How to analyze the inflection point of CXO economy?

Many investors have found that macro factors affect the prosperity of CXOs, but they are still confused about how to track the inflection point of prosperity. Commonly used tracking indicators in the market include investment and financing data, as well as CXO's inquiry, signing-related indicators. Investment and financing data often fluctuate from month to month, which reduces the accuracy of tracking, and a single tracking indicator is easy to cause "blind people touching elephants". We believe that in order to solve the above problems, it is necessary to trace back to the source and judge the inflection point of CXO prosperity by tracking the trend of R&D enthusiasm in the downstream innovative drug industry.

Overseas demand has picked up, and the expansion of new fields such as peptides has accelerated. On the demand side, since 2023, the CDMO demand of domestic CXO companies from overseas large pharmaceutical companies has picked up, and customer inquiries have gradually improved. Hengqiang, a strong player in the field of clinical CRO in China, has fluctuated in the overall number of new orders. On the supply side, in the past 23 years, the CRO field has paid more attention to the improvement of human efficiency, the construction of small molecule production capacity in the CDMO field has slowed down, and the production capacity of new fields such as peptides has continued to expand.

External demand: Financing is warm, and demand is stable. From a macro perspective, the experience of overseas pharmaceutical companies in coping with the macro cycle has been relatively mature, which to a certain extent has created a smoother transmission path of "macro factors, biomedical technology stock performance, investment and financing CXO performance". In particular, the impact of changes in investment and financing in the U.S. biomedical field on the performance of overseas CXO companies is reflected in the current year, rather than the next year, as the market generally believes. From a micro perspective, the division of labor in the overseas innovative drug industry is clearer, that is, Pharma is more responsible for clinical R&D and commercialization, and Biotech is more responsible for preclinical and early clinical R&D. As a result, as the amount of overseas biotech financing continued to grow positively in 23Q2-Q3, the order indicators in the overseas preclinical CRO field also improved (the order cancellation rate and net book-to-bill ratio of Charles River in 23Q3 both improved quarter-on-quarter).

Domestic demand: Financing bottoms out, and demand bottoms out. The scale of financing in the domestic biomedical field determines the increase in CXO's domestic demand. From 23Q1 to Q3, the overall investment in the domestic biomedical field is still cautious, and the noteworthy change is that the number of **guidance** and state-owned assets in investment institutions has increased significantly (more than 60 in 23H1 and more than 70 in 23Q3). Is there a bottom in domestic biotech financing? In addition to macro factors, we believe that when the value of biotech investment in the primary market is re-defined, the financing environment in the domestic biomedical field is expected to bottom out**:

1) Whether it is the medical insurance payment policy that affects the long-term cash flow of innovative drugs, or the review and approval policy that affects the success rate of listing and the intensity of "involution", the policy framework is becoming more and more mature, which stabilizes the domestic valuation system of innovative drugs.

2) Domestic innovative drugs have achieved the transition from lisence-in to liscence-out, for example, overtaking in the ADC field, and domestic PD-1 has been approved by the FDA for marketing and finalized**. With the continuous strengthening of the logic of going overseas, the valuation space of domestic innovative drugs has been opened.

3) The exit path of first-level pharmaceutical funds is gradually becoming clear. With the gradual clarification of the division of labor between domestic biotech and Pharma, IPO and M&A are both better exit paths, that is, not all biotech must be listed and develop into Pharma.

Investment suggestion: CXO's external demand is generally stable, due to the more mature development of the overseas innovative drug industry, the transmission path of "macro factors, biomedical technology stock performance, investment and financing CXO performance" is more rapid, and the warming of overseas financing in 23Q3 has led to the improvement of overseas CRO order indicators. Domestic demand is still bottoming out, and in the context of the increasingly mature policy framework for innovative drugs and leapfrog breakthroughs in going overseas, high-quality supply is the key factor that determines domestic biotech financing in addition to macro factors. In the process of establishing the inflection point of demand, the warming of macro factors, the improvement of Sino-US relations, and the acceleration of the upgrading of domestic downstream industries are expected to catalyze the release of optimistic expectations in the market, and CXO's stock price reacted in advance. It is recommended to pay attention to WuXi AppTec, Pharmaron, Tigermed, Gloria and Prius, etc.

This is an abridged excerpt from the report, the original PDF of the report

Report**: Value Catalog