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Author: Su Hang
Producer: Global Finance
The
generic drug industry, which was criticized for "high pricing" a few years ago, has changed overnight.
Recently, the topic of "can 3 cents produce an aspirin" has been on the hot search, the reason is that in the 10th national centralized drug procurement of the recently announced results, the winning unit price of "aspirin enteric-coated tablets" is as low as 3.4 cents a piece, which makes many people worry about whether such a low purchase price will affect the quality of drugs.
According to a report by the First Financial Daily, the price of aspirin APIs is low, and such a low price can be achieved under large-scale production, and the low price does not mean that pharmaceutical companies will cut corners.
In fact, generic drugs are a low-margin industry globally, with the world's top 10 generic drug companies all having net profit margins between 10% and 16% in 2022. Even in 2021, when centralized procurement was beginning to emerge, domestic generic drugs were often considered to be "upside down" with the global market, and the issue of how to improve the "high pricing of generic drugs" was the topic at that time.
But on the other hand, there is no doubt that the generic drug industry has entered the era of low profits with centralized procurement as a signal.
01
Innovative drugs have become the only choice
As a major centralized purchaser, Hengrui Pharmaceutical (600276. SH) appears to have been gradually weakened.
The third quarterly report shows that in the first three quarters of 2024, Hengrui Pharmaceutical's operating income was 20.189 billion yuan, a year-on-year increase of 18.67%; The attributable net profit was 4.620 billion yuan, a year-on-year increase of 32.98%. Among them, the operating income in the third quarter was 6.589 billion yuan, a year-on-year increase of 12.72%; The attributable net profit was 1.188 billion yuan, a year-on-year increase of 18.67%.
In terms of long-term range, Hengrui Pharmaceutical's upward trend is still stable, and it has maintained double-digit growth for a long time since 2006.
The
turning point came in 2021, when Hengrui Pharmaceutical's operating income decreased by 6.59% year-on-year, and attributable net profit decreased by 28.41% year-on-year, and decreased by 17.87% and 13.77% year-on-year respectively in the following year. In 2023, although revenue and net profit will resume growth, there is still a gap compared with 2020.
The reason for the decline at that time was obvious. In both the 2023 annual report and the 2024 semi-annual report, Hengrui Pharmaceutical said that the revenue of generic drugs declined slightly during the period, and "the centralized procurement of generic drugs still causes a certain degree of pressure on sales".
In the 1st to 7th batches of centralized procurement, Hengrui Pharmaceutical selected a total of 22 varieties, with an average price reduction of 74.5%, and some products in the 8th to 9th batches of centralized procurement won the bid with a reduction of more than 70%.
In the 10th batch of "national procurement", Hengrui Pharmaceutical involves a total of 2 varieties, and plans to win the bid for 1. Among them, it is proposed to be the first to win the bid for gadolinium ateinthoc meglumine injection (15ml: 5.654g/15ml: 5.6535g*1 bottle), with a price of 26.88 yuan, a decrease of about 85%.
Therefore, the future of Hengrui undoubtedly lies in innovative drugs.
As early as the beginning of this century, Sun Piaoyang, chairman of the company, led Hengrui Pharmaceutical to start the research and development exploration of innovative drugs. The concept of "secondary innovation" has also been proposed, but it has also been pointed out that "the concept of secondary innovation is cleverly used to replace generic drugs, but in essence it is still generic drugs". However, from the level of me-too and me-better, it can also be seen that Sun Piaoyang's cognition of the importance of innovative drugs has taken shape.
According to SPDB International's research report, as of August 22, 2024, Hengrui Pharma has a total of 95 major clinical R&D pipelines of innovative drugs under development. According to the "2024 Annual Review of Pharmaceutical R&D" released by Citeline, an internationally renowned consulting agency, Hengrui ranks 8th among global pharmaceutical companies and 1st in China in terms of pipeline size.
However, to this day, Hengrui Pharmaceutical has always lacked a global blockbuster drug in the true sense.
The humanized PD-1 monoclonal antibody camrelizumab independently developed by Hengrui Pharmaceutical should have taken on this important role, but it has been unsmooth since it obtained orphan drug designation from the FDA (Food and Drug Administration) in the first-line treatment indication of advanced liver cancer in 2021.
In May 2024, the FDA issued a full response letter to the New Drug Application (NDA) for camrelizumab in combination with apatinib ("double Ai") for the first-line treatment of patients with unresectable hepatocellular carcinoma, as the FDA needs to conduct a comprehensive evaluation based on the company's complete response to the inspection defects at the manufacturing site; In addition, due to travel restrictions in some countries, it was not possible to complete all the necessary clinical examinations for the project during the review cycle, and the approval of the therapy application in the United States was delayed. At present, Hengrui Pharmaceutical has resubmitted the marketing application of "double Ai" therapy in the United States.
The PD-1 of two other domestic pharmaceutical companies, BeiGene (688235. SH, 06160. HK, BGNE. US) and Junshi Biosciences (688180. SH, 01877. Toripalimab has been approved by the FDA for the indications of esophageal squamous cell carcinoma and nasopharyngeal carcinoma respectively.
Obtaining FDA approval is a crucial step in the global commercialization of a drug. BeiGene's sales of tislelizumab in 2023 and the first half of 2024 will reach 3.806 billion yuan and 2.191 billion yuan, respectively, ranking first in PD-1 sales in China.
At the same time, BeiGene's other self-developed zanubrutinib is the first domestic anti-cancer drug marketed in the United States, with global sales reaching US$1.3 billion in 2023, becoming the first "blockbuster" innovative product in China to exceed US$1 billion.
Thanks to the success of zanubrutinib and tislelizumab, BeiGene's revenue has grown rapidly. In the first three quarters of 2024, the total revenue increased by 48.6% year-on-year to 19.136 billion yuan, and the average annual revenue forecast of 9 institutions is about 25.8 billion yuan.
Of course, BeiGene also spares no effort in terms of investment. From 2017 to 2023, BeiGene's R&D expenses increased significantly from RMB 2.017 billion to RMB 12.813 billion year-on-year, reaching RMB 10.166 billion in the first three quarters of 2024.
On the other hand, Hengrui Pharmaceutical, since 2011, has been disclosed, and its R&D investment growth has been mainly "stable". While the performance in 2021 declined, R&D investment also decreased slightly. In the first three quarters of 2024, Hengrui Pharmaceutical's R&D expenses were 4.549 billion yuan, and the R&D expense ratio was 22.53%.
02
Go to sea independently, look forward and look backwards
On the other hand, BeiGene can gain a lot from tislelizumab, which also depends on its independent overseas form. BeiGene's two major products, zanubrutinib and tislelizumab, are both independently exported by the company. The difficulties and risks of going overseas independently are enormous, but the benefits are also more substantial than any form of authorization.
For Hengrui Pharmaceutical, a total of 5 licensing transactions with a cumulative amount of less than 500 million yuan in the five years from 2018 to 2022, 5 license-out cooperation with a total amount of more than 4 billion US dollars will be reached in 2023, and the first NewCo transaction in China will be completed in May 2024 and 3 products will be completed with a transaction of about 6 billion US dollars.
License-out refers to the authorization of drug projects in early stage research and development to other pharmaceutical companies for late-stage clinical development and commercialization, and obtains clinical results in each stage and a certain percentage of sales share after commercialization according to the milestone model.
NewCo (Newly Created Company) is to authorize the overseas rights and interests of the pipeline to a new company established overseas, and at the same time introduce overseas funds and build an international management team, so that the new company can be listed overseas or be acquired to achieve exit.
NewCo transactions are considered to be an intermediate form of independent overseas and license-out. In May 2024, Hengrui Pharmaceutical licensed its GLP-1 product portfolio to Hercules CM Newco, Inc., which had just been established in the United States with Bain Capital as the majority shareholder, and obtained a license fee (Golden Kylin analyst) fee and a 19.9% stake in the company.
Today, NewCo has become one of the important ways for domestic innovative pharmaceutical companies to go overseas, but this form cannot solve a thousand worries, whether it is License-out or NewCo, it is equivalent to giving up the market of the product in the authorized region, and relying on this form is also equivalent to giving up the opportunity to become an international enterprise in this field.
Fortunately, Hengrui Pharmaceutical did not rest on its laurels. At 5:48 p.m. on December 9, Hengrui Pharmaceutical issued an announcement officially announcing that the company plans to issue shares (H shares) overseas and list on the main board of the Hong Kong Stock Exchange. It can also be regarded as a confirmation of Bloomberg's previous report on its proposed listing in Hong Kong in October.
According to Bloomberg, Hengrui Pharmaceutical is expected to raise at least US$2 billion (about HK$15.5 billion), which may set a record for the fundraising of Hong Kong-listed biopharmaceuticals.
After being listed in Hong Kong, Hengrui Pharmaceutical can have more direct access to overseas capital. At a press conference held in October 2024, the Financial Secretary of the Hong Kong SAR Government said that the recent net buying of Hong Kong stocks is mainly funded by European and American investors, who account for about 85% of the net purchase value.
In terms of going to sea, Sun Piaoyang recently said: "Now we mainly borrow ships to go to sea, which has two ways, one is to cooperate with large foreign companies, authorize them, and leave things that they can't do abroad to others; The second is to cooperate with foreign large capital, who have experience in investment. These two forms can effectively avoid risks for enterprises and improve the efficiency of 'going global'. ”
As for going overseas independently, Sun Piaoyang believes that the problems faced are not only the high clinical costs abroad, but also the future commercialization and other issues, and there are many uncertain factors.
Judging from the choice of Hengrui Medicine, the overall situation is still a "seeking stability", but looking back on the past, Hengrui Medicine is inseparable from Sun Piaoyang's bold decisions to advance again and again.
03
The "first brother of medicine" who broke out
Similar to many entrepreneurs, the story of Sun Piaoyang and Hengrui Pharmaceutical began in a small state-owned factory. In 1982, Sun Piaoyang, who had just graduated from China Pharmaceutical University, joined Lianyungang Pharmaceutical Factory and started his career in the pharmaceutical industry as a technician.
In 1990, Lianyungang Pharmaceutical Factory, which had been established for nearly 20 years, was still a small workshop-type factory with a book profit of only 80,000 yuan. At this time, Sun Piaoyang, who had been transferred to the Science and Technology Department of Lianyungang Pharmaceutical Industry Company as the deputy section chief, was ordered to take on the heavy burden of the factory director.
Sun Piaoyang later recalled: "In 1991, I read the financial statements every day and calculated the accounts every day to keep the company alive. At that time, the spiramycin and erythromycin produced in the factory were sold for a penny, and they couldn't change the status quo even if they were exhausted, so they had to find a way out. ”
The way out he found for the pharmaceutical company was to develop new drugs and make a fuss about the product structure.
The
specific situation is no longer known today, but it is widely rumored that Sun Piaoyang showed his courage while drilling into the research technology, launched the anti-cancer injection VP16 project, and began to produce improved capsule products, which achieved great success when the market was almost blank at that time, and the profit exceeded one million in one fell swoop.
The following year, Sun Piaoyang once again defied public opinion, took out almost all the profits of the pharmaceutical factory, and spent 1.2 million yuan to get the patent rights of the newly developed anti-cancer drug ifosfamide from the Institute of Pharmaceutical Research of the Chinese Academy of Medical Sciences for follow-up development. At that time, whether it was for the pharmaceutical company or Sun Piaoyang himself, this was a big gamble.
Fortunately, Sun Piaoyang won the bet, and thus established the company's position in the anti-cancer drug market.
From 1991 to 1996, Sun Piaoyang led the factory to develop more than 20 new products, 5 of which were rated as national key products, and the revenue of the pharmaceutical factory exceeded 100 million yuan in 1996.
In 1997, Lianyungang Pharmaceutical Factory was restructured into today's Hengrui Pharmaceutical, and successfully landed on the A-share market in 2000.
From 2003 to 2006, Hengrui Pharmaceutical launched the share reform, and Sun Piaoyang replaced the state-owned assets as the actual controller through MBO (management buyout). Since the company's stock price was still at a low level during this period, the cost of MBO was not high. Since then, Hengrui Pharmaceutical's anti-tumor drug sales have ranked first in China for 7 consecutive years.
Although it is said to be "developing new drugs", the early Hengrui Pharmaceutical mainly produced generic drugs.
Later, under the promotion of Sun Piaoyang, Hengrui Pharmaceutical invested nearly 200 million yuan in 1997 and 2000 to set up two research centers in Lianyungang and Shanghai, and spent a huge amount of money to set up R&D centers in Chengdu and the United States and a clinical medicine department, and built six innovation platforms such as drug target and molecular screening, biomarkers and translational medicine, and promoted Hengrui Pharmaceutical's innovative drug business step by step.
It can be said that today's Hengrui Medicine is inseparable from Sun Piaoyang's courage to break the game.
Today, the generic drug industry has once again entered the era of "pennies". Since the establishment of Lianyungang Pharmaceutical Factory in 1970, Hengrui Pharmaceutical, which has passed the "Destiny of Heaven", and Sun Piaoyang, who was ready to retire at the beginning of 2020 and had to come back to turn the tide 20 months later, still have a little bit of entrepreneurial passion?
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