Source: Doctor Yao
Author: Blue Quercus

The target that has received the most attention in the pharmaceutical market today is none other than GLP-1, the “magic medicine for weight loss.” Although it has just appeared, it has been dubbed the “King of New Drugs” by the market.

The global sales volume of liraglutide, smeglutide, and duraglutide is constantly refreshing people's expectations. What is behind them$Novo-Nordisk A/S (NVO.US)$with$Eli Lilly and Co (LLY.US)$The stock price has also gone all the way north, with the highest increases since this year reaching 51.4% and 66%, respectively.

The popularity of weight loss drugs in overseas markets soon spread domestically. The entire GLP-1 upstream and downstream industry chain received great attention, and the stock prices of related companies bucked the trend and soared.

Faced with huge temptations, a large number of new players are pouring in from all parts of the industry chain. These industry up-and-comers all hope to perform until the end at the New Pharmaceutical King's dance party.

01 Hypoglycemic drugs “hit” diet pills

There's no doubt about it,The size of the diabetes market is huge — so huge that it could host the birth of a new drug lord.

As one of the top five causes of death in the world, 4 million people die each year due to diabetes. According to data from the International Diabetes Federation (IDF), the number of adults with diabetes worldwide reached 537 million in 2021. Among them, China is the largest country with diabetes. Over the past 10 years, the number of people with diabetes in China has increased from 90 million to 141 million. On average, 1 out of every 10 people is deeply affected by diabetes.

Under a trend where the number of patients continues to increase, since diabetes is a chronic disease, it has the characteristics of lifelong medication, making the corresponding diabetes drug market the second largest drug market after oncology medication. According to statistics, from 2016 to 2022, the global diabetes drug market grew from US$42.03 billion to US$59.6 billion, with a compound annual growth rate of more than 5%.

Behind the huge market share, traditional diabetes drugs (insulin, biguanides, α-glycosidase inhibitors, etc.) currently still account for more than 60% of the diabetes drug market share in China, but new hypoglycemic drugs such as DPP-IV, GLP-1, and SGLT-2 have quickly seized the market with their advantages in curative efficacy, increasing from less than 10% three years ago to 35.2%.

Among them, GLP-1 receptor agonists received the most attention. Both smeglutide and dulaglutide were the top 20 star drugs in global sales last year. As a revolutionary hypoglycemic drug product, with the launch of weekly pharmaceutical products, it is expected to replace insulin as the main drug for diabetes treatment in the future. The three most shipped insulin products in the world have all been severely impacted in the past five years, and their revenue scale has declined sharply.

While the GLP-1 drug is gradually becoming mainstream in the hypoglycemic drug market, it has also further expanded its indications for weight loss.

According to the World Health Organization, WHO, there are currently more than 1 billion people in the world suffering from obesity and overweight. As acceptance of diet drugs continues to increase, the global slimming drug market has grown from US$1.8 billion in 2016 to US$2.6 billion in 2020; among them, the size of China's slimming drug market has grown from 260 million yuan in 2016 to about 3 billion yuan in 2021, with a compound growth rate of 50.3%.

This is just the current growth rate. Diet pills have consumption attributes that fall between medical and aesthetic medicine. Once “hot” products appear, their market size may even surpass the diabetes drug market.

The remarkable curative effects, combined with the two major supermarkets, have continuously refreshed people's expectations in sales of GLP-1 drugs. The overall sales scale of GLP-1 drugs approved for marketing worldwide in 2022 has reached more than 22.5 billion US dollars, of which sales of smeglutide and duracopeptide reached 10.882 billion US dollars and 7.44 billion US dollars respectively.

In 2023, the GLP-1 drug further continued its growth trend, even causing Novo Nordisk and Lilly to raise their annual performance expectations for 23 years. In the first half of this year, Novo Nordisk's sales reached DKK 107.667 billion, up 29% year on year and net profit increased by 43%; Eli Lilly's second-quarter revenue was US$8.312 billion, up 28% year on year, and net profit increased 85% year on year.

What the market is looking forward to even more is,In addition to the diabetes and weight loss markets, GLP-1 drugs continue to explore new indications such as NASH, Alzheimer's disease, cardiovascular disease, and chronic kidney diseaseThis is another 100-billion-level market.

GLP-1 is a veritable “gold mine”, and behind it, China's two core industrial chains are actually hidden, and it is expected to become the biggest beneficiary of domestic GLP-1 Dongfeng.

02 Chain 1: Explosive growth of APIs

The most direct impact of the increase in GLP-1 drugs that exceeded expectations was a sharp increase in the supply of APIs.

According to Novo Nordisk's annual report, demand for the API (active ingredient in active ingredients) of smeglutide has reached 4 times that of 2019. As GLP-1 drugs continue to be iterated and indications continue to expand, the shortage of APIs will only worsen.

According to estimates by Anxin Securities Research Center, the minimum demand for GLP-1 pharmaceutical raw materials in the fields of weight loss, diabetes, and NASH is 1944KG, 1157KG, and 750KG, respectively. The market size is close to 20 billion yuan based on the calculation that a foreign supplier of Simeglotide API is 5,000 yuan/gram.

However, not everyone is capable of eating this piece of cake.

Currently, among the methods of peptide synthesis, solid phase synthesis is the mainstream method of production. According to the process of solid-phase synthesis of peptides, the synthesis process mainly requires key materials such as amino acid derivatives, condensation reagents, resin carriers, separation and purification equipment, and raw materials.

Judging from the raw materials side, China has a complete supply system, and corresponding leading enterprises include$Meihua Holdings Group (600873.SH)$(amino acids),$Suzhou Highfine Biotech (301393.SZ)$(condensation reagent),$Sunresin New Materials (300487.SZ)$(solid phase carrier), separation and purification ($Suzhou Nanomicro Technology (688690.SH)$,$Tofflon Science and Technology Group (300171.SZ)$,$Truking Technology (300358.SZ)$) etc. On this basis, China has become a major exporter of peptide APIs, accounting for more than 30% of the global peptide API market.

However, most of these peptide APIs are primary raw materials with less than 10 amino acids, and there are still high technical barriers to large-scale production of high-end long-chain peptide APIs. For example, peptide drugs have high purity requirements. Generally, they need to reach 99% or more, and 0.1% or less for single compounds is preferred, but using different reagents, strategies, and methods can cause various processes to generate different types and levels of impurities. Among these, process technology, quality control, and production cost control all have high technical thresholds.

Judging from the current number of active registered companies for APIs, there are 55, 19, and 19 API companies for types such as thymus pentapeptide, somatostatin, and octreotide acetate, etc., and competition is fierce; for difficult high-end products such as smeglutide and liraglutide, there are only 4 domestic qualified raw material suppliers.

In addition to the 4 companies mentioned above that have achieved double coverage of the raw materials of simeglutide between China and the US,$Hainan Poly Pharm (300630.SZ)$,$Hybio Pharmaceutical (300199.SZ)$and Shengnuo Biotech are all developing a layout of GLP-1 APIs.

Take Hanyu Pharmaceutical as an example. It has mastered internationally advanced solid-phase peptide synthesis technology, and has invented its own core technologies such as efficient solid-phase cyclic technology and sequenced small-molecule peptide separation technology, which has reached the level of large-scale production. On September 19, Hanyu Pharmaceutical announced that it had received an order of 30 million US dollars for GLP-1 polypeptide APIs from overseas customers, which triggered a wave of stock price increases.

In recent years, with the impetus of capital, domestic enterprises have also begun to continuously improve and develop processes for synthesis of complex peptides and expand production capacity. It can also be seen from the performance of major domestic API concept stocks, that at present, the sales and profit contribution of GLP-1 polypeptide APIs is still relatively small, and it is not yet possible to have a significant impact on performance. However, as capital continues to enter the market, there will be more and more players deploying GLP-1 APIs, and competition on this track will gradually intensify.

Overall analysis shows that GLP-1 APIs are a high-quality race track with high technical content, strong customer stickiness, and strict raw material control. If it can successfully enter the supply chain of Novo Nordisk and Lilly, it will also be possible to establish a remarkable moat of qualifications. For enterprises with an earlier layout, it is possible to open up popularity through a single order, continuously improve the technology platform, and gradually form a leading effect.

03 Chain 2: Peptide CDMO takes over “COVID-19 big orders”

Another reality is that under the weight loss trend set off by smeglutide, Novo Nordisk's current production capacity is completely unable to meet the rising market demand.

In mid-2022, Novo Nordisk's Wegovy (smeglutide weight loss version) was limited for almost the whole year, with sales volume of only US$874 million, an increase of 346% over the previous year. Of these, the US market contributed 99% of sales, and even the EMA (European Union Profile and European Medicines Agency) issued a warning about a continuing shortage of simeglutide drugs in March 2023.

Although Novo Nordisk has also increased its investment in the construction of its own production capacity for GLP-1 drugs in recent years, it will take a long construction period for this production capacity to actually be put into use. For a while, production capacity became one of the main factors limiting Novo Nordisk's performance growth, but this also provided OEM opportunities for domestic and foreign peptide CDMO companies.

From a cost perspective, outsourcing to peptide CDMO is a very reasonable choice. On the one hand, the technical barriers to peptide production are high and the production capacity construction cycle is long; on the other hand, the special nature of the peptide drug production process has led to the need to independently establish a complete set of hardware facilities for peptide drug development and production, which requires huge costs, while outsourcing to CDMO companies can flexibly control production capacity.

Furthermore, 2014-2026 may be the peak period when patents for major types of polypeptide drugs expire, and the emergence of generic drugs has also brought more development opportunities for peptide CDMO. According to Sullivan's data, the global peptide CDMO market is expected to grow from US$5.4 billion in 2025 to US$11.8 billion in 2030.

Compared with other emerging countries, China has the most complete upstream, middle, and downstream biological industry chains. At the same time, it has significant engineer dividends and a huge cost advantage, and is expected to become the world's main place for transferring peptide CDMO production capacity.

Last year, the “COVID-19 oral specific drug”, which was a hit in the biomedical field, generated tens of billion yuan in revenue for domestic CDMO companies, and the performance of related CDMO companies directly exploded. This year, they lost the support of “COVID-19” drugs, and the performance growth of major CDMO companies has slowed sharply. The current boom in GLP-1 drugs is also making major domestic CDMO companies lose their hands, including CXO giants$WUXI APPTEC (02359.HK)$,$ASYMCHEM (06821.HK)$,$Zhejiang Jiuzhou Pharmaceutical (603456.SH)$It also includes some CDMO companies that focus on peptides, such as San Novo Biotech and Notai Biotech.

As demand for GLP-1 drugs continues to increase, compared with the innovative drug and generic drug industry of GLP-1 drugs in China, CDMO companies that are upstream in the biomedical industry are expected to once again play the role of water sellers, or become another beneficiary of the GLP-1 dividend.

04 reproduced$Tesla (TSLA.US)$Industrial chain logic

The explosion of the GLP-1 industry chain has become the general trend. At a time when all investors are searching for who will become the leader of domestically produced GLP-1 drugs, in fact, many people have ignored the certainty that exists in the supply chain.

This is in line with the logic of investing in Tesla's supply chain in the first place. After the Tesla industry chain was fully localized, the first to benefit was not other electric vehicle brands, but the large and small suppliers behind Tesla. Tesla relied on domestic suppliers to keep costs down, while domestic suppliers obtained stable orders from Tesla, creating a situation where they went in both directions. This was also the core capital for Tesla to continue to cut prices in the future.

Similarly, behind the popularity of the GLP-1 drug, there is also a supply vacuum, which has left an opportunity for powerful domestic engineers to pay dividends. It is still unknown how high the ceiling for GLP-1 drugs is currently not being released due to limited production capacity, which is indicated for weight loss.

Based on this, the domestic GLP-1 industry chain is likely to copy the investment logic of the original Tesla industry chain. Domestic core raw material suppliers and mainstream peptide CDMO companies will benefit significantly. Along with the continuous expansion of GLP-1 drug indications, it has opened up huge market space, driven the entire upstream and downstream industry chain, and added a spark to the recovery of the biomedical field.

However, at the same time, the influx of overheated capital will also inevitably lead to partial overcapacity. In particular, many low value-added industrial chain links are more prone to blind speculation where expectations are overheated, which is worth being wary of investors.

Editor/Somer