guidance document to encourage APIs and generic drug companies to use continuous reactions in the production of small molecule chemical products to improve product quality and reduce manufacturing costs.

On the other hand, the speed of upgrading from non-standardized management to standardized management has been accelerating, and the concentration of the domestic API industry has been further improved. With the implementation of the environmental protection tax law, the implementation of the pollutant discharge permit system and the normalization of environmental protection inspectors, some strong head manufacturers have increased relevant investment, for example, the environmental protection investment of Huahai Pharmaceutical and Puluo Pharmaceutical has reached 5-1 billion yuan, while many small and medium-sized APIs and intermediate enterprises that cannot meet environmental protection norms have gradually withdrawn from the market.

As the world's pharmaceutical factory, the domestic API industry is moving towards the high-end after nearly 30 years of iteration.

Capacity allocation has triggered a frenzy in pharmaceutical stocks

Therefore, when the new crown oral drug is finally listed, the production capacity of large pharmaceutical companies is urgent, domestic API companies are pushed to the forefront, and the market value also soars.

Up to now, 3 new crown drugs have been granted emergency use rights worldwide.

The first is that at the end of 2021, Merck's Molnupiravir in the UK went on the market for the treatment of adult patients with mild to moderate COVID-19. Subsequently, the US Food and Drug Administration (FDA) successively approved the urgent use of two new crown oral drugs for the marketing of Pfizer's Paxlovid and Merck's Molnupiravir.

As soon as these two new crown oral drugs were launched, they became a strong driving force for the growth of their respective companies' performance.

According to Pfizer's 2021 annual financial report, the multinational pharmaceutical company's annual revenue was $81.3 billion, an increase of 95% year-on-year. Excluding revenue contributed by the company's COVID-19 vaccine Comirnaty and the COVID-19 oral drug Paxlovid, revenue was approximately $44.4 billion, up 6% year-over-year. For 2022 performance, Pfizer expects full-year revenue of $98 billion to $102 billion, and raises its revenue forecast from covid-19 vaccine Comirnaty to approximately $32 billion, with an initial forecast of approximately $22 billion in revenue from the COVID-19 oral drug Paxlovid.

For Merck, in the fourth quarter of 2021, when Molnupiravir delivered its first shipments, the company's sales increased by 24% year-on-year, well above the full-year growth level of 17%. Merck revealed in its earnings report that the company will ship more than 4 million treatments to more than 25 countries, including about 3 million to the U.S. government. In addition, Merck has a long-term supply agreement with UNICEF to provide more than 3 million courses of Molnupiravir in the first half of 2022.

The 3rd type of new crown oral drug comes from China. In November 2021, the clinical trial of junshi bio's small molecule drug VV116 was approved to start, and the following month it was authorized for emergency use in Uzbekistan, and it is also the only small molecule drug approved to enter clinical trials in China.

With nearly 100 million confirmed COVID-19 patients worldwide, there are only 3 types of COVID-19 oral drugs, and the production capacity pressure of Merck, Pfizer and Junshi Bio can be imagined.

At this stage, the new crown oral drugs are mostly in short supply. For example, Merck has said that most of the 10 million treatments produced by the end of 2021 have been purchased by governments around the world, and then merck has agreed to allow other drugmakers to produce Moldravir, a way that Merck hopes to expand global production capacity and help millions of people in poorer countries access medicines. And these new crown oral drug production capacity, which has to be allocated globally, has undoubtedly become the "limit code" for the current market value increase of domestic listed pharmaceutical companies.

The stock prices of Brilliant Pharma and Fosun Pharma mentioned at the beginning of this article have risen continuously, that is, the global distribution of moldupiravir production capacity has brought substantial growth to upstream APIs.

Pfizer's Paxlovid has also attracted new heat in the secondary market. On November 16, 2021 and November 28, 2021, Kelley Ingen announced that it had signed two major contracts with "a major pharmaceutical company", with a total transaction amount of up to 5.778 billion yuan or even nearly double the total revenue of Kelley Inlet in 2020. In the industry's view, the so-called "a large pharmaceutical company" and the products involved in the order are actually Pfizer and its new crown special drugs. At that time, under the blessing of this order, The Market Value continued to shrink the demand of Kai Lai Ying, ushered in a multi-day valuation rise.

In addition, on February 14, Golee Pharmaceuticals issued an announcement that the company has submitted an application for marketing authorization of ritonavir (100 mg film-coated tablets) to Germany, France, Ireland and the United Kingdom through European agents. At the same time, applications for ritonavir listing authorization in other regions, including European countries, North American countries and Asia Pacific countries, are also expected to be submitted in the near future. Oral ritonavir tablets are one of the components of Pfizer Paxlovid. On the same day, The share price of Geli Pharmaceuticals closed up 8.39%.

In fact, domestic research on small molecule drugs for the treatment of new crown has been in full swing. For example, pkrutamine, which pioneered the pharmaceutical industry, is conducting Phase III global multicenter clinical trials for the treatment of mild and moderate COVID-19 patients in the United States, Brazil, South Africa, Argentina, Malaysia, the Philippines and other countries.

For another example, the phase III clinical trial of a real organism for the treatment of new crown pneumonia is being fully promoted in China, Brazil and Russia; FB2001 of Frontier Biologics is conducting clinical phase I research in the United States.

As more and more new coronavirus oral drugs enter clinical applications, the competitive landscape of the pharmaceutical supply side will undoubtedly usher in a new round of reshuffle. Interestingly, some of the capital market oolongs during this period are actually witnessing the process of changing the position of domestic APIs in the global supply chain.

For example, although some new crown oral drug concept companies have clarified that they have not received orders for the production of Pfizer new crown oral drugs, they still cannot stop the enthusiasm of investors in the secondary market. This includes jingjing pharmaceuticals, Yaben chemicals, etc. mentioned at the beginning of the article, just on February 16, these two companies that repeatedly stressed that they have not yet joined the global new crown oral drug supply chain have ushered in a new sharp rise in stock prices.

Of course, we prefer to see these rumored API companies truly become the white horse knights of this wave of global pharmaceutical production capacity, filling the gap of new crown oral drugs, and also making themselves bigger and stronger. However, not all APIs or intermediate manufacturers are capable of undertaking the capacity of COVID-19 oral drugs.

For example, under Merck's agreement, authorized pharmaceutical companies are required to promote and sell in authorized countries, which means that the company's sales after authorization depend on the establishment of an international sales network and supply chain management capabilities.

For example, Fosun Pharma, which was authorized this time, said that the company already has a mature sales network and upstream and downstream customer resources in the English and French-speaking areas south of the Sahara Desert in Africa. In October 2021, Fosun Pharma's first African regional drug distribution center was officially put into operation in Côte d'Ivoire, and the establishment of the center guaranteed the continued accessibility of health products in Africa.

The role of the global industrial chain is advanced

I have to admit that the shortage of demand caused by the new crown epidemic has made many participating APIs companies get rich commercial returns.

For example, from the performance point of view, a number of pharmaceutical companies are expected to take the lead in doubling profits in 2021. According to incomplete statistics, about 10 of the new crown pharmaceutical companies that have issued the 2021 annual forecast have already predicted that the annual net profit will double or increase. Among them, Haite Biotech had the highest increase, and the median change in the forecast net profit exceeded 2.2 times.

The company said that during the reporting period, the CRO and CDMO business growth of its wholly-owned subsidiaries Tianjin Hankang Pharmaceutical Biotechnology Co., Ltd. and Hanrui Pharmaceutical (Jingmen) Co., Ltd. promoted the company's operating income and net profit to increase over the same period of the previous year, and it is expected that the company's performance in the reporting period will turn losses into profits.

For another example, Yaoshi Technology, which is expected to have a higher profitability for the whole year, has also doubled its profits, and the company expects to achieve a net profit of 479 million yuan to 497 million yuan in 2021, an increase of 160% to 170%. Yaoshi Technology pointed out that in 2021, it will further consolidate the CDMO business layout and improve the drug discovery technology service platform. In the absence of significant increase in production capacity, it is expected to achieve an increase of 15%-20% in operating income compared with FY2020 by further increasing the scale of operation.

But more importantly, perhaps more importantly, the long-term value that this change in the supply and demand relationship of this attack brings to the operation of the enterprise itself.

On the one hand, some smart domestic medical companies, timely layout, are gradually establishing global influence. Here is a background, in the past, domestic small medical devices sold to the global market, usually need to take other big brands hitchhiking. But the way the new crown antibody detection reagent went to sea has reversed this situation.

Among them, there are like Jiuan Medical through a series of mergers and acquisitions, integration, quickly let the independent new crown testing reagent brand foothold in the overseas market. In November 2021, Jiuan Medical announced that its subsidiary, iHealth Labs Inc., has obtained the U.S. Emergency Use Authorization (EUA) for the novel coronavirus antigen home self-test kit. Soon after, it was announced that iHealth had won a large order for the US market.

It is understood that iHealth kit products are the independent brand of Jiuan Medical iHealth, and the production site is in China and is very popular in the US market. The total contract price and tax of the government order, which has aroused widespread concern in the domestic capital market, is US$1.275 billion (including freight), which is about RMB8.1 billion, which has exceeded 50% (RMB1.004 billion) of the company's audited main business income in 2020. In a sense, this is a rare real sense of domestic IVD brands going to sea.

There are also gradually moving from the B-end market to the C-end market through slow penetration. For example, also establishing and consolidating overseas independent brands is Oriental Biotech. According to the 2021 interim performance forecast of Oriental Biologics, the company's revenue in the first half of the year was 6.382 billion yuan and net profit was 3.394 billion yuan, an increase of 547.82% year-on-year, which was the highest revenue and net profit in the IVD field in the first half of the year.

In this process, Oriental Biotech strengthens cooperation with customers such as Siemens, McCarthane, CVS, Walmart, Walgreen, etc., and promotes the continuous expansion of the influence of its own brands "Oriental Gene" and "Hengjian" in overseas markets.

On the other hand, it is to obtain a customer structure that truly matches the global head manufacturers. Whether it is for API companies or CDMO, the voice of the industrial chain is relatively low, which is a constraint on their long-term obstruction of efficient overseas. These companies started by providing upstream products and services to big brands, and for a long time, the main source of performance was limited to unstable business relationships with a small number of customers.

Driven by the COVID-19 pandemic, this situation is slowly changing. For example, Boteng shares, which have been very successful in transformation, are difficult to rank among the first echelon of domestic CDMO due to the highly concentrated large customer structure.

According to Boteng shares, since 2019, the company's business involving Pfizer has been continuously enlarged. In 2019, Boteng's revenue from Pfizer was 58.46 million yuan, accounting for 3.77% of the operating income of the year, and it increased to 103.46 million yuan the following year, accounting for 4.99% of the operating income of the year. In the first nine months of 2021 alone, Pfizer brought more than 150 million yuan of orders to Boteng, accounting for 7.46% of the current operating income.

The $681 million purchase order received recently from a subsidiary of multinational pharmaceutical company Pfizer is more than 50% of the company's audited operating income in the most recent fiscal year, further diluting the concentration of large customers of Boteng Shares.

To be sure, covid-19 is still mutating and raging. For domestic medical innovation enterprises that have taken root in the global supply chain of new crown diagnosis and treatment, the "up and down code" of new crown will still open a rapid road to wealth. But more critical than the magnified market capitalization and market expectations is the growth path they are revising.

*Cover image source: 123rf