#头条文章养成计划#
Author / Braised under the stars
Editor/Spinach Starfield
Typesetting/carrots under the stars
2022 is really an extraordinary year, affected by international disputes and the outbreak of domestic epidemics, many industries have been under pressure such as rising raw materials and stagnation of production.
APIs are no exception, and chemical APIs are the first to bear the brunt. As the main upstream of many chemical products, since the second half of 2021 has ushered in a strong cycle, and last year's commodities attracted the most attention was also petrochemical products affected by the Russia-Ukraine conflict. The gross profit margin of many A-share API manufacturers has shown a downward trend, and the gross profit margin of the sector has fallen from 38.3% in the first quarter of 2019 to 29.9% in the fourth quarter of 2022, a sharp drop of 8.4 points, which can be described as a heavy blow.
However, the surge in the upstream this year has eased significantly, with the China Chemical Products Price Index (CCPI) falling 31.8% from its mid-year high, and crude oil prices, which are the bellwether, also peaked in the second half of 2022. Under the great release of cost pressure, the profitability of API manufacturers has recovered to a certain extent. Of course, there is a certain time lag from the cost to the report, but the reversal of the performance should be more certain.
Source: Ping An Securities Research Institute
In addition, the overall valuation of the API sector has also reached a relatively low historical low. The PE (TTM) was only 29 times on June 16, compared to the 10-year mean and median of 40 and 38 times, respectively. Although this has something to do with the purgatory market of A-shares since 2022, the API section in this position may wish to give a little more patience and confidence.
First, GLP-1 APIs may become the new favorite of the industry
Chemical APIs are in the reversal zone, and biological APIs seem to have found their future.
In "Weight Loss Miracle Drugs, Aiming for the Future of Ten Billions", we talked about the great prospects of GLP-1 drugs such as liraglutide, semeglutide, and telpotide in hypoglycemia and weight management. With the successive approval of varieties and indications, the penetration rate of GLP-1 in these two large markets is likely to increase rapidly. Correspondingly, the upstream varieties of this category have naturally become the new darling of the API industry. According to CDE statistics, since 2019, more and more domestic peptide APIs have been registered.
Domestic GLP-1 API Registration Source: CDE, cde.org.cn, Pacific Securities
Unlike many traditional APIs, GLP-1 has a relatively high threshold. This is mainly because the structure of peptides is relatively complex, whether it is the mainstream biological fermentation method or chemical synthesis method, there are some key points that are difficult to solve at this stage. Therefore, at this stage, the market for such APIs is not filled with too many players, and the competition situation is relatively good. Moreover, domestic peptide synthesis equipment, API preparations, CDMO and downstream generic drugs and innovative drugs have a relatively good layout. In other words, the entire industrial chain is relatively well prepared.
But it may take some time to move from being consistently bullish to being reflected in the company's performance. Although Nuotech Biotech (688076) as a concept stock of semeglutide API raised the limit on June 6, it clearly mentioned in its investor relations record in June that the volume of this business in 2022 is still very limited. However, Hanyu Pharmaceutical (300199), a manufacturer that has successfully realized the supply of liraglutide APIs, said that its products have been sold to Europe, the United States, Japan, South Korea and other regions for a long time, and its overseas revenue in 2022 increased by 68.86% year-on-year compared with 2021, and recently announced that its semeglutide API was also approved and accepted by the FDA. Hanyu Pharmaceutical's rapid pace is inseparable from the company's deep technical accumulation, which can realize the development and production of almost all listed peptide drug APIs. It seems that peptide APIs are still scored product branches to see, especially to pay attention to the first-line leading enterprises that have opened overseas channels.
A number of peptide API patents represented by liraglutide APIs are about to expire one after another, and the clinical trial and commercialization process of a number of domestic GLP-1 drugs such as Innovent Biologics Mastopeptide are also accelerating, and the upside in this direction may be greater than that of other APIs.
Second, formulation integration + CMO/CDMO is a medium and long-term logic
In addition to the expansion of the product side, the long-term competition logic of API manufacturers can also be based on participating in the expansion of the industrial chain.
From the revenue increment composition of each company in 2022, it can be seen that Jianyou (603707), Xianju Pharmaceutical (002332), Sitaili (603520), Tonghe Pharmaceutical (300636) and other companies have benefited a lot in the preparation and CMO/CDMO two more scalable businesses, such an attempt may be a more feasible way for the API sector.
Composition of revenue increment of major API and preparation export companies in 2022 Source: Zheshang Securities Research Institute
First look at the expansion of preparations, the promotion of this direction is related to the continuous deepening of centralized procurement. The terminal price of shortlisted drugs under volume procurement has decreased, but at the same time, the demand for penetration rate is rising, which naturally has also spawned more demand for APIs. If API manufacturers can realize the integration of raw materials to preparations, they must have far stronger supply chain control capabilities than pure preparation manufacturers, and are more suitable for this logic of price for volume. The consistency evaluation of generic drugs is also gradually improving the quality standards of drugs, which is also the advantage of API companies.
Of course, these manufacturers were originally facing pharmaceutical companies, and there would be some lack of commercial aspects if they made preparations. However, centralized procurement also weakens the importance of sales channels to a large extent, narrowing the gap between API companies and pharmaceutical companies in terms of market capabilities. It should be said that API manufacturers have ushered in a historic opportunity to enter downstream preparations.
Changes in the business model of preparation enterprises before and after centralized procurement Source: Soochow Securities Research Institute
Huahai Pharmaceutical (600521) is one of the most successful companies in the integrated transformation of API manufacturers. It has achieved steady improvement in its preparation business through centralized procurement, and has also continued to grow its sales of APIs and intermediates. In 2022, Huahai Pharmaceutical achieved a revenue growth of 24.42% (to 8.266 billion yuan) and a net profit attributable to the parent of 139.24% (to 1.166 billion yuan).
In the direction of CMO/CDMO, there is no need to say how popular the domestic industry is, a large number of orders are being transferred to Chinese companies. The upstream of small molecule CMO/CDMO is also the fine chemical and petrochemical industry, and the downstream docking pharmaceutical companies. This is similar to the upstream and downstream of the API industry chain, and related companies to get a piece of the pie can be described as a familiar road.
It can be seen that whether it is the development of new APIs with market potential such as GLP-1, or the expansion into the industrial chain such as preparations or CMO/CDMO, the technical capabilities of API manufacturers are far higher than before. This is a challenge for API manufacturers who have long been accustomed to winning by volume and are trapped in upstream and downstream price fluctuations.
Note: This article does not constitute any investment advice. The stock market is risky, and you need to be cautious when entering the market. There is no harm without buying and selling.