WuXi is listed on the "sanctions" list, how to play the card of domestic CRO going overseas?

Since 2015, the domestic CRO market has ushered in a thriving scene.
In addition to the improvement of the drug R&D environment, the acceleration of drug review, and policy support, there are also the transfer of international CRO production capacity to China, and the domestic pharmaceutical companies' demand for pharmaceutical R&D.
The gradual release and other factors
.

According to Frost & Sullivan:

In 2021, the global CRO market size is about 79.
6 billion US dollars, and it is expected that the global market size will reach 95.
2 billion US dollars by 2023, with a compound annual growth rate of 8.
1%
.

In 2021, the scale of China's CRO market is about 13.
4 billion US dollars, and it is expected to grow to 21.
4 billion US dollars by 2023, with a compound annual growth rate of 29.
9%, much higher than the global market growth rate
.

When the CRO industry is in great shape, the hidden crisis has gradually surfaced
.

On February 8, the U.
S.
Department of Commerce’s Bureau of Industry and Security (BIS) published an updated “Unverified List (UVL)”, which included WuXi Biologics and WuXi Biologics (Shanghai) , This news gave China's CRO companies a critical blow, and the CRO sector plummeted across the board.
As of February 11, the leader WuXi PharmaTech's A-share market has fallen by 20.
73%
.

In this context, people can't help but ask whether CRO companies can avoid being "stuck in the neck", can they reduce their dependence on international markets such as the United States, and whether China's CRO industry still has investment value?

The fast-rising Chinese CRO

The fast-rising Chinese CRO

The CRO industry originated in the United States in the 1970s.
With the complexity of drug research and development in the United States and the fierce competition in the pharmaceutical industry, pharmaceutical companies have gradually outsourced research and development to reduce costs and risks.
In addition, factors such as continuous investment in global drug research and development are added.
, the CRO industry has grown rapidly in the past few decades
.

In China, however, CRO is an emerging industry that has only developed in the past two decades
.

In 1999, Li Ge, who is well-known in the field of global pharmaceutical and medicinal chemistry, returned to China to investigate and found that although domestic pharmaceutical research institutions already have certain R&D capabilities in the field of original research drugs, advanced production technology is still in the hands of foreign pharmaceutical companies.

In the following years, the national pharmaceutical policy has been gradually improved, the medical reform and the pharmaceutical market have gradually expanded, providing a broad market space for the entire pharmaceutical and medical machinery.
At the same time, domestic and foreign pharmaceutical companies have invested a lot in research and development in order to quickly seize market share.
The "water sellers" in China have also ushered in important development opportunities
.

According to Frost & Sullivan data, the scale of China's CRO market increased from US$2.
1 billion in 2014 to US$5.
9 billion in 2018, with a compound annual growth rate of 29.
2% from 2014 to 2018
.

It is expected to grow to US$21.

China CRO market size

Source: Baicheng Pharmaceutical Prospectus

At the same time, the current domestic CRO business penetration rate is far below the global average
.

The penetration rate of CRO business in the global market has increased from 27.

The high market prosperity is also reflected in the performance of the CRO giants.
WuXi AppTec, Tigermed, and Pharmaron's non-net profit increased from 979 million yuan, 240 million yuan, and 219 million yuan in 2017 to 2021 (prediction) 4.
03 billion yuan, 1.
229 billion yuan, and 1.
321 billion yuan, with a compound annual growth rate of 77.
9%, 103.
1%, and 126%
.

The market space is large, the growth rate is high, and the company's performance is also outstanding.
Everything is so good, but why has the secondary market CRO industry been polarized since 2021? WuXi Biologics and Tigermed both plummeted by more than 20%, and Hillhouse Capital, a "friend of time", also sold off CROs sharply.
Has the logic of the rapid growth of domestic CROs loosened?

Growth expectations cannot match high valuations

Growth expectations cannot match high valuations

There are three main reasons for the expected rapid growth of the domestic CRO industry: First, the innovation environment has been continuously optimized in recent years, the enthusiasm for new drug research and development has been continuously improved, and the domestic demand for innovative drug and generic drug research and development has accelerated, driving the rapid development of the CRO industry; In order to accelerate the registration and listing of drugs, pharmaceutical companies have entrusted CRO companies to conduct pharmaceutical R&D to shorten the R&D cycle and reduce R&D costs; third, the centralized procurement of drugs by the state forces the progress of the consistency evaluation of generic drugs to speed up
.

Under the influence of the above factors, the market is unanimously optimistic about the CRO track.
The CRO track has also experienced a surge of up to three years, but the valuation of CRO companies has also experienced an obvious bubble
.

The highest valuation of WuXi PharmaTech last year reached 165 times, Zhaoyan New Drug 169 times, Kanglong Chemicals 136 times, Tigermed 90 times.

There is no market that will grow at a high speed forever, let alone a sector that will rise forever
.

On November 19, 2021, CDE issued the "Guidelines for Clinical Research and Development of Anticancer Drugs Oriented to Clinical Value", emphasizing the clinical value-oriented research and development of new drugs, opposing low-level repetitive construction, and reducing the proliferation of Me-too drugs.
In order to cool down, many innovative pharmaceutical companies have retreated
.

The passion has faded, and the era of the brutal expansion of domestic innovative drugs will eventually pass.
This can also be seen from the performance of the secondary market for innovative drugs.
Innovative drug companies in Hong Kong stocks have been sold off.
If it persists, innovative drugs will return to the new normal of steady growth, and the corresponding growth expectations of the CRO industry will also be re-evaluated
.

The fierce confrontation at the medical insurance negotiation scene has made people across the country hooked, but it also reflects that the profit margins of domestic innovative pharmaceutical companies are getting smaller and smaller
.

Although the national centralized drug procurement has promoted the progress of the consistency evaluation of generic drugs, on the one hand, the prices of the varieties selected for centralized procurement have dropped significantly, and on the other hand, the varieties that have not been selected and small and medium-sized pharmaceutical companies may face elimination from the market

Figure: 2021 National Medical Insurance List Drug Negotiation Site

Negotiations and centralized procurement of medical insurance prices convey a deeper message: the excess of medical products and the insufficient ability of patients to pay
.

After the domestic market becomes a stock market, innovative drug and generic drug companies will inevitably face integration.

In addition, some large innovative drug companies with more pipelines, such as BeiGene and Hengrui Medicine, have also begun to build their own CRO teams
.

Because for large innovative pharmaceutical companies, the cost of self-built clinical teams is lower and the quality is more guaranteed

Affected by this, since last year, especially since this year, the valuation of CRO leaders in the secondary market has shrunk sharply, or even halved, and the valuation of the industry has begun to return to normal
.

When the enthusiasm of capital fades and the domestic CRO market becomes a stock market, then "going overseas" is the most important growth point of the domestic CRO industry
.

The Light and Darkness of the Road to Internationalization

The Light and Darkness of the Road to Internationalization

With the deepening of pharmaceutical reform, domestic drug regulatory policies are gradually in line with international standards
.

In June 2017, the former CFDA joined the International Council for Harmonization of Medicines for Human Use (ICH); in June 2018, the newly formed NMPA further became a member of the ICH Management Committee and participated in the formulation of ICH guidelines

In this context, domestic innovative pharmaceutical companies that are seriously "introverted" are also actively carrying out "going overseas" progress
.
The role of CRO as a bridge can not only help foreign new drugs enter the country, but also help domestic innovative drugs go abroad.
CROs with globalization capabilities can help innovative pharmaceutical companies to speed up their products through Sino-US dual reporting, international multi-center clinical trials, etc.
Global listing speed, and ultimately realize the return of "China + overseas" market
.

On the other hand, due to cost considerations, international pharmaceutical companies also have an urgent need to transfer CRO business to China
.

As a knowledge-intensive industry, the CRO industry mainly relies on a large number of professional and technical personnel in the field of medicine.
In recent years, China has cultivated a large number of undergraduate and postgraduate talents in science and engineering.
With a large supply of talents, the average salary of China's CRO industry is almost half that of overseas counterparts.

.
In addition, there are obvious human and material cost advantages in China.
The research and development expenses in each stage of drug research and development are only 30%-60% of developed countries, which is highly attractive to multinational pharmaceutical companies
.

Cost factors have accelerated the transfer of overseas CRO production capacity to China.
In recent years, many domestic CRO/CDMO leaders have undertaken more and more orders from overseas pharmaceutical giants.
Among them, Pharmaron and Asymchem’s overseas revenue accounted for over 85%, WuXi Kangde is over 75%, and WuXi Biologics is over 55%
.
In addition, Jiuzhou Pharmaceutical, Boten, and Yaoshi Technology all account for about 70%
.

In the current unstable international trade environment, over-reliance on overseas markets also has many uncertain risks for the CRO industry
.
On the one hand, the foreign exchange settlement of domestic CRO companies mainly uses foreign currencies such as the US dollar, and fluctuations in the exchange rate of RMB against the US dollar and other foreign currencies will actually affect the company's performance
.

More importantly, the uncertainty of Sino-US relations has cast a shadow over the internationalization of domestic CRO companies
.
Although the US Department of Commerce's "sanctions" on WuXi Biologics seem to have little impact, it also sounded a wake-up call for CROs on the road to internationalization
.

Therefore, in addition to maintaining a leading edge in cost and catching up with foreign CROs in technology, CROs going overseas also need to ensure the stability of the supply chain.
Domestic replacement of core equipment is imperative.
”, in order to truly achieve internationalization and maintain lasting competitiveness
.

summary

summary

At present, China's CRO market is in a stage of rapid growth.
Compared with innovative pharmaceutical companies, CRO companies have stronger performance certainty, but there is also the problem of overvaluation
.

At the same time, although the international trade environment is not stable and there are many unfavorable factors in the international market, both the domestic pharmaceutical market environment and the needs of international pharmaceutical companies make globalization an inevitable choice for domestic CROs
.
For domestic CROs, "going overseas" is both an opportunity and a challenge.
How to play the card of "going overseas" will determine the valuation of domestic CROs in the future
.