Key Takeaways:
- Joinn Lab’s net profit in the first three quarters of this year surpassed the figure for all 2021 as the company rapidly expanded its capacity
- The company is strongly positioned due to high barriers to entry, and a broad presence in its industry chain through its acquisition of lab animal suppliers
By Molly Wen
Disruptions from China’s strict Covid control measures this year have hurt not only consumer-facing companies, but also the country’s growing field of contract research outsourcing (CRO) companies that provide R&D, testing and manufacturing services to drug makers. But don’t tell that to Joinn Laboratories (China) Co. Ltd. (6127.HK; 603127.SH), a leader in the field, which has maintained strong growth so far this year in defiance of market expectations.
Showing off its apparent Covid immunity, Joinn last week pre-announced blockbuster results for its first three quarters of 2022, registering a net profit of 607 million yuan ($83.7 million) to 657 million yuan for the period, up about 150% year-on-year. That means the company has already exceeded its entire profit for last year, which totaled 557 million yuan.
Joinn attributed the strong performance to its continued rising investment in drug R&D, which has boosted trust among its customers. Also contributing to the gains were increased production capacity, higher capacity utilization through better project scheduling, and continuous efforts to strengthen its upstream supply chain.
Joinn’s shares briefly rallied up to 10% the day after the news came out. But they have given back all of those gains and more since then, and are now down around 15% from pre-announcement levels, reflecting downward pressure that has sent Hong Kong stocks to lows not seen since the global financial crisis of 2008 and 2009.
Joinn’s core businesses include non-clinical CRO services like drug evaluation, testing, research and screening for safety, efficacy and quality control of subjects prior to clinical trial phases. Such services generated 755 million yuan in the first half of the year, or 97.2% of total revenue, according to the company’s interim report.
Strong demand
The company is the industry leader for non-clinical drug safety assessment (DSA) services in China, ranking first with a market share of 15.7%, based on 2019 revenue. DSA, as an integral part of drug development, has always held a high barrier to entry due to the high expense and expertise needed to build and qualify facilities and staff them with capable personnel.
A research report by Pacific Securities said CRO companies engaged in drug safety evaluation services need to have Good Laboratory Practice (GLP) certification, which not only requires owning GLP labs with high standards that are difficult and time-consuming to build, but also meeting certification standards and processes that vary among countries. Some 28 CRO companies in China obtained GLP certificates from the China National Medical Products Administration (NMPA) from 2017 to 2020. But the stricter U.S. Food and Drug Administration (FDA) had only certified 14 China-based laboratories, two of those owned by Joinn Lab.
Such qualifications mean Joinn’s services are assured high demand. Its interim results show the company’s orders on hand totaled 4.1 billion yuan and new signed orders exceeded 2 billion yuan in the first half of the year. According to a recent report by Frost & Sullivan, the DSA market in China is expected to reach $2 billion in 2024, growing at a compound annual growth rate of 36.5% from 2019 to 2024, reflecting the market’s big growth potential.
To cope with a full order book that has inhibited its growth, Joinn Lab has embarked on an expansion of its facilities in the last few years. The first phase of a new 8,000-square-meter facility in the eastern city Suzhou started operating in January this year. Construction is largely done on the project’s second phase of about 20,000 square meters, with interior outfitting now taking place. The company is also constructing a DSA site in the southern city Guangzhou, with infrastructure expected to be complete by year end. Once complete, Joinn expects to convert all the new capacity into orders and new revenue, which should improve gross margins.
At the same time, the company is also expanding its lab animal business, a core link in the upstream supply chain for pre-clinical CROs. Lab animals like mice and monkeys are used in medical research, drug quality testing and biologic manufacturing, and are also important for Joinn’s DSA business. Joinn started to build an animal base in the southern Guangxi region as early as 2019. The main part of that project has been completed, and is designed to raise about 10,000 non-human primates after it goes into service, helping the company to become self-sufficient in obtaining lab animals.
Swimming upstream
The pandemic’s emergence and accelerated development of related vaccines and drugs has created huge demand for lab monkeys, driving up prices to 150,000 yuan per monkey in China by the middle of this year from just 15,000 yuan in the second half of 2019. To secure its own supplies and protect itself against such price swings, Joinn announced the acquisition in April of Weimei Bio-Tech and Yinmore Bio-Tech, for 1.8 billion yuan, to boost its lab monkey resources.
Joinn said the deal would enhance its strategic stockpiling and cost controls for key animals, reduce supply-side risk, and better meet its main business scale expansion needs. The latest profit announcement mentioned the unrealized portion of fair value gains for its biological assets was significantly higher compared to the same period last year.
Although still in its early stages, Joinn has also been actively expanding into the clinical CRO business, which includes drug registration filing, medical writing, project management and other operation-related services, gradually transitioning from projects in early stage clinical trials to include later stage phase 3 projects as well.
CRO industry leaders such as WuXi AppTec (2359.HK; 603259.SH) have successfully gained a foothold globally, now counting overseas markets as a main source of their revenue. Joinn is trying to catch up to that group. In 2019, it acquired U.S. pre-clinical CRO Biomere, which took orders of nearly 200 million yuan in the first half of this year, up nearly 30% year-on-year. Meanwhile, Joinn’s domestic CRO arm is also growing in tandem, taking record overseas orders of nearly 160 million yuan in the first half of the year, more than double the year-ago period.
Joinn currently trades at a price-to-earnings (P/E) ratio of 16 time, representing a slight discount to its peers. WuXi AppTec and Pharmaron Beijing (3759.HK; 300759.SZ) trade at 22 times and 18 times, respectively. But with more facilities coming on stream next year and better performance likely to follow, investors may be more willing to bet bigger on the company down the line.
