CXO -- Booming industry and strong demand for R&D

In recent years, with the deepening of the understanding of various targets and the progress of new technologies, innovative drug research and development has continued to rise. The rapid growth of the global pharmaceutical market, driven by the successive approval of innovative drugs and the expansion of new indications, has accelerated the development of the CXO industry under the strong demand for innovative drug research and production. In the medium to long term, we believe that the CXO industry is expected to continue to thrive, and major companies have good performance certainty and growth potential.

The CRO industry mainly serves the drug discovery and clinical research stages, and is more inclined to the early stage of drug R&D. Therefore, the prosperity of the CRO industry is more related to the global investment in pharmaceutical R&D, the number of innovative drug pipelines, the investment and financing situation of the pharmaceutical industry and the industry penetration rate, etc. The CDMO industry serves the clinical research and commercial production stages of drugs, among which the commercial production of drugs makes a greater contribution. The CDMO industry's prosperity is highly correlated with the global sales of innovative drugs.

According to Frost & Sullivan, the global innovative drug market will grow from $822 billion to $961.6 billion from 2017 to 2021, with a compound annual growth rate of about 4%, and the combined revenue of the top 20 global innovative drug companies will grow at a compound annual growth rate of 9.9% during the same period, which is higher than the average growth rate of the global innovative drug market. We believe that the steady growth of revenue of the top innovative drug companies will help expand the scale of the innovative drug CDMO market on the one hand, and the continuous growth of revenue will also help companies maintain high R&D investment intensity and promote further prosperity of the CRO market on the other.

As global pharmaceutical companies continue to invest in R&D, the GAGR of global drug R&D spending from 2016-2021 is 7.4%, and global drug R&D spending is expected to reach $295.4 billion by 2025, which will still maintain a compound growth rate of 7.2% from 2021-2025.

The combined R&D expenditure rate of the top 20 global innovative drug companies remains at a high level of about 20%, with R&D expenditure growing from $99.3 billion in 2017 to $135.6 billion in 2021, accounting for about 60% of global drug R&D, with a CAGR of 8.6%, higher than the average growth rate, which shows that the top innovative drug companies are still the main force of R&D investment in the global pharmaceutical industry. The R&D investment of listed pharmaceutical companies in China's secondary market is also continuing to increase.

The number of global drug R&D pipeline is growing rapidly, according to Informa Pharma Intelligence data, the global number of drugs under development increased from 5,995 in 2001 to 20,109 in January 2022, with a CAGR of about 5.8%, showing that global innovative drug R&D is still relatively active. The number of INDs (biologics + chemicals) in China increases from 452 to 1,777 from 2017-2021, with a GAGR of 41%, making China's growth rate ahead of the world. The importance of biotech and biopharma companies is increasing in global innovative drug development. The number of R&D pipelines of the top 10 and top 25 companies in the world has been decreasing in recent years, and the number of R&D pipelines of small biotech companies with only 1-2 drugs in the pipeline has also declined since 2021. From the above data, we can also speculate that mid-sized biotechs and biopharma companies are the leading drivers of global innovative drug R&D at this stage, as their R&D pipeline share has increased.

According to Frost & Sullivan's forecast, the global CXO industry will continue to grow rapidly in the next five years, with Chinese companies steadily increasing their market share by virtue of the engineer bonus and other advantages. For Chinese CXO companies, foreign orders mainly come from drug discovery phase R&D services and drug process development and manufacturing services with strong offshore attributes.