In the first half of this year, affected by various complex uncertainties in the external environment and geopolitical factors, the CXO sector's stock prices overall showed a downward trend with fluctuations. On the other hand, as the impact of commercialized orders from the past few years related to COVID-19 fades and industry competition intensifies, CXO companies are generally experiencing a decline in performance.
Although the entire CXO industry is going through tough times, by the Q2 quarter, there is clear differentiation within the sector. Meanwhile, with the expectation of a rate cut by the Federal Reserve in September and the market generally predicting the end of the &#34;financing winter&#34; for global biopharmaceutical end markets in the past three years, CXO companies that have started to reverse their mid-year performance in this context may become pioneers in rebounding in the second half of the year.
<h2>Continued Differentiation in CXO Performance</h2>
Currently, the domestic CXO sector in 2024 continues to be under pressure. Data shows that 22 CXO companies achieved a total revenue of 45.82 billion yuan in the first half of 2024, a year-on-year decrease of 9.4%, with a total net profit attributable to shareholders of 7.81 billion yuan, a year-on-year decrease of 33.8%. Looking at the second quarter of 2402 alone, CXO companies achieved a total revenue of 23.83 billion yuan, a year-on-year decrease of 7.7%, and a net profit attributable to shareholders of 4.7 billion yuan, a year-on-year decrease of 29.8%.
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As the four leading companies in the Hong Kong-listed CXO sector, Pharmaron (03759), Zai Lab (06127), Hugel (06821), and Hutchison China MediTech (03347) showed significant performance differentiation in the first half of 2024.
According to the Smart Finance app, among these four companies, only Pharmaron maintained a double-digit growth in revenue and profit. In the first half of 2024, it achieved a revenue of 5.406 billion yuan, a year-on-year decrease of 0.63%; and a net profit attributable to shareholders of 1.113 billion yuan, a year-on-year increase of 41.64%.
Compared to Pharmaron, Hugel, Zai Lab, and Hutchison China MediTech all experienced significant declines in revenue and profit.
Among them, Hutchison China MediTech achieved a revenue of 3.358 billion yuan in the period, a year-on-year decrease of 9.50%; and a net profit attributable to shareholders of 576 million yuan, a year-on-year decrease of 58.54%. Hugel's revenue for the period was 2.655 billion yuan, a year-on-year decrease of 42.23%; and a net profit attributable to shareholders of 491 million yuan, a significant year-on-year decrease of 70.78%. Meanwhile, Zai Lab achieved a revenue of 849 million yuan in the period, a year-on-year decrease of 16.08%; and a net loss attributable to shareholders of 170 million yuan, a significant year-on-year decrease of 287.30%.
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Although the revenue and profit performance of the above four companies varies, the factors leading to changes in their performance are not the same. Taking Pharmaron as an example, as the second-largest domestic CXO company in the preclinical CRO full chain business line after Wuxi AppTec, Pharmaron's business covers the full chain of preclinical CRO and early clinical CRO services.
One key reason why Pharmaron was able to maintain a relatively stable year-on-year revenue in the first half of this year is that its four major segments were able to share the pressure and significantly improve the company's risk resistance.
From the financial report, Pharmaron's cornerstone business, laboratory services, saw a 0.3% decrease in revenue to 3.371 billion RMB, accounting for 60.15% of the total revenue. Following laboratory services, Pharmaron's clinical research services and macromolecular and cell gene therapy services saw growth rates of 4.7% and 5.5% respectively. In other words, even with a decline in CMC business growth, other segments supported Pharmaron's overall revenue growth.
As for the significant increase in net profit for Pharmaron during the reporting period, it was due to the company selling approximately $102 million worth of its 10.21% stake in Proteologix to Johnson &amp; Johnson in May this year through a merger and acquisition, resulting in a gain of 563 million RMB from the sale of equity investments in the financial report.
This is in stark contrast to the performance of Zhaoyan New Drug, which focuses solely on safety assessment and early clinical CRO. According to the Zhitong Finance APP, the main work of non-clinical drug research services is GLP toxicology and PK studies required for R&amp;D company IND applications, which are the core business of Zhaoyan New Drug, accounting for as much as 95.33% of its revenue. Due to intensified competition in the domestic early CRO service industry in the first half of this year, Zhaoyan New Drug's revenue declined by 16% year-on-year.
As for Zhaoyan New Drug's net profit, it was affected by fluctuations in monkey prices. Previously, the Zhitong Finance APP analyzed that Zhaoyan New Drug changed the measurement method of biological assets in its 2020 annual report from the &#34;cost method&#34; to the &#34;fair value method.&#34; The result of this accounting policy change is that when the price of biological assets continues to rise, the price gains are released in the current period's financial statements. However, as a double-edged sword, once the period of soaring monkey prices ends, the company's net profit will also be negatively affected.
The sharp drop in net profit for Zhaoyan New Drug this time was due to the sharp drop in monkey prices in the market. According to Zhaoyan New Drug's 2024 H1 financial report, the net loss caused by changes in the fair value of biological assets was 235 million RMB, further deteriorating the company's profitability. However, this has no impact on the company's normal operations and safety assessment business. It is worth mentioning that the company has already achieved a turnaround in the second quarter alone.
<h2>Will the second half of the year be a key period for industry reversal?</h2>
Although the interim reports of domestic CXO companies have varied, it does not affect the subsequent investment logic of CXO. In the Chinese market, the overseas order fulfillment of domestic CXO companies has a certain lag due to the cycle, so changes brought by fluctuations in the upstream business environment will appear with a certain delay for CXO.
According to the Zhitong Finance APP, a recent report released by HSBC Innovation Bank pointed out that in 2023, there were only 161 financing deals totaling $4 billion in the global biopharmaceutical industry, while in 2024 alone, there were 71 deals totaling over $5.2 billion. The report also stated, &#34;Whether in terms of exits or financing quantity, the first half of 2024 has already caught up with the full year of 2023 and is expected to catch up to the level of 2022.&#34; It is well known that a healthy exit mechanism is an important indicator for assessing the health of the biotechnology industry, indicating a gradual recovery in the global biopharmaceutical sector.
Furthermore, according to a recent report by JP Morgan on &#34;US Biopharmaceutical M&amp;A and Financing in the First Half of 2024&#34;: In the first half of 2024, the venture capital activities in the US biopharmaceutical industry showed signs of recovery, with the second quarter being particularly active. Large funding rounds drove investments in biopharmaceuticals and platform research, regardless of the clinical stage of the companies. In addition, biologics and small molecules continue to lead in early-stage investments and licensing transaction values.
Signals of recovery in downstream industries are reflected in the financial reports of CXO companies. Taking Kailaiying as an example, although Kailaiying's revenue and profits saw a significant decline in the first half of this year, it was mainly affected by large orders related to the previous COVID-19 situation. Looking at the situation of new signed orders, the company stated in its financial report that its international division has not fundamentally changed, with new signed orders showing improvement month-on-month. The new signed orders for the period amounted to 480 million yuan, a 20% year-on-year increase.
In addition to Kailaiying, the new signed orders of Zhaoyan New Medicine and Pharmaron also indicate an overall industry recovery. Data shows that in the first half of this year, the number of new signed projects for Zhaoyan New Medicine increased by 20%, with overseas project orders growing by 30% and stable orders in the US market. Pharmaron's global customer inquiries and visits increased compared to the same period last year, with new signed order amounts growing by over 15%. The growth in orders mainly came from European and American customers, with overseas order prices steadily increasing.
The above performances will obviously boost market confidence, as in the first half of this year, when it comes to domestic CXO companies, the market cannot avoid mentioning geopolitical influences. The significant pullback in the CXO sector is also related to investors' concerns about geopolitical risks in the industry. However, at present, the overseas order growth of leading domestic CXO companies has not been significantly affected, and the industry growth logic remains intact. Currently, whether the Fed will cut interest rates in September will be a key signal for whether the global biopharmaceutical financing winter will thaw, and it will also become an indicator for the gradual recovery of the CXO sector in the second half of the year

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Despite the overall performance decline in the CXO industry, there is a clear differentiation within the industry as the market anticipates a rate cut by the Federal Reserve. In H1 2024, the revenue and net profit of 22 CXO companies showed a year-on-year decline, with only Pharmaron maintaining a relatively stable performance, indicating that some CXO enterprises may rebound in the second half of the year. The market generally expects the global biopharmaceutical industry's financing winter to come to an end

- In the first half of this year, the CXO sector faced downward stock price fluctuations due to external uncertainties and geopolitical factors. Despite a challenging period for the industry, Q2 results showed significant internal differentiation within the sector. With expectations of a Fed rate cut in September, the global biopharmaceutical sector might see an end to the "financing winter," potentially leading to a rebound for CXO companies showing performance reversals.
- Domestic CXO companies experienced varied financial performances in H1 2024, with revenue and net profit declines. Notably, Kanglong Huacheng maintained stable revenue and double-digit profit growth, while other top companies like Taige Medicine, Zhaoyan New Medicine, and Kailaiying faced significant revenue and profit drops.
- Kanglong Huacheng's diversified business segments helped mitigate pressures, with its laboratory services contributing significantly to revenue. The company's profit surge was boosted by a strategic equity sale. In contrast, Zhaoyan New Medicine's profit decline was influenced by volatile biological asset prices. Despite mixed mid-year results, the industry's future remains optimistic, with overseas order fulfillment cycles impacting CXO's delayed response to market fluctuations.

Behind the pressure on CXO performance and differentiation, industry recovery may become the theme in the second half of 2024