Earlier this year, the New York Times made a big news: China issued a wildlife ban, resulting in a shortage of experimental monkeys, slowing down the development of COVID-19 vaccine in the United States. In other words, China stuck the neck of the United States with a monkey.

What on earth is an experimental monkey? Like mice, as an animal with the highest genetic similarity to humans, the research and development of some vaccines and biological drugs is almost difficult without monkeys. But it is not only the United States that lacks monkeys, but also China. Since the second half of 2019, the price of domestic experimental monkeys has soared from 1.5w to 6.2w, rising faster than A shares. During the two sessions this year, deputies to the National people's Congress also put forward relevant suggestions on strengthening the strategic reserve of experimental monkeys.

Behind the shortage of experimental monkeys is the popularity of drug research and development.

After the regulatory reform in 2015, the policy melody of encouraging research and development and reducing imitation was set, and since then, it has also opened the prelude to China's innovative drugs. Therefore, over the past five years, China's total clinical R & D expenditure has also increased at a compound annual growth rate of 19.1%. By 2020, a total of 2086 clinical applications were received, an increase of 48% over the same period last year, doubling in three years.

However, most of the drug R & D is high-risk and heavy assets, and there are many links in the research and development of a drug, so small and medium-sized enterprises are unable to build a large-scale R & D platform. As long as there is one less link, you need to look for outsourcing. So the popularity of innovative drugs has also accelerated the rapid development of an industry called CXO.

In the pharmaceutical service outsourcing track, star companies have been born one after another: Wuxi Apptec, who has hit 400 billion of the market capitalization, Tigermed, who has risen tenfold in three years, and Kellein, which is longed for by the top investment company Gao Min Xinxin. Even in the investment circle, if you don't watch CXO, you don't dare to say that you are in medicine.

So, as the hottest track in the pharmaceutical industry in the past two years:

1. What is the role of CXO in the industrial chain?

two。 What are different CXO companies competing for?

3. The influence of CXO on society.

Drugs to treat diseases do not fall from the sky, they are discovered by pharmaceutical workers from the laboratory, and step by step to verify their effectiveness and safety, and how to produce products that can be eaten in batches over a long period of time.

The traditional R & D and manufacture of new drugs are generally carried out by pharmaceutical companies. However, with the development of the times, the complexity of new drug development is increasing, the cost of clinical trials is increasing, and the return on R & D investment is becoming more and more uncertain. the costs and risks of this lengthy process make most pharmaceutical companies start to back down.

As a result, the professional outsourced third-party organization CXO (contract XXXorganization) arises at the historic moment, which is divided into preclinical CRO, clinical CRO and CDMO in chronological order. Because it is an intermediate service, there is no guarantee of the outcome of the final product. This category is also known as the "water seller" in a certain industry. In any case, the harvest is guaranteed by drought and flood.

China's CRO started at the turn of the century, because the CRO industry in Europe and the United States has developed more mature at this time, while foreign pharmaceutical companies found low labor costs in the Asia-Pacific region and shifted the focus of research and development. Wuxi Apptec, Pharmaron Beijing Co., Ltd.* and Tigermed have been established in this period of time, with the help of the transfer of global drug research and development focus, rapidly expand the business model, from a single business expansion to the whole industry chain, since then China's CRO industry has entered a round of rapid development.

However, Chinese people's money for seeing a doctor cannot be fully earned by foreigners, and local enterprises have also learned very quickly about how to make medicine. Coupled with the development and growth of the CRO/CDMO model in China, the top-level policy is a little clearer. Once the tools are available, everyone can start on their own.

Therefore, the current domestic CXO business can be divided into two categories, one is to serve overseas pharmaceutical companies, and the other is to help Chinese pharmaceutical companies grow. The former enjoys the dividends of Chinese engineers, while the latter benefits from the rise of the Chinese pharmaceutical market; but more often, these two dividends exist at the same time.

Take Wuxi Apptec, the leader of CRO, as an example. Since its founder Li GE returned from the United States in 2000, he began to receive lists from multinational pharmaceutical companies such as Lilai, Sanofi and Merck. After foreigners had a hard time during the global financial crisis in 2008, China's business volume also gradually piled up. Therefore, Yao Ming not only uses low-cost labor to earn money for foreigners, but also gets the profit of selling shovels when China's pharmaceutical market is on the rise.

Business contract manufacturing is not a new thing, low barriers such as Foxconn, labor-intensive, "dispensable", high-end, such as Taiwan Semiconductor Manufacturing Co Ltd, belong to deep barriers, "can not do without you." In fact, what these companies do is a service outsourcing job, but the pharmaceutical industry itself has deep barriers, and CRO is only hot in its own circle. It is only when the stock price has soared in the past two years that it has gradually become known to the public.

So is China's pharmaceutical CRO industry Foxconn or Taiwan Semiconductor Manufacturing Co Ltd?

The evaluation of the scarcity of a service mainly depends on two aspects, one is the equipment cost / output ratio, and the other is the level of technical barriers. The former is easy to understand. A medical scientist suddenly has an idea who wants to develop a drug. The short-term pressure to build his own laboratory is too great. In addition to funds, venues, and so on, there are also a series of excellent moths, such as environmental protection, taxation, and fire protection. He can only find an incubation platform first.

Just like a cook who has nothing for the time being, if he wants to cook a delicious dish, the best way is to find a public kitchen with better facilities instead of building one himself.

For the latter, for example, there is a virus testing technique in gene therapy, which, in short, is the key to ensuring that gene therapy research can be carried out properly. Wuxi Apptec is the third company in the world to own the technology, and even veteran Swiss giant Lonza, the world's number one CDMO, has to snuff, making it even harder for pharmaceutical companies to access.

Therefore, with the market becoming more and more efficient in R & D and more and more clear division of labor, domestic pharmaceutical CRO enterprises are gradually moving from "dispensable" to "indispensable without you".

The monkey mentioned at the beginning of the article is not enough, mainly aimed at the clinical trial, that is, to do experiments on monkeys to find out whether the drugs are useful or not. But what kind of drug is injected into the monkey's body and what to do after it is injected, in fact, there are various subdivisions in the research and development of new drugs.

Because of the short history of the CRO industry in China, there are leading companies in various sub-fields at present. Here, there are several CXO enterprises according to the process before and after drug development.

During the drug discovery phase, many companies are doing it. Giant Pharmaceutical Ming started this business, but one of the more representative is Chengdu pilot Pharmaceutical, which was listed by Science and Technology Innovation Board last year. Founder Li Jin saved a set of DNA coding compound library technology (DEL), which is equivalent to providing a "database" for biological drug research and development, solving the previous situation of new drug research and development looking for a needle in a haystack.

However, although the forerunner was the first group of people to eat crabs in this technology in China, a single customer structure and a poor performance report made the company hesitate in the capital market; as a result, the leading pharmaceutical industry, which has "mastered the core technology", has recently been using its own compound library to screen new drugs, recently authorized a new drug to Baiyunshan, and the shovel sellers dug up their own mines to make up for cash flow.

Another very representative of drug discovery is the drug stone technology of making molecular blocks. To put it simply, a drug is made up of one molecule, just like a toy made of Lego bricks. different spelling determines the shape of the toy, and different molecular structure determines the performance of the drug. Sometimes small structural changes can cause huge proprietary drug effects, and Yashi Technology is a company that can improve drugs "locally".

Traditional CRO is more inclined to passive research and development, working for customers, the results of patents belong to customers, there is a strong binding; while medicine stone technology belongs to active research and development, sell molecular block products to customers, patents in their own hands, with stronger technical barriers. Yaoshi's gross profit margin is about 60%, which is significantly higher than the industry level, with an average revenue growth rate of more than 50%, and is still further expanding its business downstream.

The largest clinical CRO in China is Tigermed. Clinical CRO, as its name implies, is the main agent to complete clinical trials, that is, after monkeys are found to be effective and safe, they try it on patients and need to deal with doctors and patients. For the convenience of customers, clinical CRO is usually responsible for the follow-up process research, registration application, drug production and post-market re-evaluation.

Clinical trials are mostly led by PI (academic leaders, mainly big doctors), which involves few technical aspects, involving doctor resources and manpower scale (which needs to be brokered by one person), linked to the level of management. With nearly 3.2 billion in revenue last year and more than 90 clinical trials, Tiger, with a gross profit margin of 47.24%, is a well-deserved leader.

Not long ago, the revenue of Zhaoyan's new drug, which was just over 1 billion yuan, was unremarkable in terms of scale, but it was the first CRO company to do drug safety evaluation. After all, if a drug is highly toxic, it is too "useless" to give monkeys directly, because there are not many monkeys. The safety of drugs is sometimes more important than utility, and it is also an evaluation dimension that drug regulators pay more and more attention to. How to evaluate is also a minority sector with high professionalism and demand rigidity.

Zhaoyan focuses on high growth and high profits, with revenue growth of 68.27% and gross profit margin of more than 50%. Although the size is small, the GLP (good practice Laboratory) certification laboratory necessary for safety evaluation is the most in the hands of Zhaoyan in China, and it can also be regarded as the leader in the subdivision field.

Of course, after the drug research and development is on the market, there is also an outsourced service called CMO, which is ahead of Hillhouse in China. Its continuous response technology has a place in the global top, so it has also won a lot of large orders from international drug companies, with a perennial profit margin of more than 45%.

It is worth mentioning that last year, Kellein resolutely rejected the private placement price of 120 yuan per share of Hillhouse Capital (total size 2 billion). Later, Kellein raised the price to 180, and Hillhouse gladly accepted it, perhaps because Hillhouse didn't get too many shares in Yao Ming and Tiger, so this time it desperately seized the opportunity from the CDMO leader.

However, the real king of CXO still needs to be the longest-cultivated pharmaceutical system, from drug discovery to CMO, from small molecules to macromolecules, everything and proficiency in everything. When their own technology fails to keep up, they buy their competitors. Drug research and development is "integrated, full-stack" service. After the snowball rolls up, it has achieved a trillion-dollar territory of the pharmaceutical system.

Like Tencent and BABA, after Yao Ming had more money, he began to buy everywhere in the upper and lower reaches of the entire industrial chain. One of the most puzzling models is to use capital to take stakes in small and medium-sized biopharmaceutical companies, then lock in the pharmaceutical company's CRO orders as shareholders, and then make money in both capital and industry. This kind of people who do their own research, set up their own projects, buy pharmaceutical companies in their left hand, sell CRO services in their right hand, and sell shovels have built their own mines, which are simply invincible.

Yao Ming Department because of getting up early, this model has been played perfectly, Tiger is currently in the layout, and hindsight of Kailiying and Pharmaron Beijing Co., Ltd.* also began to pay attention to.

The growth brought by this model is much faster than the traditional self-pulling business, so you can see that Wuxi Apptec already has a volume of 400 billion, and his net profit still grew by 60% last year.

Although the current development of the domestic CRO industry is not long, each field still has its own leader, a hundred schools of thought still contend, and when this giant head company is in full fire, it will inevitably squeeze the players in each track.

The pilot pharmaceutical industry mentioned earlier, in fact, Wuxi Apptec himself has built a DEL compound database, although the database is not as large as the pilot, but with the dominant position of Yao Ming in the whole CRO industry, it is difficult to say that it does not have an impact on the pilot pharmaceutical industry. Before Yao Ming, Tiger, Kellein and other leaders form an absolute monopoly advantage, it is still unknown whether this batch of domestic CXO companies can gain a firm foothold.

In the past two years, with the east wind of biomedicine, capital, policies and talents are in place one after another, in which a method called VIC has sprung up, that is, a mode of developing new drugs by the combination of venture capital (Venture Capital), intellectual property (Intellectual Property) and CRO.

In this model, the party with R & D capability (returnee scientists, scientific research institutes, pharmaceutical companies) finds a venture capital, sets up a project company, asks CRO to help him incubate the project, and a pharmaceutical company is born. From level I to level II, from the HKEx to Science and Technology Innovation Board, it is no exaggeration to say that half of the increase in biomedicine in the past two years has been brought up by this model.

One of the key roles of this model is CRO/CDMO, which provides pharmaceutical companies and capital with an accelerated incubation platform that can quickly turn idea in the laboratory into an innovative drug that patients can take. In other words, drug research and development, which used to be done only by traditional big pharmaceutical companies, can now be done by anyone with ideas.

The VIC model is nothing new. It originated in the United States and has been carried forward by the success of two major biopharmaceutical centers in the San Francisco Bay area and Boston area. Gilead, which produces the divine drug Redsivir, is such an example of developing into a new drug giant with the help of CRO services. It is only in China that the top-down policy environment of the pharmaceutical industry has become increasingly clear in the past two years, and this has become popular in China.

The value of this "platform" attribute has also been proven in other fields: for example, the Internet media platform has changed the entire content industry, and individuals no longer need publishers and television stations to be themselves; for example, live broadcast + logistics platform allows each individual to start their own business; CRO is also a platform in the pharmaceutical industry, which can empower each individual, thus accelerating the transformation of new drugs.

But just as there are negative situations such as data fraud and platform monopoly on the Internet, CRO has a lot of moths when it comes to dealing with pharmaceutical companies. There are those who start the price on the ground, those who collect money and do nothing, those who forge clinical approvals, those who find that the project is really fragrant in the middle of CRO development, and those who directly play with data fraud.

In every industry, when the pattern is reshaped, order and barbarism are often carried out at the same time, while the pharmaceutical industry is an industry dealing with life, and all kinds of selfishness may affect a group of living people.

Guiding industry regulation requires better top-level design, and if one day China's CRO giants really solve these historical problems and better lead the development of pharmaceutical manufacturing, it will have more meaning than Foxconn and Taiwan Semiconductor Manufacturing Co Ltd.