In the pharmaceutical biological industry, pharmaceutical R & D and production outsourcing (CXO) is one of the key directions of Hillhouse, including Wuxi Apptec, Wuxi Biologics, Tigermed and other industry leaders are almost all into the arms of Hillhouse.This is a typical "water-selling" industry, which can guarantee harvest by drought and waterlogging.

Last month, Futu Information gave you a detailed introduction to Tigermed, the industry leader in clinical CRO."what kind of enterprise is Tigermed, which Hillhouse Capital once again increases its position?". Today, we give you a brief introduction to the pharmaceutical outsourcing industry, as well as Wuxi Apptec of the whole industry chain of CXO.

Pharmaceutical outsourcing industry

1) definition of pharmaceutical outsourcing industry

Through contracts for pharmaceutical enterprises, medical institutions, small and medium-sized medical and medical device research and development enterprises, to assist pharmaceutical and biotechnology companies to design, implement and manage their R & D projects and reduce their operational risks, and accelerate the development of safe and effective drugs and medical devices.

2) Pharmaceutical outsourcing industry to solve the pain points of the industry

The main points of new drug research and developmentEarly exploration-preclinical study-preclinical trial phase-approval for listingIn the past, traditional pharmaceutical companies had to complete all four major stages, and it would take 10 years and more than $1 billion to complete this process.

However, with the increasingly fierce competition in the global new drug R & D and sales market, the increasing time cost and expenditure of new drug research and development, and the impact of generic drugs on the original drugs, large pharmaceutical companies begin to find it difficult to obtain high profits. According to Deloitte's 2019 Pharmaceutical Innovation Drug return Evaluation, the rate of return on R & D of new drugs plummeted from 10 per cent in 2019 to 1.8 per cent in 2019, but R & D costs rose to 19.8 per cent from 11.9 per cent in 2010.

In order to shorten the R & D cycle, control costs and reduce R & D risks, large pharmaceutical companies at home and abroad devote more energy to the early stages such as disease mechanism research and new drug target discovery.Follow-up R & D and other related servicesByPharmaceutical outsourcing companies are responsible, which is the significance of the existence of pharmaceutical outsourcing industry.。

3) characteristics of pharmaceutical outsourcing industry

A) CRO prefers labor-intensive industries.Production capacity and cost are important indicators to measure the operating capacity of CRO enterprises. In recent years, due to the prosperity of the CRO/ CDMO market, the first enterprise orders are in a state of spillover, so production capacity has become an important factor restricting the development of the company.The number of employees as an indirect indicator of CRO/CDMO production capacityThe growth rate tends to show a strong positive correlation with the growth of corporate revenue.

b）It is closely related to the market development of innovative drugs, generic drugs and biological generic drugs.The United States is the largest pharmaceutical market in the world, while China is the second largest market. In recent years, China's pharmaceutical market has developed rapidly. In addition, China has relatively sufficient high-quality medical professionals. The combination of the two makes China's pharmaceutical outsourcing industry develop rapidly.

4) Pharmaceutical outsourcing industry chain & industrial value chain

An overview of overseas outsourcing:The top outsourcing service companies in the world in terms of sales are IQVIA (formerly Quintiles), Covance (Covens) and so on. IQVIA (Quintiles) is the largest CRO organization in the world, and Charles River (Charles River Laboratory) is a leading company in safety evaluation.

An overview of local outsourcing:Domestic well-known outsourcing companies are Wuxi Apptec, Pharmaron Beijing Co., Ltd.*, Tigermed, Boji Pharmaceutical and so on.Its traditional Chinese medicine Mingkang de is the only integrated platform in China to achieve full coverage of the drug R & D industry chain, especially in the field of small molecular drug discovery.Tigermed and Boji Pharmaceutical business focus on clinical drug development services, while Klein and Boteng operations focus on process research and production in the CDMO drug development phase (CDMO simply means outsourced production).

4) the scale of pharmaceutical outsourcing industry

The overall growth of the global pharmaceutical outsourcing market is stable, with an average annual compound growth rate of 10.3% from 2013 to 2017.In 2017, the overall market size reached US $104.1 billion, of which CRO market size was US $44.6 billion, accounting for 43% of the market size of CRO C (D) MO was US $59.5 billion, accounting for 57%.Therefore, Wuxi Apptec is in a trillion-level RMB market, the market space is very large.

According to the above industry analysis, we understand that the pharmaceutical outsourcing industry has a long industrial chain, but its core purpose is only one, to help pharmaceutical companies to reduce the cost of new drug research and development, shorten the research and development cycle and other issues. Wuxi Apptec is the only integrated platform in China to achieve full coverage of the drug R & D industry chain, and is the leader in many subdivision fields.Especially in the field of small molecular drug discovery.The next part of this article is to introduce Wuxi Apptec.

Wuxi Apptec

Wuxi Apptec was founded in 2000, started from compound discovery business, and extended its business to preclinical CRO, clinical CRO, CDMO and other fields through business extension, epitaxial mergers and acquisitions, etc., and has become a leading international technology platform company providing all-round integrated laboratory R & D and production services from drug discovery, development to marketization.

I. Historical Development

December 2000-founder Li GE et al and Taihu Water Group, John J.BaldwinJoint ventureEstablish；

August 2007-listed on the New York Stock Exchange, raising US $184 million

December 2015-termination of trading on the NYSE after the privatization of the NYSE

2015-2017: core business carding, divided into three major business platforms Wuxi Apptec (drug discovery business and small molecule CDMO, etc.),Wuxi Biologics(focus on macromolecular field, Hong Kong stock IPO in 2017), drug Mingcode (genetic diagnosis and other businesses, unlisted)

May 2018: Wuxi Apptec's parent company is listed on A shares

December 2018: Wuxi Apptec listed on the Hong Kong Stock Exchange

II. Introduction of the business section

Wuxi Apptec's business is mainly divided into CRO, CMO/CDMO and other businesses. Among them, the laboratory service in China under CRO business is the main source of business income, focusing on the field of small molecules.Wuxi Apptec is a global leader in the field of small molecule drug discovery.

From a business point of view, laboratory services in China (mainly preclinical CRO) is the company's core business, with revenue of 6.473 billion yuan in 2019, an increase of 26.59% over the same period last year, continuing a steady and rapid growth trend, in which the growth rate of the DDSU department tends to be stable.

The revenue of laboratory services in the United States reached 1.563 billion yuan in 2019, an increase of 29.79 percent over the same period last year, mainly due to the acceleration of cell and gene therapy CDMO services and medical device testing business.

The revenue of clinical research and other CRO services (clinical CRO+ field management SMO) reached 1.063 billion yuan, an increase of 81.79% over the same period last year. Excluding mergers and acquisitions, the growth rate was about 61.37%, and its growth rate was the fastest of all businesses.

The revenue of CDMO/CMO services reached 3.752 billion yuan, an increase of 39.02% over the same period last year. Its growth is mainly due to the promotion of existing projects to the later stage, the growth of new orders and other factors.

1) CRO- China laboratory service

The laboratory service in China is mainly preclinical CRO business (gray box). The company started in the field of small molecular compound discovery. After years of deep ploughing, the business in this field is very mature, and on this basis, the business is gradually expanded to the whole field of preclinical CRO.Wuxi Apptec is very dominant in the field of small molecule drug discovery.

In order to clearly understand the industry environment of Wuxi Apptec's laboratory services in China, we can first understand the market situation of small molecular chemicals.Small molecular chemicals have always occupied more than 70% of the global pharmaceutical market.Because of the advantages of convenient use, stable synthesis process and relatively low price, small molecular chemical drugs will still be the mainstream research direction for a long time in the future. (Wuxi Biologics is mainly in charge of the drug business of macromolecules.)

Laboratory service in China is the core business segment of Wuxi Apptec, with steady growth in income and rising gross profit margin in recent years. In 2019, the revenue of laboratory services in China is about 6.5 billion yuan, accounting for 50% of the total revenue, an increase over last year. According to the chart on the right, we can see that its gross margin remains above 40%, in part because the company launched a new integrated drug discovery service (DDSU) model in 2014.

Particularly worth mentioning is the new model of integrated drug discovery service (DDSU), which provides an one-stop new drug research and development service from the stage of drug discovery to the completion of submitting the IND declaration to the SFDA.To put it simply, it is an one-stop process of preclinical CRO.Set mealService. If the research and development of the project is successful, it will not only collect revenue from new drug research and development services, but also share the sales revenue with the approved products on the market. Its cooperation customers are: Zhengda Tianqing, Qilu Pharmaceutical and other domestic first-tier pharmaceutical companies, but also covers many small and medium-sized enterprises seeking transformation. (the following figure shows that Wuxi Apptec's IND application project has a high probability of success.)

2) CRO- US Regional Laboratory

The US regional laboratory service is mainly carried out through the wholly-owned subsidiary AppTec (Wuxi Apptec USA). AppTec has set up laboratories in Philadelphia, S ã o Paulo and Atlanta to provide for pharmaceutical companies, scientific research institutions and medical device enterprises.Cell and gene therapyR & D and production servicesMedical device testing service. (Gray box)

Cell and gene therapy industry:Although cellular and gene therapy (such as Car-T immunotherapy) has a broad prospect, the cost of research and development of cellular and gene therapy products is significantly higher than that of traditional drugs. In order to accelerate the demand for products to market and reduce costs, these pharmaceutical companies prefer to outsource the production and declaration process. At present, the cell and gene therapy product CDMO service is located inPrimary stageThe compound annual growth rate from 2013 to 2017 is 23%.

At present, the company is actively cultivating cells and gene therapy products CDMO services this new business, prior to the production capacity construction period, fixed assets and manpower investment increased more. In addition, the company has a high-quality standard of medical device research and development and production of the whole industry chain. The slowdown in 2018 is mainly due to capacity problems, but since the second half of 2018, with the continuous release of production capacity, customers continue to increase and service projects continue to advance from the early clinical stage to the later stage, achieving rapid growth. By 2019, the growth rate of laboratory revenue in the US region had rebounded to 30 per cent.

3) CRO- clinical and other CRO

Other clinical CRO business of the company = SMO business + clinical CRO business.

The company's revenue from clinical research and other CRO services reached 1.063 billion yuan, an increase of 82% over the same period last year (excluding mergers and acquisitions, revenue from clinical research and other CRO services increased by 62%). Thanks to the rapid development of the domestic new drug clinical trial market, the company's clinical CRO and SMO service quality, scale and capacity have been greatly improved, and the number of customers and orders have increased rapidly.

A) SMO business

SMO dispatches clinical research coordinators to assist researchers in conducting clinical trials to ensure that the clinical research process complies with the requirements of GCP and research programs. Jinshi Pharmaceutical was founded in 2009 and was acquired by Wuxi Apptec in 2011.Up to now, it has become the largest SMO institution in China, covering 120 + cities across the country. At present, the domestic market share is 20%, and it is expected to further improve in the future.

B) Clinical CRO business

The main body of the company's clinical CRO is its wholly-owned subsidiary Kang de Hongyi, which was established in 2011. after years of development and operation, the scope of business includes BE, clinical phase I-IV. Through the acquisition of overseas clinical CRO companies, Kangde Hongyi has a global multi-center service capacity and has set up offices in 10 cities around the world. For example, Wuxi Apptec acquired RPG, an American clinical research institution, in October 2017 and Pharmapace in May 2019.

Clinical CRO industry situation:Clinical CRO is the most critical stage, accounting for about 70% of the cost of new drug research and development. Tigermed is the leader in the subdivision of clinical CRO in China. Tigermed's clinical CRO income was 1.4 billion yuan in 2019, while Wuxi Apptec's SMO and clinical CRO income in 2019 were 1 billion yuan.

4) CMO/CDMO

CMO/CDMO service (gray box) is the research and development and production of small molecular new drug process, which is simply understood as pharmaceutical outsourcing production. The company mainly through holding subsidiariesHequan Pharmaceutical IndustryTo provide integrated services of small molecular new drug intermediates, APIs and preparations from preclinical process development to commercial production for large, small and medium-sized pharmaceutical enterprises around the world.

The core barriers to CMO/CDMO are professional R & D personnel and advanced R & D and production processes (such as the role of Taiwan Semiconductor Manufacturing Co Ltd). According to the chart below, Hequan Pharmaceutical Co., Ltd. currently has leading process development technology and production control technology and has more high-quality talents. Hechuan Pharmaceutical Industry is far ahead of the same industry in income and per capita net profit.

In 2019, the company's CMO/CDMO business revenue reached 3.752 billion yuan, an increase of 39.02% over the same period last year, making it the leader in the domestic CMO/CDMO industry.

III. Financial analysis & other indicators

In 2019, the overall income of Yao Ming Kant was 12.872 billion yuan, an increase of 34% over the same period last year, with a net profit of 1.855 billion yuan, down 17.96% from the same period last year. The main reason for the decline in net profit is the loss of 180 million yuan in the fair value of the company's investment. after deducting the loss of the target of investment, the net profit is 1.914 billion yuan, an increase of 22.8% over the same period last year, slightly higher than last year's growth rate.

In terms of income structure, more than 70 per cent of Wuxi Apptec's business is abroad, and about 20 per cent is Chinese mainland income. According to Wuxi Apptec's prospectus, its core customers are from overseas, that is, Johnson & Johnson, AstraZeneca PLC, Merck & Co Inc, Pfizer Inc, Bayer and other multinational enterprises. Wuxi Apptec's gross profit margin remained unchanged from last year at 39 per cent, but net profit fell in 2019, mainly due to Unity Biotechnology Inc. And the investment losses caused by the fall in Hua Medicine's share price are not caused by the company's business.

(note: overseas customers may mean that the business is in China, but the headquarters or place of registration is overseas, because Chinese laboratories are the company's main source of income.)

According to the icon below, we can see that Wuxi Apptec's cash flow is very abundant. With $5.2 billion in cash in 2019, there is no pressure to repay 1.9 billion of short-term loans. In addition, the cash flow of operating activities in 2019 was about 2.5 billion yuan, an increase of 66% over the same period last year. On the one hand, revenue increased by 35% over 2018. On the other hand, it is due to effective cost control and timely collection of accounts receivable (which indicates that the company has enhanced bargaining power)

4. Comparison between Wuxi Apptec and the same industry

CRO tends to be labor-intensive industries, so production capacity and cost are important indicators to measure the operating capacity of CRO enterprises. In recent years, due to the prosperity of CRO / CDMO market, the orders of head enterprises are in a state of spillover.Therefore, production capacity has become an important factor restricting the development of the company.The number of employees as an indirect indicator of CRO/CDMO production capacity, its growth rate often shows a strong positive correlation with corporate income growth.

Wuxi Apptec is currentlyThe only pharmaceutical outsourcing company with more than 10,000 domestic employees, with a growth rate of 20%.. Q1 also maintained a growth rate of 22% in 2020, indirectly reflecting the growth of its Q1 orders and the company's confidence in future development.

Pre-clinical CRO is based on laboratory and CDMO is based on factory, so projects under construction reflect CRO/CDMO 's investment in production capacity to some extent. In the past two years, due to the continuous improvement of the prosperity of the industry, the demand for orders continues to increase, and the scale of projects under construction by the leading companies has maintained a state of rapid growth. Especially in 2020Q1, the investment of most companies under construction has not been affected by the epidemic, showing that the demand of the whole industry is very strong.

Wuxi Apptec has an absolute advantage in projects under construction. 2020Q1's projects under construction reached 2.1 billion yuan, a growth rate of 140%, which is much higher than the level of the same industry.

As CDMO tends to focus on asset industries, fixed assets are more important indicators of a company's production capacity and output than the number of employees and human efficiency. In terms of "income / fixed assets", CDMO enterprises as a whole have maintained a stable state in recent years, and Wuxi Apptec has an absolute advantage in terms of the number of employees and fixed assets.

V. valuation

According to the valuation of Societe Generale Securities, Wuxi Apptec's market capitalization in 2021 is about 2140-254.4 billion yuan, and the corresponding stock price is 90,107 yuan.

VI. Summary

In 2020, most of the companies in Q1 CXO industry were not affected by the epidemic, and the growth rate of employees and investment in fixed assets were faster than that of last year, reflecting the strong demand of the whole industry. CXO is a typical "water-selling" industry that can guarantee harvest by drought and waterlogging, which is one of the key directions of Hillhouse's key layout.

The pharmaceutical outsourcing industry was born to solve the problems of controlling the cost of new drug R & D and shortening the R & D cycle. China is the second largest pharmaceutical market in the world, and it also has relatively sufficient medical professionals. The combination of the two makes China's pharmaceutical outsourcing industry develop rapidly. Wuxi Apptec is one of the few CXO in the whole industry chain in the world, except that the subdivision of clinical CRO is not the leader in China, it is the leader in all subdivisions, especially in the field of small molecule drug discovery.

Investment suggestion

Wuxi Apptec's current prices in A shares and Hong Kong stocks are reasonably expensive.

Preclinical CRO leaders: Wuxi Apptec, Pharmaron Beijing Co., Ltd.*

Clinical CRO leader: Tigermed

CMO/CDMO leader: Wuxi Apptec, Kailiying