The Rise of China's CXO Industry: More than 10 companies have doubled their revenues in five years, what is the driving force for growth?

Since the beginning of this year, the draft of the U.S. Biosecurity Act has continued to evolve, bringing certain disruptions to China's CXO (pharmaceutical R&D and production outsourcing) industry.

After nearly 20 years of development, benefiting from the increase in R&D investment of pharmaceutical companies and the continuous increase in the penetration rate of pharmaceutical outsourcing, Chinese CXO companies have enjoyed a certain say in the global CXO industry competition.

In the past five years, it has also been a stage of rapid development of Chinese CXO companies, according to the statistics of the first financial reporter, taking 2019 as a comparison, 15 A-share or Hong Kong-listed CXO companies have doubled their operating income and net profit attributable to shareholders of the parent company (hereinafter referred to as "net profit") in 2023.

The significant increase in overseas revenue has led to the expansion of the revenue scale of many CXO companies. Under the turmoil of the draft of the U.S. Biosecurity Law, how Chinese CXO companies will go overseas has also become the focus of market attention.

Double your income

The emergence of the CXO industry chain is the product of the two contradictions of the drug "patent cliff" and the increase in the cost of drug research and development. Pharma companies are more willing to outsource some of their R&D and manufacturing operations to CXOs as a means of reducing time to market, saving costs, ensuring compliance, and reallocating internal resources, allowing them to focus more on new drug development and sales. CXO includes pharmaceutical R&D outsourcing (CRO) and pharmaceutical manufacturing outsourcing (CDMO/CMO).

The CXO enterprise first emerged in the United States in the 70s of the 20th century. The global CXO industry is mainly concentrated in the United States and Europe, but in recent years, it has gradually shifted to Asia and Africa due to labor costs, engineer bonuses, and the maturity of the pharmaceutical industry. Among them, based on the advantages of drug market scale, human resources, intellectual property protection, etc., China has also become one of the main undertaking places.

China's CXO industry has only developed in the past 20 years. With the opening of China's pharmaceutical reform in 2015, China's pharmaceutical market is gradually in line with international standards, which also provides a favorable external environment for the development of the industry.

The past five years, from 2019 to 2023, have ushered in a period of rapid expansion of China's CXO industry, especially after the emergence of the new crown epidemic, that is, between 2020 and 2022.

The emergence of the epidemic has promoted a large investment in the research and development of related vaccines, neutralizing antibodies, and therapeutic drugs. Many of the new crown vaccines and new crown drugs developed and marketed in response to global public health events rely on the R&D and production outsourcing cooperation model, which has led to the rapid growth of CXO companies' revenue.

The first financial reporter counted the income of CXO companies listed on A-shares and Hong Kong stocks. Taking 2019 as a comparison, 15 companies will double their operating revenue and net profit in 2023, including WuXi AppTec, WuXi Biologics, Pharmaron, Gloria Young, Tigermed, and Jiuzhou Pharmaceutical, which will rank among the top six in the industry in terms of revenue in 2023.

Specifically, WuXi AppTec's revenue and net profit in 2023 will be 40.341 billion yuan and 9.607 billion yuan, respectively, an increase of 2.13 times and 4.18 times compared with 12.872 billion yuan and 1.855 billion yuan in 2019, respectively.

WuXi Biologics' revenue and net profit in 2023 will be RMB17.034 billion and RMB3.34 billion, respectively, an increase of 3.28 times and 2.29 times from RMB3.984 billion and RMB1.014 billion in 2019, respectively.

Pharmaron (300759. SZ and 03759.HK) revenue and net profit in 2023 will be 11.538 billion yuan and 1.601 billion yuan respectively, an increase of 2.07 times and 1.93 times compared with 3.757 billion yuan and 547 million yuan in 2019, respectively.

Gloria Ying (002821. SZ and 06821.HK) revenue and net profit in 2023 will be 7.825 billion yuan and 2.269 billion yuan respectively, an increase of 2.18 times and 3.1 times compared with 2.46 billion yuan and 554 million yuan in 2019, respectively.

Tigermed(300347. SZ and 03347.HK) revenue and net profit in 2023 will be 7.384 billion yuan and 2.025 billion yuan respectively, an increase of 1.63 times and 1.41 times compared with 2.803 billion yuan and 842 million yuan in 2019, respectively.

Jiuzhou Pharmaceutical(603456. SH) revenue and net profit in 2023 will be 5.523 billion yuan and 1.033 billion yuan respectively, an increase of 1.74 times and 3.35 times compared with 2.017 billion yuan and 238 million yuan in 2019, respectively.

Behind the rapid growth of China's CXO revenue, the increase in revenue from overseas markets is the "handle".

According to WuXi Biologics' annual report, its overseas revenue increased from RMB 2.576 billion in 2019 to RMB 13.912 billion, an increase of 4.4 times during the period.

For example, WuXi AppTec's annual report also shows that its overseas revenue has increased from 9.907 billion yuan in 2019 to 32.97 billion yuan in 2023, an increase of more than two times during the period.

For example, Gloria's overseas revenue has also increased from 2.241 billion yuan in 2019 to 6.344 billion yuan in 2023, an increase of 1.83 times during the period.

From the perspective of the top 10 CXO companies in the world in terms of revenue in 2023, WuXi (mainly WuXi AppTec and WuXi Biologics) ranked fourth with a total revenue of RMB 57.375 billion.

With the expansion of revenue scale, the voice of Chinese CXO companies in the global industrial chain competition is also increasing. According to Sullivan's forecast, China's drug R&D and manufacturing outsourcing services will account for about 15.1% of the global total scale in 2023, and the market share is expected to increase to 23.5% by 2028.

Go

Since Senate Gary Peters, a Democratic member of the U.S. Senate, filed Bill S.3558 at the end of 2023, the U.S. Biosecurity Act has been evolving, and the stock prices of Chinese CXO companies have fluctuated many times.

WuXi AppTec was the only Chinese CXO company involved in the bill turmoil, and later WuXi Biologics was added. Recently, the U.S. House of Representatives Oversight and Accountability Committee passed a new draft of the Biosafety Act (No. H.R. 8333), which has made some revisions in the early stage, clarifying that the U.S. biopharmaceutical industry is directly related to WuXi AppTec (603259.SH), WuXi Biologics (02269. HK) and other companies have set a deadline of January 1, 2032.

The submission of the new bill is based on a survey conducted by BIO. According to the survey, 79% of the 124 biopharma companies have signed at least one contract or product agreement with a CDMO/CMO company in China or owned by China, and it takes 8 years to switch production suppliers. This also shows that Chinese CDMO companies occupy an important position in the global CXO industry chain.

But H.R. 8333 will then go to a full vote in the House of Representatives, and it will need to be voted on by the full Senate before it can be signed into law by the President of the United States. Ultimately, there is still a lot of uncertainty about how the bill will go.

Under the disturbance of the draft of the "Biological Act", the layout of Chinese CXO companies in overseas markets is still attracting attention. The market, dominated by Europe and the United States, is still a highland for drug R&D innovation.

In a May 16 announcement, WuXi AppTec said that it will continue to communicate and dialogue with its consultants and with the ongoing draft H.R. 8333 and the draft legislation numbered S.3558, which was voted on by the U.S. Senate Committee on Homeland Security and Governmental Affairs on March 6, 2024. The content of draft H.R. 8333 and draft S.3558 needs to be agreed upon and is subject to further consideration and possible changes.

Some non-WuXi CXOs clarified the impact of the draft Biologics Act at recent earnings briefings or investor briefings, but at the same time revealed their determination to continue to expand their presence in overseas markets.

First of all, the bill itself does not involve companies, and companies are not engaged in the business areas covered by the bill. Secondly, from the level of cooperation with customers, the current business cooperation and negotiation with customers are in normal progress and have not been affected by this incident.

"The company will also continue to take the following countermeasures in a targeted manner: first, continue to adhere to the positioning of CDMO enterprises, provide professional services and assistance to innovative drug companies, and be a friend rather than a rival in the overseas biopharmaceutical industry; Second, to accelerate the layout of overseas construction, the first is to accelerate the production capacity from European small molecule R&D to commercial production, which is not only to disperse the potential risks of uncertainty, but also to undertake API (API) projects for more overseas customers, which is an inevitable demand for deepening cooperation in the development of the industry; The second is to accelerate the business promotion of the Boston R&D center, and use it as a fulcrum to undertake more overseas biotech customer projects; The third is to consider the layout of raw material production in overseas low-cost areas in the future. Kailaiying said.

PharmaBlock (300725. SZ) said that CXO has played a huge role in improving the efficiency of new drug research and development, reducing production costs, improving drug accessibility, and promoting the development of the pharmaceutical industry, and the company firmly believes that Chinese CXO will always be an indispensable part of the global pharmaceutical innovation industry chain. At present, the company's various businesses are progressing in an orderly manner and have not been affected by the law. The company will continue to strengthen the service capacity building of its teams in China and the United States, give full play to their respective geographical and technological advantages, and continue to actively seek opportunities for self-construction or mergers and acquisitions of production capacity, accelerate the construction of overseas production capacity layout, and enhance the resilience of the supply chain.

Proton Co., Ltd. (300363. SZ) said in its 2023 annual report that due to macro factors, in the past two years, the localization of the supply chain has become more and more important due to the consideration of supply chain security, and has become an "important variable" affecting the development trend of the pharmaceutical outsourcing service industry. Since the pharmaceutical outsourcing service industry is a talent-intensive, capital-intensive, and strongly regulated industry, it takes a long time period (two years or even longer) for new production capacity to be put into use and then recognized by customers, so it is unlikely that the industrial structure will undergo large-scale changes in the short term. For Chinese pharmaceutical outsourcing service enterprises, it will become more important to accelerate the global layout while making full use of the dividends of Chinese scientists and engineers and the advantages of the supply chain.

Some CXO companies told the first financial reporter that based on technical capabilities, scale and cost advantages, China's CXO industry occupies a place in the global market, but in the process of actively expanding overseas markets, how to achieve a balance and avoid "big moves" also tests the wisdom of each enterprise.

(This article is from Yicai)