Typesetting/Coriander under the stars

Benefiting from the perennial precipitation and breakthroughs in the field of biomedicine in China, in recent years, both A-shares and H-shares have emerged many star companies listed with the concept of "first share", such as "the first share of CRO listed by central enterprises" Innostar (688710) and "the first share of autoimmunity" Quanxin Biotechnology (09835), etc., while the anti-tumor pharmaceutical company Huahao Zhongtian Pharmaceutical (02563) claims to be ".The first stock of pharmaceutical synthetic biology", which will be successfully listed on the Stock Exchange in 2024.

In fact, synthetic biology is not a new topic, and there are 20 small companies involved in A-shares. However, judging from the performance in 2024, the performance of each company is different, and even very differentiated. Twining Biotechnology (301301), Rhine Biotechnology (002166) and other companies are in a good situation, and their synthetic biological products have been put into production, while Huaheng Biotechnology (688639) has increased revenue but not profits, and Huahao Zhongtian Pharmaceutical has continued to lose money and suffered a sharp drop in stock prices.

Huahao Zhongtian Pharmaceutical Stock Price Chart Source: Internet, compiled by the author

This is a good reflection of the current situation of the synthetic biology track, there are those who are full of energy, and there are also those who can't catch up for a while.

1. The Next Industrial Revolution?

The so-called synthetic biology is simply to let working cells produce the desired substances for us by means such as artificially writing genomes. The diversification of the output makes it widely used in various corners, such as bulk APIs in the field of biomedicine, anti-tumor drugs, and even cosmetics and food.

Compared with traditional preparation methods, synthetic biology bypasses the constraints of raw materials and reaction conditions, and is theoretically more efficient and environmentally friendly, which gives this technology a very expansive potential, and we have high hopes, and even some people are optimistic that this technology will bring the fourth industrial revolution to mankind.

Synthetic biology connotation Source: Qianzhan Industry Research Institute, Guoyuan Securities Research Institute

Focusing on the field of medicine, synthetic biotechnology has been initially applied to the preparation of bio-based APIs, and has also been laid out in the path of anti-tumor drugs such as CAR-T, trying to make cell therapy methods truly land through efficient production of drug carriers and other means. This has attracted many traditional pharmaceutical companies such as Sinopharm (600511), CSPC Pharmaceutical Group (01093) and Kelun Pharmaceutical (002422) to explore the future of synthetic biology through mergers and acquisitions and the establishment of research institutes.

Second, the performance of listed companies is very different

The size of China's synthetic biology market has shown a growth trend in the past few years, with a market size of about 6.7 billion yuan in 2022, about 8.2 billion yuan in 2023, and is expected to reach 28.5 billion yuan by 2029.

In the thriving synthetic biology industry, Twining Biotech was one of the better performing companies last year, and according to the performance forecast released at the beginning of the year, it is expected that the net profit attributable to the parent company in 2024 will increase by 44.59% to 54.16% year-on-year, to 1.36 billion yuan to 1.45 billion yuan. Of course, the growth in performance cannot be entirely attributed to synthetic biology alone. However, according to the disclosure of Twining Biotech, the application of synthetic biotechnology has actually improved the production efficiency of the target product and increased the gross profit margin by 5%. Moreover, the synthetic biological product bisabolol has been successfully put into production in 2024, and the sales target for that year is about 50 tons. Although the actual sales of this product have not yet been disclosed, with the gradual ramp-up of production capacity, the planned production capacity of up to 300 tons should be gradually released after 2025, providing some support for performance.

Cathay Biotech (688065) also performed well last year, with operating income in the first three quarters increasing by 41.49% year-on-year, and net profit attributable to the parent company increasing by 9.97% year-on-year. The long-chain diacids produced by bioprocessing through the construction of a cell factory are Cathay's main products, accounting for 90% of the company's sales, so it can be assumed that the fluctuations in the company's performance basically reflect the market situation of this synthetic biological product.

But the other side of the highlight is loneliness, the "first stock of pharmaceutical synthetic biology" mentioned at the beginning of the article, Huahao Zhongtian Pharmaceutical, was just listed at the end of October last year, and it suddenly plummeted by 40% on December 31 after rising for two months, which surprised investors. In fact, the reason is not difficult to understand, that is, Huahao Zhongtian Pharmaceutical continues to lose money, with a loss of 190 million yuan in 2023 and a loss of nearly 60 million yuan in the first five months of 2024. Although the core product Utidelon Injection (trade name: Utide) is an authentic synthetic biological product produced by genetically engineered bacteria fermentation technology, it does not reflect obvious advantages compared with other advanced breast cancer innovative drugs, and has been included in the medical insurance catalogue with a 6% discount on the premise of nearly 100 million yuan of annual sales expenses, and the gross profit is worrying.

In 2024, the terminal price of Huaheng Bio's amino acid series products (valine, etc.) will drop sharply due to the increase in new production capacity, so the gross profit margin will decline to 28.13%, a decrease of 13.16 percentage points from the same period last year, which has also led to Huaheng Bio's increase in revenue but not profit.

Huaheng Biology uses anaerobic fermentation process to produce valine Source: Huaheng Biology announcement, Open Source Securities Research Institute

Therefore, the author has always believed that synthetic biotechnology at this stage is only a means of preparation, and it is not that what is labeled with this label will necessarily shine. For companies such as Twining Biotech, the downstream market of products is relatively stable, and the gross profit space is further optimized through synthetic biotechnology, so the positive effect will be more significant. However, if companies such as Huahao Zhongtian Pharmaceutical and Huaheng Biotechnology last year encountered the dilemma of a crowded core product market and a sharp decline in gross profit margin, then any technology would be in vain.

What really determines whether the business can stand or not depends on whether the product itself is competitive.

Third, the exit is not smooth, and the investment and financing are cold

While the performance of domestic listed companies is unpredictable, the star biological enterprises on the other side of the ocean are in a deep predicament.

Zymergen was still in high spirits when it landed on the Nasdaq market in 2021, but just a few months later, the core product failed to be mass-produced, and it had to be sold to its peers after experiencing a sharp drop in stock prices. And Ginkgo Bioworks, which took over, is not all smooth sailing, and its operating income will continue to decline in 2024, and it has not climbed out of the quagmire of losses so far. If commercialization still does not improve, I am afraid that it will follow in the footsteps of the former and be abandoned by the capital market.

The sluggishness of the relevant targets in the secondary market of China and the United States has also had a negative impact on the investment and financing of many synthetic biology companies in the primary market. According to industry statistics, the financing events in the domestic synthetic biology field have been declining year by year since 2021, and there will be a sharp decline in 2024.

Of course, there are also domestic start-up companies such as Blue Crystal Microorganisms and Enzyme Biology that have received at least five rounds of investment, but the vast majority of companies are still in the early stage, with public financing of only hundreds to tens of millions of yuan, which is really far from enough for the synthetic biology track that needs to optimize gene editing, design synthetic pathways, and finally realize the synthetic biology track from R&D to production.

China Synthetic Biology Investment and Financing, 2017-2023M1-M5 (from 100 million RMB) Source: Toubao Research Institute, Guoyuan Securities Research Institute

This huge resistance is related to the fact that it is still difficult to commercialize at this stage.

On the one hand, the threshold for primary products such as raw materials is not high, and there are many entrants, so the competition is very fierce, such as the ergothioneine of cosmetic raw materials has fallen from a high point of 200,000 yuan/kg to tens of thousands of yuan/kg in just a few years. On the other hand, many projects are still in the experimental stage, and it is difficult to achieve large-scale and industrialized production. And as we mentioned above, even if Huahao Zhongtian Pharmaceutical is successfully listed, it may not be able to beat the products of other technical paths.

Although synthetic biology has high hopes, the situation of related manufacturers can be described as two worlds of ice and fire. The author believes that among the theme stocks, there are still a few companies that have really benefited from synthetic biotechnology, and the market value brought by the theme is not long-lasting.

Note: This article does not constitute any investment advice. The stock market is risky, and you need to be cautious when entering the market. There is no harm in buying and selling.

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Personal opinion, for reference only