Domestic and foreign stock markets have fallen significantly this year. Rapid overseas interest rate hikes have put tremendous pressure on growth stocks. The market prefers low-valued large blue-chip defensive stocks. The domestic economy has continued to be affected by epidemic control this year until it began to relax in December. The current widespread infection of new crown will have a short-term impact on the economy, and it is expected to gradually recover after the Spring Festival. In this annual report, I would like to explain in detail why I believe that global innovative drugs will be a very good long-term investment area.
Let me simply divide the pharmaceutical industry into eras to see where we are now.
First of all, it is the pharmaceutical 1.0 era of chemical drugs. At the beginning, the pharmaceutical industry was all about luck, looking for various natural compounds and digging in the mud everywhere. This is how drugs like penicillin come about, a bit like brute-force cracking of passwords. Later, more scientifically designed drugs and target-driven research and development models emerged. Chemical drugs dominated for a long time until biological drugs based on monoclonal antibodies appeared on the scene.
Pharmaceutical 2.0 Biopharmaceutical Era: In 1997, mankind officially entered the biopharmaceutical era. This point in time is not the emergence of biological drugs, but the commercial explosion of biological drugs. The representative works are Rituximab, the anti-cancer drug Herceptin and the autoimmune drug Infliximab. These three super blockbuster drugs all reached annual sales ranging from US$6 billion to US$8 billion at their peak. Later on, Humira, Avastin, Aflibercept, PD1, Daretux, Darbital, and other super heavyweights were released. Until this year, nearly 60% of the top 100 drugs in the world were biological products. Excluding 3 COVID-19 drugs among the top 10 blockbuster drugs in the world, 5 of the remaining 7 are biological drugs. If we use human age as an analogy, traditional chemical drugs are like middle-aged people in their 40s and 50s, while biological drugs are like young people in their 30s.
The current strength of biopharmaceuticals is far from over because of the technology of the 2.5 era: engineered antibodies, mainly ADCs and bisAbs, are getting better. ADC has already emerged as a star blockbuster anti-cancer drug with an expected annual sales of 10 billion US dollars. The dual-antibody drug also has a blockbuster hemophilia drug. In the anti-cancer field, the FDA approved multiple hematoma dual-antibodies this year. These two technologies have huge potential. They are currently only in the early stages of the outbreak of monoclonal antibodies similar to 2000 years ago.
Finally, it is the pharmaceutical 3.0 emerging technology era. The representatives are RNA, cell therapy, gene editing . These technologies are still in their early stages, similar to those of a 5-year-old child. Note that I am using the analogy of a 5-year-old child because these techniques are not just concepts. RNAi has already launched 5 drugs, mRNA has multiple vaccines on the market, and several blockbuster drugs have also appeared in cell therapy. Gene editing is still in its early stages of validation. We are now in the early stages of commercialization of these major platform technologies, and there will be rapid growth in the next 20 years.
Therefore, from the perspective of industry development, 2.5 and 3.0 emerging technologies have gradually matured but are still in their infancy commercially. This is a very ideal investment state. There are differences in valuation. XBI has fallen sharply for two consecutive years, underperforming the SP500, and is overall undervalued. At the same time, large pharmaceutical companies have performed well in the past two years. They are non-cyclical defensive stocks in the bear market, and their overall valuations are reasonable. From the perspective of the blockbuster drug patent cycle, a large number of drug patents will expire during 2025-2028. This shows that from this year to the next few years, large pharmaceutical companies will inevitably make frequent acquisitions to make up for revenue losses due to expired patents, which will have a positive effect on promoting the industry.
Looking forward to 2023, I am cautiously optimistic. The point of caution is that there is a high probability that interest rates will remain high next year, and the Federal Reserve's interest rate hikes are not over yet. The negative impact of interest rate hikes on the economy will continue to be felt next year. Optimism lies in the fact that pharmaceutical stocks have fallen for two consecutive years, a large number of risks have been released in valuation, drug consumption is non-cyclical, and the fundamentals of excellent companies are getting better and better. Domestic economic activities will recover quickly after the Spring Festival. Even if there are new escape strains in the future, the impact will be lower and lower. herd immunity does not mean that the entire population will be completely immunized at one time, but that each peak in the future will be significantly smaller than the last time, until the final risk is lower than that of influenza and can no longer be taken seriously.Humanity will eventually defeat the new crown, and the final outcome of the new crown is another "flu"
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