Guosen: The innovative drug sector continues to improve, and the CXO industry may see a turnaround.

Guosen released a research report stating that the adjustments to the July medical insurance catalog and the commercial health insurance innovative drug catalog have officially begun. Domestic innovative drugs are expected to achieve increased sales volume with the support of medical insurance negotiations and commercial insurance. In overseas markets, domestic innovative drugs have presented excellent clinical data at academic conferences such as ASCO and ADA, strengthening the trend of going global. The CXO industry's investment and financing is picking up, with prices stabilizing for pre-clinical CRO, clinical CRO, and domestic CDMO businesses. New signed orders are steadily recovering, suggesting a potential industry reversal. The report recommends focusing on CDMO international leading companies with a high proportion of overseas business. Guosen's main points are as follows: Continued recommendation for the innovative drug sector, with sustained improvements in both domestic and overseas markets In July, adjustments were officially made to the medical insurance catalog and the commercial health insurance innovative drug catalog. The newly added commercial insurance innovative drug catalog this year mainly focuses on drugs with high levels of innovation, significant clinical value, and substantial patient benefits. These drugs, which are temporarily unable to be included in the basic catalog due to exceeding the "basic guarantee" positioning, provide more economic support for the development of innovative drugs. With the support of medical insurance negotiations and commercial insurance, domestic innovative drugs are expected to achieve increased sales volume. In overseas markets, domestic innovative drugs have presented excellent clinical data at academic conferences such as ASCO and ADA. With the increasing competitiveness of domestic innovative drugs' clinical data and progress globally, the trend of going global with innovative drugs is strengthening. The CXO industry may be on the verge of a reversal, with a recommendation to focus on leading CDMO companies Overall, there is a trend of recovery in investment and financing. Prices for pre-clinical CRO business, clinical CRO business, and domestic CDMO business have stabilized, and as new orders steadily recover, the industry may be poised for a reversal. In terms of international CDMO business, pricing remains at a reasonable level, the impact of the epidemic's high base has been absorbed, and looking from the perspectives of small molecules, large molecules, and emerging businesses, the report recommends focusing on CDMO international leading companies with a high proportion of overseas business: 1) For small molecules, considering the global division of labor and industrial chain transfer perspective, Chinese companies have comprehensive advantages in talent dividend, chemical capabilities, compliant capacity, and intellectual property protection, compared to the long construction period in Europe and India's weaknesses in intellectual property protection, the report believes it is difficult for Chinese companies to change their industry position in the medium term (within 5 years) in the small molecule CRDMO field. After experiencing a long period of adjustment, current valuations already reflect concerns about future geopolitical uncertainties, with preferable valuations near their bottom, good competitive landscape, and excellent overseas production layout. 2) For large molecules, Chinese companies currently have a relatively low overall market share. On one hand, Japan, South Korea, Europe, and the United States have strong competitors, with outstanding performance in overseas large molecule CDMO companies such as Lonza, Samsung Biologics, and Fujifilm representing, making Chinese large molecule CRDMO more likely to face intense industry competition. On the other hand, the rapid development of biopharmaceuticals and high outsourcing rate drive the fast growth of the large molecule CDMO industry, with continued industry and the continuous enhancement of the domestic leading CDMO competitiveness. 3) The rapid development of new businesses such as peptides, oligonucleotides, and CGT is expected to further open up growth opportunities in the CXO sector, suggesting to focus on investment opportunities related to the industry chain. Risk warning: risks of research and development failures, risks of commercialization falling short of expectations, geopolitical risks, risks of policies going beyond expectations.