What's Next After the Surge in the Pharmaceutical Sector?
This may be a question that everyone is concerned about recently. Looking back at past bull markets, the performance of the pharmaceutical sector has been relatively moderate and stable, but this time it's different; the highly elastic innovative drug industry chain has become the main battlefield of the pharmaceutical sector.
Moreover, after experiencing a downtrend for 3-4 years, the valuation and performance expectations have been greatly compressed. So far this year, the performance of the pharmaceutical sector is still basically at the bottom of the entire market.
This means that the current pharmaceutical sector is still in a very cost-effective valuation range, and one should not easily speak of heights in the trend reversal.
From an industrial perspective, driven by the dual resonance of policy cycles and technology cycles, China's pharmaceutical industry is entering its best era, reaping the fruits of innovation. Coupled with the valuation and expectation repair brought by market sentiment, a new "storm" driven by innovative pharmaceutical companies is about to hit.
For China's pharmaceutical industry, this may be another excellent opportunity for "quantum leap."
/ 01 / Valuation Repair Under Expected Correction
One of the core logics for the pharmaceutical sector to attract more market attention is the repair of the expectation gap.
Compared to most industries, which evolve from normal expectations to exceeding expectations, the pharmaceutical sector is moving from "negative expectations" to normal expectations, far from the stage of "exceeding expectations."
From 2019 to 2021, it was a booming three years for the pharmaceutical industry, but the fundamentals grew quickly, and market expectations inflated even faster. Coupled with the new demands stimulated by the COVID-19 pandemic, which interfered with people's judgment, it ultimately led to a significant overexpansion of capacity in the entire industry, far exceeding the market's needs.The excessive influx of resources in the short term has led to a surge in the cost of single-drug development and a decline in the expected returns on single drugs. Under this situation, the expected return on investment has deteriorated, and the pressure of involution competition has become prominent. In addition, the price reduction driven by regulatory measures and the不顺 of innovative drugs going overseas have made people start to re-examine the development expectations of the industry, and the bubble has burst.
Before the start of this round of market conditions, from the middle of 2021, the stock prices of China's pharmaceutical industry have experienced a downward trend for 3-4 years, with a significant compression of valuations and performance expectations. According to WIND data, from the beginning of the year to now, the pharmaceutical sector has basically been at the bottom of the entire market.
This also means that the current valuation range of the pharmaceutical sector is still very cost-effective. Therefore, even if there is a significant increase, the essence is just a valuation repair, returning to normal expectations. In the future, there will be a series of industry benefits that will push the pharmaceutical sector's expectations higher.
This year's medical insurance negotiations may be a node that exceeds expectations. On the one hand, in the past two years, medical insurance negotiations have become more moderate, and the policy support for innovative drug companies and products is also visible. If this year's national negotiations continue this trend, it will help to further boost the innovative drug sector.
On the other hand, many new drugs are waiting for negotiations. If they successfully enter the medical insurance, they may give birth to many blockbuster innovative drugs. For example, if Nefu Kang from Yun Ding Xin Yao enters the medical insurance at a suitable price, it will accelerate the volume and become a major product with a value of more than 5 billion.
Nefu Kang is the world's first IgA nephropathy causal treatment drug. It was prescribed for the first time in Mainland China in May 2024. In just over a month after its launch, the sales revenue of Nefu Kang reached 167.3 million yuan.
According to the semi-annual performance teleconference, after launching in May, there were 23,000 patients applying for assistance and services in the first half of the year, with a repurchase rate close to 100%. The core lies in the significant meaning of Nefu Kang for IgA nephropathy patients.
Data analysis of the Chinese population shows that Nefu Kang can protect patients' kidney function, reduce kidney function decline by 66%, delay the progression of the disease to dialysis or kidney transplantation by 12.8 years, and the treatment cycle only takes about 9 months.
The most important thing is that its efficacy and pharmacoeconomic advantages are both important.
In the pharmacoeconomic evaluation conducted in the United States, Nefu Kang, as an innovative treatment for IgA nephropathy, has shown its dual advantages in treatment effects and economic costs. On the basis of supportive treatment, compared with the placebo, Nefu Kang® can significantly delay the decline of kidney function, thereby obtaining more life years (LY) and quality-adjusted life years (QALY), while the long-term total cost is lower, making it an absolutely advantageous treatment plan in terms of pharmacoeconomics.An innovative drug with clear clinical efficacy and a huge patient demand should ideally target the healthcare insurance market. The broad coverage of healthcare insurance will benefit as many IgA nephropathy patients as possible, and will also lead to better-than-expected performance from Naifu Kang, driving the company's expectations higher.
This is not only the story of Yundu Xin Yao and Naifu Kang, but also the story of many Chinese innovative pharmaceutical companies. The underlying logic is that innovative drugs are the future of China's pharmaceutical industry. With continuous improvement in innovation capabilities and the industry entering a harvest period, leading companies are showing impressive commercial performance, and new forces and significant deals are emerging continuously.
In other words, the situation of the innovative drug industry is far from as pessimistic as people imagine. There is a need to correct this wrong expectation, which has already sown the seeds for a reversal. As the expectation gap continues to be corrected, the valuation of the pharmaceutical sector will also continue to rise.
From negative expectations to exceeding expectations, emotions that have been suppressed for three years will often burst with even greater impact.
/ 02/ Fundamentals Drive Value Growth
Of course, for the pharmaceutical sector, speculative trends will eventually fade away, and fundamentals will become the core driving factor.
The certainty of the pharmaceutical sector lies in the fact that innovative drug assets are the leaders. These assets have the characteristic of high performance explosiveness and exist in a "stock price-performance" positive feedback logic.
In simple terms, although stock price increases may push up valuations in a short period of time, the performance growth of innovative drug companies is fast enough to quickly digest the valuations.
For example, Yundu Xin Yao is currently in a stage of low PS and high performance growth. Innovative drug companies usually use PS valuation. Yundu Xin Yao's revenue for the first half of this year was about 302 million yuan, a significant increase of 158% compared to the second half of last year. The company expects a full-year revenue of 700 million yuan, which corresponds to a current market value of about 8.2 billion Hong Kong dollars, only about 10 times PS.
If the market continues to evolve, there is still a possibility for Yundu Xin Yao's valuation to rise further. However, at the same time, Yundu Xin Yao, which has fully embarked on the fast track of commercialization, will still maintain rapid revenue growth with the support of multiple products, thereby digesting the rising valuation.Specifically, the expectations for the continuous growth of its flagship product Naifu Kang are becoming increasingly clear. It has been included in this year's medical insurance negotiation list and is about to be incorporated into the authoritative KDIGO guidelines, with its therapeutic status continuously gaining recognition and consolidation. Coupled with the large number of potential patients in China, continuous growth is already a clear card to play.
The growth of Yijia can also be anticipated. As the world's first fluorocycline antibacterial drug, Yijia has achieved sales revenue of 233 million yuan from its commercial launch in July 2023 to the end of June this year. On one hand, Yun Ding Xin Yao continues to exert effort at the commercialization level by increasing its own sales team, strengthening coverage of core hospitals, and expanding its reach through the CSO model. On the other hand, the release of Yijia's research data also provides important support for its clinical growth.
In addition, in 2026, Yun Ding Xin Yao will also welcome two other commercialized products, the autoimmune blockbuster drug Yiqu Mo De and the high-end antibiotic Cefoperazone/Tazobactam.
The former is a new generation of oral treatment for ulcerative colitis. Data shows that by 2030, the number of ulcerative colitis patients in China is expected to reach about 1 million people, and the company estimates that Yiqu Mo De's peak sales in 2030 will reach 2 billion yuan. The latter also aims at the huge domestic antibacterial drug market, with better effects and non-resistance, continuously eroding the market share of old products. The company estimates that its peak sales in 2030 will reach 1.5 billion yuan.
Looking to the future, in this performance feedback, innovative drug assets represented by Yun Ding Xin Yao will form a positive feedback loop of "rapid growth in performance digesting valuation - expectation of further growth". In other words, the rise of the pharmaceutical sector relies on expected repair in the short term, and the support in the medium and long term is performance feedback.
More importantly, after the test of the cold winter cycle, the competitive landscape of innovative drugs has become clear, and there is no too much controversy among the top and quasi-top, with high certainty. Although the risk of innovative research and development remains unchanged, they will not fall into a downward spiral, nor will they stage the previous value destruction.
Looking at the Hong Kong Stock Connect 18A sector, the one with the highest increase so far this year is Ascentage Pharma, and Yun Ding Xin Yao ranks third with a rise of over 21%. The rise in stock prices and the recovery of valuations are precisely the embodiment of "when the sands are blown away, the gold appears".
China's own innovative drug biopharmaceutical has taken shape, such as BeiGene; in the subsequent second echelon, it is also possible to clearly see biotechs that have traversed the cycle. They either "come ashore" through BD or have the initial appearance of a biopharmaceutical, such as Yun Ding Xin Yao.
In the long run, capital will inevitably give higher valuations to such assets, forming another positive cycle.
/ 03/ Heavyweight BD further raises expectationsWhile holding a clear card for performance growth, pharmaceutical assets often also have a "hidden line" of valuation reassessment:不定期的重磅BD, which may push expectations to rise further.
At present, against the backdrop of policy support and deepening R&D quality, innovative drugs are surging forward at an accelerated pace, experiencing a change from "importing" to "exporting".
Under the pressure of the patent cliff, large overseas pharmaceutical companies generally have growth anxiety, and domestic molecules are fast and good, thus being able to meet the strengthening logic of MNCs. Recently, a preclinical molecule from Stone Pharmaceutical Group has created a phenomenal BD with a $100 million upfront payment and a total transaction amount of nearly $2 billion.
In this context, the potential blockbuster BD logic is undoubtedly a potential catalyst for many innovative drug companies with solid independent R&D capabilities. For example, Yun Ding's mRNA pipeline and autoimmune BTK inhibitors are popular players in popular tracks, and they also have the potential to create phenomenal transactions.
Among them, mRNA tumor vaccines have the potential to subvert tumor treatment, and they have two significant advantages in treating tumors: first, they are better at reducing recurrence and distant metastasis, and second, their efficacy is more stable, which will form the core competitive advantage of mRNA tumor vaccines.
Under the prominent competitive advantage, the market space for mRNA tumor vaccines is huge. CITIC Securities estimates that the global market size for mRNA tumor vaccines will be around $14.5 billion in 2030 and $21 billion in 2035. Yun Ding's mRNA platform is independently owned intellectual property and has been clinically verified. The company has global rights to the product and can authorize it to accelerate the research and cashing of mRNA vaccines.
In August, the company's mRNA tumor vaccine for solid tumors, EVM16, has already started IIT research. The study, initiated by Peking University Cancer Hospital and Fudan University-affiliated Cancer Hospital, is the first human trial of EVM16, and the progress is ahead of schedule; the second off-the-shelf tumor vaccine is also about to submit IND in China and the United States.
At the same time, Yun Ding's BTK inhibitor with global rights, EVER001, is also accelerating, and it is expected to announce 1b phase clinical data for primary membranous nephropathy in the second half of the year, and it is expected to enter phase 2 clinical trials next year.
Unlike most BTK inhibitors worldwide, the EVER001 molecule adopts a covalent reversible approach, with high selectivity and good binding ability, and both on-target and off-target toxicity are relatively low, so it has great potential in the autoimmune field.
At present, the primary membranous nephropathy targeted by EVER001 has a patient size of 2 million in the Chinese market alone, and the global patient size far exceeds this number. The limitations of existing treatment methods are relatively large, not only do they have high side effects, but more than 30% of patients do not respond to existing standard therapies, and a high proportion (30%) of patients who achieve remission will relapse, and the demand for new therapies is extremely urgent, which is undoubtedly a potential opportunity for EVER001.In this year's mid-year report, Cloudbreak Therapeutics explicitly stated that it will accelerate the development of its pipeline with global rights. Given its outstanding business development (BD) capabilities in the past, one might anticipate some pleasant surprises brought about by BD.
After the sands of time have been sifted, a new era has gradually begun. These catalysts will inevitably speed up the process of the pharmaceutical sector returning to its peak.
/ 04/ Summary
In the last round of frenzy, China's innovative pharmaceutical industry achieved rapid catch-up, giving birth to many powerful biotech and biopharma companies. In this bull market, on one hand, it will accelerate the leap of these biotech and biopharma companies, and on the other hand, it will speed up the gestation of a new generation of kings.
For the pharmaceutical industry, it is clear that a new round of opportunities has arrived. Of course, the industry practitioners involved also need to remain sober at all times. Calmness and rationality have always been the keys to navigating through cycles.
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