Industrial: Hitting the bottom and rebounding, the turning point has appeared. The improvement in the supply and demand structure of the CXO industry is catalyzing a new round of upward cycle.

Industrial reports that the CXO industry is currently at a turning point in the cycle, with supply-side capacity being cleared out. It is expected that future capacity utilization rates will bottom out and improve, catalyzing the CXO industry to enter an upturn cycle. The report recommends focusing on CXO companies with a primary focus on overseas business, increasing demand orders, turning point in operational indicators, and high-growth areas like peptide ADCs. Main points from Industrial report: Improvement in supply and demand environment, ongoing clearance of capacity, and gradual recovery of CXO industry. From an operational perspective, in the first three quarters of 2024, there was still some pressure on the year-on-year performance of CXO companies, but there was a trend of improvement on a quarterly basis. Gross profit margin and net profit margin have stabilized and risen since 2023 Q4's historic lows. Global biopharmaceutical investment has significantly improved since 2024, and some leading domestic CXO companies have seen new order growth, resulting in improved demand that will gradually performance. The report states that the CXO industry is currently at a turning point in the cycle, with supply-side capacity being cleared out. Future capacity utilization rates are expected to bottom out and improve, leading to an improvement in supply and demand relationships that will catalyze the CXO industry's entry into an upturn cycle. Small molecule CDMO: China has multiple advantages over India, and in the short to medium term, India is unlikely to replace China's position in the supply chain. In recent years, the small molecule CDMO market has seen steady growth, with China, Europe, and the U.S. being major global suppliers. The transfer of production capacity from Europe and the United States to China and India is an inevitable trend in cost optimization and industry chain division of labor. In the competition between China and India, the report states that: 1) Currently, China's small molecule CDMO scale is significantly ahead of India, with WuXi AppTec maintaining a leading position globally; 2) In the short to medium term, India's CDMO lacks the production capacity reserve to replace China in handling large-scale orders in the supply chain; 3) China's CDMO has multiple advantages in terms of quality, capacity, customers, personnel, etc., and it will continue to increase its market share in global competition. Large molecule CDMO: The competitive landscape includes several global leading companies, and the industry is in a phase of high-speed capacity expansion and increased market concentration. On one hand, there is a steady growth in large-scale demand for basic antibody drugs, with rapid growth in demand for integrated services for new molecules like ADCs and bispecific antibodies from research and development to production. On the other hand, global orders and production capacity continue to concentrate towards leading suppliers, with China, Japan, South Korea, Europe, and the United States developing global leading enterprises in large molecule CDMO. The expansion of production capacity in the large molecule CDMO industry is trending towards scale, globalization, and diversified development as demand changes. In the short to medium term, several leading bio-pharmaceutical CDMOs will maintain rapid growth and increase market concentration. In the long term, CDMOs with comprehensive competitive advantages will emerge victorious in global competition amidst excess capacity and deteriorating industry landscape. Clinical and preclinical CRO: Industry recovery is spreading from the backend to the front end, with positive signs of improvement on the demand side. Demand side: 1) In response to the IRA Act and the patent cliff, global large and medium-sized pharmaceutical companies are undergoing large-scale cost reduction plans, resulting in high rates of project cancellations in the short term. However, the demand for projects in the later stages of clinical trials remains steady, with leading clinical CROs in a more advantageous position in competing for major clients. 2) For Biotech, the improvement in investment is gradually being transmitted to the demand side, with customer caution slowly improving. Forecasted demand indicators for 2024 show a slight improvement. In Q3 2024, overseas leading CROs saw a downward trend in order delivery, and clients primarily consisted of major pharmaceutical companies, which have higher resilience. Currently, the global clinical CRO market still has relatively high concentration, and Chinese clinical CROs have significant advantages in personnel costs and profit growth potential. Risk factors: Unexpected changes in industry policies; increased market competition risks; geopolitical disturbances risks; risks of research and development progress falling short of expectations, and so on.