Has the investment boom of the CXO head echelon faded?

With the advent of September, the lively semi-annual report release period has also come to an end, and the prosperity of the CXO track continues its high-growth brilliance

In the absence of a clear policy, such shocks have begun to form a mountain on the graph, and a steep slope seems to be gestating

▲Source: http://tech.

WuXi Department of Continued Reduction

Looking back at WuXi's decision to split three, it now appears to be extremely correct

Today, WuXi Biologics is firmly in the No.

Nonetheless, since the National Center for Drug Evaluation (CDE) on July 2nd a draft for comments emphasized that "drug development should be centered on patient needs and clinical value-oriented", WuXi Biologics has gone from a high price of HK$148 to the present.

Has the investment logic changed?

▲Source: official website

In the first half of the year, WuXi Biologics' total revenue was 4.

WuXi Biologics has been on the market for 5 years, and its development speed can be described as rapid.

In the first half of this year, WuXi Biologics continued to expand its global production capacity, with a strong global network building its own planned production capacity of approximately 430,000 liters

Not only that, WuXi Biologics is also acquiring more advanced factories around the world to rapidly increase its production capacity

The performance growth rate has exploded, and the market share has continued to increase.

Perhaps this is the result of deliberately controlling stock prices

In fact, this is the third time this year for the major shareholder WuXi Biologics Holdings to reduce its holdings.

The same story happened to WuXi AppTec

▲Source: official website

Since last year, WuXi AppTec's shareholders, directors and supervisors have taken turns to reduce their holdings

WuXi AppTec has even been investigated by the Securities Regulatory Commission for illegally reducing holdings

Shareholders and directors, supervisors, and senior executives have cashed out and left the market.
Did they foresee in advance that WuXi AppTec will have any bad news?

In fact, WuXi AppTec's performance in the first half of the year was as impressive as WuXi Biologics
.
In the first half of the year, WuXi AppTec's total revenue was 10.
537 billion yuan, a year-on-year increase of 45.
70%; net profit was 2.
675 billion yuan, an increase of 55.
79%; non-net profit attributable to parent deduction was 2.
127 billion yuan, an increase of 88.
05%
.

From WuXi AppTec's semi-annual report, we seem to have found some clues to explain the reasons for WuXi's continuous reduction in holdings
.
In the first half of the year, WuXi AppTec's investment income reached 1.
052 billion yuan, a year-on-year increase of 158.
18%
.
Five pharmaceutical companies, Adagene Inc, Immunocore Limited, LyellImmunopharma, Ambrx, and Nanomicro Technology, which mainly benefited from its shares, were listed on the Nasdaq, New York Stock Exchange or the Science and Technology Innovation Board of the Shanghai Stock Exchange in the first half of this year
.

Since its privatization and listing in China in 2015, WuXi AppTec has invested in more than 90 companies and funds, most of which are innovative drug companies that have been popular in the capital market in recent years, and have thus formed its unique set of business The model, namely "risk investment + intellectual property + medical outsourcing (VC+IP+CRO)", referred to as "VIC" model, can get more orders through investment, thereby pushing up the stock price, cashing out and then investing, forming a positive Loop
.
WuXi AppTec has used this business model to expand globally, and the number of investments in North America and Europe is equivalent to half of that in China
.

This business model is being imitated by more and more pursuers
.

The second echelon desperately chasing

Tigermed is one of the most aggressive CROs catching up with WuXi AppTec, and it is even more radical than WuXi AppTec in the application of investment strategies
.
In the first half of the year, Tigermed's total revenue was 2.
056 billion yuan, an increase of 41.
62% year-on-year; the net profit attributable to the parent was 1.
255 billion yuan, an increase of 25.
65%
.
Among them, investment income and income from changes in fair value were 1.
019 billion yuan, an increase of 39.
07%
.
Such investment income is on the same level as WuXi AppTec's 1.
052 billion yuan.
With a revenue gap of 8.
5 billion yuan, it also shows that Tigermed's overall investment >
.

▲Source: official website

According to statistics, in 2020, Tigermed Pharmaceuticals issued 15 investment announcements, and on October 20, 2020 alone, it issued 6 investment announcements in one go
.
On March 30 this year, five investment announcements were issued at one time, involving Boyuan Capital, Hankang Capital, Ruihua Holdings, Yunfeng Fund, and Shanghai Linchuang Investment, with an investment of 520 million yuan
.

In last year's uproarious sale of Shanghai Zerun by Watson Bio, the main investors behind the two funds that were prepared to take over part of the shares of Shanghai Zerun according to the original plan all had Tiger capital
.
According to preliminary statistics, Tigermed is still a strategic investor in more than 60 innovative companies in the healthcare industry and other companies, as well as limited partners in more than 40 medical funds.
These values ​​are still increasing
.

In addition to investment, Tigermed's mergers and acquisitions have never stopped
.
From the first few years of mergers and acquisitions of a company, it has grown to several companies a year
.

Extensional mergers and acquisitions have indeed optimized Tigermed's business structure, improved profitability, and expanded its business scope to overseas countries such as South Korea, the United States, and Europe
.
However, such frequent mergers and acquisitions have also caused many problems, such as the blind acquisition of insufficient quality assets without sufficient research, and the ever-increasing total value of goodwill
.

As of the end of the first half of the year, its accumulated net value of goodwill was 1.
463 billion yuan, which has recorded an increase for three and a half consecutive years
.
As the value of goodwill continues to expand, it has not only brought greater pressure on Tigermed’s operating cash flow, but also has experienced the inability of the acquired target to complete the promised performance, resulting in a huge risk of impairment of goodwill
.

Since the impact of the CDE policy on July 2, Tigermed has the largest decline in the CXO head echelon, and has fallen by more than 35% so far
.
Some analysts said that it may be because Tigermed, as the leading CRO in clinical trials, has a relatively large income from China, reaching 53.
9%.
The market is worried that the New Deal will cause a major blow to its business income
.

This may just be the fuse, but the reason is still determined by the nature of Tigermed's business
.
Tigermed’s main business clinical trial services are essentially labor-intensive services.
There is no CDMO, and laboratory services account for a low proportion of revenue.
Although it is currently deploying to the entire industry chain, other businesses have not yet appeared.
Signs of surpassing the main business, so the competitiveness in terms of valuation is relatively weak
.

Therefore, the real potential to challenge WuXi AppTec depends on Kanglong Chemical.
Its current market value of 160 billion has surpassed Tigermed's 120 billion
.

▲Source: official website

Kanglong Chemical's business originated in the drug discovery stage, and is in a leading position in drug discovery, preclinical and early clinical research.
In these years, it has been committed to expanding downstream R&D service capabilities including drug development, clinical and production
.
Through years of construction, we have built a chemical technology service platform and a pharmacokinetic research and development service platform throughout the entire new drug development process and commercialization stage, and established a complete integrated research and development from drug discovery to POC (Clinical Proof of Concept) Service platform
.

In the first half of the year, Kanglong Chemical's total revenue was 3.
286 billion yuan, a year-on-year increase of 49.
81%; net profit was 565 million yuan, an increase of 17.
93%; non-net profit attributable to parent deduction was 583 million yuan, an increase of 61.
16%
.

From the perspective of business segments, Kanglong Chemical's main business types can be divided into four service modules: laboratory services, CMC (small molecule CDMO) services, clinical research services, macromolecules, and cell and gene therapy services
.

Compared with the spin-off of WuXi and Tigermed's expansion through external investment, Kanglong Chemical chose to focus on its main business, which is reflected in its investment income and is not as eye-catching as the above two
.
In the first half of the year, Kanglong Chemical's investment income was only 132 million yuan, of which 71,164,500 yuan was derived from the amount of fair value changes that were transferred to investment income due to settlement of forward foreign exchange contracts used to hedge foreign exchange risks
.

In the first half of the year, the acquisition of a project costing 1 billion yuan was only to expand its CDMO services based on cell and gene therapy products
.
The acquired cell and gene therapy subsidiaries will bring some amortization of costs and expenses, and revenue has not yet formed, which will have some impact on operating profits
.
However, cell and gene therapy CDMO is an important development direction in the future, and WuXi AppTec is also vigorously deploying it
.

In addition, in the first half of the year, Kanglong Chemical also established Kanglong Chemical (Chengdu) Clinical Research Service Co.
, Ltd.
to integrate the clinical research and development capabilities of various subsidiaries and departments in an attempt to build a deeply integrated clinical research and development service platform
.
At present, there are 2,848 employees engaged in clinical research services, an increase of 640 people over the same period last year, which has greatly eroded Tigermed's main business
.

What Kanglong Chemical still lacks mainly includes the overall ability of CMO.
CMO is outsourcing of drug production, while Kanglong Chemical’s "CMO business" is called CMC.
The scope of this business is the process of clinical phase I-phase III drug development.
R&D and production requirements, the latter half of which involves mass commercial production has not yet produced scale effects
.

In addition, it is still unclear whether the failure to follow the "VIC" business model will cause the risk of falling behind.
Only in terms of the current scale and layout of Kanglong Chemical, it is expected to be among the first echelon of CXO
.

Concluding remarks

Although the negative effects of the CDE New Deal are still high, the China and even the global pharmaceutical outsourcing market is large enough, and the leading companies that have developed scale effects will continue to enjoy the dividends of the high prosperity of innovative drug research and development
.
However, the market is like a chess game.
The current formation may not affect the current performance, but it will definitely trigger a series of butterfly effects in the future.
The follow-up development of Meibai Medical will continue to pay attention
.

【Reference Materials】

WuXi AppTec, Tigermed Pharma, WuXi Biologics, Kangron Chemical Semi-annual Report, official website