In recent weeks, the CXO industry, known for its rapid growth, has drawn significant attention from market observers due to the widespread reduction in shareholdings by listed companies in the sectorProminent players such as WuXi AppTec, Asymchem, and MedChemExpress have revealed plans to divest substantial amounts of their shares, raising questions about the sustainability of the industry's previous boom.

For instance, WuXi AppTec, under the control of its principal shareholder, is set to reduce its stake by 89.02 million shares, which represents 3% of its total equity, amounting to around 7 billion yuan (approximately 1 billion USD). Similarly, Asymchem is planning to sell 25 million shares, 2.1% of its total equityMedChemExpress is also set to reduce its holdings by 261,000 shares, equating to 3% of its total shareholding

Advertisements

These significant reductions raised critical questions in the market: Is the CXO industry moving away from its extraordinary growth phase?

A deeper examination of annual reports reveals a noticeable performance divergence within the CXO sector during 2022. Companies benefiting from lucrative COVID-related contracts, such as WuXi AppTec and Asymchem, showcased remarkable growth, while the majority of other firms struggled compared to their robust pastWuXi AppTec reported an impressive revenue of 39.355 billion yuan, a year-on-year increase of approximately 71.84%, with a net profit of 8.814 billion yuan, also exhibiting substantial growth of around 72.91%. This success was chiefly attributed to its chemical operation segment, which skyrocketed with an increase of 104.8% to 28.85 billion yuan.

Asymchem, too, capitalized on the pandemic-driven demand, posting revenues of around 10.255 billion yuan, showcasing growth of 121.08%, and net profits surged by an impressive 208.77%. The annual report highlighted significant contracts with a large American pharmaceutical firm, with the value rising from 1.231 billion yuan in 2021 to over 5.91 billion yuan in 2022. However, with the ongoing pandemic subsiding, critical analyses suggest that such high-performance levels are unlikely to sustain

Advertisements

Early 2023 results indicate a starkly different trajectory; while WuXi maintained a modest 5.77% revenue growth compared to the same period last year, Asymchem reported declines in revenues and profits.

A closer look at other competitors, however, reveals that while some companies maintained growth, others experienced significant declinesFor example, ChemPartner reported a 37.92% increase in 2022 revenue but found net profits slipping by 7.24%. Similarly, Tigermed saw its growth rate decrease to concerning levels compared to the previous year, indicating a systemic slowdown across the industry for several players.

The CXO industry's rapid expansion phase began in the 1990s, corresponding with the surge of generic drug approvals globallyThis shift provided impetus for CXOs to innovate and reduce costs, leading to a golden era for industry growth

Advertisements

China, in particular, became a fertile ground for this expansion, marked by a significant increase in investments in clinical research organizations (CROs) and contract development and manufacturing organizations (CDMOs).

The years between 2015 and 2019 saw the global CRO market expand from $45 billion to around $63 billion, and in contrast, the Chinese CRO market more than tripled, highlighting a remarkable growth trajectoryBy 2020, the global CDMO market was pegged at around $55 billion, with China's growth outpacing this by reaching over $31.7 billion.

Despite these indicators of growth, the industry has recently faced headwindsFor example, investments in global innovative pharmaceuticals saw a dramatic dip in 2022, with a substantial 43% drop in fundingParticularly, China's innovative drug sector faced a 55% decrease in fundraising events

• Downward Potential of China Bond Yields
• Bank of Japan's Interest Rate Hike Approaches
• Oil Market Faces New Phase of Inventory Cuts
• Lithium Prices: Navigating Volatility with Hedging
• Strong Revival of Global Tourism

This has raised alarm bells regarding the health of the industry moving forward.

The outsourcing rates in the CRO sector are climbing, with marked increases noted in ChinaFrom 2017 to 2021, the proportion of outsourced CRO services grew from 30.6% to 39.6%. Projections suggest continued growth, aiming for 52.2% by 2026 in ChinaWhile these figures may suggest a bright future, the competitive landscape presents a mixed narrativeThe growing penetration of CRO services implies increased competition, further complicated by firms diversifying into CDMO services.

Companies transitioning from CRO to CDMO can leverage existing client relationships and expertise in drug development, a trend gaining traction across the industryFor instance, collaborations involving established pharmaceutical companies and emerging CXOs are indicative of this shift

This influx, however, comes with challenges, as the market risks over-saturation, turning a perceived "blue ocean" of opportunity into a more competitive "red ocean."

In sectors like gene and cell therapies, new players are emerging, offering unique capabilitiesHowever, this segment also faces struggles with profitability and sustainability, as evidenced by recent reports indicating significant losses for companies venturing into these territoriesThe burgeoning CGT CDMO space might offer long-term prospects, yet the current market remains challenging, prompting cautious optimism.

Despite the fluctuating fortunes within the domestic CXO landscape, international players report ongoing resilienceKey overseas CXO firms showcased a collective revenue of $51.769 billion in 2022, with a steady growth rate of 8.3%. Such realities highlight a stark contrast where while domestic firms grapple with market volatility, their international counterparts are thriving.

Ultimately, the Chinese CXO industry finds itself at a crossroads