October is coming to an end, and the third quarter "exam" of the innovative drug industry will also come to an end. From the surface, although the entire industry is still turbulent, new drug research and development is crowded with "involution", commercialization challenges are numerous, and the capital winter is still spreading, but from the performance point of view, the situation does not seem to be as bad as imagined. On the one hand, as the product strength and commercialization capabilities of leading innovative pharmaceutical companies are constantly confirmed, their revenue continues to grow at a high rate and their profitability is enhanced; on the other hand, more and more pharmaceutical companies have also achieved phased results in cost control in reducing costs and increasing efficiency.

The resonance of the two major factors has further expanded the "loss reduction" camp. Various signs indicate that in the cold winter after the bubble, the ecological pattern of innovative drugs is being reshaped, resilience is beginning to emerge, and the industry's leading companies are beginning to accelerate into a new cycle. In the latest third quarter report, Rongchang Biopharma is such an example. "The basic plate is stable" is the unanimous reaction of the market after the release of Rongchang Biopharma's financial report. Rongchang Biopharma's third quarter report shows that the company has continued its high growth momentum: in the third quarter, the company's operating income reached 470 million yuan, a year-on-year increase of 34.6%; if the time span is extended to the first three quarters, the total revenue scale reached 1.21 billion yuan, a year-on-year increase of 57.1%. In the past year, the entire external environment has not been very favorable for the commercialization of innovative drug companies. Compared with the same period last year, Rongchang Biopharma's revenue scale in the first three quarters of this year has accelerated significantly, which is particularly rare. This also further highlights the strong product power of Taitasip and Vedicituzumab in its commercialization pipeline, as well as the company's increasingly strong commercialization capabilities.

With the continuous growth of revenue, Rongchang Biopharma's profitability has also been continuously enhanced: from January to September 2024, the company's gross profit margin reached 79.8%, an increase of 2.9 percentage points year-on-year, of which the gross profit margin in the third quarter reached 82.1%, an increase of about 6 percentage points year-on-year. The increase in gross profit margin reflects the company's improvements and optimization in production and operations. One of the reasons behind this is the continuous improvement of production processes. With the gradual commissioning of the third and fourth phases of Rongchang Bio's new drug industrialization projects, the production process has been continuously optimized and adjusted, greatly improving production efficiency. The second reason is the continuous improvement of scale production capacity. At present, Rongchang Bio has 21 2,000-liter bioreactors, and its total production capacity is at the leading level in China. As we all know, the production process of macromolecule drugs involves multiple steps such as cell culture, purification, and filling. The equipment and facility costs of these steps are very high. Through large-scale production, these fixed costs can be spread over more product units, thereby effectively reducing the cost of each unit. The third reason is the implementation of refined management. Rongchang Bio has focused on promoting the rapid implementation of various lean production measures, continuously improving operational efficiency, further reducing comprehensive production costs, and reflecting on profitability.

Through the above three measures, Rongchang Bio's gross profit margin has been significantly improved, and operating costs have continued to decline. From the publicly available data, it can be seen that compared with the first three quarters of 2022, Rongchang Bio's revenue scale has increased by more than 1 times in the first three quarters of this year, but operating costs have only increased by 9.37%. With the continuous growth of revenue and the enhancement of potential profitability, the market's expectations for Rongchang Bio are also rising. On October 30, the first trading day after Rongchang Bio released its quarterly report, the company's Hong Kong stock price rose by 14.13%.

In fact, Rongchang Bio's cost reduction and efficiency improvement are not only reflected in the industrialization link, but also penetrate into all levels of the company's operations. In terms of cost control, the biggest highlight of Rongchang Bio's third quarter report is the sharp decline in sales expense rate. From January to September 2024, Rongchang Bio's sales expense rate was 51.5%, a decrease of 18.6 percentage points from the same period last year. Moreover, from the perspective of quarterly performance, its sales expense rate has also continued to decline steadily. In other words, Rongchang Bio's high growth is not achieved at the cost of increasing sales investment. This also sends out several positive signals: First, its commercialization team has passed the market introduction period and entered a relatively mature stage, which means that the output capacity of the subsequent team will continue to increase; second, the scale effect is also reflected in the sales expense level, and the sales expense rate has entered a stage of continuous narrowing, which means that the overall profitability is expected to increase in the future. At the same time, Rongchang Bio's management expenses are also effectively controlled. In the first three quarters of this year, Rongchang Bio's management expenses amounted to 230 million yuan, showing a year-on-year downward trend. While well controlling sales expenses and management expenses, Rongchang Bio's R&D investment has also been optimized. In the third quarter, the company's R&D investment was 347 million yuan, a 27% decrease from the second quarter. The control of R&D expenses does not mean that future expectations have been reduced, but rather reflects the company's optimization of resource allocation: According to previously public information, Rongchang Bio adjusted its strategy based on environmental changes and concentrated resources to promote Phase 3 clinical trial projects. This means that more accurate project evaluation and resource allocation strategies are expected to further enhance the overall benefits of the company's R&D investment. With the approval of new indications, it is expected to bring significant revenue growth to the company, thereby providing strong support for the company's financial situation. Judging from the overall cost growth trend, Rongchang Bio's cost control has achieved phased results. This is also reflected in the core profit level: in the third quarter, Rongchang Bio's losses narrowed to 290 million yuan, a 33% decrease from the previous quarter.

With the continuous enhancement of profitability and the continuous advancement of cost control, it will be a natural thing to achieve a break-even in the future. Rongchang Bio's positive performance is not only reflected in financial figures, but also in business. The business model of innovative drugs is usually R&D first, followed by output. Based on the high-intensity R&D investment in the past, Rongchang Bio is currently in a stage of steady release of innovative results. In the third quarter, Taitasip welcomed the approval of its second indication, rheumatoid arthritis (RA).

Rheumatoid arthritis, as a chronic autoimmune disease, is known as the "number one killer" of human disability. According to the Frost & Sullivan report, the number of rheumatoid arthritis patients worldwide is expected to reach 42.2 million (including 6.2 million in China) by 2025 and 45 million (including 6.4 million in China) by 2030. At present, the standard treatment of rheumatoid arthritis mainly includes anti-inflammatory drugs, glucocorticoids, traditional immunosuppressants and TNF-α inhibitors. For patients who are ineffective or intolerant of the above therapies, there is an unmet clinical need, and new drugs are urgently needed to break through this bottleneck.

Taitasip has demonstrated the potential to become a new treatment option. On November 15, 2023, the company announced the results of the Phase 3 clinical trial of tadalafil for the treatment of RA at the annual meeting of the American College of Rheumatology (ACR). The data showed that at 24 weeks, the ACR20 response rate of the tadalafil group reached 60% compared with the placebo group, which was significantly higher than the 26.9% of the placebo group. The final value was actually comparable to the largest-selling biological drug in the world (59%).

The application for the listing of tadalafil for the indication of myasthenia gravis was officially accepted on October 26 and included in the priority review and approval process. It is expected that tadalafil will accelerate the listing of the third indication. The previous Phase 2 clinical data showed that tadalafil showed excellent efficacy for myasthenia gravis: on the one hand, the treatment took effect quickly and the effect was significant; on the other hand, tadalafil had a wide coverage of efficacy. While reaping the fruits, research and development is still advancing for both tadalafil and vedicizumab. On the one hand, the international layout is accelerating. The global multi-center Phase 3 clinical trial of Tetasip for myasthenia gravis has achieved the first patient enrollment in the United States; on the other hand, the unmet indications in China are also accelerating. For example, the Phase 3 study of vedicizumab combined with PD-1 for the treatment of first-line urothelial carcinoma has completed the patient enrollment, and the application for the treatment of HER2-positive breast cancer with liver metastasis has been formally accepted. It is a breakthrough therapy and has been included in the priority review and approval process.

It can be foreseen that with the approval of drugs and the launch of new indications, it will continue to contribute considerable revenue and further support Rongchang Bio's investment in research and development, entering the stage of accelerating the "cash flow-innovation" flywheel. The continuously improved self-"hematopoietic" ability further supports Rongchang Bio's confidence in crossing the cycle, and to a certain extent alleviates the company's cash flow pressure, thereby making the company's financial structure more robust. As of the end of September, the company had a cash reserve of 1.12 billion yuan, plus a considerable bank loan credit line, and the company's strong commercialization process, cash flow issues have become safer and more controllable. From the financial figures to the solid performance at the business level, what runs through it all is Rongchang Bio's long-term thinking orientation, which may also provide us with some inspiration for crossing cycles.