 Home > Active Ingredient News > Drugs Articles > From the perspective of R&D return rate, the sustainable growth of Chinese pharmaceutical companies

From the perspective of R&D return rate, the sustainable growth of Chinese pharmaceutical companies

 Last Update: 2022-11-14
 Source: Internet
 Author: User

Tags

big titan compared earth

epidermal growth factor

Search more information of high quality chemicals, good prices and reliable suppliers, visit www.echemi.com

Since the second half of 2021, the pharmaceutical industry has been cold, and homogenized competition and the resulting price reduction of drugs have gradually lost confidence
in the entire industry.
Ultimately, the result of involution is concerns about declining returns on R&D for pharmaceutical innovations, which has led to a significant decline in
pharmaceutical asset prices.
But at what level is the return on investment in China's pharmaceutical innovation, and how has it changed over the years? Is there no room for return under fierce competition? This paper attempts to study these issues, and the results show that the return on innovation and R&D in China's pharmaceutical industry is still relatively ideal, and excellent enterprises can achieve sustainable growth and be recognized
by the market.

Global R&D return on innovative drugs vs Big Pharma valuation

The most reported global return on pharmaceutical R&D is Deloitte's series of research reports
.
Deloitte has been tracking the R&D ROI of 12 of the world's largest pharma companies since 2010 and concludes that "global returns on pharmaceutical R&D continued to decline until 2020 began to stabilize and rebound.
"
The return rate (IRR) in 2021 was 7%, and about 3.
2% after excluding COVID-related products, up from 2.
7% in 2020, but it is still at a low level
overall.
In addition, Kelvin of Novartis' asset management division Stott published an article that used a simple method to measure the rate of return before 2010, and the conclusion was very consistent, the global return on pharmaceutical research and development showed an almost plummeting trend
.

Has the decline in R&D investment returns caused the valuation level of pharmaceutical companies to continue to fall? Since many large pharmaceutical companies have a large proportion of liabilities in their asset structure, EV/EBITDA is used to examine the trend
of valuation levels.
The results show that the valuation level of the world's largest pharmaceutical companies has not shifted significantly
.

The return on investment in global pharmaceutical R&D has shown a downward trend, but the valuation range of major large pharmaceutical companies has not changed significantly

There may be the following reasons for this:

1.
The share price does not reflect the sunk cost of R&D

The stock price reflects the expectation of the future, the R&D return rate of innovative drugs is basically not continuously distributed, either zero or steeply high, and the successful research and development of products can bring rich profits to the company, which can still be reflected in the financial statements after deducting the R&D and operating expenses of the year, and achieve considerable growth in the foreseeable future, supporting the company's valuation
.

2.
Continuity of R&D output

Any pharmaceutical product has a life cycle, and blockbuster products can bring high market expectations, but they can also cause concern at the end of the life cycle, and similar situations have occurred many times in history, such as Gilead's hepatitis C drug and AbbVie's Humira.

The valuation reflects the expectation of growth, and the reason behind the valuation level must be the overall growth of the company, which requires the company to have continuity in R&D output
.
In fact, the above-mentioned pharmaceutical companies have achieved overall growth for a long time, although sometimes there have been product faults in the middle, BMS needs to face the expiration of the patents of two blockbusters clopidogrel and aripiprazole in 2013-2016, but due to the foreseeable relay of apixaban and nivolumab, the company's performance has declined without a decline in stock price, so the valuation has increased
abnormally.

3.
The survivor (tap) effect

Another factor is the survivorship effect, which is related to
the selection of samples.
Who will survive? The faucet survives
.
There are fewer small and medium-sized profitable pharmaceutical companies in the United States, and many companies go bankrupt or are acquired
during the R&D investment period.
The first two factors can also explain why there are few small and medium-sized profitable pharmaceutical companies abroad, because enterprises need to continuously produce products with high return on investment from small to large, and the challenge is very huge, while large pharmaceutical companies have more funds and resources, higher fault tolerance, and eventually become integrators
.
In its series of reports on returns, Deloitte included four smaller pharma companies since 2015 and found that they initially had higher R&D returns than large pharma, but then fell more quickly to match the big pharma, and one of them was eventually acquired
.

R&D return rate of innovative drugs in China

It is difficult
to estimate the return on China's innovative drug R&D.
On the one hand, most pharmaceutical companies coexist with generic drugs and innovative drugs, and it is impossible to determine the R&D expenditure invested in innovative drugs, on the other hand, China's innovative drug sales are facing a more complex situation in terms of commercial channels, payment policies, and competition patterns, and the future sales curve is difficult to predict
.

This article selects 7 innovative drug products that have started research and development at different times, including self-research-based products and late-stage products
introduced.
The R&D expenditure of specific products is based on the total R&D investment of the project disclosed in the prospectus, annual report, regular announcement, and interview information of securities firms, and is evenly apportioned to each year
in the R&D cycle from the beginning of project approval (project introduction).
Publicly disclosed sales revenue is subject to disclosure, the rest is estimated based on current sales trends and brokerage forecasts, and the sales cash flow ratio refers to the financial net interest rate plus the R&D expense ratio
.
Some products have a long secondary development cycle, such as apatinib, but only based on
the indications covered in the current sales forecast.
For the R&D returns in recent years, because the self-developed pipeline is usually in the early stage, the uncertainty of future sales forecasts is large, and the better observation sample is the late-stage products introduced, so the Tigolaxen of Luoxin Pharmaceutical, Epdun of Zai Lab, and etan growth hormone
of Jichuan Pharmaceutical are selected.
For introduced projects, the initial investment is the down payment at the time of introduction, and the milestone payment milestone information is rarely disclosed, referring to Deloitte's methodology, all remaining milestone payments are included in the year in which the (estimated) sale is initiated, and after the asset is purchased, it is still included in the R&D expenses for continued internal development or cost sharing
with partners.
Unapproved products or indications refer to the calculation of brokers, and risk adjustment is made
to sales revenue.

Take Microchip's cedamide as an example
.
According to the prospectus, cedarbenamide has started development since 2007, and the total research and development cost of peripheral T lymphocytoma is 23.
94 million yuan; Breast cancer has been launched since 2014, with a total R&D expenditure of 46.
04 million yuan; Non-small cell lung cancer has been initiated since 2010, with a total of 26.
96 million yuan; The post-marketing study was launched in 2015 with a total of 25.
26 million yuan
.
These expenses are spread evenly over the years and added up as R&D cash outflows
.
Sales revenue in 2021 is based on public disclosure, and sales revenue in 2022 and beyond is forecast with reference to the current growth trend
.
Considering that in July 2023, the patent for cedarbenamide compounds expired, although it is possible to block generic drugs through peripheral patents, it is still assumed that generic drug competition will decline to half of 2023 in 2024, and then decline at a rate of 10% per year, discounting the IRR obtained on a trial basis to 2024
.

The rest of the products are measured in turn, and the trend of China's innovation and R&D return rate is obtained, and compared
with the world.

The return on investment in China's pharmaceutical R&D is declining, but higher than global and more stable
.
The global R&D return comes from Kelvin Stott and Deloitte, China's R&D return rate is measured from different time periods

From the calculation point of view, the R&D return rate of China's innovative medicine has also shown a downward trend, similar
to that of the world.
This is relatively consistent with
the current market perception of R&D involution.
But even if it falls, it is far better than the global data, and the downward trend is slower than the world
.
There may be the following reasons for
this.

1.
China's huge unmet demand

At present, the sales scale of innovative drugs with clinical value in China's pharmaceutical expenditure is still small, there is a huge unmet clinical need, and with the increase of personal ability to pay and the aging trend, the growth rate of China's pharmaceutical expenditure is higher than that of the world
.
According to IQVIA's forecast, by 2026, the growth rate of global and Chinese drug spending will be about 3-6%, but the proportion of innovative drugs in the world's major European and American markets is much higher than that of China, so it can be assumed that the growth rate of innovative drugs, which are the main growth drivers of China, is much higher than that of the world
.

2.
Still lower R&D costs

In recent years, the contradiction between the drive of domestic capital investment and the relative lack of the overall pharmaceutical R&D industry chain has led to the rising
cost of domestic pharmaceutical R&D.
However, compared with the average cost of individual innovation assets and the expected peak sales, the cost of domestic pharmaceutical innovation R&D is still much lower than the world
.

The cost of R&D of innovative drugs in China is still much lower than the world
.
The percentages in the graph are forecasted peak sales/total R&D expenditure
for an average individual asset.
Global data are sourced from Deloitte, and China data is calculated based on the aforementioned sample

3.
Only relatively successful cases were included

The clinical demand in the Chinese market is huge, and even if there is competition for the same target, it can still accommodate a certain number of manufacturers
.
Companies with the highest R&D progress and more mature sales channels among similar target products may obtain higher return rates
.
The cases included in this article are likely to be relatively successful, with more R&D assets being scavenged
.

Introduction and external authorization

License in/out can have a positive impact
on the return on R&D investment.

Excellent product introduction and asset mergers and acquisitions can allow companies to quickly cut into the assets with the highest return rate in the entire industry at a time point when their R&D return rate is low, and a large number of products of large pharmaceutical companies around the world are externally introduced at different stages of R&D, according to Deloitte's statistics, 71% of the assets in the late stage of research in 2021 are externally introduced and developed
.
But obviously, companies must also have endogenous R&D capabilities to ensure sustainable growth in the event of
not-so-good mergers and acquisitions.

In terms of external authorization, in the case of Cinda granting PD-1 rights and interests to Lilly, it is a win-win result
.
Cinda granted China rights and interests, and due to the receipt of a large down payment, it recovered or prepared R&D funds in advance, thereby improving the return rate of
the enterprise.
From a Lilly perspective, the introduction of this Chinese interest also yielded a higher than average R&D return overseas
.
But for external licensing, it is also crucial to reflect the early recovery of funds in subsequent research and development capabilities, NASDAQ small and medium-sized biotech market capitalization below cash companies abound, and the market will not value their cash, because this cash needs to be spent on research and development, in exchange for a higher rate of
return.

Chinese pharmaceutical companies: sustainable growth

Any pharmaceutical product has a life cycle, and payment policies and fierce competition will affect the life cycle length of the product, but as long as the return on investment remains at a relatively ideal level, the model of sustainable growth for pharmaceutical companies will still be valid
.
This logic is applicable to the world's leading pharmaceutical companies in the context of declining returns on global pharmaceutical R&D; Then you can't go wrong
with Chinese pharmaceutical companies that are better than the world.
At present, the pressure of payment policies has caused a gap in expectations in the market, mainly due to the sharp decline
in sales of some innovative products in the case of forming a large income scale, and the price reduction of medical insurance.
But as the pace of negotiations accelerates, the sales curve of newly launched products will climb faster, and the rate of return will not be low
.
Some brokers have studied before that if Actinib enters medical insurance faster, the return on investment will be further improved
.

Since China's R&D return rate is higher than that of the world, and the world's leading enterprises can achieve sustainable growth through product flow + introduction, then there are also a considerable number of enterprises in China that can
.
However, due to the downward trend in R&D returns, companies need a denser product stream to support growth and, ultimately, excellent external introduction strategies
.
Therefore, this not only tests the ability of pharmaceutical companies to quickly follow up certain targets, but also tests the ability to manage the product portfolio, and needs to be good at using external introductions to maintain longer-term growth
.

With R&D returns declining, pharma companies need denser product streams to sustain revenue growth and cover rising R&D expenses
.
Companies also need to balance internal R&D with external introductions
.

China's pharmaceutical market is huge, there are many unmet needs, and the industry will continue to grow in a long cycle, but the current capital market avoids uncertainty and loses the judgment
of valuation.
In essence, the number of innovative drugs commercialized in China is small, and there is no track for a company to walk out of a sustainable path through continuous and stable innovative drug output record
。 But the road is under your feet, and you can only take it one step at a time
.
Whether it is me-better or first-in-class, or new technology fields such as gene therapy and RNA, the company will eventually be rewarded
if it continues to make product innovation the lifeline.

Disclaimer: Some of the company's sales and expenses and other data in this article are forecasts and do not necessarily represent the actual situation of
the company.
The data is used solely for research purposes herein and does not constitute any investment advice or advice
.

Resources

[1] Kelvin Stott.
Pharma's broken business model: An industry on the brink of terminal decline.

[2] Deloitte.
Measuring the return from pharmaceutical innovation.
2010 – 2021 Series Report
.

This article is an English version of an article which is originally in the Chinese language on echemi.com and is provided for information purposes only. This website makes no representation or warranty of any kind, either expressed or implied, as to the accuracy, completeness ownership or reliability of the article or any translations thereof. If you have any concerns or complaints relating to the article, please send an email, providing a detailed description of the concern or complaint, to service@echemi.com. A staff member will contact you within 5 working days. Once verified, infringing content will be removed immediately.