The cold winter of CXO has lasted for three full years since the second half of 2021. From industry leaders to emerging pharmaceutical companies, everyone has felt the chill. However, since the second half of 2024, the entire industry has shown some signs of recovery. Against the backdrop of interest rate cuts in Europe and the United States, the situation in the pharmaceutical investment and financing market has reversed, orders from many listed companies have begun to grow, and the industry turning point is about to come. Haoyuan Pharmaceutical is one of the first CXO companies to feel the warmth. Since the end of August, the stock price has risen from a low of 18.49 yuan/share to a high of 46.52 yuan/share, an increase of more than 150%.

Haoyuan Pharmaceutical stock price trend
Image source: Oriental Fortune

What is the secret of Haoyuan Pharmaceutical behind the fluctuations in stock prices?

Rapid growth of the basic plate

In the third quarter report released, Haoyuan Pharmaceutical achieved operating income of 1.62 billion yuan in the first three quarters of 2024, a year-on-year increase of 17.6%; net profit attributable to the parent was 143 million yuan, a year-on-year increase of 21.3%.

The steady growth in performance is mainly due to its basic plate, that is, the rapid growth of life science reagent business. In the first half of 2024, the operating income of the scientific reagent business was 700 million yuan, a year-on-year increase of 30.70%, accounting for about 66.3% of revenue.
Haoyuan Pharmaceutical's life science reagent products are mainly divided into molecular building blocks, tool compounds and biochemical reagents. Among them, molecular building blocks are rigid products in the process of small molecule drug research and development, which can effectively reduce the repetitive work of R&D personnel and effectively improve the efficiency of drug development. According to Nature Reviews, the global market size of molecular building blocks will be approximately US$49.5 billion in 2023 and is expected to reach US$54.6 billion in 2026.

Haoyuan Pharmaceutical's molecular building block products cover drug molecular building blocks, catalysts & ligands, materials science, ADC and PROTAC related molecules, impurity reference substances, nucleoside monomers, unnatural amino acids and general reagents. In the first half of 2024, the revenue of the molecular building block business was 210 million yuan, a year-on-year increase of 46.0%, and has become the second engine of its performance growth.

Tool compounds and biochemical reagents are small molecule compounds with certain biological or pharmacological activities at the back end of the synthesis path of molecular building blocks. They are widely used in the early stages of life science and pharmaceutical research. The development difficulty is higher than that of molecular building blocks, the cycle is longer, and the cost is higher. According to ReportLinker, by 2027, the market size of tool compounds in China is expected to reach US$4.7 billion.

Haoyuan Pharmaceutical's tool compounds and biochemical reagents are its advantageous sectors with strong international influence. The product categories cover most of the signal pathways and targets in the fields of basic scientific research and new drug development, involving chemical small molecules, protein macromolecules, peptides, nucleic acids and gene therapy raw and auxiliary molecules, cell therapy auxiliary molecules, etc. In the first half of 2024, tool compounds and biochemical reagents achieved revenue of 490 million yuan, a year-on-year increase of 25.2%, which is its profit and cash flow center at this stage.

As of the first half of 2024, Haoyuan Pharmaceutical has accumulated more than 126,000 life science reagents, including more than 85,000 molecular building blocks and about 41,000 tool compounds and biochemical reagents, which can meet the needs of different customers.

In addition to creating a rich product library, Haoyuan Pharmaceutical has spared no effort to strengthen its global layout. Warehousing centers in Europe, the United States, India and other places have accelerated their operations, forming a situation in which multiple overseas business centers collaborate with multiple domestic forward warehouses to jointly promote business expansion in new regions, ensuring the pace of business development and the speed of responding to customer needs.

It is worth noting that Haoyuan Pharmaceutical has strong bargaining power in overseas markets. In 2023 and the first half of 2024, the gross profit margins of overseas channels were 59.37% and 60.77% respectively, while the gross profit margins of domestic channels in the same period were 37.21% and 35.98% respectively.

As Haoyuan Pharmaceutical's competitiveness in the field of life science reagents continues to improve and the pace of expanding overseas markets continues to accelerate, its future profit margins are expected to continue to expand, and it will also be able to provide sufficient cash flow for its expansion of other business segments.

Differentiated layout in the ADC field

While conquering the life science reagent sector, Haoyuan Pharmaceutical's other major business segment - APIs, intermediates, and preparations business segments - is also accumulating momentum.

In this field, Haoyuan Pharmaceutical mainly focuses on specialty generic drug APIs and their related intermediates and innovative drug CDMO. In the first half of 2024, revenue of 350 million yuan was achieved, a year-on-year increase of 3.37%, accounting for 33.3%.

Although the growth rate is slightly slower than that of the life science reagent sector, in recent years, relying on the huge customer base accumulated by life science reagent business, intermediates, and specialty APIs, it is like a huge reservoir, continuously injecting strong momentum into the CDMO business.
In the innovative drug CDMO part, Haoyuan Pharmaceutical has undertaken a total of 769 projects, mainly preclinical and clinical phase I projects. As more and more projects advance to the late clinical stage, its CDMO business revenue is expected to grow significantly.

However, in recent years, due to the fact that a large number of traditional pharmaceutical companies, API companies and even innovative pharmaceutical companies have joined the competition of CDMO, the production capacity of domestic CDMO has gradually become oversupplied. In the fierce competition, the industry is severely divided and the market share is concentrated at the top. For latecomers, if they want to achieve a breakthrough, they must work hard on differentiation and specialization.

Haoyuan Pharmaceutical's advantage lies in the innovative research and development of ADC drugs. As a pioneer in domestic ADCPayload-Linker research, based on years of deep cultivation and accumulation in the ADC field, it has successfully built an XDCPayload-LinkerCMC integrated service platform, which integrates CMC and CDMO services, covering molecular design, custom synthesis, process optimization, quality research, non-GMP/GMP production and registration declaration services.

In the first half of 2024, Haoyuan Pharmaceutical undertook more than 70 ADC projects. As of June 2024, a total of 12 small molecule products related to ADC drugs have completed the US FDAsec-DMF filing, demonstrating strong service capabilities and market influence.

As one of the most watched tracks at present, ADC has attracted many MNCs and Biotechs to join the game, and it is still in a blowout state. Faced with the rapid growth of market demand, the R&D center in Ma'anshan, Anhui Province efficiently operates 4 ADC high-activity production lines, significantly improving the GMP production capacity. In addition, the construction of industrialization bases such as Anhui Ma'anshan, Shandong Heze, and Chongqing Haoyuan Antibody-Drug Conjugate CDMO is proceeding in an orderly manner, which can efficiently undertake more CMC pharmaceutical research projects and GMP production projects.

In addition to ADC, Haoyuan Pharmaceutical has further deepened its layout and enriched its product types in emerging fields such as PROTAC, peptides and small nucleic acid drugs to enhance its development and service capabilities in these fields. To this end, it has continuously increased its investment in research and development. From 2021 to 2023, the research and development expenses will be 104 million yuan, 202 million yuan and 224 million yuan respectively, which will increase significantly year by year.

Under the differentiated layout, in the first half of this year, the amount of orders on hand for Haoyuan Pharmaceutical's APIs, intermediates and preparations business was stable, and the number of projects on hand increased by 20% year-on-year.

CXO's long night will dawn

. Another key message revealed by Haoyuan Pharmaceutical's significant increase in performance in the third quarter is that the CXO industry has released positive signs of recovery.

The main reason for this round of CXO winter is that since 2022, the trend of hot money pouring into the biopharmaceutical field during the COVID-19 period has disappeared, and at the same time, it has been affected by the US dollar interest rate hike cycle, causing the capital in the global and Chinese biopharmaceutical fields to recede.

However, since the fourth quarter of 2023, the number and amount of overseas biopharmaceutical investment and financing projects have rebounded and stabilized for several consecutive quarters. In September 2024, the US dollar interest rate cut cycle began. In September, overseas, especially the US biopharmaceutical investment and financing data were positive, and further improved in October, and the trend is expected to continue.

Domestically, compared with the first half of 2023, the investment and financing trend of the domestic biopharmaceutical industry in the first half of 2024 has achieved an overall recovery. Specifically, the number of financings increased by 2.7% over the same period last year, and the amount of financing increased by 50.9% year-on-year. This means that CXO, which is at the upstream of the industry, is about to usher in new opportunities and development momentum.

The duck knows first when the spring river water warms. Since the second half of this year, as of November 11, 27 of the 30 listed companies in the A-share market for medical R&D outsourcing have seen their share prices rise, including 8 with an increase of more than 50%. Haoyuan Pharmaceutical and Northgate have doubled their share prices.

Fundamentally, the performance of several leading companies has rebounded significantly: WuXi AppTec achieved operating income of 27.702 billion yuan in the first three quarters, of which the third quarter revenue strongly returned to the 10 billion mark, reaching 10.461 billion yuan. If the impact of the new crown commercialization project is excluded, its year-on-year growth rate is as high as 14.6%; Kanglong Chemical's revenue in the first three quarters reached 8.817 billion yuan, a year-on-year increase of 3%, and its net profit was 1.422 billion yuan, a year-on-year increase of 24.82%; Zhaoyan Pharmaceutical quickly turned losses into profits in the second and third quarters after a loss in the first quarter, achieving net profits of 103 million yuan and 100 million yuan respectively, and is expected to achieve full-year profitability with this trend.

Against the backdrop of the industry's recovery trend, Haoyuan Pharmaceutical has also been working hard to accelerate its own capacity layout. On August 13, Haoyuan Pharmaceutical's application for issuing convertible corporate bonds to unspecified objects was successfully reviewed. The total amount of funds raised from the convertible corporate bonds to be issued this time will not exceed RMB 1.161 billion, which will be used for the construction of the "High-end Pharmaceutical Intermediates and API CDMO Industrialization Project (Phase I)", "265t/a High-end Pharmaceutical Intermediates Product Project", and "Ouchuang Biotechnology New Drug Technology R&D Center", and will also be used to supplement working capital.

Through the construction of these projects, Haoyuan Pharmaceutical's production capacity and R&D strength will be further enhanced, allowing it to take the lead in seizing opportunities at an important moment when the industry is recovering.

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