21st Century Business Herald reporter Ji Yuanyuan reported from Shanghai

Following its first loss since listing in 2023, Medicilon (688202.SH), the first CRO (pharmaceutical contract research and development services) company on the STAR Market, will continue to be under pressure in 2024.

Medicilon, founded in 2004, was successfully listed on the Science and Technology Innovation Board in November 2019. Medicilon's performance in the capital market for the first time has shown a trend of increasing year by year. But the good times did not last long, and the following year after the performance reached the historical peak, Medicilon fell into a loss-making situation. Recently, Medicilon released a performance forecast disclosure showing that the company continues to lose money, and it is expected to increase losses from January to December 2024, with a net profit attributable to shareholders of listed companies of -347 million yuan to -232 million yuan, a year-on-year decrease of 944.85% to 598.57%. Compared with the same period last year, the loss is expected to increase by 199 million to 314 million yuan. Deduction of non-net profit convergence.

In the first half of 2024, Medicilon's semi-annual report also shows that it will achieve operating income of 521 million yuan, a year-on-year decrease of 40.23%; The net profit loss attributable to the parent company was about 70.2303 million yuan, a year-on-year decrease of 142.27%. In response to the decline in performance, Medicilon said that the main reason was the intensification of competition in the pharmaceutical industry during the reporting period, which led to a decline in order prices and a delay in the execution of some orders.

Judging from the current market environment, local CRO companies are facing considerable performance pressure. For example, in the end of 2024, the former leading CRO company made frequent announcements, focusing on the change of control and formulating plans to issue shares to specific targets. According to the third quarter report of 2024, the company's revenue in the first three quarters was 720 million yuan, a year-on-year decrease of 15.09%; the net profit attributable to the parent company was -62 million yuan, a sharp decrease of 96.88% year-on-year; The net profit after deduction was -69 million yuan, a year-on-year decrease of 78.07%. Wind data also shows that in the A-share CXO industry, ChemPartner has the lowest performance. In the first three quarters, the gross profit margin of ChemPartner was only 19.22%, far lower than the industry average of 42.03%.

How to break the weak performance of local CRO companies?

The logic of high growth is no more?

The loss is a predicament that Medicilon cannot get rid of in the past two years.

In 2023, Medicilon will achieve operating income of 1.366 billion yuan, a year-on-year decrease of 17.68%; The net profit loss attributable to the parent company was 33.2106 million yuan, a year-on-year decrease of 109.82%. ROE, as an important indicator of the company's operating efficiency, also decreased from 23.25% in 2022 to -1.75% in 2023.

Entering 2024, Medicilon's losses continue. In terms of specific business, in the first half of 2024, Medicilon's two major business segments are declining significantly. Among them, the "drug discovery and pharmaceutical research services" segment achieved operating income of 261 million yuan, a year-on-year decrease of 35.21%; The "preclinical research" segment achieved operating income of 260 million yuan, a year-on-year decrease of 44.69%.

In response to this situation, an analyst of the pharmaceutical industry of a brokerage told the 21st Century Business Herald reporter that the industry has entered a period of adjustment from July 2021, which is the result of a mixture of geopolitics, industry policies, financing and other factors. Compared with the previous two years, the number of financing of biomedical technology enterprises is still at a low point, especially in 2022, and the scale of global and Chinese biomedical investment and financing has decreased significantly. The main reasons for this phenomenon are external factors such as the continuous cooling of the capital market in the medical and health industry, the continuous tightening of listing channels, the correction of value, and the more cautious investment institutions.

"For innovative pharmaceutical companies, if they want to survive in the cold investment and financing environment, they need to broaden their funding sources, focus on advantageous projects and cooperate with external institutions, and prioritize the use of limited resources on pipelines that are convenient for commercial transformation, so as to promote the continuous advancement of R&D pipelines and reduce the risk of capital chain breakage." The analyst said.

The cold market for innovative drugs has also put pressure on the performance of CRO. In its response to the regulatory inquiry letter in June 2024, Medicilon said, "In 2023, the unit price of the company's various businesses will decrease compared with 2022, of which the unit price of drug discovery and pharmaceutical research business will decrease from 1.4617 million yuan in 2022 to 923,700 yuan in 2023, a year-on-year decrease of 36.81%; The unit price of preclinical research business decreased from 1.4101 million yuan in 2022 to 1.0775 million yuan in 2023, a year-on-year decrease of 23.59%. ”

"The decline in customer unit price is mainly due to the decline in investment and financing enthusiasm in the biopharmaceutical industry, the intensification of competitive pressure in the industry, and the decline in the company's order price; At the same time, due to the investment and financing environment of the industry, biopharmaceutical companies are more cautious in their R&D promotion, and some R&D service orders are delayed, which has led to a decrease in the company's customer unit price. Medicilon explained.

If you want to break through the competitive situation in the industry, you can only aim at the differentiated track. At present, although the biomedical investment and financing environment has yet to recover, new opportunities have emerged with the continuous activity of GLP-1, ADC, small nucleic acid and other drug categories. In addition, some large pharmaceutical companies are actively using AI technology to innovate drug discovery and optimize the R&D process. To a certain extent, this also helps CRO companies break the bottleneck of reality.

CRO is an academic or commercial third-party organization that provides professional services in the process of basic and clinical medical research and development through contracts for medical device R&D enterprises, pharmaceutical companies, medical institutions or government agencies. In recent years, as an indispensable part of the "gold rush" road of pharmaceutical R&D, with the rise of innovative drugs, the intensification of population aging, and the continuous implementation of favorable policies, the CRO industry has continued to increase R&D investment. With the unique advantages of low cost, high efficiency and specialization, the CRO industry has developed rapidly, and its service scope has fully covered all stages of drug research and development, becoming an indispensable part of the pharmaceutical research and development industry chain. The CRO industry is also known as a "shovel seller".

According to Frost & Sullivan, China's CRO market reached $7.6 billion in 2020, accounting for 11.6% of the global market. The global CRO market exceeded $40 billion in 2020, and the North American market reached more than $20 billion, accounting for nearly 50% of the global distribution. It is estimated that by 2025, China's CRO market will reach US$22.9 billion, accounting for 21.0% of the global market, an increase of nearly three times compared to 2020.

"Although the CRO industry is facing the challenge of slowing growth in the current market, the main reasons for this are the extension of the drug development cycle, the intensification of market competition, and the increasingly stringent regulatory requirements." The above-mentioned analysts believe that with the emergence of emerging markets and the advancement of globalization, cross-border cooperation is expected to become the main growth point of the next round of biopharmaceutical industry, so that CRO companies can gain more opportunities in untapped markets and expand their business scale and influence.

The international market has become a "lifesaver"?

International business also seems to have become a key direction for Medicilon to reverse its losses in the future. Medicilon said at the third quarterly performance briefing, "The revenue from overseas customers accounted for about 36% of the main business income, and overseas orders increased year-on-year. "This is arguably one of the few upward performance figures for the company in 2024.

However, the path to internationalization has not always been easy. For example, in the past two years, WuXi AppTec, as a leading local CRO, has been deeply affected by geopolitics, and the pace of internationalization has been greatly hindered. At the end of 2024, WuXi AppTec announced the transfer of the entire equity interest in WuXi Advanced Therapies Inc. (the U.S. operating entity of WuXi ATU) and Oxford Genetics Limited (the U.S. operating entity of WuXi ATU business) held by WuXi ATU, the company's indirect wholly-owned subsidiary, to Altaris for cash consideration. According to WuXi AppTec, from January to November 2024, WuXi ATU's total operating revenue in the United States and the United Kingdom was equivalent to approximately RMB980 million (unaudited), accounting for 2.4% of the company's audited operating revenue in the most recent fiscal year. The transaction is expected to close in the first half of 2025.

It is widely believed in the industry that the introduction of the Biosecurity Act this year has had an impact on this, and the company sells related businesses to avoid potential risks. At the same time, the intensification of market competition in the field of cell and gene therapy (CGT) is also one of the important factors driving the sale.

Talking about the impact of geopolitics, the above-mentioned analysts also pointed out to the 21st Century Business Herald reporter that the current rhythm will be maintained in the short term, which also wins more time windows for enterprises to promote international layout. But the medium- and long-term effects remain.

"Although the Biosecurity Act has not been passed for the time being, the United States' concerns about biosecurity, technology dependence and data privacy have not diminished, and the pharmaceutical and biotechnology sectors are likely to remain a key focus in terms of U.S. censorship and restrictions on China's high-tech industries, especially when sensitive technologies such as genetic data and biological materials are involved." The analyst believes that this bill has an impact on the global layout of innovative drugs. In view of the fact that even though the law has not yet been expressly stipulated, some European and American companies may choose to reduce in-depth cooperation with Chinese CRO companies due to compliance considerations and reputation maintenance. Cross-border collaborations involving sensitive data, such as genetic information, may face stricter approval procedures or additional compliance requirements. Other low-cost production and R&D outsourcing locations such as India and Southeast Asia may further benefit by diverting some orders from Europe and the United States.

Therefore, in terms of coping strategies, some innovative pharmaceutical companies may need to re-plan their internationalization paths, such as exploring the NewCo model or establishing local R&D centers in Europe and the United States, in order to avoid potential policy risks. The focus of internationalization will gradually expand from the European and American markets to emerging markets such as Southeast Asia, the Middle East, and Latin America, so as to avoid the risk of a single market.

"In the medium to long term, Chinese innovative pharmaceutical companies need to strengthen data security, intellectual property protection and biosecurity management in international cooperation to meet the regulatory requirements of their target markets. Strengthen trust building with customers in Europe and the United States, and reduce concerns about biosecurity and data privacy through regular communication and compliance reviews. said the analyst.

Cross-border collaboration also requires CROs to have some important capabilities. Previously, a CRO company executive told the 21st Century Business Herald that first of all, CRO needs to have a global vision and global operation capabilities, be able to understand the local operation model, and properly handle issues such as intellectual property protection and data security. Secondly, it is necessary to have local teams in major regions of the world and have good project management and communication skills. At the same time, CROs also need to be flexible and scalable to adapt to the needs of different countries and regions. Identify unmet needs as accurately as possible in the early stages of project development, identify target patient populations and regions, and fully adapt to diverse patient populations during the development process.

In fact, in order to support the global registration and marketing of Chinese products, the best way is to conduct multi-regional and multi-center clinical trials. For Chinese companies that are accustomed to developing in China's regulatory environment, they should think more carefully about how to formulate the right R&D strategy, and fully consider the different regulatory requirements of different countries.

"This requires companies to have a good understanding of the regulations in the target countries and regions, including clinical trial design, data collection, quality standards, and different accelerated review channels." CRO is a highly competitive market that requires a high level of expertise, scale, a sophisticated operational network, and a deep talent pool, the executives said. At the same time, CROs need to carefully plan and execute their corporate strategies, focusing on clinical differentiation and global standard quality.