TOT Biopharm (01875. HK) awaits revaluation amid sustained delivery of robust growth after strategic transformation

The biomedicine industry has always been considered a sector with marked cyclical fluctuations. After reaching a peak in the past few years, the industry has entered a downward trajectory, with sluggishness and pessimism plaguing the market.

The capital market has also lacked bright spots, leaving the monthly K-line of biomedicine B-shares in the H-share market declining since 2021 and hovering at a low level for quite some time.

(Source: Futu Quotes)

As the previously high valuations of pharmaceutical stocks have been moderated to a reasonable level, it is undeniable that the opportunities in the entire industry have gradually become clearer. Standing at this juncture, industry differentiation is still inevitable, and undervalued assets with high investment value often offer better cost-effectiveness. Among them, TOT Biopharm (01875. HK) exemplifies a combination of investment value and undervaluation.

1. An Impressive Annual Report

Recently, TOT Biopharm released its financial report, registering a total revenue of RMB 781 million with a year-on-year increase of 77%. Excluding the one-time impact of revenue from license granted in 2022, revenue would have increased by 101% in 2023.

It is evident that TOT Biopharm has continued to deliver impressive annual results.

Since its strategic transformation, TOT Biopharm has demonstrated its transformation achievements through substantial growth in performance.

From the perspective of its core business, the CDMO business has become a new driver of revenue growth since 2021. That year, the business income from CDMO/CMO reached RMB 53.69 million. In 2022, it increased to RMB 72.54 million, and in 2023, it further exceeded the RMB 100 million mark to RMB 140 million. Furthermore, the year-on-year growth rate nearly doubled, reaching 94%.

Over the past year, the ADC CDMO business segment has continued to see breakthroughs. Data indicate that the company added 39 new projects throughout the year, of which 30 were ADC projects, accounting for a proportion as high as 77%. Additionally, among the 65 ongoing projects, both the revenue from and the number of ADC projects increased to 65%, indicating the market’s recognition of TOT Biopharm's differential advantages in ADC CDMO.

It is worth mentioning that the company's CMC development and commercialization production capabilities are prominent. Last year, it added four pre-BLA (pre-Biologics License Application) projects. Such key projects help the company secure potential commercialization orders, providing strong confidence for its subsequent cash flow conversion.

From the financial report, it can be seen that TOT Biopharm's profitability continues to improve, with adjusted EBITDA reaching RMB 40.04 million, representing a year-on-year increase of 274%. Furthermore, the net cash flow from operating activities remained positive even without cash inflow from licenses granted in 2023, reaching RMB 56.43 million. The net loss narrowed by 25% to RMB 37.76 million.

It is not difficult to see that TOT Biopharm has gradually established good cash flow generation capabilities. Against the backdrop of cash flow pressures faced by many companies in the industry, the company's stable operation and effective management provide strong support for its sustainable development in the future.

2. Constructing Core Economic Moat with "Technological Compound Effect + Commercialization Platform + Efficient Operation"

At this juncture, TOT Biopharm has established a considerable economic moat in the industry. The company is supported by the following major factors in terms of long-term value.

Firstly, the technological compound effect.

TOT Biopharm possesses a complete set of experiences ranging from R&D, process development, clinical trials, and registration approval, to commercial production. It has established a comprehensive ADC technology platform with core conjugate processes, amplified technology advantages, and independent analytical capabilities for key quality attributes of ADCs, ensuring high-quality product development. The company ranks among the top CDMOs in the ADC field in China.

Through long-term technological accumulation and mapping out, the company has built a vast and sophisticated technological system, which has continuously generated technological compound effects for the company, highlighting its differential competitiveness in CDMO.

It is worth mentioning that the company has successively reached comprehensive cooperation with partners such as Lepu Biopharma, Escugen, BioRay Pharmaceutical, SmartNuclide, and Haoyuan Chemexpress in areas including ADCs, Radionuclide drug conjugates (RDCs), and other broader biological conjugates. It has successfully obtained multiple pre-BLA ADC projects, fully demonstrating the company's excellent capabilities in the ADC CDMO field.

In addition, in July last year, TOT Biopharm announced a strategic cooperation with GLYCANLINK based on ADC site-specific conjugation technology to jointly develop the DisacLinkTM ADC site-specific conjugation technology platform, accelerating the development and commercialization of innovative conjugated drugs for customers.

Secondly, TOT Biopharm boasts a high-quality commercialization platform.

With large-scale production capacity, flexible production lines, and a comprehensive commercialization layout, the company is able to cater to the diverse needs of customers. On one hand, it has improved its production capacity by establishing a high-standard ADC CDMO commercialization production line integrating antibodies, ADC substance, and ADC product manufacturing. In the first half of last year, the company's state-of-the-art, large-scale commercial production line for ADC drug products was completed and put into use, with an annual production capacity of 5.3 million vials of freeze-dried drug products,demonstrating significant progress in production efficiency. In addition, the company has completed the construction of four complete commercialization production lines, including two for ADCs and two for antibodies, significantly improving production capacity and flexibility.

On the other hand, TOT Biopharm is committed to building a comprehensive "one-stop, end-to-end" ADC industrialization platform, continuously enhancing the technological competitiveness of the platform, strengthening customer stickiness, and establishing long-term cooperative relationships, laying a solid foundation for future commercialization projects.

By focusing on differential competition in the ADC CDMO racetrack and building a high-quality commercialization platform, TOT Biopharm has significant advantages in both project-undertaking capabilities and compliance guarantees. Benefiting from the company's complete experience from drug discovery to commercial production and the differentiated advantages of the ADC CDMO industrial platform, as of the end of 2023, its backlog within 3 years had grown to RMB 505 million and the booked service backlog was RMB 137 million, with a year-on-year growth rate of 163%. In addition, as of the end of 2023, the company had 65 ongoing CDMO projects, including 42 ADC projects. These provide strong guarantees for the company's subsequent business growth.

Moreover, TOT Biopharm exhibits efficient operational strength through the establishment of an integrated ADC platform. With core technological advantages in R&D, the company has centralized key production processes such as Antibody, ADC substance, and ADC product manufacturing, thus reducing transfer costs and mitigating regulatory risks. This efficient operational model also enables the company to respond more flexibly to market changes, improve project execution efficiency, and lay a solid foundation for business development.

It is noteworthy that in October last year, TOT Biopharm's global R&D service center was completed and put into operation in Suzhou Industrial Park. As the company's new service center and key R&D district, the operation of this center further strengthens the capabilities of its CDMO business in technological research, process development, quality research, and more. It also means that the company will be able to better integrate R&D resources, improve project execution efficiency, and thus become more competitive in the market.

3. Conclusion

As can be seen from its annual performance report, TOT Biopharm's excellent achievements are based on its multi-year industry experience, platform construction, and technological advantages. As a pioneer in the ADC field, the company has demonstrated robust and sustainable operational strength and profit potential by targeting potential markets. With the delivery of its performance, the company also has the potential for market revaluation.

Currently, TOT Biopharm's market capitalization stands at less than approximately HK$1.3 billion. With the company's growth potential and comprehensive competitiveness in the ADC CDMO field taken into account, it undoubtedly boasts remarkable attractiveness under the current low valuation.