Global Markets Comment
Pharmaron is a Contract Research Organization (CRO) which is our preferred subsector within the Chinese healthcare space. We like Pharmaron for its continued execution. Most recently in 1H 20, its net profits tripled y/y on revenues that rose 34%. The company is advancing into commercial manufacturing for the first time in 1H 20 (Phase III projects). Trading at half the P/E of Wuxi Biologics (also rated Buy), tactically we see an opportunity for continued re-rating into next results with profits expected to nearly triple from 2019 to 2022.
Performance since inception*
Founded in 2004, Pharmaron is a China-based contract research organisation (CRO) serving global clients. Starting with lab services, the company has extended its business to cover the full drug development value chain. It has three key business segments: 1) lab services; 2) chemical, manufacturing, and controls (CC); and 3) clinical CRO. In 2019, the company had the second highest revenue in China among lab service CROs. Pharmaron was listed on the Shenzhen and Hong Kong stock markets in 2019
Price History 1 year
China had at least 4.7m STEM (science, technology, engineering and mathematics) graduates in 2016 compared to 568,000 in the US. We think Pharmaron is well positioned to capture the domestic and global pharma R&D outsourcing trend, based on: 1) China's engineering dividend, and 2) its one-stop integrated service model. In addion, we think the increase in CMC capacity utilization could further fuel the company's longer-term growth. Globally, the CRO revenue to pharma R&D ratio increased from 27.7% in 2014 to 34.4% in 2019.
Price History 5 years
Risk in Investment Case
Key downside risks: 1) slower-than-expected ramping-up of CMC business due to the business gap between the laboratory business and large-scale production; 2) weaker outsourcing demand due to pharma's lower-than-expected R&D spending; 3) higher-than-expected competition in small-molecule outsourcing services; 4) fewer early-phase projects advancing to later stages due to more-than-expected project delays or failures; and 5) an inability to retain key talent in a highly competitive market.
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