Finance Associated Press, December 25 (Reporter Lu Afeng) "The company's 2023 target of adding 120 projects is obviously too aggressive. A description of WuXi Biologics' announcement in December this year to lower the company's overall performance target for this year also reflects the market of pharmaceutical "water sellers" for a whole year.
The reporter of the Financial Associated Press learned from a comprehensive interview and public information that after bidding farewell to the "big orders" in the special period, the number of investment and financing in the domestic biopharmaceutical industry has decreased significantly, whether it is Biopharma, which has relatively strong domestic capital, or many Biotech, which relies on external investment and financing, have begun to be more cautious and conservative in their investment in innovative drug pipelines, and the domestic new orders linked to the CRO industry have decreased significantly, and the driving force for performance growth comes more from the growth of overseas business.
"Whoever has the funds to continue to innovate is the CRO's customer. Industry experts told the Financial Associated Press reporter that although at the end of the year, the climax of ADC drugs going overseas has added a lot of confidence to the domestic biopharmaceutical industry, but in 2024, the CRO industry will bid farewell to double-digit growth and enter a cycle of single-digit growth or even decline.
The sharp decline in investment and financing led to a decrease in new orders, and the market value of the sector fell by a quarter
From the beginning of the year full of confidence, stock orders in hand, determined to hit a new high with the pace of economic recovery of the pharmaceutical "water seller", perhaps at the end of the year will really realize that the industry has truly entered the "down" cycle.
Source: wind
Wind data shows that the overall market value of the domestic CRO concept listed company sector has increased from more than 640 billion yuan at the beginning of the year to nearly a year of ups and downs, and as of today, the overall market value of the sector is more than 480 billion yuan, evaporating nearly a quarter.
Among them, Tigermed (300347. SZ), PharmaBlock (300725. SZ), Proton shares (300363. SZ), Zhaoyan New Drug (603127. SH), Medicilon (688202. SH), Kailaiying (002821. SZ), Pharmaron (300759. SZ) and other market capitalization shrank by 20%, nearly three-quarters of the company's stock price fell by more than 10% in the past year, only Chengdu Pioneer (688222. SH), Boji Pharmaceutical(300404. SZ) and Nuotai Biotech (688076. SH) and several other companies have also maintained positive growth in market capitalization.
Specific to performance, the differentiation further intensified, in the first half of the year, although Zhaoyan New Drug, Wisdom Pharmaceutical (300149. SZ) and Haoyuan Pharmaceutical (688131.SH) showed a decline in performance, while Kailaiying, Proton Shares, and Heyuan Biotechnology (688238. SH) and other CDMO companies, but more than three-quarters of the CRO listed companies have a positive year-on-year growth in revenue, and more than half of the net profit attributable to the parent company has a positive growth rate.
At that time, industry experts generally told the Financial Associated Press reporter that they should not be too optimistic about the medium-term results of the CRO industry, the CRO industry orders are relatively better long-term, and the current performance released is more dependent on the "fulfillment" of the orders previously undertaken.
In the third quarter of this year, the decline of the CRO sector has further expanded, with WuXi AppTec's domestic new drug R&D service revenue falling by a quarter in the first three quarters of this year, and the number of CRO companies with a year-on-year decrease in net profit attributable to the parent company increased from 7 to 9, and the revenue growth rate of most CRO listed companies has further slowed down.
According to announcements and other relevant public information, the reasons for the decline in the performance of some CRO listed companies are also different. In the middle of this year, Zhaoyan New Drug had a decline in performance due to "monkey hoarding", and the stock price fell to a limit; ChemPartner sold its small molecule CDMO business in 2022 and spun off its prebiotic business in June this year.
"The prosperity and market characteristics of the CRO industry this year, my personal view is that we have two points from the phenomenon point of view, one is that the prosperity is adjusted in the decline, and the other is that the market will first rise and then decline in the 2023 cycle. Hu Xiaochun, chairman of a biomedical company and a senior expert in the pharmaceutical industry, told the Financial Associated Press reporter that the industry's prosperity should be considered systematically from two dimensions, one is to jump out of the CRO industry from a macro overlook, in the context of the CRO subdivision industry can not be alone, its prosperity and the entire economy resonate at the same frequency;
In December, WuXi Biologics, a 100-billion-dollar CRO giant, lowered its earnings forecast, presenting investors with a true picture of the current state of the industry – the company's overall growth, including the high base of the pandemic, will fall short of its initial target due to the rapid decline in COVID-related revenues. Specifically, drug development (D) revenue is expected to decline by 18%-20% and manufacturing (M) revenue by 15%-18%. The slower-than-expected revenue growth in the drug development business was mainly due to the company's target of 120 new projects in 2023 in the downward cycle, which was obviously too aggressive, and the slowdown in biotechnology financing led to a decrease in new projects, which was 40 fewer projects than last year, which also meant a loss of about $300 million in revenue.
As soon as the news came out, the CRO sector crashed at the opening of the same day, WuXi Biologics fell nearly 24% in Hong Kong stocks and was temporarily suspended, and Pharmaron and Gloria Ying fell more than 10% in Hong Kong stocks, linking the A-share CRO sector to a sharp decline.
Investors were wailing and scolding at the time, forcing WuXi Biologics CEO Chen Zhisheng to hold another media conference to clarify, but it was ineffective. It can be said that since around 2010, after the first-generation CRO represented by WuXi AppTec formed a scale in China, there has never been a year of pharmaceutical "water sellers" that have made investors feel so complicated.
Zhao Heng, founder of Latitude Health, a medical strategy consulting company, told the Financial Associated Press that since the beginning of this year, it has been a fact and a future trend for the CRO sector to enter a downward cycle, which is directly related to the decline in biomedical investment and financing, and the demand for CRO has also declined.
According to Arterial Network data, in the third quarter of 2023, the number of global biomedical financing events will be 400, with a total of 156.178 billion yuan, of which the number of biomedical financing events in China will be 128, with a total of 16.599 billion yuan. In Q3 2023, the number of Chinese biopharmaceutical financing events decreased by 24% compared to the same period last year, and the total amount of financing decreased by half compared to the same period last year.
The downward cycle of "reporting group heating" will bloom at the end of next year?
"It is foreseeable that in 2024, some CRO companies that were previously dominated by the consistency evaluation business of generic drugs will enter a wave of bankruptcies, and most of them will go bankrupt if the transformation is not fast. CDMO companies or CDMO concepts are facing a state of surplus, and reshuffle is inevitable. Yang Tao, an executive of a listed biopharmaceutical company and a senior pharmaceutical industry expert, told a reporter from the Financial Associated Press.
However, WuXi Biologics' statement is not completely pessimistic about the future, but said that 2023 and the first half of 2024 are the most challenging, and it is expected to gradually recover in the second half of 2024, noting that the gross profit margin and growth rate in 2023 are the most challenging, but it is expected that the gross profit margin and growth rate will gradually resume growth in the next few years, with steady growth in 2024 and expected to resume strong growth in 2025 and beyond.
Hu Xiaochun agrees with WuXi Biologics' judgment, saying that it is more appropriate to describe the CRO industry as "in an adjustment cycle", but it may be a little urgent to see an improvement at the end of next year or 2025, after all, the overseas market may be more involved in the impact of off-market factors including but not limited to geopolitics, and the CRO track is unlikely to "stand out" so quickly.
It is worth mentioning that at the end of this year, that is, in December, there was a small wave of climax for domestic biopharmaceutical companies to go overseas, and the ADC varieties of Baili Tianheng, Hansoh Pharmaceutical, and Harbour BioMed reached huge BD transactions one after another, and ADC drugs became another hot field in the pharmaceutical industry this year since GLP-1. At that time, some people in the industry believed that ADC drugs were very dependent on technology platforms, involving the engineering transformation and system integration of more products, and the domestic CRO industry was developed, which could meet the process development and production requirements of various types of ADCs in China, and the research and development of ADC drugs may help the domestic CRO industry survive the cold winter.
Zhao Heng has a negative attitude, he said that there is no obvious change in the CRO industry at present, and it ultimately depends on the FDA's approval principles, and some ADC drugs may still have to go to the United States for clinical trials. "The big BD deals are more about the Biopharma and Biotechs that are stockpiling 'food and grass' for the winter. ”
Hu Xiaochun believes that there is a certain impact, he explained, everyone regards BD transactions as a new model for the development of enterprises now and in the future and to achieve geographical breakthroughs, although there was a view that BD transactions are turning to internal circulation and it is difficult to go to sea, but the current situation of economic strength, cognitive bias of innovative drug research and development and other factors make enterprises have to seek cooperation from the outside, but the main battlefield of the CRO industry is overseas, but the cooperation of CRO will be broader in the future, or more diversified on the CXO track.
A research report pointed out that in the first three quarters of 2023, the number of new INDs for innovative drugs in mainland China was 1,133, a year-on-year increase of 18%, and the number of new NDAs was 185, a year-on-year increase of 58.1%, a significant increase over the same period in 2022, and the demand for innovation will continue. The CXO industry is still a high-quality sector with both certainty and growth.
In overseas markets, the CRO market has stepped out of a trend that is completely different from that in China. According to media reports, the latest core business guidance of most overseas CRO companies has been raised or maintained, Samsung Biologics' full-year revenue guidance has been raised from 15%-20% growth to more than 20%, Charles River has continuously raised its full-year drug discovery and safety evaluation business revenue guidance, LabCorp has continued to raise its basic diagnostics business guidance, and ICON and LONZA have maintained their full-year guidance unchanged. But the strongest CRO is not Samsung Biotech, but Medpace, which has raised its performance guidance for 4 consecutive quarters, and its stock price has hit a record high.
Hu Xiaochun explained to the reporter of the Financial Associated Press that the phenomenon of CRO prosperity at home and abroad is very different, "on the one hand, the economic recovery of foreign countries, especially developed countries, is relatively fast, which is reflected in the market of the CRO industry, and on the other hand, the research and development of new drugs is relatively poor, whether it is the investment of R&D resources or the long-term awareness of new drug research and development. ”
"The recovery speed of the overseas biopharmaceutical market is significantly faster than that of the domestic market, and overseas Biopharma and Biotech are not very short of money, so I think that if domestic CRO companies want to grow next year, they may only bet more on overseas markets, and deeply bind themselves to Samsung Biologics Xi and large enterprises at home and abroad." Zhao Heng predicted that the growth rate of the CRO industry next year will say goodbye to double digits, and may only be in single digits on average.
Sullivan's research report pointed out that due to the characteristics of pharmaceutical R&D, such as long cycle, high investment, high risk, professionalism and the need to share technical data and information with CRO companies, pharmaceutical companies are usually very cautious when looking for CRO companies for their new drugs, and the accumulation of customer resources and service quality reputation of CRO service enterprises have become their core competitiveness. For customers who have not a cooperative relationship, they are more inclined to choose CRO companies with larger brands and better reputations, which also creates a high customer resource barrier for new entrants in the CRO industry.
For small and medium-sized CRO companies, Hu Xiaochun suggested that enterprises should not easily "transform", enterprises can adjust business lines instead of impulsively transforming business, and "establish first and then break" is very suitable for small and medium-sized CRO companies. "At the same time, I think that domestic CROs should think about it in this difficult adjustment period, whether the previous ambition to engage in CRO integration is radical and blind? It's not impossible to engage in CRO integration, but is it normal to rush to the market for quick success?"
This article originated from the Financial Associated Press reporter Lu Afeng