On August 21, 2024, Hengrui Pharmaceutical announced its remarkable financial results: in the half year, the company's revenue reached 13.601 billion yuan, an increase of 21.78% over the same period last year; Net profit was Rmb3.432 billion, up 48.67 percent year-on-year. Then, on August 27, 2024, Hengrui Pharmaceutical announced that its self-developed innovative drugs were successfully listed in the field of self-immune diseases, becoming the first innovative drugs for psoriasis in China, breaking the market monopoly position of similar imported drugs. Over the past three years, Hengrui has faced serious challenges - its stock price has hit a trough, generic drug sales have fallen sharply, and the market has been skeptical that it can pull through. As we all know, in order to deeply understand the development of China's pharmaceutical industry, Hengrui Pharmaceutical is a representative that cannot be ignored. This company started from the imitation of traditional Chinese pharmaceutical companies and gradually moved to the road of innovation, becoming the epitome of the development of the industry. For a long time, Chinese companies have been playing catch-up in the field of innovative drugs. According to data from the State Food and Drug Administration around 2015, there are about 5,000 pharmaceutical companies in China, and more than 95% of the 190,000 drug approval numbers approved at that time are generic drugs. In the "Lianyungang Pharmaceutical Factory" period, in the face of almost unable to extricate themselves from the dilemma, the factory director decided to develop those large pharmaceutical companies do not want to produce, and small pharmaceutical companies are difficult to manufacture drugs. Since then, Hengrui Pharmaceutical started from the cancer chemotherapy drug etoposide, and continued to expand its product line, from focusing on first imitation drugs to high-end generic drugs, to realize the replacement of imported drugs. However, with the implementation of the country's centralized procurement policy for generic drugs, the value of this model has declined rapidly, and its impact has gradually emerged. In the fifth batch of national collection, the sales of eight varieties fell by 88%, resulting in a simultaneous decline in revenue and net profit, and the stock price was also hit hard, falling by more than 70% at one time.
With its fast-track strategy, Hengrui has consolidated its market position and accumulated extensive experience in the large pharmaceutical sector. This strategy has supported the development of Hengrui and many other Chinese pharmaceutical companies for more than a decade. There are two kinds of innovation: one is to follow, that is, to compete in the existing market; The other is pioneering, that is, opening up new markets. It is the former that is affected by the harvesting policy. Therefore, Hengrui Medicine did not indulge in the past, but decisively turned to another field. Since its listing in 2000, Hengrui Pharmaceutical has invested 350 million yuan to establish an innovative drug research and development center in Shanghai. In June 2011, Imericoxib was approved, which after 14 years of independent research and development, for the treatment of osteoarthritis 1.1 innovative drugs, marking Hengrui Medicine has entered a new era of innovative drugs. Since then, Hengrui's R&D investment has increased from 400 million yuan to 6.15 billion yuan in 2023, and the proportion of R&D expenses to total revenue has increased from about 5% to nearly 30% at its peak.
The massive investment in research and development began to bear fruit after 2018, with more than two new drugs approved each year, and revenue from innovative drugs has steadily increased. Large companies are notoriously slow to shift and tend to cling to proven business models. Although in Hengrui's case, innovation has been less in cutting-edge areas and more focused on proven overseas big drugs, the company has already begun to adjust its direction. Hengrui's best-ever half-yearly report included a one-off gain. The semi-annual report included a 160 million euro (about 1.27 billion yuan) down payment on a large innovative drug overseas license confirmed last year. On October 30 last year, Hengrui Medicine licensed two Class 1 new drugs to Merck. In addition to the down payment being included in the first-half results, up to €90 million in technology transfer fees, exercise fees and milestone payments will be received. Merck will also pay Hengrui a double-digit percentage of sales commissions.
Hengrui Pharmaceutical has obtained the approval of 3 innovative drugs, and the number of category 1 innovative drugs on the market has increased to 16; The total number of invention patents applied has reached 2,527, 691 PCT patents, 585 invention patents effectively authorized in China, and 705 patents authorized in Europe, America, Japan and other countries and regions. Although Hengrui Pharmaceutical has experienced a downturn since 2021, in sharp contrast to the decline in the company's performance and stock price, its innovative drug business revenue has continued to grow steadily. The revenue in the past three years was 5.207 billion yuan, 8.116 billion yuan and 10.637 billion yuan respectively, accounting for 39.15%, 38.15% and 46.61% of the total revenue in the same period. In the internationalization strategy of innovative drugs, a direct way is to "build ships and go to sea", that is, local pharmaceutical companies independently carry out clinical trials overseas, declare for listing, and develop markets and sell new drugs overseas. Although this way is direct and the benefits are fully owned, it requires relatively strong financial strength and rich international experience. At present, Chinese pharmaceutical companies in the international exploration stage, most companies do not sell drugs directly, but through the sale of new drugs under development "pipeline", which is often referred to as "borrowing the ship to sea", that is, through the transaction with partners, using its mature platform to complete the development and commercialization of drugs. On May 16, 2024, Hengri Pharma licensed the GLP-1 series of innovative drugs to Hercules in a transaction totaling up to $6 billion, of which a down payment of $110 million is expected to be confirmed in the second half of the year. It is worth noting that Hengrui Pharmaceutical obtained the equity of the counterparty of the transaction, holding 19.9% of the shares. This is not only to change the payment and profit methods, in fact, Hengrui Pharmaceutical can directly participate in the overseas research and development and commercialization process, have a certain say in decision-making, and occupy a place in the operating profit distribution and capital gains. This provides Hengrui Medicine with an opportunity to transform the overseas market into its home field, which is a transitional form of the strategy of "borrowing ships to go to sea" and "shipbuilding to go to sea", and is likely to become a key step in becoming an ocean-going giant ship. Innovative drugs now account for nearly 50% of the company's overall revenue, almost splitting the market with generics.
BeiGene, its half-year revenue has exceeded the 10 billion mark, reaching 11.996 billion yuan, an increase of 65.4%; The net loss attributable to shareholders of the parent company was 2.877 billion yuan, a decrease of 45% year-on-year. Crucially, BeiGene has finally hit the break-even point after years of losses. After long-term research and development investment, BeiGene also ushered in the dawn of profitability. At the same time, with its dazzling half-year performance report, Fosun Pharma achieved an operating income of 20.463 billion yuan and a net profit of 1.254 billion yuan, and its international market expansion of biosimilars was in full bloom, which was dubbed as "the first brother of globalization" by some media reports. In the highly competitive field of innovative drugs, emerging innovative drug companies are like well-equipped and agile destroyers. However, despite the slow turn of the carrier, it has the advantage of being "big". First of all, Hengrui Pharmaceutical is still the strongest clinical execution of pharmaceutical companies in China, even if its research and development pipeline into the clinical stage late, still can rely on its excellent clinical execution ability. For example, in the research and development of PCSK9 monoclonal antibody, Hengrui Pharmaceutical only took 62 months from research application to listing declaration, which is far faster than other companies that started earlier. On the other hand, it is well known that drug development requires three "10" challenges: a 10-year development cycle, a billion dollars of investment, and a 10% success rate in clinical trials. As a result, revenue-driven profit growth is often seen as a sign of greater strength. In the first half of the year, a total of 57 innovative drug clinical approvals were obtained, of which 10 clinical trials were advanced to phase III, 20 to phase II, 19 to phase I, while more than 90 drugs are in clinical development stage, and more than 300 clinical trials are carried out worldwide.
According to the US Clinicaltrial database, in the first four months of this year, Astrazeneca once led in the number of new clinical trials opened in a single month, and Hengrui Pharmaceutical tied with it, also occupied the first place in the total number. Hengrui Pharmaceutical's R&D investment continued to grow, reaching RMB 3.037 billion in the first half of the year, accounting for 22.34% of its total revenue, an increase of 30.3% compared with the same period last year. Hengrui Pharmaceutical has consolidated its leading position in innovative medicines by continuously increasing its investment in research and development. However, it is worth noting that after the strategic transformation, whether its strong financial strength can cope with the future market broad but challenging environment needs to be further observed.