How Chinese CXOs Answer the Question of Going Global？

In 2024, the acceleration of Chinese CXOs going global is collective.

In just a few days in May, at least three CDMOs announced their overseas progress in succession. WuXi AppTec’s R&D production base in Singapore started production; Porton’s R&D production base in Slovenia began operations; and Asymchem acquired Pfizer’s Sandwich Site in the UK, completing the layout of its first European R&D production base.

Such a dense overseas layout action is actually a trend, and the underlying logic is clear and discernible.

There are two reasons. First, under the impetus of the globalized economy, the demand for international expansion of Chinese CXOs is increasingly urgent. Looking back at 2023, the proportion of overseas revenue of leading CXO companies such as WuXi AppTec, Porton, Asymchem, and Pharmaron all reached about 80%, highlighting the core position of overseas markets in their business layout.

Second, it is driven by geopolitical “counter-pressure”. Especially with the intensification of US trade protectionism and the “Biosecurity Act” targeting events such as WuXi AppTec, it has prompted Chinese CXO companies to accelerate the implementation of the “going out” strategy and actively embrace the changes in the international market. Especially for the expansion of some emerging markets, this is an important link to enhance the ability to resist external risks.

It is worth noting that the rise of Chinese CXOs is the result of the rational division of labor and allocation of global drug resources. Chinese CXOs have become the preferred partners for global MNCs and Biotechs due to their high quality, high efficiency, and cost-effectiveness.

At present, with the profound changes in the global pharmaceutical industry, CXOs are setting sail at an unprecedented speed, and those companies with an advantage in overseas expansion undoubtedly occupy a strategic high ground in this global competition.

As an industry leader, Porton has reaped rich rewards from the development of the international market through its early overseas layout, and has laid a solid foundation for its current and future globalization strategy.

01

The First Outbound Journey Brought a Transformation to Porton

In April 2017, Porton acquired J-STAR, a US-based CRO company with a history of more than 20 years, completing the company’s first outbound journey.

The opportunity for this outbound journey was very subtle.

Before 2017, Porton positioned itself as a CMO, implementing a “key customer +” strategy, with customers mostly being MNCs such as Gilead and Johnson & Johnson, and the business line was also focused on large orders after phase II clinic trials.

Although this business model was conducive to Porton’s rapid growth as a leading domestic CMO, and through cooperation with MNCs, it established international standard production, EHS, and quality management systems, the singleness of customers also limited its ability to resist risks.

In 2017, Porton experienced its first decline in revenue and profit since its establishment in 2005, due to the decline in terminal sales of the top two customers.

At the same time, this period was also the main transitional stage for multinational pharmaceutical companies to develop the market and for local pharmaceutical companies to develop rapidly. For the CXO as a “water seller,” whether to grasp the opportunity of the rise of the international biotechnology field is crucial.

As an old CRO, J-STAR has rich experience and professional technology in process development, analytical services, cGMP kilogram-level laboratory production services, and API salting and crystallization services.

The acquisition of J-STAR allows Porton to quickly enter the early clinical service field, enhance its ability to undertake small and medium-sized Biotech, and thus optimize the original business structure. Moreover, because it is an early intervention, long-term cooperation can also increase customer stickiness, paving the foundation for the mid and late stages of the clinic and subsequent commercialization projects.

Porton is very clear about the advantages of J-STAR. In 2017, it proposed the strategic positioning of “marketing transformation, product upgrade, and the development of process chemistry CRO,” actively expanding small and medium customer business under the continued development of the “3+5” international major customer camp.

Now, J-STAR can guide at least more than 40 projects to Porton every year. In 2021, J-star guided 60 projects to its domestic market, mainly early-stage projects from North American Biotech.

According to Porton’s financial report in 2018, the company obtained business orders from 20 North American biotechnology companies through resource integration, and the income from North American small and medium customers exceeded 50 million yuan for the first time.

Now, J-STAR is continuously expanding its team, laboratory scale, and business scale. As of 2023, J-STAR has three strategic R&D sites in New Jersey, USA, capable of undertaking customized R&D services for early-stage clinical APIs and formulations.

With the construction and commissioning of new fixed assets and service capabilities such as crystallization, formulation, and high-activity laboratories of J-STAR, its “API + formulation” integration and ADC business service efficiency have been further improved.

Thanks to the continuous increase in overseas business, Porton has become a small molecule CDMO with international influence. The existence of J-STAR also helps Porton to some extent to weaken the impact of geopolitical factors and diversify risks.

It can be said that Porton’s first outbound journey brought it a transformation.

02

Porton Sets Sail Again, Landing in Slovenia

On May 22, 2024, the opening ceremony of Porton’s R&D laboratory in Slovenia was held in Mengeš, Slovenia.

This is another milestone in Porton’s globalization process following J-STAR. So this time, can Porton seize the opportunity again with its previous successful experience?

Slovenia, located in the central southern part of Europe, at the northwest end of the Balkan Peninsula, is a member of the “Belt and Road” initiative. Porton actively responds to the national call, successfully goes global to Slovenia, and becomes the first overseas small molecule CDMO company introduced to the country, effectively broadening its international horizons and enhancing its adaptability to complex geopolitical environments, in line with the trend of the CXO industry to accelerate global layout.

The choice of Slovenia was the result of Porton’s careful consideration.

Firstly, to reduce costs. Because Slovenia has advantages in terms of labor costs, land use costs, and operating costs compared to some Western European countries.

Secondly, to increase efficiency. The Porton R&D laboratory in Slovenia is located on the site of Novartis’ subsidiary Lek, where the existing infrastructure and industrial environment can help Porton quickly start operations, reducing time and initial investment costs.

Lastly, to fit into the global layout. Porton has subsidiaries in Belgium and Switzerland, and landing in Slovenia can echo between Eastern and Western Europe, building an initial network covering Europe.

Porton’s Slovenian R&D laboratory is equipped with advanced equipment. It has 4 small molecule active pharmaceutical ingredient (API) R&D laboratories, 6 analytical laboratories, and a kilogram-level laboratory that meets the OEB 4 (≥1µg/m³) standard, ensuring flexible operation in both non-GMP and GMP environments.

Porton’s small molecule API CDMO business is its core pillar. According to its 2023 financial report, the company serves about 350 customers worldwide, with about 46% being American customers and about 6% being European customers.

Looking at the project pipeline, in 2023, Porton had signed contracts for 655 projects (excluding J-STAR), a year-on-year increase of about 14%. During the reporting period, the company delivered 590 projects, a year-on-year increase of about 31%, of which 296 were in the pre-clinical and phase I clinical stage, and 141 were in the market stage.

This series of data confirms Porton’s deep cultivation and steady expansion in the field of small molecule APIs. It can be said that the small molecule API CDMO business is Porton’s basic plate. This time going global is another bet on its basic plate.

The launch of the Slovenian laboratory not only can shorten the supply chain distance and provide customers with the choice of dual-site production. It is also to meet the gradually increasing customer demand, with Porton’s European business growing by 6% year-on-year in 2023.

So far, Porton has preliminarily built a global multi-site collaborative delivery system around J-star and the Slovenian laboratory, to strengthen the management and business collaboration in the European and American regions, and to improve supply chain flexibility and operational efficiency.

In this race of Chinese CXOs going global, Porton’s precise choice of strategic locations to integrate global resources has a demonstration effect on other CXOs, and also injects strong confidence and momentum into the Chinese CXO industry.

03

The light of ‘Ten’ never fades, the ‘Nine’ becomes ever fresh

On June 12, 2024, the U.S. “Biosecurity Act” encountered obstacles during the legislative process of being included in the “Fiscal Year 2025 National Defense Authorization Act,” which led to a surge in the entire CXO sector in China.

Geopolitical issues should not be the Sword of Damocles hanging over Chinese CXOs. An increasing number of negative cases have confirmed that after leaving Chinese CXO companies, the first to be impacted will be American domestic pharmaceutical companies, whether MNCs or Biotechs.

The decoupling of the Sino-American biopharmaceutical supply chain is a all loser outcome that no one wants to see or bear. In March 2024, a survey conducted by BioCentury showed that among 141 biopharmaceutical industry practitioners, as many as 75% admitted to having cooperated with Chinese CDMOs, 53% believe that replacing services is very difficult, and 64% believe it will greatly slow down the development of their pipeline drugs.

This result highlights the potential threat of the breakdown of Sino-American cooperation to patient welfare and the irresponsible attitude towards the progress of global health.

To this day, CXO has become a basic platform for the development of the pharmaceutical industry and the core of industry know-how. And this trend will continue to evolve with the current capital winter.

After the COVID-19 pandemic, the global biopharmaceutical industry has gradually cleared up on the supply side, and the financing difficulty of Biotech has increased sharply. Even CXO, once considered a “sure win,” was not immune.

In 2023, many CXOs withdrew their IPO applications in a concentrated manner, and by the first quarter of 2024, even industry leaders such as WuXi AppTec, Pharmaron, and Asymchem also faced the dilemma of declining revenue and profit growth.

Faced with the harsh winter of the capital market, competition within the industry has become fierce. The development path of Chinese CXO companies has become increasingly clear, that is, to further concentrate on leading companies with global, integrated, end-to-end service capabilities and leading companies in niche fields.

Mr. Ju Nianfeng, Chairman and General Manager of Porton, said at the launch ceremony of the “Porton ADC GMP Production Base”: “Porton started with small molecules, has developed for more than a decade, and provides a one-stop service solution including small molecules, peptides, oligonucleotides, biologics, and gene and cell therapy drugs.”

In his view, only by “going global” can Porton better release its integrated, end-to-end service capabilities, and meet customers’ growing needs for supply chain security and high-quality, innovative, and reliable services.

“The light of ‘Ten’ never fades, the ‘Nine’ becomes ever fresh.” As Porton is about to celebrate its 19th anniversary, can this company once again accurately seize the opportunity and step into its 20th birthday with a brand-new posture? It is worth looking forward to.