In the past, the birth of the pharmaceutical outsourcing industry was mainly due to the overcapacity of large pharmaceutical companies.Pharmaceutical companies take advantage of production capacity to provide professional production services for others, and then gradually developed into a more professional outsourcing industry. Later, with the gradual complexity of drug research and development process, CRO services gradually infiltrated into all aspects of new drug research and development: preclinical CRO, clinical CRO, CMO/CDMO and so on, which we collectively referred to as CXO.

On the other hand, on the demand side, the birth of pharmaceutical outsourcing industry solves the R & D time and cost of innovative pharmaceutical companies.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.

So generally speaking, the pharmaceutical outsourcing industry can be compared to "semiconductor contract manufacturing industry" such as Taiwan Semiconductor Manufacturing Co Ltd, Semiconductor Manufacturing International Corporation, Huahong Semiconductor and so on, while innovative pharmaceutical companies can be compared to "chip design enterprises" such as Huawei Hayes chip, Qualcomm Inc chip and so on.We all know that drugs and medical devices are easily affected by national medical policies (price reduction), such as the volume purchase of drugs and medical devices, etc., but the pharmaceutical outsourcing industry is basically not affected by any medical policies.

Business model: "milestone" payment model and "risk sharing, benefit sharing" model

At present, the cooperation between large-scale CXO enterprises and pharmaceutical companies is mainly "milestone" payment mode and "risk-sharing, benefit-sharing" cooperative R & D mode.The cooperation model between CXO enterprises and pharmaceutical enterprises has gone through four stages: the first stage is the one-time charging mode related to pharmaceutical companies, and the CXO enterprises have low risks and low returns; the second stage is the "results-oriented" model, in which CXO enterprises can get excess bonuses if they complete the project ahead of time, otherwise the benefits will be reduced; the third stage is the "milestone" payment model, in which CXO enterprises charge according to schedule.

The fourth stage is the "risk-sharing, benefit-sharing" model. CXO is responsible for the design and implementation of the project, providing financial and technical support to pharmaceutical companies, and sharing the sales of drugs after listing. Quintiles partnered with Eli Lilly and Co in 2002 for the drug Cymbalta, and Quintiles earned a return on sales of about $748 million.

Pharmaceutical outsourcing is mainly divided into three modules: preclinical CRO, clinical CRO and CMO/CDMO.

Pharmaceutical outsourcing is a complex industry chain, which is mainly composed of three modules: preclinical CRO, clinical CRO and CMO/CDMO.

According to the scale classification of China's CXO industry chain, China presents a "1-2-N" pattern, and the scale advantages of the first three enterprises have initially emerged.The first echelon is Wuxi Apptec, covering the whole CXO industry chain. The second echelon is Pharmaron Beijing Co., Ltd.* and Tigermed, Pharmaron Beijing Co., Ltd.* is mainly in the field of preclinical CRO, Tigermed is mainly in the field of clinical CRO. The third echelon is mainly for other subdivided areas.

The domestic CXO enterprise is the largest one. Wuxi Apptec has maintained an absolute leading position in the industry for many years in terms of revenue and net profit. Yao Ming's market share has always been in the first place in the industry, and its market share reached more than 15% in 2019. But the industry ranking first in net interest rate is Tigermed, the leader of clinical CRO.

1) preclinical CRO is highly dependent on technology platform.

Preclinical CRO mainly includes compound research and drug preclinical trials.① compound research is the initial stage of new drug research and development, which provides the initial drug molecular structure for innovative drug research and development.The study of compounds is subdivided into: target selection and confirmation-lead compound research and optimization-early safety testing.

Preclinical trials of ② drugs provide evaluation of drug safety and drug toxicology.The main purpose of this stage of the experiment is to further study the compounds and live animals to observe their biological activity against target diseases and to evaluate their safety.

The study of compounds is highly dependent on professional and technical platforms, especially the structure database of lead compounds.The success rate of screening lead compounds is only 1/1000 or even 1/10000, so there are higher requirements for the database and technology platform of outsourcing service enterprises. At present, the commonly used technologies include high-throughput screening (HTS), fragment-based drug design (FBDD) and so on. Drug screening technology lays the foundation for the development of the whole original research and innovation drug.

From the perspective of technology platform, Wuxi Apptec's service content is the most comprehensive.Wuxi Apptec not only has traditional FBDD, SBDD, HTS, DEL libraries and other services, but also continues to develop PROTAC drug discovery and testing platform and DNA coding compound library (DEL). Among them, DEL platform has enabled 110 global customers, including 7 of the top 20 pharmaceutical companies in the world.

The businesses of Wisdom Chemistry and Vivia Biology cover traditional services related to new drug research and development, while Pharmaron Beijing Co., Ltd.*, Yaoshi Technology and Chengdu Leader focus on providing some characteristic services. Wuxi Biologics, on the other hand, specializes in macromolecular drug development and has a platform for double-antibody and ADC drug development.

2) Clinical CROCore Competitiveness is Talent Reserve

Clinical studies evaluate the effectiveness of new drugs in the treatment of diseases and their safety effects on the human body through extensive human trials. Clinical CRO is mainly divided into I-IV phase, in which phase I, II and III are carried out before the approval of the new drug on the market, while phase IV clinical trials are usually completed in the new drug registration application (NDA).

CRO in the clinical stage is the biggest cake in the R & D process.In terms of the proportion of stage costs, clinical phase I to III costs account for about 70%, which is the biggest cake in the R & D process and the highest ceiling stage in the CRO industry, of which phase I accounts for about 5%, II phase accounts for about 15%, and III phase accounts for about 50%.

There are great differences in the trial standards and the number of subjects in different clinical stages.① Phase I clinical trials were conducted to evaluate the pharmacology and safety of candidate drugs in humans. 20-30 subjects were small in size. ② clinical II phase to verify the efficacy and safety of drugs, the subjects range from dozens to hundreds of people. The clinical III phase of ③ mainly focused on drug usage and risk-benefit ratio, and the number of subjects expanded to hundreds to thousands. The main purpose of clinical IV phase of ④ is to investigate the efficacy and adverse reactions of drugs under the condition of widespread use after the drugs are put on the market.

The core competence of clinical CRO is an industry talent reserve with rich experience in excellent projects.The core competence of clinical CRO includes one-stop service ability. Because clinical research requires higher ability to deal with temporary events such as scheme design and serious side effects, experienced medical specialists have more advantages. The reserve of experienced personnel in clinical CRO enterprises will also directly constitute its core competition barrier.

Taking Boji Pharmaceutical and Tigermed, which are both clinical CRO, for example, the number of personnel of Tigermed is much higher than that of Boji Pharmaceutical. Accordingly, the per capita income and per capita profit of Tigermed are 10 times that of Boji Medicine respectively.

3) CMO/CDMO has higher requirements for capacity utilization and cost control.

CMO/CDMO can be divided into two stages: laboratory (preclinical) and factory (commercial). CMO provides pharmaceutical companies with customized services such as APIs, intermediates and preparations in the product research and development stage to improve the production efficiency of new drugs. CDMO optimizes the technical route for pharmaceutical companies on the basis of CMO.

CMO/CDMO capacity construction needs a lot of capital investment, capacity utilization and cost control constitute the competitive advantage of enterprises.CMO/CDMO enterprises usually need to have advanced R & D facilities and GMP standard production plants with pilot and large-scale production capacity in order to meet the requirements of downstream pharmaceutical companies. The construction cost of a single GMP production line is at least 50 million yuan, mainly for fixed assets investment and sustained capital expenditure, and higher requirements for the financial strength of enterprises.

C of small and macromoleculesThe bibcock of MO/CDMO is all medicine Ming system.According to the technology platform, CMO/CDMO can be divided into small molecules (chemical drugs) and macromolecules (biological drugs). The threshold of small molecular field (chemical drugs) is low, which is mainly drugs with continuous mixing and blending of a variety of chemical components, which are easy to copy and mass production. Hechuan Pharmaceutical Co., Ltd. (Wuxi Apptec Biological subsidiary) is the largest CMO/CDMO in China.

In the field of macromolecules (biopharmaceuticals), Wuxi Biologics (the company that Wuxi Apptec split and listed from the department) is the leader of domestic macromolecular CDMO, the threshold is very high, because its raw materials are living cells, living cells are extremely sensitive to temperature, light, humidity, pH, etc., so it is difficult to copy. Wuxi Biologics ranks fourth in size in the world, ranks first in China and has a market share of 78 per cent.

Summary:The core barrier of preclinical CRO lies in the professional technical platform and the database of lead compounds, because the success rate of lead screening is only 1/1000 or even 1/10000, so the more advanced the database and technology platform of pharmaceutical outsourcing enterprises, the easier to screen the target drugs. The core competence of clinical CRO is not only a reserve of experienced talents in excellent projects, but also a cake with the highest value in the industrial chain. CMO/CDMO capacity construction needs a lot of capital investment, capacity utilization and cost control constitute the competitive advantage of enterprises.

Summary

1. CXO originated from undertaking the insufficient R & D capacity of pharmaceutical companies, and now it has penetrated into all stages of drug research and development. At present, the CXO industry is mainly divided into three parts: preclinical CRO, clinical CRO and CMO/CDMO;. In addition, the pharmaceutical outsourcing industry is basically not affected by any medical policies, and it is a typical "water seller" drought and waterlogging industry.

2. At present, CXO business model is mainly based on "milestone" payment model and "risk-sharing, benefit-sharing" model. With the gradual listing of domestic innovative drugs, the above two models will bring sustained cash inflows to CXO enterprises.

3. The core barrier of preclinical CRO lies in professional technical platform and lead compound database, the core competitiveness of clinical CRO lies in talent reserve, and the key of CMO/CDMO lies in capacity utilization and cost control.

Stock price performance of Hong Kong pharmaceutical outsourcing industry this year

This year, the stock price performance of the pharmaceutical outsourcing industry is eye-catching, with Pharmaron Beijing Co., Ltd.* performing the best, followed by Wuxi Biologics, the industry's highest barrier, Wuxi Apptec, the industry's absolute leader, and Tigermed, the clinical CRO leader with the highest value in the industry chain (listed later).