China-focused Tigermed staves off biopharma gloom

Investors have not been deterred by an earnings slide, wagering that the drugs services company is better placed to weather an industry storm than some biopharma stocks

Key Takeaways:

• Tigermed has been scaling back its clinical programs amid falling demand for drugs research
• But the company is less exposed to U.S. policy risks than pharma giant WuXi AppTec

By Molly Wen

In China’s chilly biopharma sector, one company has been relatively insulated against fears of a U.S. order freeze.

Despite falling profits, drugs services provider Hangzhou Tigermed Consulting Co. Ltd. (3347.HK; 300347.SZ) has been somewhat resilient to selling pressure thanks to its largely domestic focus as a Contract Research Outsourcing (CRO) company.

China’s pharmaceutical outsourcing industry has had a tough year so far. A generally bearish mood was exacerbated by a proposed U.S. law that would ban federal agencies from doing business with some top Chinese biotechs or their U.S. commercial partners. Chinese industry leader WuXi AppTec (2359.HK; 603259.SH) faced a share sell-off after finding itself on the list of U.S. targets, depressing the sector as a whole.

Amid the gloom, many stock investors have opted to keep faith with Tigermed, which is less exposed to U.S. risks in its business model and stands to benefit from supportive policies at home. 

Even so, the firm is feeling the financial chill, posting lower quarterly revenues and profits in an earnings report published last Thursday. In the first quarter, Tigermed’s revenues fell 8% to 1.66 billion yuan ($230 million) from the same period a year earlier, while net profit tumbled nearly 59% to 235 million yuan. Excluding non-recurring items the profit came in at 303 million yuan, 20.5% less than the prior year’s quarter.

Despite the profit drop, Tigermed’s stock price rose 8.4% in the first trading session after the earnings, while investment bank Ping An Securities rated the stock a “hold”, noting that revenues had come off a high base due to deferred Covid orders that landed in the year-earlier quarter.

Meanwhile, weaker demand for drug research and development in the second half of 2023 fed through into a reduced number of new clinical programs launched in the first quarter of this year. Ping An Securities said the first-quarter performance was thus in line with its expectations and predicted a rising trend through to the full-year results.

Tigermed mainly focuses on services related to clinical trials, including research involving drugs and devices. It provides laboratory services, data management, statistical analysis and medical imaging, covering all the key requirements for domestic drug trials. The company’s market share reached 12.5% in 2021, making it China’s leading provider of clinical outsourcing services.

Tigermed’s spending on clinical trials accounts for approximately 67% of its R&D expenditure, according to research from Frost & Sullivan.

The quarterly earnings statement did not disclose much business detail. However, the most recent annual results showed the company scaled back its clinical projects to 752 by the end of 2023, 20 fewer than at the mid-year stage. Money generated by new orders fell 18.8% to 7.85 billion yuan in 2023 from the previous year. The company attributed the drop to customer cancellations, project changes or sharply reduced handling fees.

Gross margin on sales for the first quarter fell 1.82 percentage points year on year to 37.83%. The company’s asset-light business model helped it maintain relatively stable margins, despite price cuts for new orders, Ping An Securities said. The structure of its CRO business allows for efficiency and cost savings to offset price cuts during an industry downturn.

Aside from its CRO activities, Tigermed has also been investing in the broader healthcare industry for some time. It owns stakes in several listed companies, including Genor Biopharma (6998.HK), CANbridge Pharma (1228.HK) and ClouDr Group (9955.HK). However, the sector slump over the last two years has taken a toll. In the first quarter the company made a loss of 3.59 million yuan on its investments, while price falls on its shareholdings flowed into a 92.8% drop in revenue from fair-value changes, which shrank to 12.75 million yuan.

Yearning for respite

Financing for innovative drug development has been fraught with uncertainty in recent years, such as U.S. interest rate moves, depleting the income stream for providers of drug development services to the pharmaceutical industry.  As a result, many companies have sought to expand overseas to secure fresh revenue. WuXi AppTec is a prime example, deriving more than 80% of its turnover from outside China in 2023.

However, a draft U.S. “Biosecure Act” introduced in January this year seeks to ban federal agencies from buying equipment or services from specific biotech companies such as WuXi AppTec. The move could spell disaster for Chinese medical contracting companies that are heavily dependent on U.S. business. Tigermed, with about 57% of its revenue coming from China in 2023, is less vulnerable to a business rift with the United States.

Meanwhile, the domestic environment has become more supportive of the biomedical industry. Chinese municipalities including Beijing and Guangzhou have introduced a string of policies to promote innovative medicine that could  stimulate investment in the sector.

Although Tigermed’s orders fell after the pandemic, its core business remains stable. The company’s current price-to-earnings (P/E) ratio is about 16 times, higher than WuXi AppTec’s nine times. Tigermed could reap the benefits if China’s push to promote its home-grown drugs industry pays off.

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