Bide Pharma Lists on STAR Market: Is the Drug Building Block Business a Lucrative Opportunity?

Today, Bepharm, an independent brand supplier of drug molecule building blocks, officially listed on the STAR Market.

Bepharm, established in 2007, is one of the earliest domestic brands specializing in drug molecule building blocks. As the name suggests, drug molecule building blocks serve as the fundamental “bricks and tiles” for constructing drug molecules. Compared with pharmaceutical intermediaries in the general sense, molecule building blocks occupy a more upstream position in the drug research and development process.

The prospectus shows that Bepharm's revenue consists of drug molecular building blocks and scientific reagents. During the reporting period, the company achieved rapid performance growth, with revenues from 2019 to 2021 amounting to249 million yuan, 390 million yuan, 606 million yuan。

It appears that molecular building blocks constitute a lucrative business once industry barriers are established.

In recent years, several pharmaceutical building block companies have listed on the STAR Market and demonstrated strong stock performance.Pharmablock and Haoyuan Chemexpress have both seen their price-to-earnings (P/E) ratios exceed 100x.

Shanghai Bepharm Science&Technology Co.,Ltd.’s entry into the capital markets will continue to challenge the domestic market share held by international giants and capture a portion of their global market share. However, it also faces challenges from the downturn in the biopharmaceutical industry’s prosperity and uncertainties surrounding its overseas expansion amid the broader macroeconomic environment.

New drug development companies need to screen, evaluate, and optimize thousands of candidate compounds. Compared with ordinary reagents, building blocks can significantly improve synthesis efficiency.

The primary competitive barriers in the molecular building block industry lie in the purity levels and diversity of product offerings. On one hand, companies must possess strong R&D capabilities to proactively stockpile materials based on global trends in new drug development. On the other hand, they must maintain substantial inventory levels to meet customers’ needs for one-stop procurement.

Founded in 2007, Bepharm is one of the leading domestic providers of molecular building blocks at scales below the kilogram level. According to its prospectus, the company has stocked 73,300 types of drug molecular building block products and can offer customers access to over 300,000 products. Its end customers include innovative pharmaceutical companies, research institutes, and CRO organizations, represented by Roche, Merck, Hengrui Medicine, Harvard University, and Tsinghua University.

WuXi AppTec, Fluorochem Limited, and Sigma-Aldrich have been Bepharm’s top three customers over the past two years.

Molecular building blocks themselves exhibit a long-tail effect. Downstream customers’ demands are characterized by high technical requirements, diverse product categories, small dosages, and high purchase frequency. In particular, for building blocks with high synthetic barriers and limited market availability, it is difficult for pharmaceutical process R&D and manufacturing companies to identify numerous suppliers during the early clinical stages.Consequently, it becomes easier to develop a dependency on block suppliers with scale advantages.

Shanghai Bepharm Science&Technology Co.,Ltd. disclosed performance data showing rapid revenue growth: from 2019 to 2021, the company’s revenues were RMB 249 million, RMB 390 million, and RMB 606 million, respectively. This strong growth momentum continued into this year, with Shanghai Bepharm Science&Technology Co.,Ltd. reporting H1 2022 revenue of RMB 369 million, a year-on-year increase of 37.41%.

High gross profit margin is a distinguishing feature of this business,From 2019 to 2021, Bepharm’s overall gross profit margins were 59.66%, 54.38%, and 49.46%, respectively, while its net profits after deducting non-recurring gains and losses were RMB 35.12 million, RMB 64.48 million, and RMB 89.87 million, respectively.

From a market outlook perspective, the global pharmaceutical R&D industry continues to grow, driving increasing demand for drug molecule building blocks for innovative drugs. Meanwhile, the trend of pharmaceutical companies outsourcing R&D activities and directly acquiring projects is becoming increasingly pronounced, ensuring a sufficiently stable growth trajectory for the drug molecule building blocks sector.

According to Nature Reviews, 30% of global pharmaceutical R&D expenditure is allocated to the procurement and outsourcing of drug molecular building blocks. Based on this estimate, excluding labor costs, the global market size for drug molecular building blocks was $44.1 billion in 2020 and is projected to reach $54.6 billion by 2026.

It is worth noting that Sigma-Aldrich, a major client of Bepharm, is a global giant in the molecular building block industry. Through multiple mergers and acquisitions and resource integration, it has built a diverse and structurally novel library of drug molecular building blocks for the global pharmaceutical industry. From its NASDAQ listing in 1980 to its acquisition by Merck in 2015, Sigma-Aldrich has consistently been favored by capital markets and serves as a key benchmark for many domestic molecular building block companies.

Previously, Pharmablock Sciences, Haoyuan Chemexpress, and Aladdin Scientific were all recognized in the capital markets; even against the backdrop of a global sell-off in biopharmaceutical stocks, they managed to maintain high price-to-earnings (P/E) ratios.It is evident that the market holds a highly favorable outlook on the early stages of drug development.

The high gross profit margin in the pharmaceutical molecular building block industry is related to the characteristics of customer demand. Many research institution-type customers or those in the early stages of R&D are not sensitive to product prices. The amount of pharmaceutical molecular building blocks used in laboratories for new drug development is relatively small, with purchase quantities typically ranging from milligrams to grams. These customers place greater emphasis on the novelty of product structure, product quality, and delivery speed.

However, the prospectus reveals that Bepharm’s overall gross profit margin has consistently remained below the industry average and has continued to decline over the past three years. In response, Bepharm explained that the decrease in overall gross profit margin was attributable to the continuous expansion of its product sales volume and the increasing proportion of high-volume product sales.

In recent years, China’s molecular building block industry has overcome the challenges of low technological content and small scale. Domestic companies have continuously increased their market share within China, demonstrating a strong import substitution effect.

While following in the footsteps of international giants, domestic molecular building block enterprises have also developed more in-depth business models. In addition to Shanghai Bepharm Science&Technology Co.,Ltd., Pharmablock Sciences (Nanjing), Inc., listed on the ChiNext board in 2017, and Haoyuan Chemexpress Co., Ltd., listed on the STAR Market in 2020, have all expanded demand for molecular building blocks in late-stage clinical and commercialized drugs by increasing product scale and deeply binding with customers.

After years of industry accumulation, Chinese pharmaceutical building block companies are establishing their own brand presence.

However, the decline in gross margin as scale expands is also a long-term development challenge that pharmaceutical building block companies must face: as new drug development enters stages such as process research and pilot-scale production, customers begin to focus on the procurement costs of pharmaceutical building blocks.

To maintain profitability while driving business growth,One approach is to emulate Sigma-Aldrich., continuously acquiring companies to cover the industry, thereby rapidly scaling up and moving up the hierarchy; however, this approach places extremely high demands on capital and operational capabilities.

Another approach is expanding into the CDMO sector, as evidenced by Pharmablock and Haoyuan Chemexpress both pursuing this second growth curve.Molecular building blocks can share the industrial chain with CDMO businesses, achieving seamless integration and possessing inherent advantages in transitioning to CDMO. Compared to the moderately growing molecular building block industry, the domestic CDMO sector boasts a compound annual growth rate of approximately 30%, offering significant attractiveness.

However, regardless of the path chosen, it is closely tied to the prosperity of the drug development industry. The impact of the global slowdown in new drug development will also be transmitted to upstream molecular building block companies. If deeply bound to downstream pharmaceutical R&D enterprises for the long term, they must not only cope with risks such as changes in customer demands and even R&D failures but also face competition from CDMO giants like WuXi AppTec and Asymchem.

In addition to seeking new growth models, pharmaceutical building block companies are also continuously advancing their overseas expansion to break through growth ceilings.

According to the prospectus, Bepharm has subsidiaries in the United States, Germany, India, and other regions.From 2019 to 2021, the proportion of its overseas sales revenue to its main business revenue was 41.17%, 48.98%, and 46.11%, respectively.

In Bepharm’s strategic plan, it is also evident that the company strives to strengthen its global layout and serve more overseas customers, with the aim of achieving rapid growth in sales revenue.

As a cornerstone of drug R&D infrastructure, drug molecular building blocks play a significant role in the biopharmaceutical industry chain; however, as a link in the supply chain, their recent market performance has also been impacted by bioeconomy executive orders.

Can Chinese drug molecule building block companies, which have just begun to compete with international brands, maintain stable overseas business?

Although President Biden’s signing of the executive order on the bioeconomy has reignited market concerns about decoupling between China and the United States, it is extremely difficult for the U.S. to build an independent and complete domestic industrial chain against the backdrop of today’s globalized industrial collaboration, with significant challenges in infrastructure and costs. If biopharmaceutical infrastructure were reshored to the United States, overall costs for pharmaceutical companies would rise substantially. This contradicts the recently enacted Inflation Reduction Act, which explicitly calls for cost reductions to curb inflation.

Approximately 50% of U.S. pharmaceutical manufacturing facilities are located overseas; indeed, more than 70% of factories producing active pharmaceutical ingredients (APIs) are situated abroad, with 80% of critical ingredient production taking place outside the United States. Rahul Singhvi, CEO of the biotechnology company Resilience, has stated that three to four out of every five U.S. pharmaceutical companies collaborate with China’s WuXi AppTec or South Korea’s Samsung Biologics.

On October 7, the U.S. Department of Commerce’s Bureau of Industry and Security released its latest Unverified List, from which WuXi Biologics’ Wuxi facility was explicitly removed, providing an immediate boost to the CXO sector.

Overall, many core segments of the global pharmaceutical industry chain are located in China, which also represents a vast market for biopharmaceuticals. Consequently, a decoupling strategy cannot be fully implemented in the pharmaceutical sector. The business model and growth potential of the CXO (Contract X Organization) industry remain unchanged; companies that leverage economies of scale and help clients enhance efficiency will continue to stand out.