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The domestic pharmaceutical and biological industry has stepped out of the traditional routine
of "pharmaceutical is king".
29 years ago, the first "Harbin Pharmaceutical Shares" in the domestic pharmaceutical and biological industry was listed, kicking off the prelude to the landing of pharmaceutical and biological enterprises in the capital market
.
As of the end of September 2022, more than half of the top 20 pharmaceutical and biotechnology companies by market capitalization accounted for more than half of the non-pharmaceutical categories, of which research and development service (CRO) companies occupied three exclusive seats
.
CRO enterprises, known as the "water sellers" of innovative drug research and development, benefited from the wave of domestic innovative drugs and the increase in the penetration rate of offshore outsourcing of overseas customers, and the CRO sector was in the limelight in the pharmaceutical bull market from early 2019 to mid-2021, and once became a sub-field
of the pharmaceutical and biological industry with high prosperity and high concentration of positions.
However, in the process of adjusting the pharmaceutical sector in the past year, CRO has borne the brunt, and this article attempts to make some discussions and prospects
around whether the valuation of the CRO sector has bottomed out.
Back to square one
Back to square oneIn the CRO sector, after ups and downs, the valuation in 2022 is back to the original starting point
.
After the structural "track" bull market that started in January 2019 and lasted for about two and a half years, the pharmaceutical and biotechnology sector is experiencing the largest correction in the past five years in the past year, and high valuation digestion has become the core demand, and CRO has not been spared
.
.
As of the end of September 2022, the price-earnings ratio (TTM) of leading companies in the CRO sector has basically dropped to the level before the start of the structural bull market in the pharmaceutical and biotechnology industry in 2019 or lower, on the one hand, relative to their own historical valuation has entered the bottom range, on the other hand, there is no excessive valuation premium compared with the valuation level of overseas leading enterprises
.
.
We believe that the valuation reflects to a considerable extent the market's expectations for the growth of the sector in a specific macro environment, which is not static, but there are traces to follow, largely depending on the judgment of the growth of the CRO sector itself, and also closely related to the change in market awareness, combined with the impact of the overall market environment of the drug, it may be more appropriate to judge whether the valuation of the CRO sector is currently in the bottom range
.
More than two years of big rise, more than a year of digestion
More than two years of big rise, more than a year of digestionSince the beginning of 2019, the valuation of the CRO sector has increased significantly after more than two years, which is a three-dimensional resonance
of the relaxed pharmaceutical market environment, rapid growth of the CRO sector, and novel market recognition.
First of all, at that time, it was a structural bull market in the pharmaceutical and biological industry, and the concentration of incremental funds provided a source of impetus for the CRO sector to climb the valuation of
"allocation cattle".
There are foreign funds favored with outstanding long-term allocation characteristics, the scale of pharmaceutical-themed funds under the equity of residents' assets and wealth effect is rising, and there are also non-pharmaceutical fund allocations caused by sector comparative advantages and wealth effects
.
for the CRO sector to climb the valuation of "allocation cattle".
Secondly, the local CRO companies launched in the 90s of the last century have entered a period of rapid growth since 2015, full orders have begun to be fulfilled, and the performance under a relatively low base continues to be outstanding (the revenue CAGR of the CRO sector in 2018-2021 exceeds 30%), and the CRO sector continues to receive a valuation premium with its ultra-high industry prosperity
.
furthermore
CRO has only gradually become well known in the capital market in recent years, and there are only a few CRO listed companies that have been large-scale before 2018, following the return of WuXi AppTec to A-share in 2018, and a large number of domestic CRO companies have completed their issuance and listing
.
As of the end of September 2022, the number of domestic CRO listed companies has exceeded ten, which is more systematically presented to investors as a new track in the pharmaceutical industry, and at the same time, it has further thickened the capital carrying capacity
of the sector.
Before the middle of 2021, the market looked at CRO as a freshness, so at that time, every quarterly report performance, rapid growth in orders, and the launch of equity incentive plans and other events are likely to bring about sector benefits, and the market has not yet worried too much about
the marginal change in the industry's prosperity.
of the sector.
From mid-2021 to the present, the valuation of the CRO sector has been greatly digested for more than a year, and while affected by the tightening of the pharmaceutical market environment, the market has evolved from early adopters to worries, and its growth expectations are uncertain
.
First of all, under the strong performance of new energy and pro-cyclical in the second half of 2021, the pharmaceutical and biotechnology sector was significantly pumped, and the growth stocks brought about by the increase in US interest rate hike expectations in the first half of 2022 continued to adjust the sector, and at the same time, the industry's own policy expectations intensified to achieve the continuous and substantial digestion
of the previous high valuation.
As a high-valuation CRO sector, and a typical of high position concentration, how can it not be dragged
.
So far, the price-to-earnings ratio (TTM, excluding negative values) of leading companies has basically fallen to the level
before the start of the structural bull market in the pharmaceutical and biotechnology industry in 2019, or lower.
Secondly, after the market has a relatively full understanding of CRO companies in mid-2021, it began to worry about the marginal changes in the prosperity of this track, superimposed on the negative feedback formed by the long-term continuous adjustment of the industry as a whole, resulting in excessive trading pessimistic expectations
under the inertia of digesting valuations.
Fluctuations in monthly order growth, changes in domestic innovative drug policies, potential return of overseas orders, cold investment and financing in the primary market, and macro international relations have become reasons to
accelerate the valuation of the CRO sector.
under the inertia of digesting valuations.
Change and change, where to go
Change and change, where to goThe valuation of the CRO sector has returned to the level of the beginning of 2019, where will it go from here?
First of all, after more than a year of adjustment, the pharmaceutical market environment has entered a rare "three lows" state - low valuation, low positioning, and low trading volume
.
At present, the price-to-earnings ratio (TTM) of Shenwan Pharmaceutical's biotechnology industry is significantly undervalued by 22 times, and the pharmaceutical positions of non-pharmaceutical active funds in the second quarter of 2022 are significantly underallocated to a 13-year low, and have underallocated
for seven consecutive quarters.
Judging from the situation in the past 15 years, the duration of undervaluation + underallocation will not be too long, and underestimation is generally accompanied by a subsequent round of position improvement
.
Therefore, the current overly pessimistic pharmaceutical market environment continues to drive the valuation of the CRO sector to become a small probability event, and as the market gradually recovers its objective understanding of the growth attributes of the pharmaceutical industry, the pharmaceutical sector, including the CRO sector, has obvious room for
valuation repair.
.
Secondly, we are still optimistic about the growth of the CRO sector, innovation is still a general trend of global pharmaceutical development, domestic CRO companies are far from reaching the growth "ceiling" compared to overseas CRO leaders, and it is still expected to maintain high growth
in three to five years or longer.
On the one hand, the global demand for innovative drug R&D continues to be strong, and the primary market investment and financing of innovative drugs account for a limited proportion of global R&D investment, and there are signs of recovery in the second half of 2022, so short-term volatility can be viewed
rationally.
At present, domestic CROs rely on engineer dividends and efficient and high-quality service supply capabilities to undertake the transfer of the global industrial chain to China, and the preclinical offshore outsourcing business orders of some leading companies continue to grow rapidly
.
rationally.
On the other hand, the wave of domestic innovative drugs is rising, and the aging population and the complex disease spectrum changes of residents really need innovative drugs and innovative therapies, which will increase the market share
of innovative drugs.
At the same time, with the development of policies such as new policies for anti-tumor drugs and medical insurance negotiations for innovative drugs, the acceptance and approval of new drugs are also accelerating, and the importance of clinical value and international standards is highlighted, so the penetration rate of new drug R&D outsourcing is expected to continue to increase
.
of innovative drugs.
It is true that changes in indicators such as new signings, inventories and even biological assets have become more concerned points in measuring marginal changes in the
sector's prosperity.
Compared with two or three years ago, some CRO companies may show that the order growth rate has declined, but objectively speaking, while domestic CRO companies have achieved rapid development in recent years, the scale base is also increasing, and it is equally precious
to be able to maintain the same level of order growth as revenue and profit growth.
Taking a step back, the current valuation level of the CRO sector has relatively fully digested the expectations of the so-called marginal downward trend of the industry prosperity and entered the bottom range
.
Returning to performance growth, the CRO sector continues to have comparative advantages in the pharmaceutical industry, the attributes of the growth sector remain unchanged, and the medium and long-term allocation value is prominent
.
.
We believe that innovation is an important driving force for the long-term development of the pharmaceutical and biotechnology industry, and remain optimistic
about the growth of the CRO sector.
