Net profit of 700 million in half a year! CRO leader WuXi AppTec, stagnant growth

The "return of the king" drama in the innovative drug sector is still unfolding.

As the "water seller" for innovative pharmaceutical companies, the CRO sector has also begun to rebound from the bottom.

Statistics show that as of the latest closing, East Money's CRO index has risen by more than 49% this year, ranking among the top concept indices, while the performance of CRO-related concept stocks is even more outstanding. For example, WuXi AppTec, the "big brother" of CRO, has seen its stock price rise by nearly 100% this year.

In contrast, Pharmaron, regarded as the second in the industry and second only to WuXi AppTec, has performed slightly worse.

As of the latest closing, Pharmaron's year-to-date increase is only 22.75%, not only lagging behind its peers but also failing to outperform the sector index. Its stock price is still down 70% from its peak.

From a performance perspective, Pharmaron's fundamentals are not weak.

According to the interim report, in the first half of the year, Pharmaron achieved revenue of 6.441 billion yuan, a year-on-year increase of 14.93%; net profit was 701 million yuan, a year-on-year decrease of 37%; and non-GAAP net profit was 637 million yuan, a year-on-year increase of 36.66%.

Specifically, in the second quarter, Pharmaron's revenue was 3.342 billion yuan, a year-on-year increase of 13.92%; net profit was 396 million yuan, a year-on-year decrease of 55.17%. In other words, the sharp decline in net profit in the first half was mainly dragged down by the second-quarter performance.

Regarding the decline in net profit, Pharmaron previously stated that the reason for the decline was the decrease in "non-recurring gains and losses." In the same period of 2024, the company disposed of PROTEOLOGIX, INC. equity and obtained 648 million yuan in non-recurring gains. Excluding this factor, the company's non-GAAP net profit increased by 36% year-on-year.

Emerging from the trough

Pharmaron's story began in a laboratory in the Beijing Economic-Technological Development Area in 2004.

Over the past two decades, it has transformed from a scientific research service provider focused on small-molecule drug discovery to a global CRO platform covering the entire process of "drug discovery—development—production."

From a business perspective, Pharmaron's business spans four major segments: core laboratory services (drug discovery), small-molecule CDMO (CMC), clinical research services, and strategically positioned macromolecular and cell and gene therapy (CGT). With its "integrated, international" strategy, Pharmaron was once known as one of the "Big Three CROs" alongside WuXi AppTec and Tigermed.

In 2018, Pharmaron's IPO was approved, and it subsequently completed dual listings in A-shares and H-shares. After that, Pharmaron began to build a more comprehensive global strategy, with a series of acquisitions: in 2020, Pharmaron acquired the U.S. CRO company Absorption Systems, and in 2021, it announced the acquisition of AbbVie's biologics production plant in the UK, Allergan Biologics Limited. At the time, CRO was at its peak, and Pharmaron became highly sought after by capital. Its A-share stock price once climbed to 107.91 yuan per share in 2021, with a total market value exceeding 190 billion yuan.

However, a turning point emerged in 2023. The Federal Reserve's interest rate hikes suppressed global biotech financing, domestic medical insurance negotiations compressed pharmaceutical companies' profit margins, and coupled with the multiple impacts of geopolitical disturbances, R&D investment in innovative drugs suddenly slowed down. As the "water seller" for pharmaceutical companies, the CRO industry suffered a huge impact, and Pharmaron bore the brunt. From the most intuitive revenue and net profit perspective, Pharmaron's revenue growth rate in 2023 fell to 12.39%, a nine-year low; in 2024, the revenue growth rate further declined to 6.39%, and non-GAAP net profit plummeted by 26.8%, with both core indicators falling below the growth baseline.

In addition to slowing performance growth, Pharmaron faces even more severe challenges at the business level. Among them, the "CGT and macromolecular business," regarded as a new business, is deeply mired in losses.

Data shows that Pharmaron first disclosed this business separately on December 31, 2021, but the business progress has not been good, even becoming a drag on performance. Wind data shows that the segment's revenue in 2024 was 408 million yuan, a year-on-year decrease of 4%, while costs surged by 33% to 612 million yuan, resulting in a gross loss of 204 million yuan, the widest loss margin in four years. Looking back over the past four years, the segment's revenue climbed from 151 million yuan in 2021 to 425 million yuan in 2023, but the gross margin has always been negative: -13.84%, -27.73%, -8.30%, and now -50.07%.

Fortunately, with the support of favorable policies, the innovative drug market has begun to recover. Statistics show that in the first half of the year, the number of innovative drug approvals reached 43, a year-on-year increase of 59%, close to the total approvals for the whole of 2024. In addition, in terms of going global, there were 33 License-out transactions for Chinese innovative drugs in the first quarter of this year, with a total amount exceeding 36.2 billion U.S. dollars, a year-on-year surge of 258%. For example, 3SBio reached an agreement with Pfizer, with an upfront payment of 1.25 billion U.S. dollars. Such transactions are converting huge amounts of capital into R&D investment, with more than 60% of the funds flowing into clinical R&D.

With the gradual recovery of the innovative drug market, the CRO industry has begun to rebound from the bottom, and Pharmaron has also seen a recovery.

Opportunity for a breakthrough

Although performance has recovered in the first half of the year, Pharmaron's stock price has not kept up.

From the stock price trend this year, Pharmaron's performance in the capital market has not been very good. As of the latest closing, Pharmaron's year-to-date increase is only 22.75%. In the same period, East Money's CRO index has risen by more than 49%, and WuXi AppTec, the "big brother" of CRO, has seen its stock price rise by nearly 100%.

So, why has Pharmaron's stock price increase lagged far behind its peers?

From a fundamental perspective, over the past two decades, Pharmaron has transformed from a scientific research service provider focused on small-molecule drug discovery to a global CRO platform covering the entire process of "drug discovery—development—production." However, although its business is diverse, its overall competitiveness is far behind that of "big brother" WuXi AppTec, and each specific business faces enormous competitive pressure.

For example, the clinical research services business achieved revenue of 1.826 billion yuan in 2024, accounting for 14.88% of total revenue. Although this business is still relatively small, growth has clearly slowed. In addition, the competitive landscape for clinical research services is already quite severe, especially in clinical trial execution and site management (SMO) business, where "price wars" are fierce, and pricing power is crucial. In terms of gross margin, Pharmaron's clinical research services business has a gross margin of 12.82%, while Tigermed's clinical trial-related services and laboratory services have a gross margin as high as 36.84%.

Of course, Pharmaron's core competitiveness lies in laboratory services, which are its core foundational business and also the entry point for traffic. In 2024, laboratory services achieved revenue of 7.047 billion yuan, accounting for 57.4% of total revenue. However, this core business also faces challenges. In terms of gross margin, the gross margin for laboratory services in 2024 was 44.92%, slightly higher than the 44.28% in 2023, but the growth rate of the business has clearly slowed. In 2023, the business's revenue was 6.66 billion yuan, which means the revenue growth rate in 2024 was only 5.81%.

In addition to competitive pressure in its businesses, Pharmaron also lacks management and operational capabilities. Essentially, the CRO industry is a high-talent-density industry, and the foundation for rapid industry development lies in the engineer dividend. The better a company manages "human efficiency," the stronger its competitiveness. According to Tonghuashun iFinD data, Pharmaron's management expense ratio is not low. In 2024, its management expenses accounted for 12.9% of revenue, while the other comparable leading companies did not exceed double digits. A high management expense ratio indicates, to some extent, that the company's management efficiency is not high and that personnel allocation needs optimization.

Kan Jian Finance believes that the "stagnation" in Pharmaron's stock price reflects the multiple pressures it faces in its business and management. Although its performance has rebounded with the recovery of the innovative drug industry, Pharmaron still needs to continue to break through. Fortunately, the most difficult times are over, and its performance should improve in the third quarter.