Core Logic:
The demand for generic drugs in China continues to be strong. The domestic generic drug market is expected to exceed 900 billion yuan, and the overall demand for centralized procurement background continues to be high, with 2,315 generic drug registration applications accepted in 2022 (+29%), and the number of declared varieties is still increasing year by year.
Generic CXOs are expected to continue to boom. The domestic market size of generic CRO is expected to exceed 20 billion, and we expect to continue to have a high degree of prosperity: 1) the high-quality requirements of policies such as MAH and consistency evaluation, the competition between difficult generic drugs and the first generic drug, generic CRO also has not low barriers, and the gross profit margin of generic CRO companies is in the forefront of the industry; 2) Generic CROs are all domestic businesses, which are basically immune to the impact of overseas macro environment and pharmaceutical investment and financing; 3) The generic CRO model continues to be upgraded, from entrusted R&D to independent R&D transfer, from one-time income to long-term equity sharing, providing a certain guarantee for its long-term growth; 4) Generic CROs are also expected to enter the innovative drug track in the future;
Generic CXOs have high growth and low valuations, and the current environment is expected to usher in valuation reshaping. The performance of generic CRO companies is outstanding, and the revenue of Baicheng Pharmaceutical in 2023Q1-3 increased by 69%.7%, Sunshine Nuo and 397%, Wanbang Pharma 334%, Wind consensus expects that in 2024, Baicheng Pharmaceutical is only 186 times, Sunshine Nuo and 245 times (as of January 24, 2024), we believe that there is a large expectation gap in the industry, which is expected to usher in a valuation reshaping;
1. The demand for generic drugs is still strong
Generic drugs are still an important part of the domestic drug market. Generic drugs are drugs with the same active ingredients, dosage forms, routes of administration and the best effects as the original drugs, as an important part of China's pharmaceutical market, occupy a position that cannot be ignored
The domestic generic drug market will still exceed 900 billion in 2021. According to the report information released by the China Pharmaceutical Industry Information Center, the scale of China's generic drug market in 2021 will be 906.9 billion, a year-on-year increase of 74%, even in the context of several years of centralized procurement + new crown epidemic, the scale of the generic drug market is still considerable;
The number of domestic generic drug declarations is still growing rapidly. The number of CDE generic drug registration applications has maintained a growth trend in recent years, reaching 2,315 in 2022, a year-on-year increase of 29%.
In the context of standardized + cost-controlled pharmaceutical policies, generic drugs are expected to continue to benefit.
In recent years, the national drug policy has continued to be standardized, the MAH policy and consistency evaluation system have put forward high requirements for drug quality, and at the same time, measures such as centralized procurement have also clarified the general environment of medical insurance cost control. Therefore, we believe that in the current policy environment, high-quality, cost-effective generic drugs are expected to benefit:
MAH (Marketing Authorization Holder) system and generic drug consistency evaluation system: The MAH system requires pharmaceutical companies to take primary responsibility for the quality of drugs throughout their life cycle; These two policies put forward high requirements for the drug quality of pharmaceutical companies, and enterprises with worrying drug quality will face rectification or even be eliminated.
Normalization of centralized procurement: Centralized procurement has been carried out to the ninth batch by 2023, and it has now become normalized, the traditional drug sales model has been broken, relative to the sales capacity, the priority product quality and stable ability of the dominant position have been improved, the industry pattern has been reshaped, and new players have the opportunity to enter the market in many drugs;
DRG DIP: The DRG DIP policy is gradually being piloted and promoted, and in the future, under the restriction of medical insurance payment according to the type of disease, the restrictions on drugs in hospital diagnosis and treatment may become more and more significant, and generic drugs with higher cost performance are expected to occupy more application scenarios in this environment. In the context of standardized + cost-controlled pharmaceutical policies, generic drugs are expected to continue to benefit.
2. Domestic generic CRO continues to be booming, and the future is promising
The prosperity of the domestic generic drug CRO industry continues to rise. The prosperity of the domestic generic drug CRO industry continues to rise. According to CICC Qixin data, the market size of China's generic drug CXO industry in 2022 will reach 20.6 billion yuan (including CRO and CDMO), a year-on-year increase of 205%。
There are also significant barriers to the research and development of generic drugs.
The goal of generic R&D is to achieve the "substitutability" of generic drugs and original drugs in clinical application, and under the clear requirements of the current consistency evaluation and MAH system, the R&D quality of generic drugs is high, and there are many difficult generic drugs in generic drugs, which have extremely high requirements for R&D technology; On the other hand, in the context of the normalization of centralized procurement and the expiration of patented drugs, generic drugs require a shorter R&D cycle, so that they can be approved before centralized procurement, or strive for the first generic after the expiration of patented drugs to obtain a first-mover advantage after the expiration of patented drugs.
From the perspective of gross profit margin, generic CXO companies lead the industry. In terms of the overall sales gross profit margin of 2023Q1-3, Baicheng Pharmaceutical is 67%, Sunshine Novo is 56%, and Wanbang Pharmaceutical is 51%, and the gross profit level is at the forefront of the industry.
The model is upgraded, from entrusted R&D to independent R&D transfer, from one-time income to long-term equity sharing.
Independent research and development: because its research and development is mainly for the generic of new drugs that have been marketed, there is a high uncertainty in the exploration of new drugs, in contrast, generic drug CRO has a clear goal, before receiving the order demand from pharmaceutical companies, can independently establish the varieties with future demand opportunities, in order to achieve advanced layout, in the future entrusted demand can save customer time through the existing results, enhance the certainty of research and development, improve bargaining power, from the investment of enterprise research and development expenses can be seen Baicheng Pharmaceutical, Generic CRO companies such as Sunshine Novo are actively laying out independent research and development projects.
The model is upgraded, from entrusted R&D to independent R&D transfer, from one-time income to long-term equity sharing.
Equity sharing: By bearing certain costs for pharmaceutical companies, generic drug CROs choose to sign sharing agreements with domestic pharmaceutical companies, which is expected to obtain long-term sustainable net profits from drugs, such as the valsartan amlodipine tablets project jointly invested by Baicheng Pharmaceutical and Huayuan Pharmaceutical Co., Ltd. in 2022 to obtain an equity share of 5691500,000 yuan, a total of 0900 million yuan, we expect the current cumulative profit share has exceeded 100 million. In the future, it is also expected to enter the track of innovative drugs.
Generic drug CRO companies are also expected to enter the innovative drug track, such as Sunshine Novo continues to increase the number of independent innovative drugs, establishes a drug discovery technology platform to focus on in-depth exploration of peptide-like innovative drugs, and the new drug PK PD technology platform focuses on PK PD macromolecules such as antibody drugs, cell and gene ** products, blood products, nucleic acid drugs, vaccines, etc., and the number of innovative drug bioanalysis projects in operation as of 2023H1 exceeds 60; As of 2023H1, Baicheng Pharma has a total of 10 innovative drug projects under development, of which BIOS-0618 tablets have been announced to obtain phase I clinical reports.
This is an abridged excerpt from the report, the original PDF of the report
Pharmaceutical Biology-Generic CXO Topic: The Industry Continues to Prosper High, and Valuation May Be Reshaped-Debang**[Chen Tielin, Liu Chuang, Zhang Jun]-20240126[Page 22].
Report**: Value Catalog