(Report produced by Author: Everbright**, Wang Mingrui).
1.1. Demand analysis: overseas demand is picking up quarter by quarter, and domestic demand is fluctuating
The demand for CDMO of overseas pharmaceutical companies has picked up, and the domestic clinical CRO field is strong. In the first three quarters of '23, the revenue of SW's pharmaceutical R&D outsourcing segment was 71 billion yuan (-0.).49% yoy), net profit attributable to the parent company was 16.5 billion yuan (-10.95% yoy), the apparent performance was affected by the large orders related to COVID-related in the same period of '22, and the growth rate was negative. For companies with overseas revenues, after excluding large orders for the commercialization of the new crown, the order of performance growth performance in the first three quarters of '23 is CDMO > drug discovery CRO. For example, in the first three quarters of '23 (after excluding large orders), WuXi AppTec's revenue from the world's top 20 pharmaceutical companies was +43% year-on-year, and the revenue from multinational pharmaceutical companies in Gloria's small molecule CDMO business was +66% year-on-year5%。Among the domestic revenue-based companies, the ranking of performance growth performance in the first three quarters of '23 is generic drug CRO> clinical CRO > preclinical CRO. Due to the phased cold investment and financing in the field of domestic innovative drugs, the growth of preclinical CRO revenue has slowed down, and clinical SMO orders have been concentrated in leading enterprises. To sum up, in the field of small molecule CDMO, which is dominated by overseas demand, and in the field of clinical CRO dominated by domestic demand, the revenue growth of key companies in the first three quarters of '23 was relatively stable.
Newly signed orders: overseas inquiries have gradually improved, and domestic orders have fluctuated. CRO Field, 23H1 New Orders The order of growth is clinical CRO generic CRO > preclinical CRO. In the field of clinical CRO due to the SMO leading effect and other reasons, the scale of new orders of key companies continued to grow in 23H1;In the preclinical CRO field, due to the fluctuating financing environment of domestic innovative drugs, the scale of new orders of key companies in 23H1 has declined. In the CDMO field, benefiting from the measures to increase the development of early-stage projects in recent years, the number of early-stage projects in most CXO companies' 23H1 CDMO service projects has grown rapidly, and the year-on-year growth rate is higher than that of the whole. In terms of customer inquiries, with the gradual resumption of international exchanges, overseas customer inquiries from key domestic CXO companies resumed quarter by quarter in 23Q1-Q3, among which the demand from multinational pharmaceutical companies remained strong, and the demand from overseas biotech gradually recovered under the catalyst of the recovery of the financing environmentIt will take time for domestic customer demand to recover, resulting in fluctuations in new orders signed by related companies in the first three quarters of 23.
1.2. Supply analysis: pay attention to the improvement of human efficiency and the investment in production capacity in new fields
CRO: 23H1 personnel efficiency is basically stable, and personnel recruitment slows down. In terms of human efficiency, the per capita income of 23H1 Prius, Sunshine Novo and Baicheng Pharmaceutical increased year-on-year respectively. 8% and 401%, Tigermed and Hongbo Pharmaceuticals decreased year-on-year respectively. 6%, and the per capita revenue of the remaining CXO companies in 23H1 was flat or increased by single digits year-on-year. The year-on-year change in per capita revenue generation is more related to the development stage of each company itself. In terms of personnel recruitment, as of the mid-23 report, the total number of employees except Boji Pharmaceutical, Prius and Baicheng Pharmaceutical increased from the end of 22 month-on-month. 5% and 10Except for 4%, most CXO companies were basically flat or slightly lower than the previous month. We believe that the above shows that since 2023, domestic CXO companies have paid more attention to the optimization of the internal structure of employees and the improvement of human efficiency.
CDMO: The construction of production capacity in the small molecule field has slowed down, and the production capacity of new fields such as peptides continues to expand. As of the end of the third quarter of 2023, due to the impact of the high base in the same period of '22, the fixed asset turnover ratio of WuXi AppTec, Gloria Eng and Proton shares fell year-on-year. Correspondingly, after the fixed asset expansion cycle from 2019 to 2022, the capital expenditure of some CXO companies in the first three quarters of 2023 fell year-on-year or slowed down significantly.
Specifically, in 23Q1-Q3, the CAPEX of WuXi AppTec and Gloria Ion decreased year-on-year respectively, and the CAPEX of Pharmaron and Proton increased by % year-on-year respectively (the CAPEX increased year-on-year in 2022%).
2.1. Medium-term trend from a macro perspective
2.1.1. The Fed's interest rate hike expectation affects the valuation trend of innovative drugs
Macro factors affect the overall development of innovative drugs. In our "Analysis of Innovative Drugs from a Macro Perspective: How to Look at Valuation from a Higher Dimension - In-depth Research on Innovative Drugs Series VII" released on September 29, 2022, we proposed: In the interest rate cut cycle, the cost of capital decreases and the discount rate decreases, leading to an increase in valuation;The abundant liquidity caused by the easing of monetary policy means that innovative drug companies can obtain more financing to invest in R&D, production, sales and other business activities, and the capital market has more abundant liquidity for investmentFactors such as exchange rates and interest rate differentials can affect the premium between AH sharesAs a result of the above factors, the market expects that the future of innovative drug companies will become better, and the risk appetite will rise, and the strong beta attribute will be highlighted, starting the bull market of innovative drugs**.
The Fed's interest rate hike expectations affect the valuation trend of innovative drugs. Due to the high proportion of the forward value of innovative drugs, the RNPV valuation system is greatly affected by the discount rate, which in turn is greatly affected by the change of the benchmark interest rate. During the interest rate cut cycle, the discount rate shows a downward trend, and innovative drug companies with large potential market space and a high proportion of discounted forward cash flow will have greater market value flexibility in the future. Therefore, interest rate cuts are the "charge" of innovative drugs. Through the review, we found that the S&P Biotechnology Index (XBI)** price has been inversely correlated with the 10-year Treasury yield for most periods.
U.S. Treasury interest rate trend: the downward trend is certain, but there are short-term risks. According to the "How Much Downside Is There in U.S. Treasury Rates?", released by Everbright's macro team on December 22, 2023——Deconstructing the United States Series III", The downward trend of the U.S. bond interest rate is the general direction, but considering that it may be difficult to achieve the necessary conditions for interest rate cuts in the first quarter of 2024, the volume of U.S. bond issuance in the same period is still at a historical high, and the downward range of U.S. bond interest rates may be relatively limited.
2.1.2. The transmission of macro factors to the performance side of overseas CXOs is faster than market perception
How long will it take for macro factors to be transmitted to the performance side of CXO companies?We found that after the macro factors changed, the transmission from investment and financing to overseas CXO performance was completed in the same year, faster than market perception. Specifically:
Treasury Yield XBI Index Performance: In July 2020, the 10-year Treasury yield fell from a bottom of 0It started at around 6%** and fell back to a high of near 5% in October 2023The XBI index retreated from its highs in February 2021 and maintained its consolidation after reaching a phased low in May 2022.
XBI Index Performance Investment and financing in the U.S. biomedical sector: In February 2021, the XBI index retreated from its highs. In 2022, investment and financing in the U.S. biomedical sector decreased by 27% year-on-year to US$35.8 billion, and the amount of investment and financing was slightly higher than in 2020;It is worth noting that in 2021, the amount of investment and financing in the U.S. biomedical field increased by 38% year-on-year, which includes the increase in the amount of investment and financing in the CGT field driven by the new crown mRNA vaccine.
Performance of CXO companies in the investment and financing of the U.S. biomedical field: Most of the overseas CXO companies will experience a decline in revenue growth in 2022. Most of the overseas revenues of domestic CXO companies will still maintain rapid growth in 2022, especially those that have received large commercial orders. That is, the impact of the decline in the scale of investment and financing in the U.S. biomedical field on the performance of overseas CXO companies will be reflected in 2022, not in the next year. The scale of investment and financing in the United States has fallen, and the transmission of the performance of domestic CXO companies has taken longer, and we believe that the reasons include the accelerated transfer of CRO orders from overseas to China in 2021, and part of the execution cycle to 2022;The execution time and revenue recognition time of large commercialization orders received by some domestic CDMO companies are later than the clinical stage orders of related drugs undertaken by overseas clinical CROs.
2.1.3. Reason: The experience of overseas pharmaceutical companies in dealing with macro cycles is relatively mature
Why is the transmission of macro factors to the performance side of overseas CXOs faster than market perception?First of all, we look for the answer by reviewing and pulling it to a longer time dimension. We found that during the development period of the global CRO industry, the year-on-year growth rate of global pharmaceutical R&D investment was 112%~21.5% range, during which the year-on-year GDP growth rate of the United States was 33%~12.Between 2%, the growth of the CRO industry is mainly driven by the continuous increase in R&D investment. During the period of continuous growth of the global CRO industry, affected by the financial crisis, major pharmaceutical companies around the world have reduced their R&D investment, and even experienced negative growth in 2009 (the year-on-year GDP growth rate of the United States in 2009 was -2%, which is also negative growth), and the growth rate of R&D investment of major pharmaceutical companies remained low until 2019. During this period, a number of biotech companies emerged, which were relatively more dependent on the services of CRO companies. Therefore, during the period from 2008 to 2019, the scale of the CRO industry still grew at an annualized compound growth rate of about 12% per year, which was much higher than the growth rate of R&D investment in the same period, mainly driven by the continuous increase in outsourcing rate.
We believe that after several rounds of economic cycles, overseas Pharma and Biotech have relatively mature experience in dealing with economic fluctuations. In terms of industrial division of labor, after 2008, a pattern has been formed in which large-scale Pharma is more responsible for clinical R&D and commercial promotion, and Biotech is more responsible for preclinical and early clinical R&D. In the event of the adjustment of innovative drugs** and the weakening of pharmaceutical financing, Pharma's R&D investment in late-stage clinical projects will maintain steady growth, but it will strengthen fixed asset management and increase the outsourcing of late-stage and commercialized CDMO projectsBiotech will reprioritize its pipeline to focus on advancing its key late-stage pipelines and reducing preclinical spending. The impact of the above changes in investment and financing on the performance of overseas CXOs was basically in the current year, especially for preclinical CRO companies and CDMO companies that are driven by growth as early-stage projects. Thanks to the increase in outsourcing rate, the integrated platform of CXO leading companies can still achieve relatively stable performance at this stage. The logic behind the above macro cycle response strategies adopted by pharmaceutical companies is that their business essence is that cash flow is king. Large-scale Pharma has formed a complete cash flow cycle of sales and research, while Biotech needs to switch from financing cash flow to sales cash flow in order to grow into BioPharma. Therefore, we believe that the improvement of the macro environment and the repair of innovative drugs** will enhance the confidence of pharmaceutical companies in future cash flow to a certain extent, and then strengthen the investment in R&D of early-stage pipelines, which will correspondingly drive the demand side of CXO.
2.2. Look at marginal changes from a micro perspective
2.2.1. Biotech's financing warmer drives the improvement of overseas CRO order indicators
The marginal change in the orders of overseas CRO companies is one of the "internal indicators" to judge CXO's external demand. In the field of overseas pre-clinical CROs, Charles River, for example, its orders in hand have declined in stages due to Biopharma's re-prioritization of its R&D pipelineThanks to the continuous positive growth of Biotech's financing, its order cancellation rate and net order-to-bill ratio improved in 23Q3 from the previous quarter. In the field of overseas CROs, benefiting from the continuous warming of Biotech financing, the clinical CRO demand environment remained healthy, and the orders in hand of IQVIA, ICON and MEDPACE all achieved positive growth sequentially in 23Q1-Q3. In the field of overseas CDMOs, orders in new areas such as early clinical stages and CGTs, which are greatly affected by financing, performed poorly, while orders for back-end projects (high value-added small molecules such as Lonza ADC toxins and large molecules from Samsung Biologics) maintained rapid growth.
2.2.2. Based on the judgment of overseas CRO companies, the inflection point of Biotech financing is being established
The inflection point of overseas biotech financing is being established. According to Bioworld data, in 23 quarters, the amount of financing of Xinxing Biotech was 17,118.7 billion US dollars, an increase from the previous quarter. 4%；In the first three quarters of '23, the total amount of emerging biotech financing was +8% year-over-year. In terms of judging the inflection point, based on the judgment of the management of overseas clinical and clinical CRO companies, in view of the continuous recovery of biotech financing in the first three quarters of 23 and the stabilization of the financing environment, overseas CRO companies remain cautiously optimistic that this positive trend will continue until 2024, that is, the upward inflection point of overseas biotech financing is being established.
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. It is worth noting that the number of investment institutions with **guidance** and state-owned assets has increased from more than 60 in 23H1 to more than 70 in 23Q3, indicating that local governments are continuously increasing their support for investment and financing in the biomedical industry. Is the domestic biotech financing bottoming out?We have analyzed this from three aspects. First of all, to determine whether the valuation system of innovative drugs in China is stable, we analyze the medical insurance payment policies that affect the long-term cash flow of innovative drugs, as well as the review and approval policies that affect the success rate of innovative drugs and the intensity of "involution". The second is to judge whether the valuation space of domestic innovative drugs is opened, and we summarize the cashing rhythm of the logic of domestic innovative drugs going overseas. 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 biotechs must be listed and develop into Pharma.
3.1. The policy framework is becoming more and more mature, and the domestic valuation system of innovative drugs is stabilized
What role does the policy environment play in CXO's domestic downstream demand?As the policy framework for the review and approval of innovative drugs and the payment of medical insurance becomes more mature and stable, the homogenization of a large number of me-too innovative drugs will be improved in the future, and innovative drugs with high clinical value will obtain a more friendly commercialization environment at the terminal, and the downstream innovative drug industry is gradually entering a new stage of development driven by innovative research and development.
3.1.1. The marginal warming of medical insurance payment promotes the transformation of clinical value into commercial value
In terms of medical insurance payment, the policy environment for innovative drugs is marginally improving. For example, on July 21, 2023, the National Health Insurance Administration (NHSA) announced the Rules for Negotiating Drug Renewals and the Rules for Non-Exclusive Drug Bidding, which include: (1) Establishing rules for adjusting payment standards that basically cover the entire life cycle of drugs. From the perspective of international experience, it is generally about 8-10 years for a drug to reach its peak from marketing to sales. Thanks to the promotion of the dynamic adjustment mechanism, the process of the Chinese market has accelerated. Accordingly, the Renewal Rules propose that negotiated drugs that have reached 8 years old be included in the regular catalogue management;For drugs that have been negotiated for less than 8 years, if the varieties with a continuous agreement period of 4 years or more are easily renewed or the price reduction is triggered by new indications, the reduction rate will be halved. The above adjustments are conducive to stabilizing corporate expectations, reducing the pressure of price reduction in the later stage, and reducing the possibility of failure to renew. (2) Further reflect the support for innovation. In order to further reflect the support for "true innovation", it has been added that for Class 1 chemical drugs, Class 1 ** biological agents, Class 1 and Class 3 proprietary Chinese medicines approved in accordance with the current registration management measures, when the renewal triggers the price reduction mechanism, you can apply for renegotiation to renew the contract, and the National Health Insurance Administration will organize experts to calculate according to the procedure, and the reduction rate of negotiated renewal does not have to be higher than the reduction stipulated in the simple renewal. (3) In 2023 and 2024, the price of new crown drugs will not be reduced if they are renewed. Considering the inflexibility of the new crown epidemic, if the actual expenditure of drugs included in the national "Diagnosis and Treatment Plan for Novel Coronavirus Infection" exceeds the budget, the price will not be reduced when the contract is renewed in 2023 and 2024. Judging from the draft of the negotiation renewal rules in 2023, under the premise that the overall policy framework remains stable, the rules for the renewal of innovative drugs will be further refined, and the payment policy environment will be more friendly, which is conducive to the sales of innovative drugs in China. For innovative drugs entering the medical insurance, the long-term price reduction pressure is expected to be significantly alleviated, and the discounted forward cash flow will get a better valuation environment in the RNPV valuation system. In addition to the support for innovation reflected in the policies negotiated by the state, local medical insurance bureaus have also successively introduced medical insurance payment support policies for innovative products, such as separate payment in Hubei, payment excluding DHS-DRG in Beijing, and multiple payment mechanisms in Shanghai, which are expected to have a positive impact on the sales of innovative drugs in clinical terminals.
3.1.2. The evaluation standards are becoming more and more stringent, and the intensity of "involution" of high-quality innovative drugs will be reduced
With the continuous maturity of China's drug evaluation system, the evaluation standards for innovative drugs have been gradually improved. For instance, on July 27, 2023, the Center for Drug Evaluation of the State Food and Drug Administration issued the Technical Guidelines for Patient-Centered Drug Clinical Trial Design (Trial), the Technical Guidelines for the Implementation of Patient-Centered Drug Clinical Trials (Trial), and the Patient-Centered Technical Guidelines for Drug Benefit-Risk Assessment (Trial). Higher requirements are put forward for the design and implementation of drug clinical trials, for example, it is pointed out that the selection of the best and accessible control for the subjects is pointed out: the selection of the control group in the clinical trial should fully protect the rights and interests of the subjects and comply with ethical principles. As the accepted standard** protocol is constantly being revised, it is expected that the selection of the appropriate control group will change over time. Therefore, it is recommended to select the best and accessible ** in current clinical practice on the basis of combining patient experience data, pay attention to other available **, evaluate the dynamic changes of **demand in the future period**, and prospectively select the control group. In general, it should be avoided to use sub-optimal ** as a control to influence the participant's ** choice. If the criteria for the target indication change during the clinical trial, the subjects should be informed in a timely manner to ensure that the subjects fully understand the other options and the right of the subjects to choose whether to withdraw from the trial. The improvement of the standard of the clinical trial control group undoubtedly puts forward higher requirements for the future research and development of innovative drugs, and only by showing advantages compared with the best and accessible methods in the current clinical practice can we gain greater advantages in the drug review process in the future. In addition to the increase in the requirements of the control group, in recent years, the CDE has also intensively issued various guiding principles for drug research and development to promote the development of innovative drugs towards a more standardized approach. It can be expected that with the tightening of the review policy, the review standards for domestic innovative drugs will become more and more stringent in the future, and only innovative drugs that truly demonstrate clinical advantages can be successfully approved for marketing, and once successfully approved, the competitive landscape will be more ideal, and the intensity of "involution" will be reduced, so as to have a better commercialization environment.
3.2. Domestic innovative drugs are gradually fulfilling the logic of going overseas and opening up the valuation space
In recent years, many companies have disclosed excellent data at international academic conferences, and overseas innovative drug manufacturers have also frequently introduced domestic innovative drugs. In the long run, the logic of domestic innovative drugs going overseas is expected to be gradually realized, and the clinical value will be transformed into commercial value on a global scale, that is, to break through the domestic market and open up long-term valuation space.
3.2.1. Overtaking in corners from lisence-in to lisence-out, ADC, etc
From liscence-in to liscence-out, when domestic innovative drugs go overseas. Pharmaceutical licensing transactions (liscence-in or liscence-out) are an important way for pharmaceutical companies to commercialize and globalize. With the accelerated development of domestic innovative drugs, the number and proportion of liscence-out have been increasing in recent years. In 2020, the number of liscence-out projects doubled from 32 in 2019 to 74, which is widely regarded as the first year of liscence-out in China. In 2022, the proportion of license out transactions in China reached a record high, increasing from 14% in 2017 to 28%. The above shows that overseas recognition of the innovation ability of Chinese pharmaceutical companies is increasing, and the realization of overseas expansion through liscence-out will help them improve the profitability of related drugs.
Domestic innovative drugs are "overtaking in corners" in new fields such as ADCs. It is worth noting that in recent years, some domestic innovative drug companies have achieved corner overtaking in new fields such as ADC drugs and bispecific antibody drugs. Taking ADC as an example, according to the data of Pharmacube, the United States and China have the largest number of transferors in ADC licensing transactions, reaching 15 in 2022. Why can domestic ADC drugs frequently liscence-out?ADC drugs are a combination of large and small molecules, and process development and analysis require interdisciplinary technical capabilities. Due to the strong chemical synthesis capabilities of many domestic enterprises, coupled with the accumulation of biologics development over the past decade, and the excellent ability of combinatorial innovation, Chinese pharmaceutical companies have shown unique advantages in the process of global ADC drug research and development. The above has helped some domestic enterprises to achieve "corner overtaking" in the field of ADC.
3.2.2. The domestic PD-1 is in Meiding**, and the logic of going to sea is strengthened
What is the value of commercialization of domestic innovative drugs after they go overseas?Despite some twists and turns, some of China's innovative drugs have firmly entered the commercialization harvest period, and these products are characterized by differentiated advantages
Zanubrutinib-Efficacy: BeiGene's proprietary BTK inhibitor has demonstrated efficacy advantages in head-to-head clinical trials with ibrutinib, the world's first BTK inhibitor. It was approved by the FDA for marketing in the United States in November 2019, which is a successful case of independent overseas expansion. In 2020-22, zanubrutinib sales in the U.S. were 018/1.16/3.$9 billion, a multiplication.
Cilta-cel-Differentiated Target: The first CAR-T drug approved in the U.S. in China, Legend Biotech has selected the differentiated BCMA (B-cell maturation antigen) over the crowded CD19 CD20 target. It was approved for marketing in the United States, Europe and Japan in February, May and September 2022, and was jointly launched by Legend Biotech and Johnson & Johnson. In 2022, cilta-cel achieved sales of 1$3.4 billion.
Toripalimab - Differentiated Indication: It is a PD-1 monoclonal antibody independently developed by Junshi Biosciences and has 5 FDA orphan drug designations. In 2022, FDA on-site verification of the drug was hampered by international travel restrictions. On October 29, 2023, Junshi Biosciences announced that toripalimab became the first and only immunological** drug approved for nasopharyngeal carcinoma** in the United StatesIts partner, Coherus, announced that the 240mg package of toripalimab is priced at 889203 USD bottle, equivalent to about 6 RMB30,000 yuan, about 1912 after the domestic medical insurance was included96 yuan bottle of ** 33 times.
3.3. In addition to IPO, what are the exit paths for investing in unprofitable biotechs?
Since 2022 (as of December 22, 2023), the number of biopharmaceutical companies listed on the STAR Market has decreased, with a year-on-year decrease of 38% in 22 years. Among the 106 companies listed since 2019, 17 have not yet made a profit, of which 9 are now lower than the issue price. In addition to the IPO, is there any other exit path for Tier 1 funds to invest in unprofitable biotechs?
In the context of the cold investment and financing of domestic biopharmaceuticals, and the strong financial strength of traditional pharmaceutical companies and leading biopharma, biotech and pharma may accelerate the differentiation of industrial roles, and biotech will focus more on R&D after divesting its back-end business. Referring to the experience of large overseas Pharma, its development is accompanied by continuous mergers and acquisitions to expand its business in new targets, new technologies and new markets. For example, on March 13, 2023, Pfizer announced the acquisition of Seagen, a leader in ADC, for $43 billion, with synergistic product pipelines complementing each other, and Pfizer expects Seagen to contribute more than $10 billion in risk-adjusted revenue in 2030 and could grow significantly beyond 2030. To sum up, with the rise of mergers and acquisitions in the domestic innovative drug industry, mergers and acquisitions are also a better way for first-class pharmaceutical investment institutions to exit funds.
This article is for informational purposes only and does not represent any investment advice from us. To use the information, please refer to the original report. ）
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