In the past few years, the stock market has not done well, and many of the high-performing stocks have also fallen sharply, some of which have been reasonably or even undervalued. Yansong Investment Research Circle has done many issues, focusing on high-quality companies that have fallen significantly in the past two years, and has made an in-depth analysis of these companies from the aspects of historical stock price trends, main business, development, and valuation.
Pharmaron and Tigermed are both leaders in the CXO industry, with the biggest declines of more than 80% in the last two or three years. Today, let's take a look at the situation of these two companies, we don't make judgments about the future, but only by reviewing the historical market, we will explain the situation of the company and the industry, mainly with data.
1. Pharmaron
1. Historical fluctuation range
As a scarce full-process integrated pharmaceutical R&D outsourcing service company, Pharmaron was a proper bull stock at the beginning of its listing. In just two and a half years from its listing in February 2019 to August 2021, the highest increase reached 2293.86%. In August 2021, as the CXO industry pulled back from its highs all the way to the present, it fell by 82% and is currently down 77%.
2. Main business
Pharmaron is engaged in integrated drug research, development and manufacturing services from drug discovery to drug development. The main services are laboratory services, CMC (small molecule CDMO) services, clinical research services, large molecule and cell and gene therapy services. In 2023, the revenue will account for 58%, 23%, 15%, and 4% respectively. The company has 21 operating entities in China, the United Kingdom and the United States (including 11 overseas), with foreign revenue of 9.563 billion, accounting for 82.88% of revenue.
(1) Laboratory services
The company's laboratory services mainly include laboratory chemical and biological science services. Laboratory Chemistry Services provides customers with different laboratory chemistry services such as compound library design and synthesis, hit discovery, lead synthesis and optimization, bioorganic small molecule synthesis, chiral and achiral separation and purification. Bioscience services provide customers with drug development services including target confirmation, structure-activity relationship research, candidate compound confirmation, druggability research, etc.
(2) CMC (small molecule CDMO) services
The company's CMC (small molecule CDMO) service is mainly to provide chemical and formulation process development and production services to pharmaceutical companies in the drug development stage, covering the needs of process development and commercialization stage production in all stages of clinical development.
(3) Clinical research services
Overseas clinical research services focus on radiolabeling science and early clinical trial services. The Radiolabeling Science Service accelerates the clinical development process by helping customers synthesize carbon-14 and tritium-3 radiolabeled compounds to study the absorption, diffusion, metabolism and excretion of various compounds in the human body. In addition, through its independent 96-bed Early Clinical Development Center and Analysis Center in Maryland, USA, we provide clinical trial services including comprehensive first-in-human trials, vaccine development/infection challenge trials, comprehensive carbon-14 drug absorption, distribution and excretion studies, TQT/cardiac safety, and cross-racial bridging trials.
The China clinical research service consists of clinical trial services and clinical research site management services, which comprehensively cover the service needs of different stages of clinical research in China.
(4) Macromolecule and cell and gene therapy services
The Company's macromolecule and cell and gene therapy services include macromolecule drug discovery and development and manufacturing services (CDMO) and cell and gene therapy laboratory services and gene therapy development and manufacturing services (CDMO).
3. Development history and major changes
1. 2004-2008: Initial period
The company was founded in 2004 and started out in the small molecule laboratory chemistry and drug discovery businesses.
2. 2009-2013: business development stage
The company began to slowly expand its CMC business and improve its preclinical CRO business, achieving a comprehensive layout of toxicology and pharmacology research and CMC and a solid position in the drug discovery business.
3. 2014-2018: Integration phase
Through intensive investment and acquisitions, we will expand the clinical CRO and CDMO business, and realize the construction of an integrated service platform for drug research and development, clinical trials and industrial pharmaceuticals.
4. 2019-2023:
The company strengthens the integration of clinical services, CDMO capabilities focus on laboratory chemistry, and layout macromolecule and CGT services.
Impact of the U.S. Biosecurity Act
On March 6, 2024, the U.S. Senate Homeland Security Committee passed the Biosecurity Act by a vote of 11 in favor and 1 against. If the bill is ultimately passed in the Senate and House of Representatives, it will have a significant impact on the business of Chinese companies such as BGI and WuXi in the United States.
But for the time being, it is not directly related to Kanglong. In April, pharmaceutical industry media outlet Endpoints reported that the biosecurity bill could be extended to more Chinese companies, including Beijing-based Pharmaron, causing the company's stock price to plummet.
There are concerns about being implicated, while others believe that the U.S. can't do without China's CROs, and that if the U.S. decides to sanction certain Chinese biotech companies, Pharmaron could be an alternative.
In the latest news, last Friday, Brad R. Wenstrup, a Republican member of the U.S. House of Representatives, sponsored a new version of the "Biosecurity Act" (H.R. 8333), and the U.S. House Oversight and Accountability Committee is scheduled to hold a hearing on the evening of May 15. It is said that the new version of the Biological Laws has added an eight-year exemption period. No one knows what will happen in 8 years.
4. The company's future planning
The company's annual report states that it has always been the company's core development strategy to continuously build and continuously improve a deeply integrated, "full-process, integrated and international" drug R&D service platform that follows the highest international standards. Adhere to the business development strategy of both domestic and foreign markets.
5. The future development of the industry
- The aging of the global population is accelerating, and the industry has been improving for a long time
The acceleration of the aging of the global population, the expansion of the population of patients with chronic diseases, and the increase in the total investment of countries in medical and health care will continue to develop the global and Chinese pharmaceutical markets, which in turn will lead to the continuous increase in investment in pharmaceutical R&D and production.
According to Sullivan's forecast, the global pharmaceutical market is expected to invest in drug R&D and production to reach US$825 billion by 2028, with a compound annual growth rate of 5.7% from 2023 to 2028. Among them, the investment in drug R&D and production in China's pharmaceutical market in 2023 will be about 686.8 billion yuan, and this investment scale is expected to increase to 1,035.6 billion yuan by 2028, with a compound annual growth rate of 8.6% from 2023 to 2028.
(1) Drug R&D and production outsourcing services have been improving for a long time
Under the dual pressure of increasing R&D costs and patent cliffs, as well as the impact of their own R&D talent limitations, pharmaceutical companies are gradually inclined to choose pharmaceutical R&D and production outsourcing services to reduce the cost of drug R&D and improve the company's R&D efficiency.
(2) According to Sullivan's forecast, the overall scale of drug R&D and manufacturing outsourcing services in the global pharmaceutical market will be about US$159.4 billion in 2023, and it is expected to reach US$265.3 billion by 2028, with a compound annual growth rate of 10.7% from 2023 to 2028.
6. Performance and valuation
In 2019, when it was listed, the revenue was 3.76 billion and the profit was 550 million, and in 2023, the revenue was 11.5 billion and the profit was 1.6 billion. The scale of revenue increased by 3 times, and the profit increased by 2.9 times. In 2022, due to factors such as the disruption of the epidemic and the early investment stage of emerging businesses, the performance will decline. In 2023, the performance will return to growth.
The company's revenue in the first quarter of 2024 was 2.671 billion yuan, a year-on-year decrease of 1.95%; the net profit attributable to the parent company was 231 million yuan, a year-on-year decrease of 33.80%; The year-on-year decrease was 46.01%. The reasons for the decline in performance were: (1) the one-time loss caused by the integration of laboratory service business in Shanghai and Ningbo/Beijing and the closure of the Shanghai laboratory; (2) The fair value change income of assets decreased by 29.71 million yuan compared with the same period in 2023; (3) Increased financial costs.
Let's look at valuations. At the high of 2021, the company's P/E ratio was close to 150x PE-TTM, and its current valuation is 27x PE-TTM. Most institutions expect the company's profit in 2024 to be about 1.7 billion, and the current market value of 40 billion corresponds to a price-earnings ratio of 23.5 times. From the perspective of historical quantiles, the current valuation is basically in the lowest area in history.
In addition, the company is an A+H listed company, and the current premium of A shares over H shares has reached 120%, and the earnings ratio of the Hong Kong stock market is only 12.5 times PE-TTM.
7. Summary
- The company, known as "Little WuXi", is a scarce all-in-one platform company in the CXO industry;
- The reasons for the sharp decline in stock prices: the return of valuations and the decline in performance caused by the decline in industry prosperity;
- The company's orders are mainly dependent on foreign countries, and the market is worried that it will be sanctioned by the United States in the future;
- Valuations are currently at a low level, with H-shares being more cost-effective.
2. Tigermed
1. Historical fluctuation range
From 2019 to July 2021, in just 2 and a half years, Tigermed has increased by more than 6 times. After that, the stock price has also pulled back with the CXO industry all the way to the present, with a maximum amplitude of more than 90%, and the current decline is still close to 70%, and the stock price has been cut off by the ankle.
2. Main business
The company is a contract research organization (CRO) focusing on providing professional services for the whole process of clinical trials for new drug research and development, and its main products are clinical trial technical services, clinical trial-related services and laboratory services. In 2023, the revenue will account for 56% and 42% respectively. From a geographical perspective, domestic revenue accounted for 56%, and overseas accounted for 42%.
According to Frost & Sullivan's report, the company has ranked first in China's clinical outsourcing service market share for many consecutive years, and is also the only Chinese clinical outsourcing service provider to enter the top 10 in the world. Compared with Pharmaron, Tigermed is more focused on the clinical stage business, and the proportion of domestic and foreign businesses is more balanced, and it is less affected by Europe and the United States.
3. Development history and major changes
The development of Tigermed can be said to be a history of self-construction and investment and mergers and acquisitions, and the general process has gone through three important stages:
Phase I: Early development period 2004-2008.
At the beginning of its establishment, the company only focused on simple CRO services such as drug clinical research registration and declaration, and expanded it to Shanghai, Beijing and other major domestic cities through continuous self-built service outlets.
The second stage: 2009-2012 is the period of development and growth.
The company acquired Mestar, extended its business to pharmaceutical data management and statistical analysis, broadened the boundaries of CRO services, and began to provide clinical research services to customers around the world. In 2012, it was listed on the A-share market.
The third stage: 2013 to the present, it is a period of rapid growth.
Endogenous and acquisitions go hand in hand. First, we established Inophobio to extend its business to medical imaging services, and then successively set up overseas subsidiaries in Asia Pacific, North America, and Europe to expand global service outlets. In terms of acquisitions, the company has successively acquired Fangda Holdings, Beijing Medical Renzhi, Jietong Tairui, Hangzhou Kangpaq Hospital, Shanghai Mousi Pharmaceutical, Beijing Huangtu and other enterprises in China. Overseas, it acquired BDM and Concord in the United States, DreamCIS in South Korea, and Opera in Romania, and established a joint venture with Accerise in Japan to take a stake in EPS, a leading CRO company in Japan. In 2023, it will complete the acquisition of Marti Farm, a European CRO company.
4. The company's future planning
According to the description of the company's annual report, looking to the future, the company will continue to embrace regulatory reform, technological innovation and global expansion, continue to improve and build an integrated R&D service platform, enhance end-to-end one-stop service capabilities, and drive performance growth. At the same time, the company will continue to expand the customers of multinational pharmaceutical companies and large domestic pharmaceutical companies, establish business units based on therapeutic areas or drug types, and enhance the commercial and operational capabilities in the United States and Europe through acquisitions and mergers and acquisitions, so as to further increase the global market share and achieve long-term growth and development of performance.
5. The future development of the industry
The development of domestic innovative drugs has accelerated, and the R&D capabilities have been internationally recognized.
According to the statistics of the Drug Clinical Trial Registration and Information Disclosure Platform, the number of clinical trials in China increased from 3,316 in 2022 to 4,205 in 2023, a year-on-year increase of 26.81%. According to CDE statistics, 40 Category 1 new drugs will be approved in China in 2023, a record high.
According to incomplete statistics, in 2023, the number and amount of overseas license-out product licensing transactions for domestic innovative drugs will hit a new high, with a total of 80 transactions and a potential total transaction size of more than US$41.1 billion. A number of innovative drugs and biosimilars are also under review by the FDA and Europe. With the increasing investment in drug R&D and production in China, the market share of China's drug R&D and manufacturing outsourcing services in the global drug R&D and manufacturing outsourcing services market is also increasing.
According to Sullivan's forecast, the investment in drug R&D and production in China's pharmaceutical market in 2023 will be about 686.8 billion yuan, and this investment is expected to increase to 1,035.6 billion yuan by 2028, with a compound annual growth rate of 8.6% from 2023 to 2028. In 2023, China's drug R&D and manufacturing outsourcing services accounted for about 15.1% of the world's total scale, and it is expected that by 2028, China's drug R&D and manufacturing outsourcing services will reach 444.2 billion yuan, and the market share is expected to increase to 23.5%.
6. Performance and valuation
When the company was listed in 2012, the revenue was only 250 million, and the profit was only 68 million, and it grew slowly in the following years, and began to accelerate growth in 2017, with a revenue of 5.2 billion in 2021 and a profit of 2.87 billion, with a revenue increase of 20 times and a profit increase of more than 40 times. In 2022 and 2023, affected by the epidemic and the decline in biomedical investment and financing, the company's performance will decline.
From the profit side, the company has laid out many funds, and the non-recurring profit and loss in 2020 will exceed 1 billion yuan, so the company was once complained of as an "investment freak". However, in the cold winter of innovative drugs in the past two years, the stock prices of many innovative pharmaceutical companies invested by the company have plummeted, and the investment business has changed from the original performance bonus to an oil bottle.
Let's look at valuations. At the high of 2021, the company's P/E ratio exceeded 90x PE-TTM, and after more than 2 years of digestion, the valuation fell below 20x PE-TTM at the beginning of 24, and the current valuation is 30x PE-TTM. The agency predicts that the company's profit in 2024 will be roughly around 2.2 billion, with a market value of about 50 billion, corresponding to a price-earnings ratio of about 23 times. Valuations are now largely in the lowest-all-time zone.
Tiger is also an A+H company, with a premium of 77% for A-shares and a valuation of 17 times PE-TTM for Hong Kong stocks.
7. Summary
- Although the growth rate of customer R&D investment has slowed down due to the impact of investment and financing in the global pharmaceutical industry, the trend of long-term sustainable development of the pharmaceutical and health industry will not change.
- The company is a leading clinical CRO in China, and domestic innovative drugs have entered the accelerated development stage;
- Overseas revenue accounts for a relatively small proportion and is relatively less affected by overseas sanctions;
- The company's investment business is two-sided;
- Valuations are currently low.