Is Pharmaceutical CXO Industry in China like a 'Snowball'?

In the past five years, "CXO" has been a hot word in the healthcare sector in China. According to the statistics from the website eastmoney.com (Chinese: 东方财富网), the total revenue of Chinese CXO companies grew to CNY 66.5 billion (USD 9.8 billion) in 2021, up 38.17% year on year, and the revenue raised to CNY 22 billion (USD 3.3 billion) in Q1 2022, an increase of 62.42% from the same period last year. The net income attributable to shareholders of these companies grew to CNY 4.2 billion (USD 622 million) in Q1 2022, 32.02% higher than in the previous year.

Before understanding why the pharmaceutical CXO is an industry with high growth potential and valuation, we should know what the abbreviation "CXO" stands for.  

The CXO refers to a company that provides medical contract outsourced services, including research and development, clinical trials, and production and commercialization of medical products. The letter "X" is an uncertain word which can be "R" or "M," then becomes "CRO" or "CMO."  

There are four pharmaceutical CXOs in China: CRO, CMO, CDMO and CSO. 

Pharmaceutical CRO (Contract Research Organization)

A pharmaceutical CRO is a company that provides support to the pharmaceutical and biotechnical industries in the form of research services outsourced on a contract basis. It can be divided into drug discovery CRO, preclinical CRO and clinical CRO. 

The drug discovery CRO involves four significant components: target identification, modeling, lead drug discovery and lead drug optimization. According to Frost &Sullivan, the forecasting market value of drug discovery CRO in 2023 will be USD 3.4 billion, representing 20 % of the total pharmaceutical CRO market value. Chinese companies providing drug discovery CRO services include ChemPartner (Chinese: 上海睿智), Viva Biotech (Chinese: 维亚生物), PharmaBlock (Chinese: 药石科技) and Bioduro-Sundia (Chinese: 保诺-桑迪亚). 

The preclinical CRO provides compound research services and preclinical research services, including new drug discovery, synthesis and industrial development of lead compounds and active pharmaceutical intermediates, and safety evaluation research services. Chinese companies that provide preclinical CRO services are Wuxi AppTec (Chinese: 药明康德), Pharmaron (Chinese: 康龙化成), Medicilon (Chinese: 美迪西), ChemPartner (Chinese: 上海睿智) and Joinn (Chinese: 昭衍新药).  

The clinical CRO provides Phase I-IV clinical and technical services, clinical data management and statistical analysis, and new drug registration. According to Frost &Sullivan, the market value of clinical CRO in 2023 will be USD 10.2 billion, representing 6o% of the total pharmaceutical CRO market value. Chinese companies providing clinical CRO services include Tigermed (Chinese: 泰格医药), Boji Medical Technology (Chinese: 博济医药) and Huawe Medicine (Chinese: 华威医药). 

 Pharmaceutical CMO (Contract Manufacturing Organization) 

Pharmaceutical companies contract CMOs to manufacture drug substances. They can offer either part of or the whole development and production services, with the primary goal to get the manufacturing done. Manufacturing processes may include solution, emulsion and nano-suspension, liquid-filled capsules, aseptic filling, terminal sterilization, pre-filled syringe and vials, tablet and pills. 

Chinese companies majoring in CMO services are Porton Pharma Solutions (Chinese: 博腾股份), WuXi Biologics (Chinese: 药明生物), Asymchem (Chinese: 凯莱英). 

Pharmaceutical CDMO (Contract development and manufacturing organization)

The difference between CMO and CDMO is that CDMO handles not only the outsourced manufacturing of drug substances but also all the innovation and development work such as clinical trials and commercialization. The pharmaceutical CDMO covers small molecule drugs, biological macromolecular drugs and Cell and Gene Therapy (CGT).  

 CDMOs are derived from the competitive international nature of the pharmaceutical market and the increasing demand for outsourced services. The best-positioned services providers focus on a specific technology or dosage form and promote end-to-end continuity and efficiency for their outsourcing clients. With lower cost, international manufacturers capture an increasing percentage of the contract manufacturing market, and specialization may be an effective hedge against loss of market share. 

WuXi Biologics, Asymchem, Porton Pharma Solutions, WuXi STA (Chinese: 合全药业) and Jiuzhou Pharma (Chinese: 九州药业) are some of the famous Chinese CDMO companies.

 Pharmaceutical CSO (Contract Sales Organization) 

CSOs provide various services and solutions for sales and marketing activities for new drug development and therapy success, offering stability and success for the clients. These services may include full-time or part-time sales staff, specific quotas for marketing activities and sales goals, and even recruitment of dedicated medical sales team members. 

The main CSOs in China are China Medical System (Chinese: 康哲药业), China NT Pharma Group (Chinese: 泰凌医药) and Pioneer Pharma (Chinese: 先锋控股). 

As the global drug R&D demand continues to rise, some international pharmaceutical companies begin to transfer a part of their business into emerging countries, such as China and India. India is famous for developing generic drugs, but China is far ahead of India in terms of novel drugs. Recently, the Chinese government encouraged drug innovation by releasing a series of policies. More and more Chinese CXO companies have made go-global strategies and have developed deeper cooperation with international pharmaceutical companies. EqualOcean believes the top 3 Chinese CXO companies with go-global plans are Asymchem, Pharmaron, and Porton Pharma Solutions. 

1. Asymchem

Founded in 1998, Asymchem is a leading CDMO that provides R&D and one-stop production services to the world's top pharmaceutical companies. The company continues to accelerate the launch of new drugs, providing one-stop CMC services for the entire drug development lifecycle. 

According to the prospectus, the company’s overseas revenue grew to CNY 4 billion (USD 592 million) in 2021, representing 86% of total revenue. Asymchem has developed rather deep cooperation with the top international pharmaceutical companies, such as Pfizer (Chinese: 辉瑞), MSD (Chinese: 默沙东), Abbvie (Chinese: 艾伯维), Lilly (Chinese: 利来), Bristol-Myers Squibb (Chinese: 百时美施贵宝) and AstraZeneca (Chinese: 阿斯利康). 

On February 11, 2022, Asymchem announced its agreement to acquire Snapdragon Chemistry for USD 57.94 million. Snapdragon Chemistry is a US-based chemical technology company providing expertise in continuous manufacturing and early-stage chemical process development services to the pharmaceutical and fine chemical industries. This acquisition will help Asymchem to enlarge its service range and target market and to expand its overseas business.  

2. Pharmaron

Founded in 2004, Pharmaron is a premier R&D service provider for the life sciences industry. The company has invested in its people and facilities and established a broad spectrum of research, development and manufacturing service capabilities throughout the entire drug discovery, preclinical and clinical development process across multiple therapeutic modalities, including small molecules, biologics and CGT products. 

According to its prospectus, 83% of its total revenue in 2021 came from overseas business, and the income from clients of the top 20 international pharmaceutical companies accounted for 18.97% of total revenue. With its go-global strategy, the company has ten operating entities in the United Kingdom and the United States. In 2021, overseas subsidiaries accounted for 13.70% of its total revenue. 

 3. Porton Pharma Solutions

Founded in 2005, Porton Pharma Solutions provides global pharmaceutical companies with innovative, reliable and end-to-end process R&D and manufacturing services across small molecule APIs, dosage forms and biologics. 

In 2021, the company’s revenue grew to CNY 3.1 billion (USD 461 million), an increase higher than the previous year. The European market is Porton’s largest market, followed by the American market and the Chinese market. Its overseas revenue represented 78% of total revenue in 2021.  

In 2017, Porton became one of the rare Chinese companies to join the United Nations Global Compact, which helped the company to expand its business in international markets. The same year, the company acquired J-STAR Research, a contract chemistry organization based in South Plainfield, New Jersey. 

Although the overseas business share of these companies in 2021 is lower than that of 2020, for these three companies, the overseas business occupies a still considerable part of their entire business. 

The pharmaceutical CXO is an industry with high growth potential and valuation; correspondingly, it has a high barrier to entry. “Therefore, companies that want to enter the industry need to well establish their differentiation. This is the most important thing to stand firmly in this industry. They can choose a more specific niche to show their differentiation in services or products.” Yang Mohan, Chief Medical Investment Officer of Partners Financial Holdings Limited, told EqualOcean. “Constant news are showing that the U.S. Department of Commerce will gradually move Chinese CXO companies out of the Unverified List,” Yang Mohan added, “Partners Financial Holdings Limited is optimistic about the CXO sector and we think companies such as Wuxi AppTec and Joinn Lab are some good examples and worth the investment.”

EqualOcean also believes the pharmaceutical CXO in China is a sector with high growth potential and worth the particular attention from pharmaceutical companies and investors. Companies just need to be in the right kind of snow which is about providing the right service, consequently, the ‘snowball’ will happen. EqualOcean will continue to follow the pharmaceutical CXO's latest news, and we look forward to its development in the future.