In-depth research report on the innovative drug industry chain

At present, China attaches great importance to medical innovation.

(Report producer/author: China Securities, He Juying, Yuan Qinghui, Hu Shichao, Yang Mingchun)

1.

Definition of innovative drugs: relative to the definition of generic drugs

Compared with generic drugs, innovative drugs emphasize structural initiative and clinical development evaluation

The research and development of innovative drugs is a rigorous process of screening and evaluation of efficacy and safety, and requires complete and reliable large-scale clinical trials

Innovative drug research and development, production process and clinical development process

The R&D and production process of innovative drugs includes drug discovery, preclinical research, clinical application, clinical trial, production application, and large-scale production

Types of innovative drugs: biological innovative drugs and chemical innovative drugs

From chemical drugs to biological drugs, the complexity of molecular structures has increased significantly

Bio-innovative drugs mainly refer to antibody drugs: monoclonal antibodies, double antibodies, ADC drugs

Bio-innovative drugs can be divided into recombinant protein drugs and antibody drugs.

2.

(1) The hospital drug structure is continuously optimized, and the penetration rate of innovative drugs is expected to increase

Sales of innovative products have gradually increased: Bevacizumab, Osimertinib, and Trastuzumab entered the top ten sales;

Anti-tumor products gradually entered the top ten: trastuzumab began to enter the top ten in 2018, and bevacizumab and osimertinib entered the top ten for the first time in 2020.

There is still a lot of room for optimization of medication structure: At present, there are still auxiliary medications among the top ten medications, and there are five patents expired, and there is still a lot of room for substitution

(2) Supply side-drug policy reform: speed up the approval of new drugs and promote domestic new drug research and development

From 2011 to 2014, the average review time for China's 1.

In July 2015, the former State Food and Drug Administration issued the "Announcement on Carrying out Self-Inspection and Verification of Drug Clinical Trial Data" to strictly check the clinical trial data; August 2015, August 2015, the former State Food and Drug Administration made public Commitment: After digesting the backlog of new drug applications for nearly 10 years in three years, it was successfully realized; in June 2017, China officially became a member of the global ICH, which not only allows Chinese new drugs to directly enter the European and American markets, but also enables global new drugs to be introduced into China.

In 2018, Merck’s 9-valent HPV vaccine took only 8 days from the submission of the marketing application on April 20 to the approval on April 28; Teva Pharmaceutical’s deuterated tetrabenazine tablets are under new drug review in the first half of 2020 It took only 139 days to be approved for listing; Bayer's Xarelto and AbbVie's Humira have been approved for multiple indications almost simultaneously with the world

(3) Demand side: centralized procurement of generic drugs to free up new birds for innovative drugs

In 2018, the Medical Insurance Bureau began to organize the centralized procurement of generic drugs that passed the consistency evaluation, greatly reducing the price of generic drugs, and allowing more medical insurance funds to be used for innovative drugs

National-level rules continue to be optimized, and centralized procurement will be normalized in the future

3.

In April 2018, the Hong Kong Stock Exchange revised the Main Board Listing Rules and added Chapter 18A "Biotechnology Companies" (hereinafter referred to as the "new regulations"), allowing biotechnology companies with no income or profits to submit listing applications

(1) Capital item: Hong Kong stocks 18A, science and technology edition to help the development of innovative drugs

In 2018, Hong Kong stocks liberalized the listing of unprofitable biopharmaceutical companies.
There are currently more than 20 unprofitable innovative drug companies listed from Golly Pharmaceuticals to Jax Nuocheng Jianhua has been widely recognized by investors
.

(2) The Science and Technology Innovation Board provides new options for innovative drug companies

Since the launch of the Science and Technology Innovation Board in 2019, innovative drug companies have added new ways to go public.
At present, investors on the Science and Technology Innovation Board have a high degree of recognition of innovative drug companies.
Share prices of listed companies such as Microchip Biotechnology and Biotech Performed well
.
Among them, Biotech and Zejing are unprofitable companies
.
Among them, Junshi Bio, Fuhong Henlius, and Fudan Zhangjiang have achieved the "A+H" layout through listing on the Science and Technology Innovation Board
.

4.
Upstream of the industry chain: CXO boom of water sellers remains high

(1) Global CRO and CDMO market scale

According to Frost & Sullivan, the market size of the CRO industry increased from approximately US$40 billion in 2014 to US$57.
9 billion in 2018, with a CAGR of 9.
6% and a penetration rate from 28% in 2014 to 33% in 2018; it is expected to be 2023 The CRO market will reach 95.
2 billion U.
S.
dollars, with a CAGR of 10.
5% in 2019-2023, and a penetration rate of 44%, realizing sustained and rapid growth
.

(2) China's CRO and CDMO market scale

According to Frost & Sullivan, the scale of China's CRO increased from US$2.
1 billion in 2014 to US$5.
5 billion in 2018, and is expected to increase to US$19.
1 billion by 2023.
The compound annual growth rate from 2018 to 2023 is expected to be 28.
3.
%; China's CDMO market scale has increased from USD 1.
1 billion in 2014 to USD 2.
4 billion in 2018, with a CAGR of 21.
5%.
The market size is estimated to be USD 8.
5 billion in 2023, with a CAGR of 28.
8% from 2018 to 2023.

(3) CRO: The overall prosperity of the industry remains high, and domestic clinical CRO is expected to recover in 2021.

Statistics show that there will be a significant increase in the number of domestic IND phases in 2020, indicating a higher level of demand for CXO
.
From 2017 to 2020, CDE accepted a total of 274, 290, 455, and 585 categories of chemical drugs and therapeutic biological products, respectively
.
Among them, the number of INDs for category 1 chemical drugs from 2017 to 2020 were 144, 149, 239, and 371, respectively, and the number of INDs for category 1 therapeutic biological products were 130, 141, 214, and 214, respectively
.

(4) It is expected that domestic clinical CRO is expected to recover in 2021

The domestic clinical CRO is expected to recover in 2021
.
Affected by the epidemic in 2020, the number of clinical trials may remain flat or decrease
.
However, based on the number of INDs in 2020, the number of clinical trials in 2021 may increase significantly
.
At the same time, the increase in the cost of domestic clinical trials and the increase in the complexity of clinical trials will increase the market space for clinical trials
.
Considering that the epidemic will be brought under control in 2021, we expect that the domestic clinical CRO is expected to recover in 2021
.

(5) CDMO: Global industrial transfer + MAH two-wheel drive, sustained strong growth

The capacity divestiture of large pharmaceutical companies will further strengthen the penetration rate of the CDMO industry
.
At present, the proportion of outsourcing in the pharmaceutical manufacturing industry is about 26%, and there is still a lot of room for improvement in the future
.
At present, the penetration rate of outsourcing of small and medium-sized pharmaceutical companies in the pharmaceutical industry is higher than that of large pharmaceutical companies, and as large pharmaceutical companies continue to spin off their non-core manufacturing facilities, it is expected that the penetration rate of the CDMO industry will continue to increase in the future
.

The outsourcing rate of different production links is diversified, and the precise division of labor in the industry chain is expected to boost the penetration rate
.
There are diversified drug production links.
Both the clinical research and development stage and the commercial production stage require drug supply.
At the same time, the raw materials, intermediates, APIs, and preparations required for production are different in terms of production conditions and requirements
.
For pharmaceutical companies, building a complete and complete production system requires a relatively large cost
.
At the same time, the utilization efficiency of self-built capacity has an impact on the company

5.
The overall innovation enthusiasm is high, comprehensive R&D, clinical, commercialization, and international stock selection

(1) The industry's overall R&D investment has risen significantly, and the trend of innovation and transformation continues

In 2020, the R&D expenses of most leading companies in the chemical and pharmaceutical sector will continue to increase, and the growth rate of R&D expenses will be significantly higher than that of the industry as a whole
.
From the perspective of the top 10 companies with R&D investment in the chemical medicine sector, Hengrui, Livzon, Joincare, Kelun, and Renfu are all leading companies in the pharmaceutical sector, and they are also relatively fast in innovation and transformation
.
In 2020, the R&D expense rate of these companies will rise, and the investment demand for enterprises to transform to innovation is strong, and it is expected that the differentiation of the industry will continue
.

(2) Hong Kong stock biotech companies maintain high R&D investment, and the boom of innovative drugs continues

The growth of Biotech’s core value lies in the advancement of its own pipeline.
Hong Kong stock biotech companies continue to invest heavily in R&D.
Innovative biopharmaceutical companies represented by BeiGene, Cinda Bio, Junshi Bio, Zai Lab, and CStone Pharmaceuticals In 2020, R&D expenditures will maintain high growth
.

(3) The elements of long-term success of innovative pharmaceutical companies are front-end R&D, clinical capabilities, commercialization capabilities, and internationalization

Cancer front-end R&D can be further subdivided into target/indication prediction and selection capabilities and R&D risk management system.
Front-end R&D determines direction selection and the prospects of products under research; clinical capabilities can be divided into clinical program design, clinical resources and Operational capabilities; commercialization capabilities are an important obstacle for many biotech pharmaceutical companies to mature pharmaceutical companies, and can be subdivided into central and regional market access capabilities, market and medicine, channels, and sales teams
.
Internationalization requires varieties worthy of internationalization, an international clinical (management) team and a commercial team
.

6.
Valuation logic: DCF is widely used, pay attention to the differences between China and the United States

Differences in valuation systems for innovative drugs between China and the United States

Drug life cycle

From 1996 to 2015, the average time from launch to patent expiration for new drugs in the United States was between 135 months and 189 months.
There are fewer new molecular entities for innovative drugs in China, and channel barriers are relatively high.
Currently, there is a lack of drug patent cycle data.
Considering that channel barriers are considered, the life cycle of Chinese innovative drugs may be longer
.
Regional differences persist between the launch of new drugs and patent expiration.
The United States is relatively long, and Japan is relatively short, which may be related to local patent protection regulations and new drug review efficiency; in addition, drugs and biological drugs with annual sales of more than 1 billion US dollars The average patent expiration time is longer
.

Peak sales time

The average peak time of 61 drugs marketed in the United States from 2000 to 2002 was about 6 years.
Among them, the average peak time of new drugs was 5 years, the average peak time of Me-too drugs was 6 years, and the peak time of non-biological drugs was 6 years.
In 2015, the peak time of biological drugs was 5 years
.
As for China, it is different from the form of immediate medical insurance in the United States.
In the past, it took 3-4 years to be covered by medical insurance.
After the establishment of the National Medical Insurance Bureau, the efficiency has been greatly improved.
The peak time is expected to be higher than 6 years
.

7.
Other promising directions

(1) Tumor immunity

PD-1 competes into the second half, and the opportunity lies in the non-responding crowd
.
The tumor immunity program is designed according to the characteristics of tumor cells "immune escape", so that the human immune system can recognize tumors again
.

The era of precision treatment is coming
.
The goal of precise treatment of tumor immunity is to achieve precise treatment of tumor immunotypes, and seek the most effective treatment options for tumors of different immunotypes
.

(2) The global market for immune diseases: the next gold mine after tumors

The proportion of immune disease drugs has increased rapidly in the past 10 years
.
Immune disease drugs accounted for 27% of the 2019 Top 100 drugs, second only to oncology drugs
.
From 2009 to 2019, the proportion of immune disease drugs in the 2019 Top100 increased from 8% to 27%, and the total sales of immune disease drugs in the Top100 increased from US$9.
009 billion to US$89.
485 billion
.
In terms of clinical needs, the incidence of immune diseases has increased over time.
At the same time, advances in detection technology and deeper understanding of the disease have enabled more patients to be diagnosed
.
With the deepening of basic research and the development of synthetic screening technologies, new targets are constantly increasing, more clinical needs are met, and the proportion of biologics drugs has increased significantly
.

(3) Targets for immune upgrade are emerging one after another, and indications are mutually infiltrated

New autoimmune target drug indications penetrate each other
.
JAK, IL17, and IL12/23 have all obtained at least 3 indications, and the indications are still being expanded
.

(4) Gene therapy clinical trials using AAV as a carrier are gaining momentum

AAV as a carrier for gene therapy strategies

Gene overexpression : The goal is to deliver genes that express normal proteins to compensate for the effects of loss-of-function mutations
.
It is suitable for the treatment of recessive single-gene diseases and has been extremely successful in clinical trials
.

Gene silencing : The goal is to treat single-gene diseases caused by gain-of-function gene mutations, such as Huntington disease
.
RNAi therapy is currently the preferred strategy for AAV gene silencing platforms
.

Gene editing : Emerging endonuclease-based gene editing technologies (such as ZFN, TALEN and CRISPR/Cas9) are also being developed by scientists for the treatment of diseases
.
The combination of AAV with strong tissue targeting plasticity and the CRSIPR system that can perform multiple functions has become a powerful and potentially versatile animal experiment tool
.
At present, CRISPR application research using AAV as a vector has been published mainly in three categories: gene knockout, gene fragment deletion, and precise homologous recombination repair
.

Excerpts from the report: