Kanglong Chemical receives a pie falling from the sky

(Source: Thumb Pharmacy)

Finding Balance on GR

Author: Northwest Echo

“Millennium’s No. 2” Kanglong Chemical finally found an opportunity to take the pharmaceutical headlines.

On the evening of March 11, Kanglong Chemical suddenly announced jointly with Eli Lilly: they will collaborate on the commercialization and production of the small molecule oral GLP-1 drug Orforglipron. The agreement states that Lilly will invest $200 million to build capacity, with potential for further expansion.

First, a brief background is needed. Novo Nordisk and Lilly are both competing in oral GLP-1. Novo Nordisk is developing semaglutide tablets, using peptide + encapsulation technology. Lilly has abandoned the idea of reformulating taspoglutide and instead developed another small molecule GLP-1. At the end of last year, Orforglipron submitted an application for market approval in China.

The production base Kanglong Chemical plans to build is specifically for local production of Lilly’s small molecule GLP-1.

It’s worth noting that Lilly’s taspoglutide has a major CDMO supplier in China: WuXi AppTec. This time, Lilly did not deepen its cooperation with WuXi but instead chose Kanglong Chemical, which is somewhat surprising.

Moreover, Kanglong Chemical has mainly focused on preclinical CRO development, with a relatively small share of CDMO business, and it doesn’t seem to aim for an end-to-end integrated full process like WuXi. This collaboration appears more like:

▌Lilly forcing $200 million on it

Kanglong Chemical was founded in 2004 by American-educated scientist Lou Bo-liang in Zhongguancun, Beijing. The company was originally registered in the US, with the English name Pharmaron. The initial motivation for starting up in China was similar to WuXi’s: bringing foreign business back to China and leveraging lower Chinese labor costs for CRO.

Since then, Kanglong Chemical has been developing in Beijing, until 2013 when it first expanded southward, opening a new base in Lou Bo-liang’s hometown, Ningbo. To this day, Kanglong Chemical’s core laboratory and small molecule CDMO businesses remain centered in Beijing, while Ningbo mainly handles large molecules and CGT.

However, the issue is that Kanglong Chemical has not followed WuXi’s comprehensive integrated approach.

The WuXi model, established after 2010, shifted from a single CRO outsourcing model to a more extensive CMO business with higher throughput but slightly thinner margins. Currently, WuXi’s CDMO business accounts for about 60% of revenue, while true “CRO” services make up less than 15%.

Kanglong Chemical, however, has not adopted WuXi’s model. As of 2024, 57% of Kanglong Chemical’s revenue still comes from laboratory “test-tube” work, 24% from small molecule CDMO, and 15% from clinical services.

“Test-tube” work was high-margin business 20 years ago, given China’s low labor costs at the time. But now, with rising labor costs, laboratory output efficiency has declined. In 2024, WuXi’s net profit margin was 24%, while Kanglong Chemical’s was only 11.5%. The difference is stark.

The purpose of this background is to show that Kanglong Chemical has small molecule CDMO capabilities, but they are not particularly strong; its scale even lags behind Tianjin’s Kelun Pharma. As a result, Lilly’s investment of $200 million to strengthen its production capacity makes sense.

Kanglong Chemical’s only advantage might be its location.

In promotional materials about the Lilly partnership, the Chinese general manager Dehulan mentioned “adding oral solid dosage capacity in Beijing.” Although Lilly announced an “investment of $3 billion in China,” it’s clear that “building new capacity in Beijing” is a significant part of that total investment.

Looking back, it’s evident that in recent years, foreign pharmaceutical companies have collectively chosen to “invest in Beijing.”

Last March, AstraZeneca announced a $2.5 billion investment in Beijing; by the end of 2024, Sanofi plans to invest €1 billion to build a new insulin production base in Beijing. Pfizer, Bayer, Merck & Co., Medtronic, and others have already established R&D or innovation centers in Beijing.

Lilly is currently heavily investing in Suzhou, spending about $200 million in 2024 to upgrade its factory there. This plant is being prepared for taspoglutide production. Given Suzhou’s proximity to Shanghai and Changzhou, intermediates developed by WuXi can be quickly transported for further processing. But now, to develop small molecule oral weight-loss drugs, continuing to focus on Shanghai seems too biased.

Lilly needs to balance its business geographically,

▌And perhaps also find balance on GR

In any case, Kanglong Chemical’s recent situation can be described as “a mouse falling into a rice jar.” WuXi’s fastest-growing business now is peptide CDMO TIDES, heavily relying on Lilly’s big tree. If Kanglong Chemical sticks to oral GLP-1, not to compete directly with WuXi, at least its performance will be secure for the next few years.

By the way, a quick note: Kanglong Chemical’s large molecule and CGT production bases in Ningbo only started operation in the first half of 2024, and current output is limited. However, the company believes business growth is rapid, and whether it can become a new breakthrough remains to be seen.

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