How much impact will this round of capital winter have on CRO companies?

In the first half of the year, although overseas CRO companies generally performed well, and their performance and orders on hand continued to grow, analysts on Wall Street were still anxious

In the first half of the year, although overseas CRO companies generally performed well, and their performance and orders on hand continued to grow, analysts on Wall Street were still anxious

On almost all CRO's second-quarter earnings calls, Wall Street analysts asked one question: How does the continued decline in funding in the biotech industry affect the company?

The sentiment of the secondary market will be transmitted to the primary market; the declining financing amount in the primary market will also be fed back to the CRO industry, which is not a problem

In fact, the phenomenon of declining market demand has already occurred

However, the new order data disclosed by the CRO company in the financial report has a "delay effect" and cannot immediately reflect the market dynamics, resulting in the "illusion" that the CRO industry is still in strong demand

Medpace said in the second-quarter conference call that although its "new orders" data is good, the real demand in the second quarter both fell by about 50% from the same period to the previous month

The truth, what is it?

/ 01 // 01 // 01 /

CRO in the capital winter:

CRO under the capital winter: CRO under the capital winter: CRO under the capital winter:

Performance rose against the trend

performance rises against the trend performance rises against the trend performance rises against the trend

In the first half of 2022, the global biotech industry has experienced one of the most tragic bear markets, causing many Biotechs to fall into the predicament of layoffs
.
But this does not seem to have an impact on CRO companies
.

In the first half of 2022, the global biotech industry has experienced one of the most tragic bear markets, causing many Biotechs to fall into the predicament of layoffs
.
But this does not seem to have an impact on CRO companies
.

Take the domestic top CRO as an example, WuXi AppTec's revenue in the first half of the year increased by 68.
52% year-on-year, and non-net profit increased by 81%; Pharmaron has not yet announced its financial report, but the performance forecast is not bad: revenue is expected to increase by 39% year-on-year.
%—42%, with a year-on-year increase of 10% in non-net profit
.

Take the domestic top CRO as an example, WuXi AppTec's revenue in the first half of the year increased by 68.
52% year-on-year, and non-net profit increased by 81%; Pharmaron has not yet announced its financial report, but the performance forecast is not bad: revenue is expected to increase by 39% year-on-year.
%—42%, with a year-on-year increase of 10% in non-net profit
.

Overseas, giants such as IQVIA and small players such as Medpace are still improving their performance to varying degrees
.
IQVIA performed slightly worse, but also grew by more than 3%, while Medpace's revenue grew by more than 20%
.

Overseas, giants such as IQVIA and small players such as Medpace are still improving their performance to varying degrees
.
IQVIA performed slightly worse, but also grew by more than 3%, while Medpace's revenue grew by more than 20%
.

Compared with performance, CRO companies are still growing "unexecuted contract amount" (contract liabilities or backlog), which gives the market greater confidence
.
Because compared with the current performance, this is the leading indicator to observe the prosperity of the industry
.

Compared with performance, CRO companies are still growing "unexecuted contract amount" (contract liabilities or backlog), which gives the market greater confidence
.
Because compared with the current performance, this is the leading indicator to observe the prosperity of the industry
.

For CROs, the digestion of orders takes a cycle, so newly signed contracts will be reflected in the financial report in the form of "contract liabilities" or "backlog orders"
.

For CROs, the digestion of orders takes a cycle, so newly signed contracts will be reflected in the financial report in the form of "contract liabilities" or "backlog orders"
.

If the industry boom is high, and the new contracts are larger than the consumption contracts, the "unexecuted contract amount" will inevitably continue to rise; when the industry demand declines, the orders in hand are gradually consumed, and the new orders have not increased, this number will inevitably become smaller
.

If the industry boom is high, and the new contracts are larger than the consumption contracts, the "unexecuted contract amount" will inevitably continue to rise; when the industry demand declines, the orders in hand are gradually consumed, and the new orders have not increased, this number will inevitably become smaller
.

According to this indicator, in the first half of the year, up to IQVIA, down to Medpace is still "too busy"
.
As the chart below shows, the backlog of orders for both companies continues to rise
.

According to this indicator, in the first half of the year, up to IQVIA, down to Medpace is still "too busy"
.
As the chart below shows, the backlog of orders for both companies continues to rise
.

It seems that at a time when the financing volume of the entire biotech industry has fallen sharply, CROs are still able to stay on their own
.
So, is this really the case? The answer is obviously no
.

It seems that at a time when the financing volume of the entire biotech industry has fallen sharply, CROs are still able to stay on their own
.
So, is this really the case? The answer is obviously no
.

In fact, CROs are not unaffected.
In fact, this situation may have happened, but it has not been reflected in the financial reports of listed companies
.

In fact, CROs are not unaffected.
In fact, this situation may have happened, but it has not been reflected in the financial reports of listed companies
.

/ 02 /

/ 02 // 02 // 02 /

Lagged down cycle:

Lag Down Period: Lagged Down Period: Lagged Down Period:

U.
S.
demand may have fallen sharply in the second quarter

U.
S.
demand may have fallen sharply in the second quarter

The specific reasons should start from the steps to obtain the CRO order
.

The specific reasons should start from the steps to obtain the CRO order
.

Generally speaking, for a CRO to acquire a new business, it takes about three steps: the pharmaceutical company publishes clinical needs, and the CRO company follows up to get initial contact; the pharmaceutical company starts public bidding, and one lucky CRO among many bidding CROs stands out; The details of the final contract were finalized with the company, and the contract was officially reflected in the CRO company's financial report, becoming a member of the "unexecuted contract amount"
.

Generally speaking, for a CRO to acquire a new business, it takes about three steps: the pharmaceutical company publishes clinical needs, and the CRO company follows up to get initial contact; the pharmaceutical company starts public bidding, and one lucky CRO among many bidding CROs stands out; The details of the final contract were finalized with the company, and the contract was officially reflected in the CRO company's financial report, becoming a member of the "unexecuted contract amount"
.

Most CRO companies do not publish the "preliminary order quantity" (the second link), but only publish the finalized contract data (the third link), which will eventually lead to a delay in being reflected in the financial report
.

Most CRO companies do not publish the "preliminary order quantity" (the second link), but only publish the finalized contract data (the third link), which will eventually lead to a delay in being reflected in the financial report
.

Because from the perspective of time span, from the second link to the third link, it may take 2 to 3 quarters
.
That is to say, the truth about the popularity of orders we are seeing now is not objective:

Because from the perspective of time span, from the second link to the third link, it may take 2 to 3 quarters
.
That is to say, the truth about the popularity of orders we are seeing now is not objective:

This is only an order that was initially bid for 2 to 3 quarters ago, and it was implemented in this quarter
.

This is only an order that was initially bid for 2 to 3 quarters ago, and it was implemented in this quarter
.

This also means that, through the data of "new orders" and "book-to-bill ratio", we may draw the conclusion that the CRO industry is still booming, but the actual situation is quite the opposite
.

This also means that, through the data of "new orders" and "book-to-bill ratio", we may draw the conclusion that the CRO industry is still booming, but the actual situation is quite the opposite
.

Medpace is the best example of this
.
As mentioned above, according to the second quarterly report, the company's orders are still increasing, but in fact Medpace's future growth has encountered obstacles:

Medpace is the best example of this
.
As mentioned above, according to the second quarterly report, the company's orders are still increasing, but in fact Medpace's future growth has encountered obstacles:

According to Medpace's second-quarter earnings conference call, the "preliminary order number" of its second link in the second quarter was already unbearable, down 45% year-on-year and 42% month-on-month
.
The truth about weak downstream demand may start to show in its earnings report in the fourth quarter
.

According to Medpace's second-quarter earnings conference call, the "preliminary order number" of its second link in the second quarter was already unbearable, down 45% year-on-year and 42% month-on-month
.
The truth about weak downstream demand may start to show in its earnings report in the fourth quarter
.

Obviously, this will not be the fate of a CRO company in Medpace
.

Obviously, this will not be the fate of a CRO company in Medpace
.

/ 03 /

/ 03 // 03 // 03 /

Another big worry in the down cycle:

Another big worry in the down cycle: Another big worry in the down cycle:

order cancelled

order cancelled order cancelled order cancelled

Everything escapes gravity
.

Everything escapes gravity
.

Today, most Biotechs obviously have to tighten their belts to get
by.
According to Morgan Stanley estimates, in 2022, about one-third of biotech companies in the U.
S.
stock market will need financing
.

Today, most Biotechs obviously have to tighten their belts to get
by.
According to Morgan Stanley estimates, in 2022, about one-third of biotech companies in the U.
S.
stock market will need financing
.

However, as the financing window gradually closes, survival has become a problem, and naturally it is impossible to take care of the overall situation
.
Cutting off the original pipeline is already an issue that global biotech companies have to consider
.

However, as the financing window gradually closes, survival has become a problem, and naturally it is impossible to take care of the overall situation
.
Cutting off the original pipeline is already an issue that global biotech companies have to consider
.

This has been reflected in the country
.
Not long ago, Clover Bio stopped all pipelines except the new crown vaccine
.

This has been reflected in the country
.
Not long ago, Clover Bio stopped all pipelines except the new crown vaccine
.

Cutting pipelines is not difficult for pharmaceutical companies; but for CRO companies, it is another matter
.
Because this means that the previously signed contracts may be "unfinished" and the benefits will be greatly discounted
.

Cutting pipelines is not difficult for pharmaceutical companies; but for CRO companies, it is another matter
.
Because this means that the previously signed contracts may be "unfinished" and the benefits will be greatly discounted
.

As mentioned above, the digestion of the entire clinical order takes one cycle, and the contract amount is usually paid in instalments based on progress
.

As mentioned above, the digestion of the entire clinical order takes one cycle, and the contract amount is usually paid in instalments based on progress
.

For pharmaceutical companies, there is neither much additional cost to terminate the contract early, only need to settle the expenses incurred; it is not complicated, usually only need to notify the CRO in advance
.

For pharmaceutical companies, there is neither much additional cost to terminate the contract early, only need to settle the expenses incurred; it is not complicated, usually only need to notify the CRO in advance
.

According to IQVIA's financial report, its customers can cancel existing contracts if they notify customers 30 to 90 days in advance; according to Medpace's financial report, its customers only need 30 days' notice, and it can happen at any stage
.

According to IQVIA's financial report, its customers can cancel existing contracts if they notify customers 30 to 90 days in advance; according to Medpace's financial report, its customers only need 30 days' notice, and it can happen at any stage
.

Pharmaceutical companies can stop losses in time, but CROs may have to bear more costs
.
As IQVIA says, they may have an ethical obligation to complete or end clinical trials at their own expense
.

Pharmaceutical companies can stop losses in time, but CROs may have to bear more costs
.
As IQVIA says, they may have an ethical obligation to complete or end clinical trials at their own expense
.

Obviously, in the downward cycle of the industry, the pressure of CRO's original orders to be cancelled is not small
.

Obviously, in the downward cycle of the industry, the pressure of CRO's original orders to be cancelled is not small
.

And this is happening
.
In the second quarter earnings conference call this year, another US stock-listed CRO giant, ICON, said that the number of customer cancellations in the second quarter has risen slightly
.

And this is happening
.
In the second quarter earnings conference call this year, another US stock-listed CRO giant, ICON, said that the number of customer cancellations in the second quarter has risen slightly
.

New orders will be reduced, and existing orders may be cancelled.
CRO companies are vulnerable to enemies.
It is no wonder that Wall Street analysts are particularly concerned about the issue of financing shrinkage
.

New orders will be reduced, and existing orders may be cancelled.
CRO companies are vulnerable to enemies.
It is no wonder that Wall Street analysts are particularly concerned about the issue of financing shrinkage
.

CRO companies also responded to the doubts of Wall Street analysts
.
In their earnings calls, companies said that no matter how bad the environment is, there are countermeasures
.

CRO companies also responded to the doubts of Wall Street analysts
.
In their earnings calls, companies said that no matter how bad the environment is, there are countermeasures
.

So, how much impact will this round of capital winter have on CRO companies?

So, how much impact will this round of capital winter have on CRO companies?