The Zhitong Finance App learned that Zheshang Securities released a research report stating that profitability is related to product IP ownership, product development stage, and CSO's empowerment of products. In the future, the profitability of the CSO business is expected to continue to improve as the product structure gradually matures and the proportion of its own IP products increases. At this stage, based on judging the current macroeconomic environment and the direction of continuous deepening of medical reform, the CSO sector is an important new business format for breaking the current pharmaceutical market. Changes in business trends may support the growth and profitability of the internal standards of the business format to exceed market expectations.
It is recommended to focus on:
Professional CSO with proven brand marketing capabilities and mature sales channels and replicable marketing methods: Baiyang Pharmaceutical (301015.SZ), Kangzhe Pharmaceutical (00867), etc.
Distribution leaders with a central state-owned enterprise background, good hospital foundation, and experienced distribution leaders with experience in external market channels and commerce: Sinopharm Co., Ltd. (600511.SH), Shanghai Pharmaceutical (601607.SH), Kyushu Express (600998.SH), etc.
Traditional pharmaceutical companies that have proven their sales ability with their own single products, know better medicine, and have stable teams: Huadong Pharmaceutical (000963.SZ), Jichuan Pharmaceutical (600566.SH), etc.
The main views of Zheshang Securities are as follows:
CSO: New business formats under industry trends
Zheshang Securities believes that pharmaceuticals are gradually entering a new stage of supply-side reforms (total control, increased demand, structural adjustment, and new quality productivity). New industry trends include: ① pharmaceutical separation, prescription outflow, and drug channel adjustment; ② increased concentration and refinement of industrial division of labor driven by standardized behavior; ③ Biotech is gradually entering a harvest period, and demand for specialized commercial promotion capabilities is rising; ④ cost reduction and fee control brought about by severe aging trends and prominent pay-side pressure. These trends have spawned demand for CSO from biotech/MNC/traditional pharmaceutical companies, and have also prompted professional CSOs/distribution companies/traditional pharmaceutical companies to further revitalize their proven sales capabilities and channel advantages.
What is a CSO? Who are the CSO's primary customers?
CSO is an inevitable product of the continuous refinement of the innovation industry chain. By signing corresponding promotion agreements with manufacturers, CSO provides them with services such as consumer education, academic product promotion, marketing planning, business contacts, product distribution, flow tracking, and supply chain management. Its essence is the same as the rest of CXO; it is to reduce costs and increase efficiency for pharmaceutical companies.
CSO's main customers include: ① Biotech: gradually becoming the backbone of new drug pipelines. Some companies built their own teams to sell less than expected, commercialized or switched to cooperation with CSO/pharmaceutical companies. ② MNC: Affected by the collection/Chinese market environment, MNC tends to disband some mature pipeline sales teams and outsource to reduce costs and increase efficiency. ③ Traditional pharmaceutical companies:
Pharmaceutical separation and changes in sales patterns, CSO is a more efficient choice.
CSO business development stage
Zheshang Securities believes that the development of CSO is divided into a total of four stages, from initially acting as an import original research agent, to gradually establishing cooperative relationships with MNC/pharmaceutical companies, to increasing the viscosity of cooperation with pharmaceutical companies, building a product matrix, expanding cooperation models, and finally moving towards independent IP and an innovative implementation period of independent research and development.
Currently, the main CSO industry participants include: ① traditional pharmaceutical enterprise development: drug knowledge and rich marketing experience; ② distribution company expansion: rich channels and long-term cooperative relationships with pharmaceutical companies; ③ professional CSO: brand marketing capabilities in the professional field, especially strong competitiveness in the out-of-hospital market.
Comparison of core financial indicators
Growth: In 2019-2021, companies with a high share of CSO showed stronger growth under policy impetus. The future mainly depends on the gradual maturity and release of internal products and the implementation of new BDs.
Profitability: Kangzhe Pharmaceutical has the highest net interest rate. The net interest rate level is close to 40%, and the net interest rate is rising steadily. Zheshang Securities believes that profitability is related to product IP ownership, product development stage, and CSO's empowerment of the product. In the future, the profitability of the CSO business is expected to continue to improve as the product structure gradually matures and the proportion of its own IP products increases.
Profit generation per capita: An important indicator at the CSO development stage. The increase in per capita profit generation is a sign that CSO promotion capabilities are gradually maturing and marginal effects are showing. Among CSO related targets, in 2022, Shanghai Pioneer Holdings (686,000) > Sinopharm Co., Ltd. (638,000) > Kangzhe Pharmaceutical (577,000).
Risk warning
There is a risk of short-term fluctuations in upstream and downstream operations due to the accelerated liquidation of the industry; the risk of fluctuations in sales of core products; and the risk of new brand expansion falling short of expectations.