On the evening of July 21,Pharmaron(300759.SZ/03759.HK) Releases 2024 Interim Earnings Forecast: Net Profit Attributable to Shareholders Expected to Reach RMB 1.055 Billion to RMB 1.143 Billion in H1, Increasing by 34% to 45% Year-on-Year; Non-Recurring Net Profit Estimated at RMB 445 Million to RMB 483 Million, Decreasing by 36% to 41% Year-on-Year.
Net profit increased, but non-GAAP net profit declined. A key factor was that Pharmaron sold its equity interest in a participating company during the reporting period.
Notably, Pharmaron disclosed the growth of orders in the first half of the year in its earnings forecast, stating that global customer inquiries and visits have rebounded compared to the same period in 2023. This appears to be signaling a potential industry recovery to the market. However, combined with the sale of equity, questions remain about whether this warming trend is definitive.
On July 22, Pharmaron opened high and continued to rise, once increasing by more than 7%, closing up 5.90%, with a latest total market value of 37.875 billion yuan.
A Deal with 13 Times the Value
Johnson & JohnsonBecoming the "contributor" to Pharmaron's net profit growth in the first half of this year.
During the reporting period, Pharmaron sold its stake in PROTEOLOGIX, INC. ("Proteologix") to Johnson & Johnson (JNJ.N), a U.S.-listed company, through a merger and acquisition. On June 21, 2024, Pharmaron received a payment of $86.195 million after deducting related transaction fees and making necessary adjustments. This transaction impacted the company's non-recurring gains and losses for the first half of the year by approximately RMB 560 million.
Pharmaron stated in the announcement that, as a minority shareholder of Proteologix, after comprehensively analyzing the biopharmaceutical market, Proteologix's core technology, and operational status, the company agreed to the overall sale arrangement. Pharmaron will cooperate with Proteologix to transfer all equity directly held by its subsidiary in Proteologix for a consideration of approximately US$102 million.
Looking back, Pharmaron acquired shares by investing in Proteologix twice in 2021 and 2022, spending a total of $7 million. Three years later, this investment has appreciated more than 13 times. For Pharmaron, this is a very cost-effective deal, but on the other hand, the sale seems to contradict the original intention of the investment.
Proteologix was founded in January 2021, with its main business being the development of an innovative biopharmaceutical pipeline for the treatment of autoimmune diseases. The primary pipeline includes two bispecific antibody drugs, PX128 and PX130. Among them, PX128 targets moderate to severe atopic dermatitis (AD) and moderate to severe asthma and is about to enter Phase I clinical trials; PX130 targets moderate to severe atopic dermatitis and is currently in the preclinical development stage.
Notably, in the same year Proteologix was established, Pharmaron made an initial investment of $3 million in the company. This is related to the development path of the CXO (Contract Research and Manufacturing Organization) industry. By investing in startups, CXO companies can form long-term strategic relationships with the invested enterprises, further securing potential clients for their CXO business, and potentially gaining substantial investment returns once the invested company becomes capitalized.
Moreover, the风波 of the U.S. Biosecure Act has not yet subsided, and the market once speculated that Pharmaron's sale was to reduce American suspicion. The company denied this, as Proteologix is merely a participating company and has not been consolidated. Pharmaron stated that selling the equity would help increase cash inflow, replenish the company’s cash flow, and promote the construction of the company’s R&D service capabilities.
Is the industry recovery accurate?
Pharmaron's sale of its early equity stakes in invested enterprises brought substantial capital gains, embellishing the company’s profitability figures, which carries a sense of "enjoying the fruits planted by predecessors." However, this divestment has inevitably raised two major questions: first, whether it is related to the international situation; second, whether the so-called industry recovery trend is indeed accurate.
According to the earnings forecast, in the second quarter of 2024, Pharmaron expects its revenue to increase quarter-over-quarter and grow slightly year-over-year.
By segment, the company's laboratory services Q2 revenue hit a new high thanks to the recovery in new orders; CMC (small molecule CDMO) service revenue saw a sequential increase, with more projects expected to be delivered and recognized as revenue in the second half of 2024; Clinical research services, large molecule, and cell and gene therapy services all achieved sequential and year-over-year growth in revenue. Notably, in the first half of the year, global customer inquiries and visits rebounded compared to the same period in 2023, with new order amounts increasing by over 15% year-over-year.
The data previously announced by peers also proved that the industry is warming up.Asymchem(002821.SZ/06821.HK) The mid-term performance forecast shows that, after excluding the impact of large orders from the same period last year, the company's revenue achieved slight growth. In 2024, the company’s newly signed orders increased by more than 20% year-on-year, and the second quarter saw a significant increase compared to the first quarter. Orders from customers in the European and American markets grew at a rate higher than the overall order growth rate of the company.JOINN Laboratories(603127.SH/06127.HK) Semi-Annual Report Preview: Although the company's revenue is expected to decrease by 3.8% to 28.9% year-on-year and the net profit is projected to turn to a loss, excluding the impact of the first quarter, the median values of revenue and net profit for the second quarter are 520 million yuan and 112 million yuan respectively, showing a quarter-on-quarter increase of 60.46% and a turnaround from losses.
These data show that the impact of the U.S. Biosecure Act on the decoupling of the CXO market is leveling off. However, three months ago, many CXO companies were still reporting dismal results for the first quarter. According to statistics, in the first quarter of this year, among A-share listed CXO companies, 11 reported a year-on-year decline in revenue, 14 reported a year-on-year decline in net profit, and four incurred losses in a single quarter. Among them, Pharmaron's revenue in the first quarter of this year decreased by 1.95% year-on-year to 2.671 billion yuan, and its attributable net profit decreased by 33.8% year-on-year to 231 million yuan.
Whether the warming trend conveyed by the early release of the half-year earnings forecast is a flash in the pan or a localized phenomenon still needs to wait and see.WuXi AppTec、Tigermed、Porton Advanced Solutions、MediCIFurther conclusions can only be drawn after the leading companies release their data. At that point, it will become clearer whether Pharmaron's intention in selling its assets is to strengthen R&D or to reserve cash to prepare for a more challenging future.
(This article was first published on the Titanium Media App, Author: Yang Yaru, Editor: Sun Cheng)