Recently, Hengrui Pharmaceutical has lost its position as the "top pharmaceutical company".

On February 21st, the A-share pharmaceutical sector ushered in a historic turning point - at the closing price, BeiGene surpassed Hengrui Pharmaceutical's 308 billion yuan market value with a market value of 310.7 billion yuan, and for the first time topped the A-share pharmaceutical company market value list with a slight advantage of 2.7 billion yuan, overturning Hengrui Pharmaceutical's long-standing position as the "top pharmaceutical company".

BeiGene's transcendence sends a signal.

For a long time in the past, Hengrui Pharmaceutical was undoubtedly the leader in the pharmaceutical industry. With its "imitation+innovation" model, Hengrui has been leading the entire industry, and its multiple core products once occupied half of the domestic pharmaceutical market.

As early as 2021, the stock price of Hengrui Pharmaceutical continued to rise after a continuous surge, reaching a peak of 96.7 yuan per share, with a total market value of an astonishing 616.9 billion yuan.

However, a turning point also occurred in 2021. Affected by multiple factors in the industry and the outside world, the growth engine of Hengrui Pharmaceutical has gradually stalled, and the "imitation+innovation" model is gradually becoming unsustainable.

In terms of performance, from 2021 to 2023, Hengrui Pharmaceutical's revenue was -6.59%, -17.87%, and 7.26% respectively, and its net profit was -28.41%, -13.77%, and 10.14% respectively. Compared with the past revenue growth rate of over 25% and net profit growth rate of over 30%, Hengrui Pharmaceutical's performance growth has significantly slowed down in recent years.

From the current perspective, although the market value of Hengrui Pharmaceutical has been surpassed by BeiGene, the significance behind it is quite significant. This means that Hengrui Pharmaceutical's "imitation+innovation" model, which has been used for more than a decade, is beginning to be overturned. The moat advantage built under this model is gradually disappearing, which also proves that the era of innovative drugs in the domestic pharmaceutical industry has arrived.

Industry transition

The dilemma of Hengrui Pharmaceutical comes from the industry itself.

In the past, as the "top pharmaceutical company", Hengrui Pharmaceutical's success was due to its forward-looking layout vision. For example, while various pharmaceutical companies were still laying out their raw materials, Hengrui Pharmaceutical's business had already shifted to generic drugs with characteristics such as oncology and anti infection.

Later, when the industry also began to flock to generic drugs, Hengrui Pharmaceutical had already laid out innovative drugs. In other words, Hengrui Pharmaceutical's vision is several years ahead of most pharmaceutical companies, and it is precisely these "generational gaps" that have kept Hengrui Pharmaceutical in a leading position.

However, in the context of big innovation, the speed of Hengrui Pharmaceutical is still "too slow". Of course, for the innovative pharmaceutical industry, high investment, long cycle, and high failure rate are the basic characteristics of the industry.

According to media statistics, on average, only one out of more than 10000 potential compounds can eventually become a drug on the market, indicating that innovative drugs do not rely on forward thinking to succeed, but on "hard power". Due to the extremely high threshold for developing innovative drugs, pharmaceutical companies that can develop innovative drugs already have strong capabilities. Therefore, in the era of innovative drugs, Hengrui Pharmaceutical is facing increasing competitive pressure.

From the perspective of R&D investment, from 2021 to 2023, Hengrui Pharmaceutical's R&D expenses were 5.943 billion, 4.887 billion, and 4.954 billion, respectively, accounting for 33.29%, 34.73%, and 34.23% of the period's expenses. It is reported that in recent years, the net profit of Hengrui Pharmaceutical has been negative growth.

The huge capital investment is certain to put pressure on the performance of Hengrui Pharmaceutical at the current stage. But if a popular product appears, all problems can be easily solved.

Taking BeiGene, which has a market value surpassing Hengrui Pharmaceutical, as an example, its R&D expenses for 2021 and 2023 are 9.538 billion yuan, 11.15 billion yuan, and 12.81 billion yuan, respectively, which are 1.6 times, 2.28 times, and 2.59 times that of Hengrui Pharmaceutical. From this, it can be seen that the dilemma of medicine comes from the product and the enterprise itself, rather than the capital market.

The surpassing of Hengrui by BeiGene demonstrates the changes that an innovative product brings to enterprises and even industries.

Hengrui's Breakthrough

Hengrui Pharmaceutical has long been aware of the changes in the industry in recent years.

In order to cope with market pressure, Sun Feifan, who has already stepped back from the background, has once again emerged.

After returning to the front line, Sun Feifeng immediately adjusted his research and development strategy. This includes multiple external investments made by Hengrui Pharmaceutical in the past two years, including equity participation in Yingli Pharmaceutical, acquisition of Wanchun Pharmaceutical Punabulin, investment in Tianguangshi, and alliance with Qiyu Biotechnology.

Hengrui Pharmaceutical's research and development strategy has shifted from relying mainly on "self-developed" to "self-developed+acquisition".

From now on, the effect of the strategy adjustment is significant.

According to reports, Hengrui Pharmaceutical will launch more than 20 innovative drugs within 2024, and the sales proportion of innovative drugs is expected to reach 50%; In the next two years, Hengrui's innovative drugs will enter the intensive stage of market launch, and it is expected that 13 products will be approved, including anti-tumor drugs, postoperative analgesics, ophthalmic drugs, and innovative drugs in the fields of immunotherapy and metabolism.

In addition, the performance and stock price of Hengrui Pharmaceutical have also begun to recover. In terms of performance, Hengrui Pharmaceutical's cumulative revenue and net profit in the first three quarters of last year were 20.19 billion and 4.62 billion, with revenue and net profit growth rates of 18.67% and 32.98%, respectively; In terms of stock price, Hengrui Pharmaceutical's stock price has continued to rise in the past three quarters, with a cumulative increase of 26.19%, and its market value has returned to over 300 billion yuan.

In addition to changing its research and development strategy, Hengrui Pharmaceutical has also made a noteworthy move recently. On February 6th, Hengrui Pharmaceutical released a document personally signed by Chairman Sun Feifan, which strongly stated that the entire company, from headquarters to subsidiaries, from research and development to sales, must submit a detailed AI application plan by February 25th, and directly link the implementation status with cadre assessment.

As for the reason for Hengrui Pharmaceutical's comprehensive introduction of AI, media analysis is based on the need for "acceleration". According to the TechEmergency report, AI can increase the success rate of new drug development by 16.7%. AI assisted drug development can save pharmaceutical companies $54 billion in research and development costs annually, and save 40% to 60% of time costs in key stages of development.

Overall, as the industry leader, Hengrui Pharmaceutical's brief breakthrough may send some signals, but for Hengrui Pharmaceutical, it is not entirely a bad thing. For Hengrui, increasing the research and development efforts of innovative drugs and breaking through from the direction of innovation remains the most important strategy for Hengrui in the future.

Disclaimers

This article aims to share industry information and knowledge, without any commercial use. The article only represents the author's viewpoint and does not represent the position of this website.