Economic Data Reveals: How's Pharmaceutical Industry Performing?

Recently, the National Bureau of Statistics announced the economic performance of China in the first three quarters. The data shows that from January to September, the value added of large-scale industry grew by 5.8% year-on-year; in September, out of 41 major industries, 36 industries maintained year-on-year growth in value added, among which the pharmaceutical manufacturing industry grew by 11% year-on-year, and the overall growth for the first three quarters was 3.1%.

It is not surprising that the growth rate of the pharmaceutical manufacturing industry has slowed down in the cold winter.

Looking at the performance of the first three quarters of the listed companies in the pharmaceutical industry that have been disclosed, most of them have achieved double growth in revenue and net profit, and the overall performance of the industry is still considerable. In addition, with the anti-corruption in the medical field and the supervision and disposal of violations by relevant departments such as the National Healthcare Security Administration, the pharmaceutical industry will undergo a new baptism and will move forward in the pain of the development cycle.

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Moving forward in the pain

iFind data shows that according to the industry classification of Shenyin & Wanguo, there are 23 listed companies in the A-share pharmaceutical and biological industry that have released financial reports for the first three quarters, among which 17 have achieved revenue growth, and 18 have achieved growth in net profit attributable to the parent company.

Looking at the segments, 9 chemical medicine segments have achieved revenue growth, and 3 have seen a decline in revenue, namely Qianhong Pharmaceutical (-17.62%), Tonghua Jinma (-7.24%), and Huangshan Capsule (-2.54%). In the traditional Chinese medicine segment, two companies have released their third-quarter reports, with Pien Tze Huang achieving double growth in revenue and net profit, while Jianmin Group has seen a decline in both revenue and net profit; in the biopharmaceutical segment, only Kaiyuan Technology has released its third-quarter report, with a slight increase in revenue of 0.82%.

The performance of the pharmaceutical commerce segment is not very optimistic, with Renmin Tongtai's revenue declining by 1.88%, and net profit attributable to the parent company declining by 14.36% year-on-year; Luyan Pharmaceutical's revenue increased by 4.32% year-on-year, but net profit attributable to the parent company declined by 1.77%. Among them, Renmin Tongtai is a drug circulation enterprise under Harbin Pharmaceutical Group, mainly engaged in drug management, online pharmacies, and special hospitals. The company stated that the gross margin of the retail segment in the first three quarters decreased, mainly due to the increased sales proportion of "new special drugs" (DTP) in this period, but its gross margin is low, causing the overall retail gross margin to decline.

It is worth noting that since this year, the National Healthcare Security Administration has strengthened the supervision of the use of medical insurance funds by chain pharmacies. Recently, four pharmacies in Harbin were exposed for fraud, with chain pharmacies writing fake prescriptions by hand and illegally prescribing drugs, involving a total amount of more than one billion yuan.

Not long after the case was disclosed, the National Healthcare Security Administration issued the "Notice on Regulating the Management of Prescriptions for External Dispensing of Medical Insurance Drugs" (hereinafter referred to as the "Notice"), which mentioned that the National Healthcare Security Administration will carry out special governance on the use of prescriptions for external dispensing of medical insurance drugs. Specifically, by the end of December 2024, special inspections will be conducted on drugs prescribed for outpatient chronic diseases and special diseases, the "two diseases" drug mechanism for urban and rural residents' outpatients, and other drugs with high amounts, large expenses, and high risks of fraud and insurance fraud. Those who have illegal and illegal issues will be held accountable according to the law.Analysts at Guojin Securities have indicated that the National Healthcare Security Administration has issued guidelines to regulate the management of prescriptions for medical insurance drugs dispensed outside of hospitals, and has clearly stated the need to accelerate the construction of an electronic prescription center. On one hand, this confirms the trend of prescription outflow, and on the other hand, it is beneficial for clearing up industry chaos. Companies that operate more compliantly and stably are expected to benefit first from the coordinated implementation.

Significant achievements in innovative drugs

Data from the official website of the National Medical Products Administration (NMPA) and the Drug Intelligence Network show that nearly 40 Class 1 innovative drugs were approved in the first three quarters of this year, with 8 innovative drugs approved in the third quarter, accounting for 1/4 of the number of new drugs approved that quarter.

The star product of Legend Biotech, Ciltacabtagene Autoleucel Injection, was approved by the NMPA for marketing in August this year. It is suitable for the treatment of patients with relapsed or refractory multiple myeloma who have previously received treatment with a protease inhibitor and an immunomodulatory agent. This is the sixth CAR-T therapy approved in China and also the first and only B-cell maturation antigen (BCMA) targeted therapy approved globally for second-line treatment of multiple myeloma patients.

In addition, other Class 1 innovative drugs approved in the third quarter include Sirtex Medical's Benfotiamine Fuglue汀 Tablet, suitable for improving blood sugar control in adults with Type 2 diabetes; Innovent Biologics/Jinfang Pharmaceutical's Fluzolelesin Tablet, suitable for adult patients with advanced non-small cell lung cancer with KRAS G12C mutation who have received at least one systemic treatment; and Hengrui Pharmaceutical's Fulankizumab Injection, suitable for adult patients with moderate to severe plaque psoriasis.

This year, favorable policies related to the innovative drug industry have been frequently released. The government work report first proposed to accelerate the development of the innovative drug industry; the State Council's executive meeting reviewed and approved the "Whole Chain Support Plan for the Development of Innovative Drugs," strengthening the policy protection for the development of innovative drugs from multiple aspects; many provinces and cities represented by Beijing, Shanghai, Jiangsu, and Shandong have introduced relevant whole chain innovative drug support policies.

In terms of review and approval, the NMPA issued the "Pilot Work Plan for Optimizing the Review and Approval Process of Drug Supplementary Applications," allowing provincial-level drug regulatory departments with conditions to provide pre-service to shorten the technical review time required for supplementary applications that need to be inspected and tested by enterprises in their province. Moreover, the NMPA was re-elected for the third time as a member of the International Council for Harmonisation of Technical Requirements for Pharmaceuticals for Human Use (ICH) Management Committee, steadily promoting the work of joining the Pharmaceutical Inspection Cooperation Scheme (PIC/S), and accelerating the alignment of China's new drug research and development and registration technical standards and management levels with international standards.

Overseas prospects are still expected

In the first three quarters of this year, the heat of domestic innovative drug licensing-out transactions is still present, with nearly 50 transactions completed. Among them, the transaction with the highest amount involved is the cooperation between the Hong Kong Stock Exchange-listed company Yiming Angke and Instil Bio.

Instil Bio will obtain the development and commercialization rights of Yiming Angke's two research and development products outside the Greater China region, including the PD-L1xVEGF bispecific antibody IMM2510 and the CTLA-4 antibody IMM27M. Yiming Angke will receive an initial payment of $50 million and potential near-term payments. In addition, the potential total revenue from this cooperation is expected to exceed $2 billion.The most market-attention-grabbing license out deal belongs to the collaboration between Hengrui Medicine and the American Hercules company. On May 16th this year, Hengrui Medicine announced that it would grant the exclusive rights to develop, produce, and commercialize the GLP-1 product portfolio HRS-7535, HRS9531, and HRS-4729 globally, excluding the Greater China region, to the American Hercules company for a fee.

According to the terms of the agreement, Hercules will pay Hengrui Medicine an upfront payment and near-term milestone payment of $110 million, a cumulative amount not exceeding $200 million for clinical development and regulatory milestones, a cumulative amount not exceeding $5.725 billion for sales milestones, and sales royalties ranging from a low single-digit to a low double-digit percentage of actual annual net sales. The total transaction value exceeds $6 billion.

The uniqueness of this deal lies in the fact that Hengrui Medicine will not only receive the aforementioned transaction payments but also acquire a 19.9% stake in Hercules. This model is known in the industry as "NewCo."

Compared to traditional license-out deals, the advantage of this model is that the entry of external investors can bring in some experienced management and technical talents, thereby increasing the success rate of the entire business model. After several years of development, the overseas new company can go public or be acquired, and the domestic company can also exit accordingly. As the domestic "innovative drug leader," Hengrui Medicine has pioneered the new "NewCo" model, also allowing the industry to see more exciting new possibilities in overseas transactions.