Pharmaceutical Weekly – firmly believe in the long-term value of core assets, and the cost performance becomes more and more prominent after the correction

This week we discuss the cdmo industry of cell and gene therapy (CGT).

CGT can overcome the limitations of traditional small molecule and antibody drugs in protein level regulation, and can realize the upgrading of therapy or the treatment of rare diseases by means of gene expression, silencing or in vitro modification at the molecular level. With the gradual maturity of gene editing, vector transformation and other technologies and the listing of related products, the investment and financing in the field has increased rapidly, and a large number of drugs under research have entered the clinic. As of October 2021, 1890 CGT research projects (less than 400 in 2015 from preclinical to registration), of which nearly 30% are in the clinical stage, and the indications include cancer (mainly car-t and tcr-t), rare diseases and ad For Parkinson’s disease (mainly gene therapy), the number of drugs on the market is expected to exceed 100 around 2030 (calculated by 20% clinical success rate).

Due to the complex technical mechanism, high threshold process development and large-scale production, strict regulatory requirements and limited industrialization experience, CGT products rely more on cdmo than traditional pharmaceuticals, and its outsourcing penetration rate exceeds 65%, far exceeding 35% of traditional biological agents. Considering that the production of virus vectors as the core involves very complex processes, extremely difficult and long preparation cycle, it is expected that the outsourcing rate of CGT will remain high in the future. It is estimated that in 2025, the global cgtcdmo market will reach US $10.1 billion (five-year compound 35%) and the Chinese market will reach US $1.7 billion (five-year compound 51%). As CXO giants such as Lonza and Wuxi Apptec Co.Ltd(603259) have relatively large production capacity and perfect GMP standards, it is expected that the dividends from the rapid development of cdmo market in the future will be shared by major giants. Viral vector is the main delivery means of CGT at present, and the mainstream includes AAV (mostly used for gene therapy) and LV (mostly used for cell therapy). Its expression and production is the core of CGT drug production. The upstream of virus vector production (USP) mainly includes transfection and culture. At present, the mainstream of transfection is still the transient process of multi plasmid co transfection. In culture, the method of adherent (mature process and high titer) or suspension (large volume reactor can be used after domesticating HEK293 cells or Sf9 insect cells). Considering the expansion of production capacity, it is expected that stable transformation and suspension culture will become the mainstream in the long term (reducing cost and expanding scale). The downstream (DSP) step is more complex than biological drugs, and its yield is usually only 15-30%. According to the calculation of production model, it is expected that the gap between supply and demand of AAV carrier will be mainly reflected in commercial products (some indications have large doses); LV carrier supply can meet the needs of commercialization (less patients and small dose). A large number of car-t projects under research may affect the release of enterprise capacity. Related enterprises: Wuxi Apptec Co.Ltd(603259) (acquired Tessa technology through oxgene acquisition), Kingsley Biotechnology (leading plasmid business), Porton Pharma Solutions Ltd(300363) (team growth and rapid development), Heyuan Biology (advantage of oncolytic virus business), Pharmaron Beijing Co.Ltd(300759) (acquired absorption and allerganbiologics). Market Review: the biomedical sector fell 7.21% this week (January 17-january 21), Underperformed the CSI 300 index by 8.32 PCT and the gem index by 4.49 PCT, leading the decline in 30 CITIC primary industries. CITIC medicine sub sectors fell this week, with traditional Chinese medicine decoction pieces and Chinese patent medicine sectors falling the most, with declines of 10.01% and 7.50% respectively.

Investment suggestions:

Recent view: we firmly believe in the long-term development value of core assets, and the callback cost performance of high-quality track related companies is becoming more and more prominent. In the short term, we should continue to suggest two ideas: no game policy, and on the premise that the policy is relatively immune, it is preferred:

1. Rapid growth, continuous improvement of performance, estimation is still in a reasonable range, and grasp the valuation switching market. Vaccines: Beijing Wantai Biological Pharmacy Enterprise Co.Ltd(603392) , Chongqing Zhifei Biological Products Co.Ltd(300122) and Shenzhen Kangtai Biological Products Co.Ltd(300601) ; Auxiliary reproductive Service Leader: Jinxin reproductive; Oral consumables: Yantai Zhenghai Bio-Tech Co.Ltd(300653) (active biological bone will be approved soon); Upstream: Jenkem Technology Co.Ltd(688356) (PEG derivative), Nanjing Vazyme Biotech Co.Ltd(688105) (molecular enzyme), Acrobiosystems Co.Ltd(301080) (recombinant protein reagent).

2. Downside risk is limited, waiting for Fundamentals to catalyze. Blood products sector (leading enterprises are expected to benefit from the 14th five year plan of pulp stations in many provinces and further open the growth of pulp volume, including Beijing Tiantan Biological Products Corporation Limited(600161) and Hualan Biological Engineering Inc(002007) ); Pharmacy sector ( Yifeng Pharmacy Chain Co.Ltd(603939) , Yixintang Pharmaceutical Group Co.Ltd(002727) , Lbx Pharmacy Chain Joint Stock Company(603883) and Dashenlin Pharmaceutical Group Co.Ltd(603233) ), Shenzhen Mindray Bio-Medical Electronics Co.Ltd(300760) (short-term policy disturbance does not change the logic of long-term development), China’s sublingual desensitization leader Zhejiang Wolwo Bio-Pharmaceutical Co.Ltd(300357) ; China’s leading pharmaceutical glass enterprise Shandong Pharmaceutical Glass Co.Ltd(600529) .

Medium and long term perspective: focus on the invariance in change and look for opportunities for relative certainty

With the continuous expansion of the impact of centralized mining, the opportunity at the investment level lies in that the foundation for the establishment of centralized mining is that “multiple enterprises supply mutually replaceable varieties, and the production capacity can be supplied indefinitely in theory”. The basis for enterprises to maintain product price and profit space is the competition pattern, and the dynamic excellent competition pattern lies in the ability to continuously develop products and product iteration, which remains unchanged.

Start DRG / Dip reform in 2022. As a means of payment, the core role of DRGs is to achieve a balance between improving the efficiency and quality of diagnosis and treatment and ensuring the sustainability of medical insurance through refined medical insurance management. Hospitals that cannot actively adapt to the rules of the game will be eliminated. The opportunity at the investment level lies in that excellent private medical institutions have paid more attention to cost control for a long time, with higher operation efficiency and competitive advantage.

The general trend of industrial development is: China Meheco Group Co.Ltd(600056) industrial manufacturing is upgraded, the competitiveness is continuously improved, and moves upstream in the global production value chain.

The competitiveness of upstream raw materials is prominent:

1) biological “core” – life science support industrial chain: domestic enterprises have developed rapidly, reagent quality has reached the international leading level, and their competitiveness has been continuously improved. Entering the overseas market through global comparative advantage, China benefits from domestic alternative logic, with high growth and great development potential.

2) IVD raw materials and consumables: covid-19 epidemic opens the window for the transfer of global IVD raw materials and consumables production and supply chain to China.

Accelerated internationalization process: with the breakthrough of key technologies of Chinese enterprises, not only the localization rate of the Chinese market is accelerating, but also some high-quality enterprises have the strength to compete with international giants.

1. Manufacturing upgrading of pharmaceutical industry and continuous improvement of Competitiveness:

Upstream: life science support industry chain, IVD raw materials and consumables, related targets: Nanjing Vazyme Biotech Co.Ltd(688105) , Sino Biological Inc(301047) , Acrobiosystems Co.Ltd(301080) ;

High end medical devices: endoscope and sequencer, related subjects: Shenzhen Mindray Bio-Medical Electronics Co.Ltd(300760) , Qingdao Novelbeam Technology Co.Ltd(688677) , Sonoscape Medical Corp(300633) , Aohua endoscope, Micro-Tech (Nanjing) Co.Ltd(688029) ; Huada Zhizao (IPO application in progress);

International layout of medical devices, related targets: Shenzhen Mindray Bio-Medical Electronics Co.Ltd(300760) ;

Others: Jenkem Technology Co.Ltd(688356) , Shandong Pharmaceutical Glass Co.Ltd(600529) .

2. Pay attention to the supply pattern: blood products, related subjects: Beijing Tiantan Biological Products Corporation Limited(600161) , Boya Bio-Pharmaceutical Group Co.Ltd(300294) and Pacific Shuanglin Bio-Pharmacy Co.Ltd(000403) ; Desensitization preparation, related subject: Zhejiang Wolwo Bio-Pharmaceutical Co.Ltd(300357) .

3. Private medical service sector with differentiated competition. Ophthalmology, Aier Eye Hospital Group Co.Ltd(300015) ; Dentistry, Topchoice Medical Co.Inc(600763) ; Assisted reproduction, Jinxin reproduction; Cancer treatment services, Hagia.

4. Pharmacy sector. Related subjects: Yifeng Pharmacy Chain Co.Ltd(603939) , Dashenlin Pharmaceutical Group Co.Ltd(603233) , Lbx Pharmacy Chain Joint Stock Company(603883) and Yixintang Pharmaceutical Group Co.Ltd(002727) .

5. Aging and consumption upgrading.

Class II vaccine, related targets: Chongqing Zhifei Biological Products Co.Ltd(300122) , Beijing Wantai Biological Pharmacy Enterprise Co.Ltd(603392) and Changchun Bcht Biotechnology Co(688276) ; Invisible orthodontics, related subjects: Angel of the times;

Risk tips: policy risk, price risk, risk of performance falling short of expectations, risk of product R & D, risk of expansion progress falling short of expectations, risk of medical malpractice, risk of overseas covid-19 virus epidemic

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