CXO is unyielding!

None of the leading mines exploded, Q3 high growth and the past glory is no different, the market waiting for the cycle turning point failed again.

This is CXO's final stubbornness.

"Is it important for China to win a Nobel Prize or a Li Ge?" Luo Peizhi, founder of Tianyan Pharmaceutical, commented on Peking University alumni in 2015. Time has passed, the value of Tianyan Pharmaceutical in the US stock market is close to zero, and pharmaceutical Ming system has turned to low profile.

Since September 30, the company has spent HK $2.328 billion to buy back 50,7201 shares and cancelled them all. Wuxi Apptec ended its H-share offering, forgoing more than HK $4.5 billion at the year's lowest price of 57.9 yuan.

IQVIA, Charles River, LONZA, Medpace, on October 25 respectively up 10.1%, 9.1% and 5.7%, 37.7%, igniter domestic CXO.

Medpace, a large and medium-sized clinical CRO serving biotech companies, raised its revenue guidance for 2022 to 26.1 percent to 27.8 percent due to strong demand from biotech companies. IQVIA2022 fiscal year third quarter reported (cumulative) net profit of 864 million US dollars, year-on-year growth of 33.3%.

After becoming a behemoth, overseas CXO has not stalled, but only shifted from high growth to stable growth. They are the mirror image of domestic CXO in the future, and cyclical anxiety should be greatly eased.

But, weighed down by three negative expectations, CXO's valuation will never go back.

01

The head CXO showed no signs of fatigue

Wuxi Apptec's third-quarter results sent a signal that CXO is still humming, with its full-year 2022 revenue growth target revised from 68-72 percent to 70-72 percent.

Wuxi AppTec Q3 revenue of 10.639 billion yuan, net profit of 2.742 billion yuan, withholding non-net profit of 2.382 billion yuan, respectively up 14.6%, -8.3%, 11.5%, beyond expectations. Excluding COVID-19 commercial production projects, the chemical business segment saw revenue growth of 38.3% year on year, which was in the higher range. Contractual liabilities were 4 billion yuan, an increase of 800 million yuan from the previous quarter. The total number of employees is 45,646, which increased by 5930 compared to the last quarter, with a quarter-on-quarter growth of 14.9%. It may be one of the most impressive employers in the graduation season. Under the continuous and repeated impact of the epidemic in many places, the company showed a strong operation capacity, the capacity utilization rate continued to improve, and the growth rate of net profit exceeded the growth rate of revenue in the same period.

In the special period, Wuxi AppTec has the operating resilience, including scale effect, global layout, multi-location operation and the advantages of the whole industrial chain coverage, which are not possessed by most of its peers.

After this wave of share buybacks, Pharmatbio updates its progress in a vague manner, with an additional 120 projects expected in 2022 and continued growth through 2023. Reconfirm revenue and profit forecasts for 2022.

The number of comprehensive projects in the first half of the year has increased by 126, and the annual target is unknown.

Pharmaron, also an integrated CXO platform, saw sequential growth in Q3 revenue and net profit, showing a trend of recovery. In the first three quarters, the laboratory service revenue was 4.577 billion yuan, with a year-on-year growth of 38.6%, and the CMC(small molecule CDMO) service revenue was 1.680 billion yuan, with a year-on-year growth of 37.3%. The mature business was still in a reasonable expansion state. Emerging businesses (clinical, macromolecule and CGT) have lower gross margins in the integration and input phase.

Tiger Pharma's position as the king of clinical CRO is rock solid. The non-net profit of Q3 was 421 million yuan, up 29% year-on-year and 7.1% quarter-on-quarter. The main business has achieved quarter-on-quarter growth for 10 consecutive quarters. Income from changes in fair value in the first three quarters was 403 million yuan, down 64% year-on-year. Contract assets were 2.08 billion yuan, an increase of 61.8% over the beginning of the year and 17.8% over the previous quarter. Contract liabilities were 1 billion yuan, an increase of 26.6% over the beginning of the year. In contrast, Wuxi AppTec's clinical CRO and SMO revenue in the first three quarters was 1.135 billion yuan, up 4.6% year on year, a significant slowdown in growth. Pharmaron's clinical research services have a gross margin of just 10.2 per cent, which is flat or at a slight loss and will only be profitable next year.

Zhao Yan new drugs storm, but full orders, all the way to the strong still unbreakable. Q3 net profit was 261 million yuan, up 176.9% year-on-year and 6.1% quarter-on-quarter. Excluding the impact of unrealized income from changes in the fair value of biological assets, interest income and exchange gains and losses, the non-net profit of the first three quarters increased by 71.0% compared with the same period last year. Contractual liabilities of RMB 1.5 billion, an increase of 10% over the previous quarter. At the end of the third quarter, the company's orders on hand exceeded 4.6 billion yuan, which is expected to increase by more than 50% year-on-year. Productive biological assets of 785 million yuan, an increase of 0.9 percent from the previous quarter, monkey also slightly increased in price. According to previous performance, Q4 net profit is the highest for the whole year, the annual performance is expected to reach the upper limit of institutional forecasts. To establish evaluation capability for emerging hot areas of development (CGT, nucleic acid drugs, exosomes, innovative delivery system drugs). Its subsidiary, Qichen Biology, has established animal disease models on a large scale, and will continue to expand its production capacity in the second half of the year to improve the high-throughput production line of gene editing models. Wuzhou experimental monkey base construction has been basically completed.

The COVID-19 single is both honey and poison for Kellein. According to the estimate of 60% of the revenue of COVID-19 business, Kelleying's regular business revenue in the first three quarters was 3.1 billion yuan, up 7% year on year, and its capacity was crowded out by Pfizer's big order. In the first three quarters, the revenue of small molecule business was 7.136 billion yuan, up 168% year on year; the revenue of emerging business was 671 million yuan, up 154% year on year; and the revenue of domestic market was 1.09 billion yuan, up 160.7% year on year. The balance of cash and cash equivalents at the end of the period was 6.3 billion yuan, an increase of 5.9 billion yuan over the same period of last year, mainly due to the collection from the over-allotment of H shares and the COVID-19 pandemic.

Number of VC/PE investment and financing events in China's Innovative pharmaceutical sector Data sources: Arteria.CN, China Merchants Securities (Hong Kong); Note: The number of investment and financing events does not include companies that have not disclosed the amount of financing

02

Three clouds lay on top

The CXO is a bright light against the backdrop of recession, a march in slow times. Most brokerages predict that the top CXO's regular business (excluding the COVID-19 project) can maintain a growth rate of more than 35 percent in the next two years.

But with the clouds on top, CXO is out of date, hiding in a cave of low valuations.

overcapacity

Sherpa Biology, a subsidiary of Cinda Biology, has become the second largest CDMO by capacity in China since its debut.

The earliest motivation was to solve the potential surplus capacity of Cinda Biological and improve the efficiency of asset use. The idle capacity and material inventory of innovative pharmaceutical enterprises need an export consumption, and CDMO becomes a direct solution. Finally, Xinda Biological divided the CMC team of more than 1000 people to establish a professional CDMO.

Whether Xinda Bio's move will divert traditional CXO business is still uncertain, but the current threat is not to be underestimated. Sherpa, sea turtles, master, doctor accounted for over 30%, 4 commercial products operating experience, and completed several drugs declare China, the United States, Europe, eight aid drug complete commercial listed at home and abroad, is China's most commercial production of biological medicine service CDMO company, has completed more than 400 batches of commercial production, The success rate of each batch is 100%.

Sherpa Bio has a commercial antibody chemical plant with a capacity of 60,000 liters and is in the process of building another 170,000 liters. What order of magnitude is that? Pharmatech's new plants in the US, Ireland and China will open in the second half of the year with a total capacity of 262,000 litres by the end of the year.

Rongchang Bio-related enterprise Maiberui Bio-layout ADC-CDMO, has submitted the GEM IPO application.

Fang Jianmin is the chairman of Macquarie. In 2019, 2020 and 2021, the revenue of Mulberry from related party customers accounted for 27.88%, 30.06% and 21.22%, respectively, mainly from the CDMO service revenue of Prosperity Biologic. Major customers also include Hengrui Pharmaceutical, Henson Pharmaceutical, CP Tianqing, Xinda Biological, Junshi Biological, Corning Gerui, Heavenly Biological.

With a revenue of 388 million yuan in 2021 and an existing production capacity of 27,000 liters, Maibrelli has 9 production lines for protein drug cell culture, including 12 sets of 2000L disposable cell culture bioreactors from three international brands: Sartoris, Sitopan, and Thermerfeil. Maibrelli also has ADC coupling reactor that can meet commercial needs. The total scale of bioreactor in domestic bio-drug CDMO enterprises ranks the second.

On the old turf, CXO's new medical infrastructure is still going strong. The fixed assets and projects under construction of the 18 representative CXOs continued to grow, increasing to 29.27 billion yuan (+62.1%) and 15.02 billion yuan (+52.3%) respectively. The current situation is that the industry demand continues to strong order saturation, capacity utilization is maintained at a high level. Logical linear extrapolation is the expansion of capacity, which can be turned into incremental performance in the future.

Keep the music, keep the dance.

Decline in investment and financing

The capital winter of biomedicine got colder in October.

According to Arternet, the global health industry comes from VC/PE monthly investment and financing (excluding IPO/SPAC/

Post-ipo financing) was $4.1 billion in October (down from the January-September average of $6.7 billion).

Healthy investment and financing volumes in China were even more dismal, at $600m in October (down sharply from the January-September average of $1.7bn), mainly due to a 44 per cent year-on-year decline in average event financing and a 42 per cent year-on-year decline in the number of events. None of the sub-sectors has seen a $100 million-plus event since September, compared with six in August.

China's innovative drug investment and financing was weak in October, with 3mMA (three-month moving average) down 68 per cent year on year, mainly due to a decline in the number of events to 20 and average event financing to US $21 million. Top ten financing events in the global innovative pharmaceutical sector, Chinese innovative pharmaceutical companies were absent for two consecutive months.

The cold air passes to the CXO. Wuxi AppTec's domestic drug research and development service (DDSU) revenue in Q3 this year was 217 million yuan, down 30.3% year on year, accelerating the contraction. Adjusted Non-IFRS gross profit was 49 million yuan, down 58.5% year on year, and gross profit margin was 22.7%. Forced to iterate towards the discovery of potential best-in-class molecules and new molecular classes, the company is working on 15 preclinical projects for customers on new molecular classes, including polypeptide/polypeptide-coupled drugs (PDC), protein depressors and oligonucleotides.

It is of positive significance in the long run that domestic innovative drugs are de-homogenized and innovated to the source.

The short-term travails of innovative drugs have not shaken CXO's fundamentals because most of its revenue comes from overseas. According to the Chinese Journal of Pharmaceutical Biology, the contribution rate of the North American market to the company's revenue is 54.1%, the contribution rate of the Chinese market is 24.9%, the contribution rate of the European market is 18% and the contribution rate of other markets is 3%.

For the CDMO industry, perhaps 95% of the market is outside China, especially in the context of the current "overcapacity" in the domestic biopharmaceutical industry. If companies can serve the global market, there will be no "overcapacity", said Chen Zhisheng, CEO of Wuxi Biotech.

He believes that most innovative drug companies are based on the domestic market, and it may take five, ten or more years to really go out. However, most CDMO companies serve the global market, and the European and American markets account for a greater proportion of revenue.

But CXO's perceived superiority abroad creates a paradox.

Geopolitical risk

Moving out of the UVL list is not the end point.

When CXO is asked about decoupling, the usual response is that international geopolitical factors have not had a material impact on the company's business. CDMO serves for the development of new drugs, and there is always a health need. The background of the rise of CDMO is that big foreign pharmaceutical companies improve efficiency and reduce costs through professional outsourcing. At present, Europe and the United States are trying to control inflation and reduce the cost of health care. There is a greater need for outsourcing professional services. Domestic CDMO market share is not very high in the global market, and the growth rate is significantly higher than the global market, this business will have very good opportunities.

According to Zheshan Securities, the overseas market share of the nine local CXO leaders in 2021 is only 9.13%, which is still at a low position. Under the background of domestic labor cost advantage, unique business model and delivery efficiency unchanged, there is still a large room for improvement in the overseas market share, which will continue to drive orders and performance at a high growth level.

Capacity decoupling is unlikely for the time being. The US pharmaceutical industry sits at the top of the food chain, grabbing the most lucrative slice of the global division of Labour. Pfizer's oral drug Paxlovid had sales of 9.6 billion U.S. dollars in the first half of the year, while the three Chinese pharmaceutical companies, Apptec, Kellein and Berium, together confirmed the revenue of major orders for COVID-19 of less than 1.5 billion U.S. dollars in the first half of the year.

The domestic CXO is a part of the low value in the division of labor of the global pharmaceutical industry chain, and the US has no motivation to change this situation. In addition, the cost will be out of control if the bio-manufacturing returns to the local production in the US.

However, the possibility of technical limitations still exists, and supply chain risks have not been eliminated.

The luxury production lines of Mulberry are all imported from well-known global brands. More than 90% of its scientific instruments are imported. Chen Zhisheng said that the procurement volume of Pharmingbio is large, and the purchase volume of materials and equipment reaches tens of billions of yuan every year. At present, the upstream equipment and raw materials are mainly imported. It is estimated that part of the hardware of the bioreactor can be made in six months to one year, and the localization cycle of the ultrafiltration membrane package will be longer, which may take 1-2 years.

The United States' restrictions on biotechnology are still in the framework stage. The more it goes through the chip sanctions process, the more precise the crackdown measures will be.

More targeted restrictions cannot be ruled out in the biotech sector, and CXOs are still spooked.

CXO has a global layout to avoid possible risks. It has R&D and production bases in the United States, Ireland, Germany and Singapore, which can be switched flexibly if required.

But it is not without its countermeasures. This year has been full of geopolitical surprises.

The internal growth of CXO is still strong, but the external environment is harsh