The Year of Pharmaceutical Turnaround

This winter has been too long. In the distant summer of 2021, no one would have thought that the pharmaceutical downturn would last more than three and a half years, to the point where even the most patient holders are on the verge of collapse.

Referring to the CDMO that bottomed out first (see "WuXi Lands, CXO Bottoms Out" in May 2024), when all negative factors are fully priced in, any slight marginal improvement will bring significant elasticity. Struggling up from the bottom, WuXi AppTec rebounded about 60%, WuXi Biologics rebounded about 110%, and WuXi HeLian once approached a historical high.

Do not expect a dramatic turnaround, but slight marginal improvements are to be anticipated, which is already sufficient.

In Q4 2024, the proportion of all public funds' holdings in the pharmaceutical sector was 8.58%, a decrease of 1.08 percentage points quarter-on-quarter, which has exceeded the low point of 9.37% in Q3 2022, dropping to a historical low position, meaning that any slight incremental funds will bring elasticity.

The ice is melting. On the payment side, a single payment system is about to break through, and a diversified payment system will be preliminarily established within the year. Moreover, driven by the increasing concern of the public about drug efficacy, centralized procurement and medical insurance negotiations are expected to shift towards a balance between cost control and quality control; on the financing side, the IPOs of unprofitable biotech companies are expected to reopen, bringing a positive chain reaction.

The spring of serious medical care (treatment of essential needs) is not far away, but consumer healthcare will continue to face pressure. Traditional Chinese medicine is equivalent to the vaccines of three years ago (see "The Vaccine Industry Enters Hell Mode" in June 2022), and the cold winter may have just begun.

01 A Great Beginning

As of January 31, 278 pharmaceutical companies have released their performance forecasts for 2024, with about 41% of companies experiencing positive year-on-year net profit growth and about 59% experiencing negative growth. Among the widespread lamentations, the few pharmaceutical companies that can maintain double-digit growth are worth cherishing.

The extreme cold generates heat, and both the payment side and financing side are welcoming a breakthrough year.

The first version of the Class B medical insurance catalog is planned to be released within the year, marking the formal establishment of the payment ecosystem for innovative drugs. Perhaps the change is slight, but this is a great beginning.

First, commercial insurance support for innovative drugs has finally moved beyond mere slogans. The National Healthcare Security Administration will guide and support people-oriented commercial health insurance to include Class B catalog drugs in the product liability coverage, and other compliant commercial health insurances can also use the Class B catalog. A major pain point for commercial insurance has been information asymmetry, lacking drug sales data for specific innovative drug payments, relying only on third-party statistics for estimates to decide whether to include reimbursement and the reimbursement ratio. The Class B catalog is expected to provide support in determining the reimbursement scope and ratio for commercial insurance.

Second, high-priced innovative drugs have finally gained breathing space. The Class B catalog mainly focuses on drugs with high innovation levels, significant clinical value, and substantial patient benefits, but which cannot be temporarily included in the basic medical insurance catalog due to exceeding the "basic protection" positioning. The Class B catalog provides a buffer zone for high-priced innovative drugs to quickly enter the market, enhancing accessibility through increased commercial insurance payers Third, the introduction of market-oriented factors in the pricing of innovative drugs. The Class C catalog emphasizes the decisive role of market entities, and insurance companies will participate fully. The settlement price for commercial insurance in the Class C catalog will be determined through negotiations organized by the National Healthcare Security Administration (NHSA) between insurance companies and pharmaceutical enterprises, exploring stricter price confidentiality measures. The NHSA will no longer be the sole payer, and the voice of insurance companies will gradually expand.

Fourth, restoring the right to choose medications to patients. In some regions, the DRG policy will assess the proportion of out-of-pocket expenses. For example, the implementation rules for DRG in Guangxi require that the out-of-pocket expenses in the total medical costs of DRG settlement cases for the entire year do not exceed 10% of the NHSA policy scope, leading to interventions in patients' out-of-pocket expenses by hospitals. The Class C catalog can be excluded from the assessment of the insured's out-of-pocket rate and the monitoring scope of alternative drugs selected through centralized procurement. Eligible cases can also be temporarily charged on a project basis, not included in the DRG scope.

Public attention to the efficacy of domestic drugs will not be diluted by a Spring Festival holiday; mainstream opinions are clear—low prices should not be the only consideration, and this is believed to promote marginal improvements in future centralized procurement and healthcare negotiations.

Signs of thawing in financing for unprofitable biotech companies have emerged.

On February 7, the Biotech company Dige Pharmaceutical's 1.85 billion yuan private placement plan was approved, marking the first unprofitable company to receive registration approval from the China Securities Regulatory Commission (CSRC) for refinancing since the release of the "Eight Measures for Science and Technology Innovation."

On February 7, the CSRC issued the "Implementation Opinions on Capital Market to Promote Financial 'Five Major Articles'," increasing support for strategic industries such as new generation information technology, artificial intelligence, aerospace, new energy, new materials, high-end equipment, biomedicine, and quantum technology. Continuous support will be provided for high-quality unprofitable technology companies to issue and list.

The normalization of IPOs and refinancing for unprofitable biotech companies will bring multiple benefits to the innovative drug ecosystem, one of which is particularly noteworthy:

As cash flow eases, the external business development (BD) of Chinese innovative drugs may increase in price.

Source: Company announcements, CITIC Construction Investment Securities

02 Continuing the Innovation in Pharmaceuticals

An important signal conveyed by the 2025 JPM conference is that Chinese biotech is rising rapidly, even beginning to surpass overseas biotech in certain fields, with advantages in high efficiency and low cost, similar to DeepSeek.

In fact, this is the fruit of the capital frenzy that took place before July 2021. As the winter lasted for three and a half years, the biotech ecosystem began to deteriorate, but improvements on the payment and financing sides have revived everything. Many years later, when we finally have our own MNCs, we will be grateful for the progress made in 2025:

Biotech also has breakthroughs at the level of national fortune. Innovative Drugs

Innovative drugs remain the main line of the pharmaceutical industry, containing the greatest elasticity and miracles, while internationalization remains the main line of innovative drugs.

Going against the tide. In the context of an overall reduction in the pharmaceutical sector, the holdings of funds in Biotech innovative drugs continued to grow quarter-on-quarter in Q4 2024; amidst a decline in global pharmaceutical merger and acquisition transactions, the amount of external licensing for Chinese innovative drugs continued to grow. According to the Insight database, the total amount of BD transactions by domestic pharmaceutical companies reached USD 63.5 billion in 2024, a year-on-year increase of 22.59%, setting a historical high. In 2024, the number of major BD transactions in domestic pharmaceuticals reached 24, with a total amount of USD 43 billion, increasing its global share to nearly 20%.

According to the latest report from EvaluatePharma, at least one-fifth of the projects in the entire industry's clinical pipeline involve Chinese companies, with the participation rate of Chinese innovative pharmaceutical companies in the fields of ADC, bispecific antibodies, and CAR-T exceeding half. In 2025, Chinese innovative drugs will continue to shine in BD.

CXO

CDMO is warming up in advance.

In 2024, WuXi AppTec's cumulative new signed orders increased by approximately 20% year-on-year, and the inquiries and visits from global clients at Pharmaron showed a recovery compared to the same period in 2023, with new signed order amounts increasing by over 20% year-on-year. WuXi Biologics indicated at the 2025 JPM conference that "2025 revenue will achieve accelerated growth compared to 2024," and WuXi AppTec expects TIDES business revenue to grow by over 60% in 2024, with continued growth of over 60% expected in 2025. The total production capacity of peptide solid-phase synthesis reactors is expected to reach 41,000 liters by the end of 2024, with further growth to 100,000 liters anticipated in 2025.

With the improvement of the domestic investment and financing environment, the prosperity of clinical CROs is also expected to rebound.

In 2024, Tigermed's net new orders are projected to be between RMB 8.4 billion and RMB 8.9 billion. In Q4 2024, Zhaoyan New Drug's revenue reached RMB 683 million, a quarter-on-quarter increase of 41%, with a median net profit of RMB 144 million, a quarter-on-quarter increase of 45%. The net gain from changes in the fair value of biological assets was RMB 63.5 million, turning positive for two consecutive quarters, and experimental monkeys remain a hard currency for CROs.

Medical Devices

The darkest phase of medical devices is coming to an end.

According to Zhongcheng Shuke, in December 2024, the national medical equipment bidding and tendering amounted to RMB 27.064 billion, a quarter-on-quarter increase of 72.11% and a year-on-year increase of 59.18%. In the bidding and tendering of various segmented devices in December 2024, CT, MR, ultrasound, endoscopy, DSA, and DR devices amounted to RMB 3.930 billion, RMB 3.752 billion, RMB 3.206 billion, RMB 2.863 billion, RMB 1.779 billion, and RMB 538 million, respectively, with quarter-on-quarter growth rates of 78.91%, 79.28%, 53.15%, 29.12%, 81.17%, and 85.71%. With the recovery of routine procurement and the implementation of equipment updates, the domestic performance of Mindray Medical and United Imaging Healthcare will significantly rebound The trade war will not interrupt the overseas expansion of medical devices; Chinese companies' cost advantages and resilience are astonishing. Taking Yingke Medical as an example, the tariff on medical rubber gloves will rise to 50% by 2025, with an additional 10% tariff coming into effect immediately, yet the company is still operating at full capacity and sales.

According to Haitong Securities, as of October 11, 2024, there are 29 medical device companies globally with a market value of over $20 billion, including 3 from Japan, 1 from China, and the rest from Europe and the United States. Mindray Medical has advantages in per capita metrics compared to other overseas companies, demonstrating competitiveness and profitability on a global scale. In terms of per capita profit, Mindray Medical reached $90,000 in 2023, surpassing Medtronic, Abbott, and Danaher. Regarding ROE levels, Mindray Medical achieved 36% in 2023, far exceeding Abbott's 15% and Medtronic's 7%.

Home medical devices represent another promising direction. As the aging population deepens and the prevalence of chronic diseases continues to rise, home medical devices are gradually becoming common "small appliances" in many households. The main adverse factor is the impact of declining consumption, but various local consumer goods replacement programs have included some home medical devices in the subsidy scope, which may create a hedge.

Cofe Medical's revenue and net profit growth in Q3 2024 are both in double digits, and the year-on-year growth rate has further accelerated compared to Q2 2024. High-margin products such as hearing aids, back support, dressings, thermometers, and physiotherapy devices are maintaining rapid growth. Meihua Medical's revenue in Q3 2024 increased by 55.68% year-on-year, and net profit grew by 49.91% year-on-year. The insulin pen project achieved bulk delivery in Q3 2024 and is expected to scale up in the future. JD Health and Sanofi Biotech also belong to the broad concept of home medical consumption.

Traditional Chinese Medicine

Finally, we arrive at the most controversial sector.

Hengrui Medicine sold 45% of its shares in Shanghai Hengrui Pharmaceutical for $608 million, which has been interpreted in various ways by the market. If one must link it to the Li family's business acumen, could it be that they foresee a decline in traditional Chinese medicine assets? Shanghai Hengrui Pharmaceutical's core product, Shexiang Baoxin Pill, is positioned as a basic cardiovascular medication with annual sales nearing 3 billion yuan and is still a cash cow, making it a good time to sell at a favorable price.

Traditional Chinese medicine is feeding back into innovative drugs. Hengrui Medicine plans to use the funds obtained from the sale of Shanghai Hengrui Pharmaceutical to advance the construction of the next-generation antibody-drug conjugate (ATTC) platform and the internationalization of innovative drugs.

The cycle of the traditional Chinese medicine industry is actually not synchronized with the entire pharmaceutical industry. In 2023, while innovative drugs faced harsh conditions, traditional Chinese medicine felt it had reached a peak, with over 60% of listed traditional Chinese medicine companies achieving positive growth, and several companies emerging from losses to reverse their performance. Qiu Huawai, Chairman of China Resources Sanjiu, candidly stated, "2023 is a year of vigorous development for high-quality traditional Chinese medicine."

However, in the 2024 mid-year report, the weak cycle of traditional Chinese medicine companies has been broken. In H1 2024, the traditional Chinese medicine sector (71 listed traditional Chinese medicine companies) reported revenue of 185.03 billion yuan, a year-on-year decrease of 2.8%, and net profit attributable to the parent company of 21.61 billion yuan, a year-on-year decrease of 5.6% The performance is showing a deteriorating trend, and the negative factors troubling the traditional Chinese medicine industry are no less than those in the vaccine industry in 2022.

According to Wind data, 30 listed traditional Chinese medicine companies in the A-share market have released their performance forecasts for 2024, with only 8 companies expecting an increase in net profit, while 21 companies expect a decline in net profit. If we look at the maximum change, 14 companies are expected to see a decline in net profit exceeding 100%.

The decline is across the entire industry, not just for Lianhua Qingwen and Pian Zai Huang.

Source: Archimedes Biotech, original title: "The Year of Pharmaceutical Turnaround"

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