Porton Pharma: Business Transformation Began Three Years Ago, Diversification Strategy Drives Performance Inflection Point

In early March 2020, Chongqing Porton Pharmaceutical Technology Co., Ltd. (hereinafter referred to as “PORTON”) officially announced a strategic partnership with XtalPi, a renowned computation-driven innovative drug R&D technology company. In its announcement, PORTON stated that the two parties would engage in comprehensive, multi-faceted deep collaboration in areas such as drug crystallization technology and process research and development, intelligent drug development platforms, and market expansion for biologics and formulations. Together, they aim to provide global customers with novel drug R&D services built on a core framework of “computation + experimentation + process development and manufacturing.”

With this, PORTON has joined the ranks of Roche, Pfizer, AWS, and Tencent Cloud, becoming a key partner of XtalPi, a company that has attracted significant attention since its inception. Over the past decade-plus of operations, PORTON has been more prominently recognized as a leading supplier of commercial-stage intermediates, primarily providing products and services to multinational pharmaceutical giants such as Johnson & Johnson and Gilead Sciences. So why was it PORTON that took the lead in embracing intelligent drug R&D solutions? With this question in mind, VCBeat conducted an interview with PORTON.

In late March, PORTON released its "2019 Annual Report," which showed that the company's operating revenue and net profit attributable to shareholders of the parent company in 2019 were approximately RMB 1.55 billion and RMB 190 million, respectively, representing year-on-year growth rates of approximately 30.9% and 49%. The net profit after deducting non-recurring gains and losses was RMB 160 million, a year-on-year increase of 125%.

The performance leap revealed by these data indicates that 2019 was an extraordinary year for PORTON. In 2017, PORTON initiated its strategic transformation into a CDMO during its darkest hour. 2019 marked the third year of this sustained and in-depth transformation. Ju Nianfeng, Chairman of the Board, stated in a recent institutional survey that the end of the previous three-year period signifies the beginning of a new three-year chapter, expressing his anticipation for further evolution at PORTON.

Since its establishment in 2005, PORTON has rapidly grown into a leading domestic contract manufacturing organization (CMO), benefiting from the continuous promotion of its key account strategy. In the process of supporting the market launch of multiple innovative drugs for pharmaceutical giants such as Johnson & Johnson and Gilead, PORTON gradually established production, EHS, and quality management systems that comply with international standards and accumulated extensive project management experience. These achievements have formed PORTON’s core competitiveness in the field of commercial product manufacturing, but have also laid the groundwork for potential risks.

In 2016, revenue from PORTON’s two largest clients, Johnson & Johnson and Gilead, accounted for 56.44% of its annual income, while the top five clients contributed 71.36%. The following year, however, its key-account strategy suffered a major setback. In 2017, amid rapid industry growth, PORTON’s performance declined sharply: total operating revenue reached RMB 1.184 billion, a year-on-year decrease of 10.74%, and net profit attributable to shareholders of the listed company amounted to RMB 107.46 million, down 37.23% year on year. This downward trend persisted into the first quarter of 2018.

According to the annual report, that year saw simultaneous significant fluctuations in demand for two major products from its two core customers, directly causing a sharp decline in PORTON’s full-year performance. The concentrated emergence of latent issues inherent in the “key customer + key product” strategy made management acutely aware of the necessity for transformation. “We rapidly initiated a marketing transformation by extending our reach from key customers to small and medium-sized customers, a business model transformation from CMO to CDMO, and a product upgrade from intermediates to active pharmaceutical ingredients (APIs).”

In 2017, the “3+5+N” strategy was formally introduced. “3” refers to traditional key accounts: Johnson & Johnson, Gilead Sciences, and GSK; “5” refers to Pfizer, Novartis, Roche, Boehringer Ingelheim, and Allergan; and “N” denotes small and medium-sized clients. Among these, the acquisition of J-STAR provided crucial support for PORTON in extending its reach to small and medium-sized enterprises in North America.

J-STAR is a CRO company with a 20-year history. At the time of acquisition, it had a staff of approximately 50 and a relatively small revenue base. Despite its strong technical capabilities and excellent industry reputation, J-STAR was unable to expand its business due to limited capital. In 2016, PORTON made the decision to acquire J-STAR. In fact, the acquisition enabled PORTON to achieve strong synergy between its early-stage and late-stage services. At that time, J-STAR was highly sought after in the market, with at least seven other companies participating in the bidding process.

When asked how it stood out among numerous potential buyers, PORTON attributed its success to two factors. On one hand, PORTON had proactively leased a large laboratory near J-STAR’s headquarters, demonstrating its sincerity in jointly expanding CRO businesses. On the other hand, J-STAR’s management team sought to further extend its business chain downstream through mergers and acquisitions, a need that aligned perfectly with PORTON’s robust commercial-scale manufacturing capabilities.

As a technology-driven service company, J-STAR’s most prominent capability lies in efficiently addressing various crystallization challenges encountered during drug development. This capability is highly attractive to both small and large pharmaceutical companies. For small pharmaceutical companies, J-STAR’s Crystallization Center can help identify crystal forms of active pharmaceutical ingredients (APIs) and intermediates, evaluate and recommend suitable crystal forms, formulations, and dosage forms for further development, and study the interactions between APIs and other excipients. For large pharmaceutical companies, the Crystallization Center can assist in discovering previously unidentified crystal forms, generating data for patent protection, and conducting rapid or in-depth process optimization.

The acquisition of J-STAR has equipped PORTON with the technical capabilities required for CRO services, propelling it into the CDMO industry. In fact, the strategic crisis that befell PORTON three years ago was a microcosm of the broader restructuring underway in the drug outsourcing sector and even the entire new drug R&D industry. As the time and financial costs of new drug development continue to rise, and as market dynamics shift due to patent expirations impacting originator drugs, global pharmaceutical companies are focusing on shortening R&D cycles, controlling costs, and mitigating development risks. Consequently, they are concentrating their resources on early-stage research, such as disease mechanism studies and novel target discovery, while outsourcing druggability assessment, preclinical, and clinical development stages. This trend has further elevated the importance of technology-intensive CROs within outsourcing services, creating substantial business opportunities for the CDMO sector.

According to Frost & Sullivan statistics, driven by the increasing outsourcing tendencies of large multinational pharmaceutical companies and the booming development of small biotechnology firms, which has led to a rising trend in outsourcing rates, the global CRO market size grew from USD 32.3 billion in 2012 to USD 48.9 billion in 2016, and is expected to maintain a compound annual growth rate (CAGR) of approximately 8% over the next five years. In terms of timeline, new drug development generally requires more than 10 years of research, including 2–3 years for drug discovery, 1–3.5 years for preclinical studies, 5–7 years for Phase I–III clinical trials, and 0.6–2 years for regulatory submission and market approval. Regarding the distribution of R&D expenses, drug screening accounts for 5%, pharmacological studies for 10%, drug safety evaluation for 15%, Phase I clinical trials for 5%, Phase II clinical trials for 15%, and Phase III clinical trials for 50%.

Leveraging its “3+5+N” strategy, PORTON has achieved an ideal level of customer diversification across regions, with significantly increased business demand from biotech companies in both the United States and China. Particularly in China, as the Marketing Authorization Holder (MAH) system is progressively implemented, breaking the previous “bundled” management model that tied drug marketing authorization to production licensing, the capacity of the domestic pharmaceutical outsourcing services market is expected to be further unleashed. Moreover, PORTON’s extension of its CDMO services to small and medium-sized enterprises has directly unlocked potential for margin improvement.

Strategic transformation has driven adjustments in product focus. During the “Key Accounts + Key Products” phase, large pharmaceutical companies primarily manufactured APIs in-house, limiting CMOs to providing custom R&D and manufacturing services for GMP intermediates and GMP starting materials with relatively lower technical complexity. In the “3+5+N” strategic phase, PORTON took the lead in upgrading its product portfolio toward APIs, the representative product type of CDMOs. Unlike large pharmaceutical companies, small and medium-sized clients are more inclined to outsource API production. Meanwhile, with the development of its CRO capabilities and business, PORTON has increasingly strengthened its integrated service capacity to provide pharmaceutical companies with end-to-end solutions, including early-stage clinical API custom development, late-stage clinical validation manufacturing, regulatory registration, and commercial manufacturing.

This is underpinned by a straightforward business logic: on the one hand, active pharmaceutical ingredients (APIs) typically carry higher value-added, which helps enhance customer stickiness, average transaction value, and sales revenue; on the other hand, the gross profit margin for APIs is generally higher than that of their corresponding intermediates. In 2018, PORTON signed the “Darunavir API Technology Transfer and Licensing Agreement” with Janssen, securing Johnson & Johnson’s darunavir API business. It also obtained its first two high-potential Phase III clinical API projects from a U.S. biotechnology company and seven API projects from Chinese clients. With further optimization of production workshops such as Changshou and Dongbang, PORTON’s CDMO capabilities will be significantly enhanced.

Currently, PORTON has established a strategic framework for building an integrated technology platform encompassing five core capabilities: crystallization, biocatalysis, flow chemistry, high-potency active pharmaceutical ingredients (HPAPIs), and supercritical fluid chromatography (SFC). Following its acquisition of J-STAR, the company has further strengthened its position by forging strategic partnerships with Codexis and XtalPi in succession.

It is understood that Codexis possesses world-class biocatalysis capabilities, enabling the rapid development of high-performance enzymes to meet customers’ demands for fast, efficient, and sustainable production in the commercial application of biocatalytic processes. Through its strategic partnership with Codexis, PORTON has rapidly established its enzymatic catalysis capabilities. The company’s team now boasts comprehensive biocatalytic expertise encompassing enzyme development, evolution, screening, fermentation, and application, which has been successfully implemented in customer projects and earned client recognition.

In early 2020, PORTON chose to partner with XtalPi, aiming to combine cutting-edge scientific advancements with industry best practices in crystallization and formulation development, thereby establishing a new benchmark for drug solid-state R&D services. “We also look forward to close collaboration between research teams from our diverse backgrounds and fields in the areas of drug development and manufacturing, jointly exploring innovative technical solutions to bring new medicines to more patients faster,” said Ju Nianfeng.

Furthermore, as a key initiative to establish a globally leading pharmaceutical service platform, PORTON has begun to lay out its large-molecule CDMO services. In late 2018, PORTON established its subsidiary, Suzhou Porton Biopharmaceuticals Co., Ltd., recruiting top-tier global talent in relevant fields to build a service platform for monoclonal antibodies and gene and cell therapies. The company aims to leverage cutting-edge expertise and technologies to provide reliable and competitive biologic CDMO services to pharmaceutical and innovative companies worldwide. VCBeat will also provide an in-depth analysis of Porton Biopharmaceuticals in subsequent articles.