Following the upward trend at the end of last Friday, September 20th, on Monday this week, the concept stocks of CRO (Contract Research Organization) continued to shine.

Rui Zhi Pharmaceutical strongly recorded a "20CM" daily limit rise, while Bai Hua Pharmaceutical and Shuang Cheng Pharmaceutical also successively reached a "10CM" daily limit rise.

Almost all stocks in the sector saw their prices soar.

With leading companies driving and good news supporting, can the CRO concept continue to perform well?

To steadily move forward in fierce market competition, companies are actively exploring new development models.

Why did the CRO concept rise collectively?

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As the industry "leader," WuXi AppTec's stock price once surged by more than 7%, which undoubtedly played a leading role in the entire sector.

WuXi AppTec is an integrated platform for biopharmaceutical services and has a strong market share in various links such as scientific research, clinical trials, and production.

Recently, news of the company's cooperation with international pharmaceutical giants on important projects has greatly increased investors' expectations for its future profit growth.

At the same time, companies such as Rui Zhi Pharmaceutical and Kang Long Hua Cheng have gradually gained market favor due to their continuous expansion in the field of biopharmaceutical research and development, such as the launch of new drugs and capacity expansion.

The strong demand behind them mainly comes from the continuous growth of the global biopharmaceutical market and the favorable drug approval policies at home and abroad.

In terms of news, the official website of the US Senate showed that on September 19th local time, the Senate Armed Services Committee announced the Senate version of the National Defense Authorization Act (NDAA) for fiscal year 2025, which includes 93 amendments, but does not include proposals related to the "Biosafety Act."

This means that the attempt of the "Biosafety Act" to take advantage of the NDAA has been blocked.

The NDAA is a federal law in the United States that is passed once a year to stipulate the budget, expenditure, and policy of the US Department of Defense.

Industry insiders believe that the absence of the "Biosafety Act" in both the House and Senate versions of the NDAA means that the legislative fast track has technically "miscarried," leaving only the way of separate legislation.

The upward trend of the CRO concept is not just the result of a single variable, but also reflects the confidence of investors in the industry's prospects.

However, there are still many uncertainties in the market, such as international trade situations and domestic policy changes.

Whether this rise can continue remains to be seen.

Looking at the semi-annual report for 2024 that was just disclosed, among the 38 CRO concept stocks, 24 stocks suffered losses or a decline in net profit attributable to the parent company in the first half of this year, accounting for more than 60%.

Only 11 companies achieved dual growth in both main business and net profit attributable to the parent company.

Chen Zhu, director of CITIC Securities Co., Ltd., believes that this is mainly due to the industry being generally affected by price competition, and the gross profit margin has been squeezed to the limit.

Moreover, the predicament of the CRO industry is not limited to this.

This year, several CRO companies have been terminated for listing applications.

For example, Shanghai Xi Hua Testing Technology Service Co., Ltd., Shanghai Bai Ying Biotechnology Co., Ltd., and Changsha Du Zheng Biotechnology Co., Ltd. have successively announced the termination of their listing on the ChiNext board.

The reason is that the company and the sponsor have withdrawn the application for listing.

Some industry insiders believe that insufficient profit growth and the decline in market conditions may be the main reasons.

The key to CRO's important position in the pharmaceutical industry lies in its ability to help pharmaceutical companies significantly shorten the drug development cycle, reduce research and development costs, and improve research and development efficiency.

Over the past decade, the industry has achieved explosive growth, but with the change in supply and demand, intensified industry competition is inevitable.

Ni Sheng, vice chairman of the Zhejiang Pharmaceutical Industry Association and chairman of Heze Pharmaceutical, believes that some excess capacity is likely to be gradually digested in the next 5 years, and some CRO companies will disappear or transform.

However, for any industry, "rolling" cannot become a norm, and long-term "involution" will eventually make all parties unable to benefit.

How to move forward steadily in fierce market competition?

Actively exploring new development models on the basis of compliance may be a good choice.

For example, Kang Long Hua Cheng stated in its semi-annual report that the company uses its unique database formed by years of accumulated experience and chemical synthesis technology to train AI models, enabling it to recommend the best chemical reaction screening conditions according to customer needs, thereby improving experimental efficiency.

In addition, "going overseas" is also a direction that many CRO companies are exploring.

Currently, some CRO companies have expanded their overseas business through investment and construction of factories, acquisition of overseas CRO, etc., and some companies have already achieved market returns.

Kang Long Hua Cheng's net profit attributable to the parent company in the first half of 2024 increased by 41.64% year-on-year, and its overseas business revenue accounted for more than 80%.

The company stated that with the initial recovery of global biopharmaceutical industry investment and financing, the company's laboratory service orders in the first half of 2024 increased by more than 10% year-on-year.

The reversal of the CRO sector has also attracted high market attention to the institutional positions disclosed in the semi-annual reports of listed companies.

All 38 CRO companies have been favored by institutional funds, among which 51 companies have more than 50 holding institutions, and 12 companies have more than 100.

Moreover, among the stocks held by more than 100 institutions, the total shareholding ratio of 10 companies increased compared to the end of the first quarter.

At the end of the report, WuXi AppTec had the most institutional shareholders, with 612.

Among them, Hong Kong Central Clearing Limited held 101.8353 million shares, and the China Europe Medical Health Mixed Fund managed by Ge Lan held 58.148 million shares, ranking as the fourth and seventh largest shareholders of the company, respectively.

However, looking at the change in shareholding, the shares held by the two major shareholders at the end of the second quarter were reduced compared to the first quarter.

At the same time, the Jing Shun Great Wall Emerging Growth Mixed Fund, Jing Shun Great Wall Dingyi Mixed Fund, and Jing Shun Great Wall Domestic Demand Growth No.

2 Mixed Fund managed by Liu Yan Chun have completed the construction of the company.

In addition, the HSBC Jinxin Dynamic Strategy Mixed Fund, HSBC Jinxin Research Selection Mixed Fund managed by Lu Bin, and the Anxin Medical Health Theme Equity Fund managed by Chi Chen Sen also continued to increase their holdings in the company.

It is worth mentioning that the company updated the latest shareholding situation of the major shareholders on September 10th.

Since the third quarter, Hong Kong Central Clearing Limited and the China Europe Medical Health Mixed Fund have re-added positions, increasing by 24.0314 million shares and 1.7224 million shares, respectively, compared to the end of the second quarter.

Similarly, Tai Ge Pharmaceutical, which was also concentrated by institutions, had as many as 591 institutional shareholders at the end of the second quarter.

The China Europe Medical Health Mixed Fund managed by Ge Lan increased by 1.2415 million shares, and the China Europe Medical Innovation Equity Fund increased by 804,300 shares; Xing Quan He Run Mixed Fund managed by Xie Zhiyu newly bought 4.743 million shares, and Xing Quan He Yi Flexible Allocation Mixed Fund newly bought 2.9738 million shares; Rong Tong Medical Care Industry Mixed Fund managed by Wan Minyuan newly bought 276,000 shares.

Ge Lan said that after experiencing the baptism of industry order standardization and tests of internal and external macro factors, high-quality enterprises with core product competitiveness and efficient management capabilities can truly emerge from the industrial adjustment cycle and usher in sustainable long-term development.

Wan Minyuan believes that from the perspective of risk-return ratio, it is possible to be more optimistic about the pharmaceutical industry at present.

From the perspective of position and odds, the pharmaceutical index is still hovering at the bottom of the past 4 years.

The current valuation and market value implied odds are already sufficiently appropriate, and the core drivers of future industry growth have not fundamentally changed.

The aging population, changes in the disease spectrum, and the supply of innovative technologies, the overall valuation cost performance and potential space of the sector are attractive.

Chi Chen Sen also continued the judgment that the pharmaceutical industry will grow from low to high throughout 2024, believing that the pharmaceutical industry is expected to usher in a turning point in prosperity, and said that the current overall allocation is more in the fields of special raw materials, generic drugs, CRO, and innovative drugs.