The Yao Ming Kangde Interim Report was released, and the annual performance guidelines remained unchanged.

Overall, although the impact of the Biosafety Act exists, it is clear that the impact at this stage is far less than the pessimistic expectations of the market.

What is more noteworthy is that the interim report conceals a more important trend, and overseas biomedicine is clearly picking up. As an industry leader, Yao Ming Kangde is expected to benefit greatly from industry recovery and continue to maintain its leading edge in the industry.

1. Pharmaceutical Kangde's 2nd quarterly report, new orders greatly exceeded expectations

As far as Yao Ming Kangde's results for the second quarter of 2024 are concerned, revenue growth of 16% month-on-month reached 9.26 billion yuan, which is in line with general market expectations and is in line with the performance forecasts previously issued by Kanglong Chemical and Gloria Ind.

It is worth noting that the month-on-month growth rate of Yao Ming Kangde is still higher than Kanglong Chemical's 4.8%-11.2% increase and Gloria Ying's slight increase.

After adjustment, Yao Ming Kangde's net profit from non-IFRS (non-International Financial Reporting Standards) increased 28.5% month-on-month to 2.46 billion, higher than revenue growth, mainly due to better cost control.

Due to the characteristics of the CXO industry, the conversion of on-hand orders into performance is more predictable, so this part is basically in line with expectations. On a year-on-year basis, the month-on-month growth in the second quarter has surpassed that of domestic peers, showing the resilience of leading companies.

However, the brightest data for this quarter, which also surpassed market expectations, came from a 33.2% increase in the amount of new orders in progress (after excluding COVID-19 business). As of the end of June 2024, the company's on-hand orders were RMB 43.1 billion.

This data is surprising because even the most optimistic investors can hardly expect a 10% increase in new order value under the current biosafety legislation.

According to the order funnel chart,

• R (Research Services) orders increased 7%

• D (Development Services) order volume increased by 18%

• M (production service) order volume increased 20%

All three parts of the volume increase were less than 33% of the increase in value, which meant that new orders were still dominated by “high-priced big orders”.

The company stated, “The relevant orders will be converted into results within 18 months. At the same time, some customers use Grandfather's terms to sign long-term agreements. This part does not meet our definition of an in-hand order, so it is not included in the in-hand order.”

Regarding the annual results, the company further stated that this year's performance guidelines remain unchanged, and the 2025 guidelines still need to focus on order growth in the second half of this year, which will be disclosed in the annual report.

It is worth mentioning that the TIDES business (mainly including peptides used in weight loss drugs), which received the most attention in the market, continued to grow rapidly in the second quarter.

By the end of the second quarter, the business's on-hand orders had increased 147% year over year, and the number of service molecules reached 288, an increase of 39% year over year.

Regarding the future outlook for the TIDES business, the company stated in a conference call that TIDES will become an important growth engine for the company in the future. It is expected to grow by more than 60% in 2024, and will maintain this growth rate in 2025.

In terms of capacity planning, the company's production capacity was 32,000 L in January this year, and said it will continue to increase investment to further expand peptide production capacity to meet customer needs.

In addition, Yao Ming Kangde revealed that customer revenue from the top 20 global pharmaceutical companies reached 6.59 billion yuan, an increase of 11.9% year-on-year after excluding COVID-19 commercialization projects. This growth shows the company's business resilience against the backdrop of major clients reprioritizing R&D pipelines due to the impact of the Inflation Reduction Act (IRA).

At the same time, overseas markets, particularly the European market, contributed considerable growth.

2. Pharmaceutical Kangde's performance confirms the recovery trend of the industry

It is worth noting that it was not only Yao Ming Kangde that surpassed expectations in order growth in the second quarter. Gloria Ying and Kanglong Chemical, which previously disclosed performance forecasts, also gave order growth data that exceeded expectations.

Kanglong Chemical disclosed in its performance forecast:

“The amount of new orders signed in the first half of 2024 increased by more than 15% year-on-year, with laboratory services increasing by more than 10%, CDMO increasing by 20-30%, clinical research services increasing by 10%, and macromolecular CDMO increasing by more than 10%.”

Gloria Ying revealed in the announcement:

“New orders in the first half of 2024 increased by more than 20% year on year, and the second quarter had a significant month-on-month increase compared to the first quarter. Among them, the growth rate of orders from customers in the European and American markets exceeded the company's overall order growth rate.”

In particular, Gloria Ying directly pointed out that the number of orders from European and American customers surpassed the company's overall growth level, which confirmed the recovery trend in the overseas pharmaceutical market.

According to Jefferies' latest pharmaceutical financing data, although refinancing (FO) dragged down overall month-on-month growth, the second quarter achieved 35% year-on-year growth. What is more noteworthy is that in the first half of 2024, the amount of financing for US biotech companies increased sharply by 72% over the same period last year.

While US interest rates remain high, biomedical market financing has gradually returned to pre-interest rate hikes. Once the US market cuts interest rates in September, biomedical market financing is expected to increase further.

The significant recovery in the biomedical financing market has also led to a recovery in order volume in the CXO industry. Not only did the orders of the three Chinese companies mentioned above exceed expectations, but overseas giants also revealed positive order signals brought about by the industry's recovery in recent interim reports.

LONZA (Lonza) stated in its semi-annual report that due to improvements in the financing environment in the US and European biomedical markets, the company's biologics CDMO business performance exceeded expectations (2% increase), and the company's core EBITDA exceeded expectations (6% increase).

In the conference call that followed, Longsha was even more optimistic that there were more early inquiries in the second quarter. Such inquiries stemmed from industry recovery rather than from the spillover of Biosafety Act orders.

“Demand for RFPs (Request for Proposals) in the early stages increased significantly. We think this is due more to improved funding in the biotech sector than to the impact of biosafety laws. Compared with the same period last year, the financial situation of biotech companies improved markedly, and capital increased by almost 30% in the first half of the year. As a result, the market environment has changed significantly.”

Longsha further stated that it would take a delay of 6-9 months for these funds to be converted into company orders. At the same time, CDMO will not cut prices this year.

Another industry giant, IQVIA, also hit a record high for active orders in the 2nd quarter, while all forward-looking indicators showed an upward trend.

By the end of the second quarter of 2024, the company's on-hand orders reached 30.6 billion US dollars (up 7.7% year over year, adjusted by exchange rate; 8.1%, without exchange rate adjustment).

IQVIA and Longsha agree on how to improve the biotech financing environment.

IQVIA indicates:

The amount of biotech financing for the first half of 2024 was approximately $70 billion, almost equal to the sum of the whole of 2023, which is certainly a positive sign of the company's order growth.

However, IQVIA also points to another trend in the pharmaceutical industry: in response to the impact of the Inflation Reduction Act (IRA), large pharmaceutical companies are reorienting their project portfolios, cutting costs, and focusing capital on the most attractive projects.

This may bring more order opportunities to large CXO companies. Outsourcing is expected to help large pharmaceutical companies reduce costs, but at the same time, it is necessary to pay attention to possible price competition.

IQVIA said it will use AI automation and other methods to further reduce costs, improve efficiency, and gain competitive advantage.

Thermo Fisher Fisher also said during the second quarter conference call,

Biotech customers changed their pessimistic attitude from last year in the first half of this year, and their confidence in capital increased markedly. This will be transformed into Thermo Fly's early order indicators. It is expected that this situation will continue to improve in the second half of the year. Major customers are indeed concerned about supply chain flexibility and want to be able to deliver products stably.

Danaher, on the other hand, expressed the view that demand will increase from the perspective of production capacity:

Production capacity in the market, especially commercial production and production capacity in the third phase of clinical trials, needs to be increased. In the long run, the production capacity of large pharmaceutical companies or CDMOs is insufficient, and we are optimistic about the increase in equipment orders.

3. Significant differences in the impact of the Biosafety Act on different business sectors

Similar to what Thermo Fisher expressed during the conference call, the concerns of large customers about supply chain flexibility were also expressed during the Yao Ming Kangde earnings call.

Yao Ming Kangde said: In the context of the Biosafety Act, the company's chemical business orders continued to grow in the second quarter, and TIDES and small molecule DM continued to grow well. The main reason was that customer demand for high-quality and compliant production capacity continued to grow. This is also the company's definite competitive advantage in the face of uncertainty.

At present, the Testing and Biology sectors are mainly affected by prices. Only a very small portion of early R&D has been affected. The contribution ratio of European and American orders is similar to the previous one, and there is no particular change.

The most serious impact was the ATU division (mainly involving cell and gene therapy), and it was also the part of the company's presentation materials where revenue and profit fell short of expectations due to the bill's impact. Due to its special product requirements, customers are most concerned, and new products are limited the most. Currently, the company will work hard to complete existing orders.

It is worth mentioning that at the end of the conference call, some analysts optimistically asked whether the company would adjust this year's guidelines, which also reflected some changes in the market's extremely pessimistic expectations.

The company's response was that it is confident that it will complete the full-year guidelines this year. The delivery coverage rate for that year was 85%, which is basically the same as previous years. Next year's performance guidelines will be disclosed in the annual report based on orders for the second half of the year.

summed

Judging from the performance of leading CXO companies in the world, the industry has shown some positive changes. After improving the financing environment in the first half of 2024, biotech companies are expected to gradually increase capital expenditure over the next 18 months, which will further boost the performance of other companies in the industry chain.

This is also a change that biomedical investors need to continue to pay attention to in 2024.