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China's CRO Farewell to the Golden Age of Profitability?

This year, CRO(contract research organization) concept stocks in China have generally performed sluggishly. Since April, major CRO companies have released their annual reports. The performance growth rate of most CRO companies has dropped from 70% to 200% to 30% to 40%. Some companies have experienced performance or profit decline for the first time.



Profitability Is Weakening


With the decline in the amount of investment and financing, and the introduction of policies to encourage clinical-oriented research and development, pharmaceutical companies are more cautious in setting up projects, and the changes in the international trade environment have led to fewer overseas orders, putting pressure on China CRO performance growth.


For the first time since Pharmaron went public, its performance declined, and its holdings were reduced by major shareholders.


The 2022 annual report shows that Pharmaron achieved an operating income of 10.266 billion yuan, an increase of 37.92% over the same period last year; net profit attributable to shareholders of listed companies was 1.374 billion yuan, a decrease of 17.2% over the same period last year.


The 2022 performance report released by Medicilon shows that the operating income is 1.702 billion yuan, a year-on-year increase of 45.85%; the net profit attributable to the parent is 363 million yuan, a year-on-year increase of 28.60%. But the growth rate is much slower than in 2021. In 2021, Medicilon's operating income will increase by 75.28%, and its net profit attributable to the parent company will increase by 118.12%. In the past 8 months, Medicilon's share price has been cut in half, and its total market value has shrunk by more than 20 billion yuan.


The 2022 annual report released by Tigermed showed that the main operating income was 7.085 billion yuan, a year-on-year increase of 35.91%; the net profit attributable to shareholders of listed companies was 2.007 billion yuan, a year-on-year decrease of 30.19%.


This is Tigermed's first net profit decline since 2017.


In this regard, Tigermed said, “The global clinical contract research organization market is increasingly competitive, facing competition in many aspects including price, service quality, service scope, flexibility, ability, timeliness of service provision, compliance with regulatory standards and customer relations. It needs to compete with multinational CROs and domestic small and medium-sized CROs and also compete with the customer's own development team. If it cannot effectively compete with existing competitors or newcomers, the business, financial status, and operating results will be adversely affected. In addition, increased competition would put pricing pressure on services and could reduce revenue and profitability."


High-End Production Capacity Is Still Scarce


Under the changes in policy and market environment, leading CRO companies have accelerated their business adjustments and reduced unprofitable projects.


Recently, WuXi AppTec responded to the news on the interactive platform and confirmed that the rumors of the closure of WuXi Shengji’s Lingang production base did involve some business adjustments, and relevant employees were laid off.


According to the 2022 annual report of WuXi AppTec, the annual revenue is 39.355 billion yuan, a year-on-year increase of 71.8%. Among them, the cell and gene therapy CTDMO(Contract Testing, Development, and Manufacturing Organization) business achieved revenue of 1.308 billion yuan, but the gross loss reached 106 million yuan, and the gross profit margin decreased by 6% year-on-year.


Regarding why the business has been reduced, some people in the industry believe that "the future of CGT(Competitive Generic Therapy) therapy is uncertain, and CGT CDMO has excess capacity, and the ebb of the entire biomedical capital has extended to the back-end CDMO of the industrial chain."


CITIC Securities pointed out that CGT is a new generation of precision therapy after small molecule and macromolecule targeted therapy, and is currently the most promising development direction in the field of biomedicine. The global CGT market is rapidly expanding, and upstream and downstream companies are expected to benefit from it. CGT has many advantages, but accessibility is one of the biggest problems.


CITIC Securities believes that there are three main characteristics of companies with competitive advantages in the CGT CDMO industry: first, having a patented technology platform for virus vector development or production; second, a CDMO platform that provides one-stop services; third, having a global production capacity layout. GCT therapy has a stronger demand for local production, which puts higher requirements on the overseas production capacity layout of China's domestic CDMO companies. Only companies with production capacity in Europe and the United States can expand to a larger market faster.


In the view of Liang Yuyu, managing partner of Qiming Venture Partners, “China's domestic pharmaceutical innovation has begun to evolve from scale to quality and efficiency, and corporate valuations have gradually returned to rationality. Enterprises need to think about how to use technology to meet unmet clinical needs and enhance corporate value and competitiveness.


Under the premise of policy guidelines and medical insurance price cuts, Chinese innovative drug companies have also begun to look for differentiated competitive advantages. First, the innovation target is moving forward, and the differentiation of molecular reagents is becoming more and more of a trend. The second is the differentiation of technology platforms. Many companies use AI technology to discover drug targets and realize laboratory automation. "


Just on April 3, Pharmaron said in an institutional survey that clinical research services are mainly in the Chinese domestic market, and the competition is relatively fierce. The company will improve the efficiency of personnel utilization, thereby increasing the profit margin of clinical research services. Empowering existing technology platforms through AI has not yet seen revolutionary changes, but it is possible to reduce costs and increase efficiency in terms of platform methods and processes.


 

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