This article is based on publicly available information and is for information purposes only and does not constitute any investment advice
From a popular investment concept to a value depression that few investors pay attention to, it took only four years for China's innovative drugs to take place.
Has the fundamentals of China's innovative pharmaceutical companies deteriorated significantly? In fact, no, the pipeline progress continues to advance, and even a large number of ADC pipelines have been successfully sold to MNC. However, in the secondary market, it is a diametrically opposite scene, and the stock prices of innovative drug companies have collectively fallen, and investors have not seen any vitality.
What is the problem of China's innovative drugs? This may be the question in the minds of the vast majority of investors who care about innovative drugs. Next, we will analyze this problem from the three dimensions of enterprise, capital and industry.
The most fundamental crux of the reason why China's innovative drugs are not welcomed by investors is "blind innovation", and they do not regard innovative drugs as a business.
First in class is the core demand of many pharmaceutical companies, and from the perspective of human development as a whole, such drugs can solve diseases that have not been solved before, which is indeed of great scientific significance. But there is a core key behind innovation, that is, what is the cost of validating this path, and what are the results? Only when the cost is controllable and the results are abundant, this first-in-class innovation has investment value.
However, in practice, when most companies open the first-in-class pipeline, they value the courage to be the first, and the pursuit is fast, novel, and exclusive. Maybe in the eyes of these companies, I have a good idea, and no one is trying to verify it, then what I am doing is something worthwhile.
Isn't this idea really something that no one has thought about before? Probably not, maybe it's because it's too expensive to validate the idea, or because the idea isn't very productive. For MNC, it is not necessary for them to put all their wealth into an innovative target, and they will evaluate the cost and results before entering an innovative target, and then consider whether to participate in research and development. Even if you miss the first wave of development, MNC can be license-out or acquired, so the exclusive idea you come up with is likely to be a cost-effective one.
A new idea is not necessarily suitable for investment, what matters is the price-performance ratio of the new idea, and only an idea that is cost-effective enough can give birth to a company with commercial prospects. Back then, Regeneron and Genentech were absolute top scientists, but they never achieved good stock price performance, and it was not until professional managers participated in the operation of the company that their best began to emerge.
However, unfortunately, there are not many companies that really fully evaluate the value of the target before R&D, and most innovative drug companies still come up with an idea and find capital for financing, so as to transform into an innovative pharmaceutical company. In other words, the suffering of Chinese pharmaceutical companies at this stage may not be due to failure in the operation process, but because they chose the wrong track at the beginning of the project. Running on the wrong path, the harder you try, the worse the results.
Although innovative drugs are a stage with innovation as the core competitiveness, innovation is not the only element. As a listed company, its core appeal is still to be able to make money, or have the expectation of making money. If a pipeline is successfully listed, it can only sell tens of millions of revenue every year, but needs to invest billions in R&D, is this a good investment project?
Businessmen value profits over parting, in fact, investors are also like this. Maybe in the beginning, they will be attracted to innovative ideas, but if they can't see the return for a long time, then parting becomes the only outcome. The investment value of the first-in-class pipeline is limited, and only the first-in-class pipeline with large indications is valuable.
Innovative drug companies should not be new for the sake of new or listed for the sake of listing, but should really start from the perspective of business and how to do a good job in this innovative drug business.
If innovative pharmaceutical companies do not treat what they are doing as a business, then they will not consider the return on investment, and they will even spend a lot on various investments.
When "fast, new, and independent" become the only indicators considered by innovative pharmaceutical companies, the monitoring of many operational indicators will be ignored, and various costs will also rise. In the absence of profitability, financing from the capital market has become the only way for innovative pharmaceutical companies to survive.
However, this way of parasitic on the capital market is greatly affected by the capital market cycle, and if the market environment is sluggish, then some innovative pharmaceutical companies with poor cost control will have the risk of capital chain rupture at any time. Of course, there is nothing wrong with relying on financing, and any new industry is driven by capital. But if the market environment turns cold and there is not so much water, the shortcomings of this heavy reliance on market financing will be further amplified.
The more pessimistic the market, the more the earnings expectations of the company's core pipeline are tested. This profit expectation is not the higher the better, but related to the cost performance, only the potential results and the cost to pay, investors can judge the core value of the enterprise. This is also the reason why the companies whose stock prices are rising well at this stage are not BeiGene's core products that are in overseas volume.
If China's innovative drug industry wants to mature, it must learn to reduce its dependence on market financing, and when the product is not commercialized, pharmaceutical companies can obtain funds through license-out or joint research and development, and can get funds from MNC, which also reflects the core competitiveness of the pipeline of innovative pharmaceutical companies. Looking back at the development of the industry, the stock prices of companies that are able to obtain cash flow through license-out are much better than those that can only raise funds from the market.
The capital market can be the starting point for innovative pharmaceutical companies, but it should not be the only way to raise funds.
Innovative drugs are dead and alive, this is something that investors know, and the probability of failure of overseas innovative pharmaceuticals is also very high, but why are investors willing to invest in their innovative drug companies? That's because of the ubiquitous MNC.
"Coming later" is a common strategy for MNC, and given the low ceiling of emerging track markets, large MNCs often do not enter the market at the first time. But when this track gradually matures, they often do not hesitate to invest heavily in acquisitions, and the purchase of domestic ADC pipelines by MNC is a good example. This kind of acquisition by MNC is not limited to hot tracks, such as many innovative pharmaceutical companies with poor cash flow but great potential in the pipeline will most likely be taken over by MNC in the end.
The research and development of innovative drugs is a process of big waves. After the market filters out companies with poor quality, most of the innovative pharmaceutical companies with good quality will actually choose the mnc camp to join. In other words, MNC is not only a pharmaceutical company, but also an industrial capital platform. It is precisely because of the existence of MNC that the European and American innovative drug industries can retain iterations again and again.
Even if the innovative pharmaceutical company does not succeed in the end, investors can still exit by giving the MNC, which greatly reduces the risk faced by investors. For European and American innovative drug investors, it is not necessary to find a great company, but only to find a potential project. The MNC is expected to make the valuation floor of innovative pharmaceutical companies, and at the same time, it also improves the investment fault tolerance rate.
For China's innovative drug industry at this stage, what is most lacking at present is not R&D capabilities, but large pharmaceutical companies (or potential new stars) that have a strong economic foundation and know how to measure the value of drugs. In fact, the growth of the innovative drug industry does not occur in the hot period of the industry, but in the cold winter of the industry.
The cold winter of the industry is also the most suitable time for large mergers and acquisitions in the pharmaceutical industry, and excellent innovative drug assets will be injected into large pharmaceutical companies, so as to realize the accumulation of core value of the pharmaceutical industry. The development of the pharmaceutical industry is based on mergers and acquisitions again and again.
Based on this point of view, I believe that the underestimation of the innovative drug industry at this stage is a normal cyclical behavior, and the most scarce thing in the entire industry at present is high-quality enterprises with asset integration capabilities, which is the key puzzle of the closed loop of China's pharmaceutical industry. Only when the entire pharmaceutical industry forms a closed loop can we accumulate strength in generation after generation of iterations.
It is gratifying for innovative pharmaceutical companies to want to become giants, but the probability is extremely low. For most innovative pharmaceutical companies, it is the best outcome to be acquired by excellent companies at a reasonable price. This group of enterprises with M&A capabilities should be the core targets that are most worthy of investors' attention.
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