Led by Huahai Pharmaceutical and Sinopharm Modern, the leading pharmaceutical companies integrating APIs (Active Pharmaceutical Ingredients) and finished dosage forms, both achieved significant growth in their performance for the first three quarters of 2024. This growth is primarily attributed to the recovery in the API market, continuous cost reduction and efficiency enhancement, and the realization of benefits from integrated management and formulation.
As the season for disclosing quarterly reports approaches, several pharmaceutical companies have released their performance forecasts. Among them, Huahai Pharmaceutical and Sinopharm Modern, both in the API-integrated formulation niche, have published their forecasts. For the first three quarters of 2024, their net profit growth is expected to be at least 37% and 64.01%, with the upper limits being 45% and 74.65%, respectively.
Huahai Pharmaceutical and Sinopharm Modern are leading companies in the API-integrated formulation sector. Their revenue scales in 2023 were 8.309 billion yuan and 12.07 billion yuan, respectively, with their total market capitalization at the close on October 11 being 27.3 billion yuan and 16.012 billion yuan. The logic behind the rapid growth of these two leading companies is consistent. On one hand, with the recovery of the API market, the growth in the API segment of both companies is significant, and the market is expected to continue to be favorable. On the other hand, both companies have been continuously strengthening cost control to enhance overall profitability.
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High Growth in Performance
Huahai Pharmaceutical, which went public in 2020, is a leader in domestic specialty APIs. Starting with APIs and intermediates as the foundation for development, the company has expanded into the downstream formulation segment, forming a complete industrial chain that integrates intermediates, APIs, and formulations.
On October 10, Huahai Pharmaceutical released a performance forecast, expecting the company to achieve a net profit of between 988 million yuan and 1.046 billion yuan for the first three quarters of 2024, an increase of approximately 37% to 45% year-on-year; the expected non-IFRS net profit is between 990 million yuan and 1.055 billion yuan, an increase of about 22% to 30% year-on-year.
Looking at previous years, Huahai Pharmaceutical's operating income in 2023 increased by 0.52% year-on-year, while net profit and non-IFRS net profit decreased by 28.88% and 25.96%, respectively. It is evident that the performance since 2024 has significantly improved compared to 2023. Benefiting from this, the company's stock price has risen from a low of 10.59 yuan in February 2024 to a high of 21.55 yuan, with the maximum increase being 103.49%. As of the close on October 11, the company's stock price was 18.59 yuan per share, with a total market capitalization of 27.3 billion yuan.
Similarly, another API-integrated formulation pharmaceutical company has also achieved rapid growth in performance.
Sinopharm Modern, a listed company under Sinopharm Group, is ultimately controlled by the State-owned Assets Supervision and Administration Commission of the State Council. On October 10, Sinopharm Modern released a performance forecast for the first three quarters of 2024, expecting to achieve a net profit of 925 million yuan to 985 million yuan, a year-on-year increase of 64.01% to 74.65%; the expected non-IFRS net profit is 892 million yuan to 952 million yuan, a year-on-year increase of 68.3% to 79.62%.
In the past three years, Sinopharm Modern's net profit changes from 2021 to 2023 were -12.41%, 10.47%, and 10.21%, respectively. It is evident that the performance since 2024 has accelerated compared to previous years. The company's stock price has risen from a high of 7.47 yuan in January 2024 to 14.41 yuan, with the maximum increase being 92.9%. As of the close on October 11, the company's stock price was 11.94 yuan per share, with a total market capitalization of 16.012 billion yuan.In addition to the aforementioned, there is another peer company whose scale, though not as large as the first two, has also achieved relatively fast growth in its performance forecast.
Qianhong Pharmaceutical released its performance forecast for the first three quarters of 2024 on October 9th, expecting to achieve a net profit of 310 million yuan, a year-on-year increase of 56.47%, and a net profit of 215 million yuan excluding non-recurring gains, a year-on-year increase of 29.74%. The company's main products are two major series of biochemical drugs: polysaccharides and active enzymes. The polysaccharide varieties mainly include heparin raw materials and heparin preparations, while the active enzyme varieties mainly include the pancreatic kallikrein series, compound digestive enzyme capsules II, and asparaginase series. As of the closing price on October 11th, the company's stock price was 5.99 yuan per share, with a total market value of 7.667 billion yuan.
Active Pharmaceutical Ingredients (API) Sector Gains Momentum
APIs are one of the core revenue segments for the aforementioned pharmaceutical companies. According to the 2023 annual report data, Huahai Pharmaceutical and Guoda Modern, two companies, contribute 38.03% and 40.86% of their total revenue from the sales of APIs and intermediates, respectively.
Since 2024, the performance of both integrated API and formulation leaders has grown rapidly, benefiting from the strength of the API sector.
Huahai Pharmaceutical's performance forecast for the first three quarters of 2024 attributes the growth to the company's focus on sales team fission and organizational restructuring, market penetration, and the expansion of new business models. The company has actively promoted the global sales network layout, effectively increasing its product market share and significantly boosting sales revenue.
According to the mid-year report for 2024, Huahai Pharmaceutical's API business revenue increased by 19.46% year-on-year. In the first half of the year, the company's international sales center visited nearly 300 global customers, initiated more than 80 major customer project cooperations, and achieved continuous breakthroughs and upgrades in major customer relationships. At the same time, the company has been committed to the development of new varieties and new businesses, striving to extend cooperation from individual products to product lines and even product clusters, laying a solid foundation for the commercialization of the company's new products and new validation batch projects. During the reporting period, there was a significant increase in the markets of original research and development major customers and domestic markets.
Guoda Modern's performance forecast for the first three quarters of 2024 states that there is a strong market demand for penicillin and macrolide APIs. The company actively seized market opportunities, dynamically optimized product structures, increased the sales volume of related APIs, and simultaneously drove an increase in the gross profit margin of the company's pharmaceutical intermediates and API business segments year-on-year.
According to the mid-year report for 2024, Guoda Modern's API and pharmaceutical intermediates segment achieved sales revenue of 2.687 billion yuan, an increase of 7.38% compared to the same period last year, with a segment gross profit margin of 32.29%, an increase of 10.97 percentage points compared to the same period last year. On one hand, the upstream intermediate of the penicillin series, 6-APA, was prioritized for the production of downstream high-value-added products for external sales. The sales volumes of ampicillin acid, amoxicillin, and clavulanic acid products increased by 805.78%, 93.78%, and 33.95% year-on-year, respectively, with a significant increase in sales volume driving a noticeable increase in revenue. On the other hand, the sales volume and price of the macrolide API azithromycin rose together, driving a doubling of the revenue scale year-on-year.
In fact, the performance of the entire API sector has improved since 2024. According to Pacific Securities, in the first half of 2024, the API sector's total operating income achieved a slight year-on-year increase, with the growth rate of net profit attributable to the mother company and net profit excluding non-recurring gains faster than the revenue growth rate, indicating a significant improvement in profitability.Guotai Junan analysis states that from 2022 to 2023, the profitability of the active pharmaceutical ingredients (API) sector was under pressure due to the rise in upstream raw material costs and freight expenses influenced by geopolitical conflicts, terminal product price pressures during the destocking cycle, and competition from India's industrial chain. Since 2024, revenue and profit have seen sequential improvements, with profitability bottoming out and beginning to rebound. The industry's destocking cycle is nearing its end, and the stabilization and potential upward correction of terminal product prices are anticipated.
Cost Reduction and Efficiency Enhancement
Another significant reason for the high growth in performance of two leading integrated pharmaceutical companies, which combine API and formulation, is the focus on cost reduction and efficiency enhancement.
Huahai Pharmaceutical's performance forecast for the first three quarters of 2024 indicates that the company's lean management continues to be optimized, with continuous improvement in technological transformation capabilities and economies of scale, enhancing the company's cost control and overall competitive strength. Concurrently, the company has optimized its product structure, leading to a year-on-year increase in gross margin and further enhancement of profitability.
Looking at the mid-year report data for 2024, Huahai Pharmaceutical's gross margin decreased by 1.88 percentage points year-on-year to 62.01%. At the same time, the company's management expense ratio decreased by 1.47 percentage points year-on-year to 12.71%, and the R&D expense ratio decreased by 1.37 percentage points year-on-year to 8.58%.
In terms of cost reduction and efficiency enhancement, Guoyao Modern's performance forecast for the first three quarters of 2024 states that the company has continued to deeply carry out quality improvement, cost reduction, and fee control, boosting management efficiency, with a significant year-on-year decrease in period expenses.
From the mid-year report data for 2024, Guoyao Modern's API segment gross margin increased by 10.97 percentage points year-on-year to 32.29% in the first half of the year. This improvement is not only due to the rise in API prices but also related to enhanced cost control on the supply side. On one hand, the company dynamically tracks market trends and, through strategic procurement and optimization of supplier channels, has reduced the purchase prices of some raw materials. On the other hand, the continuous advancement in process optimization and improvement of some key API products has led to a year-on-year decrease in costs.
At the same time, Guoyao Modern's sales expenses have also seen a significant decrease, with a 42.79% year-on-year drop to 716 million yuan in the first half of 2024, and the sales expense ratio decreased by 7.41 percentage points year-on-year to 12.02%. Among them, sales service fees decreased the most, from 1.068 billion yuan to 525 million yuan. The reason behind this is that, in response to the impact of industry policies and tender procurement trends, the company has been continuously promoting the adjustment and transformation of its marketing model and carrying out marketing management improvements. The decrease in sales expenses has been greater than the decrease in the gross margin of the formulation business, maintaining and further enhancing the overall profitability of the formulation segment.
Although the contribution of the formulation business to performance growth is not as significant as the previous factors, it is still noteworthy.
In the first half of 2024, Huahai Pharmaceutical transformed its formulation sales channels, deepening business cooperation with mainstream commerce, and has established cooperative relations with nearly 300 target chains; e-commerce business has been carried out in an orderly manner, with cooperation established with leading e-commerce platforms such as Alibaba, JD.com, and Meituan. As of the end of the first half of 2024, the company has obtained more than 70 domestic registration approvals for its formulation products, with over 120 research projects underway; in the United States, it has obtained nearly 100 ANDA numbers for its formulations (including temporary approval numbers); there are more than 20 biopharmaceutical research projects underway, with 12 projects in various stages of clinical research.Despite a decline in the first half of 2024, the sales of overseas formulations for Modern Pharmaceutical increased by 21.38% year-on-year, becoming a significant highlight. At the same time, there is an active push to enhance independent innovation capabilities.
From a medium to long-term industry perspective, Guotai Junan believes that China's domestic industry chain infrastructure, manufacturing upgrades, and the dividend of engineers, along with significant advantages in environmental protection technology and processes, are notable. Leading companies continue to increase their investments in the integration of "intermediates - APIs - formulations" and CDMO layouts, initiating full industry chain competition. In addition, several blockbuster small molecule patent original research drugs are expected to expire in the future, and under the "patent cliff" effect, the potential of the generic drug market is substantial, driving the demand for related specialty APIs. Companies with relevant layouts are expected to enter a period of accelerated performance release.