Report guide

On July 7, 2020, we published the Drug screening Industry report "how to view the future valuation and growth space of early drug screening CRO? The business model of the drug screening platform has been analyzed in. Among them, Vivia biology-"service + capital" two-wheel drive business model, while services bring stable cash flow, the use of incubation investment to bring leveraged income to achieve a breakthrough to the traditional CRO manpower-intensive drive model. In this report, we will mainly solve several puzzles about the future development of via Biology Company in the market: 1. Can the company's main business drug screening service income continue to grow at a high level? two。 What are the advantages and risks of downstream service chain extension? What is the texture of Longhua Pharmaceuticals, the target of the acquisition? 3. How to evaluate the profit margin of EFS investment incubation business? 4. What is the ceiling of the company's market capitalization? This report will provide exploratory answers to the above questions, hoping to address investors' doubts about the biological business model and future development space of Weiya. In summary, we believe that the company has a good entry point in the industrial chain of service business, while expanding the investment incubation business and extending the service chain with the help of CRO, this business model raises the ceiling and lays the foundation for the company to become bigger and stronger.

Main points of investment

Via Biology: service + investment, build a new ecological CXO drug screening CRO, enhance the ceiling by expanding investment incubation business for customers, and cooperate to supplement downstream services to enhance the service capacity of the whole industry chain of innovative drugs. The company mainly provides structure-based drug discovery services, and combines the traditional CRO service for cash (CFS) model with the unique service for equity (EFS) model to earn short-term drug discovery service fees while achieving high returns from long-term drug incubation investment.

In the second half of 2020, the company successively acquired Reliance Bio-enhanced front-end service capabilities, acquired Longhua Pharmaceutical Supplementary back-end Services (CMO) to create an one-stop platform, and built Hangzhou incubation base to strengthen CFS+EFS two-wheel drive synergy. On the basis of having the source flow of CFS and EFS business, we have reached strategic cooperation or mergers and acquisitions with innovative pharmaceutical companies in all aspects of the industrial chain to build an integrated innovation service platform.

CFS business: expanding from drug screening service (CRO) to full service chain (CRO+CDMO), platform construction is expected to continue to exceed expectations.

In 2020, the company continued to strengthen CFS from the aspects of technology platform, customer scope, service chain extension and so on. We believe that the increment of performance mainly comes from the following two aspects: 1) CRO business: drug screening revenue continues to grow at a high rate, receiving Reliance Bio-enhanced front-end capability. The company's drug screening service 2020H1 on-hand order growth, the second half of the performance is expected to continue to realize. The acquisition of drug synthesis CRO Reliance Biology has strong cooperation with the original business, which is expected to thicken the front customer base of the service chain, realize the two-way diversion of the upstream and downstream service chain, improve the company's service chain, and enhance customer stickiness. In the long run, the company's forward-looking introduction of new technology platform, has been based on frozen electron microscope technology to carry out services, continue to consolidate the technical advantages in the field of structural chemistry and broaden the moat. 2) CDMO business: the acquisition of small molecule CMO is expected to land at the end of the year, with rapid improvement in profitability in the first half of the year, and the continuous layout of large molecule CMO. On August 9, 2020, the company promoted the strategic integration agreement with Longhua Pharmaceutical and proposed to acquire an 80 per cent stake in Longhua Pharmaceutical with 2.56 billion yuan. Through the analysis of the company's financial data, we found that the company's main business of CDMO from 2017 to 2019 was the sales and commercialization of intermediates and APIs. With the construction of CDMO capacity and the introduction of orders in the first half of 2020, the net interest rate increased rapidly, and the per capita income and profits were in the forefront of the industry. We believe that the company's rich production management experience and certified large-scale production capacity have laid a good foundation for the transformation of CDMO, and cooperation with via Biology is expected to bring more customers to Longhua Pharmaceutical and strongly promote the development of CDMO.

On the whole, we believe that there is no doubt about the company's ability to upgrade the ceiling and incubate customers downstream from CRO, and the competitiveness of the two businesses has been well verified. As the leader of business development, we believe that the continuous verification of the company's integration capability will be an important variable that affects the company's overall competitiveness, which is also the focus of our attention at the initial stage of accelerated business expansion. Once verified, the ceiling of the company will open quickly.

Investment incubator (EFS): with the help of CFS to build an innovative pharmaceutical business incubator based on quality CFS services, the company expanded its business model to service for equity (EFS) in 2015 to share the profit space brought about by the increased valuation of Biotech after the promotion of the project. As of 2020H1, the company has incubated 56 enterprises, with an average shareholding of 21.78%, and the proportion of project selection is about 3%. Starting from 2018, the company successively withdrew from six incubation projects, earning a total investment disposal income of 113 million, with an average investment return of 258%.

At present, the research and development of the incubation project is progressing smoothly, of which 3 are in clinical II phase, 1 clinical phase I and 1 IND phase. On September 17, 2020, the Dogma project, a company incubator, was acquired by AZ. We speculate that the valuation of the project is about 600-800 million, and the return on investment may reach 5000%. We believe that this reflects the company's investment logic: 1) the professional team is deeply involved, strictly screen the incubation project, reduce the risk and improve the return. 2) the company uses services to buy shares to reduce the input cost of a single project, better control the progress of the project and reduce the risk. 3) early intervention, early exit, less investment in a single project, better risk control. 4) the company has a wide layout, focusing on Firstin-class projects, solving clinical pain points and improving return on investment. On the whole, we believe that the investment incubation model of EFS is different from ordinary PE/VC investment, which promotes the progress of the project better with the help of CFS's high-quality outsourcing services, and effectively reduces the return on investment and investment risk. EFS's early investment preference also makes the company based on its own most advantageous areas and is expected to achieve better investment results. In view of the company's current gradual withdrawal of investment returns, we believe that the company's EFS performance may be independent of the short-term investment and financing of the market, continue to achieve better and faster growth, and create great performance flexibility for the company.

Profit forecast and valuation

We use the segment valuation method to value the business of all sectors of the company:

CFS Services Business:

1) CRO: the net profit of the company's original CFS drug screening service is 114 million in 2019. Based on the continuous expansion of the company's personnel and the short-term guidance of existing orders, we assume that the CRO business will grow by 55% year on year in 2020, and this part of the company will contribute 178 million profit in 2020. With reference to comparable companies in the industry, we think that the reasonable market capitalization of CRO is 13.35 billion yuan (75 times PE).

2) CDMO (Longhua Pharmaceuticals): based on the changes in Longhua Pharmaceutical's performance and business structure in the first half of the year, we expect Longhua Pharmaceuticals to make a net profit of 175 million in 2020. With reference to the four comparable companies with A shares and H shares, the average PE in 2020 is 88 times. Considering the potential diversion effect of the company's original business, the CDMO business is still in the primary and initial stage of business integration risk. We assume that if we give the CDMO business 50 times PE, the corresponding market capitalization of the CDMO business is 8.75 billion yuan.

EFS business: in order to reduce the annual fluctuation caused by the exit rhythm, we use the DCF method to value the EFS business. With reference to the project success rate and return on investment in the drug R & D market, we believe that the investment experience of via is still in the early stage of accumulation, considering the average annualized rate of return of 45% for the industry at the same stage.

Under the three scenarios of 40% (optimistic) / 35% (neutral) / 30% (pessimistic), the market capitalization of the company's EFS business estimated by DCF valuation method is about 17.049 billion (optimistic) / 13.567 billion (neutral) / 10.564 billion (pessimistic).

Regardless of the CDMO business that has not yet landed, we think the reasonable market capitalization of the company is about 26.717 billion.

Investment suggestion

Based on the analysis of the company's core business segment, regardless of the impact of the unacquired CDMO business, we estimate that the company's EPS from 2020 to 2022 will be 0.45 yuan 0.32 yuan per share and 0.36 yuan per share respectively. The net profit of CRO business is expected to reach 178 million in 2020. With reference to comparable companies, we think that the reasonable market capitalization of CRO should be 13.35 billion yuan, corresponding to 75 times of PE. In order to reduce the annual fluctuation of investment income, we use DCF method to calculate part of the market capitalization of EFS. Under the optimistic / neutral / pessimistic hypothesis, the market capitalization of EFS business is about 17.049 billion / 13.567 billion / 10.564 billion. Under the neutral forecast, the company's reasonable market capitalization is 26.717 billion, which is significantly undervalued, covering the "buy" rating for the first time.

Risk hint

M & An integrated management risk; CDMO capacity building is not up to expectations; CFS downstream business diversion effect is not as expected; market investment and financing boom decline and EFS investment rate of return is not up to expectations; industry policy changes; innovative drug research and development boom decline; order short-term volatility; competitive risk.