March 17 proved to be a turbulent trading day for investors in Zhaoyan New Drug (603127.SH, 06127.HK), a leading CRO (Contract Research Organization) firm. Following the announcement of a major shareholder reduction plan the previous day, the company's stock opened sharply lower and hit the daily downside limit by the time of writing, reflecting significant market panic.
The stock plunge was triggered by a complete stake liquidation announcement. Shareholders Gu Xiaolei and his concert party Gu Meifang plan to sell their entire combined holdings of 30.7425 million A-shares via centralized bidding within the next three months, representing 4.1% of the company's total share capital. This move comes less than two months after Zhaoyan New Drug released a seemingly strong 2025 earnings forecast, projecting a more than 200% surge in net profit attributable to shareholders. The juxtaposition of explosive profit growth against major shareholders' complete exit raises questions about the underlying rationale, particularly as the CRO industry shows signs of recovery.
A securities analyst specializing in pharmaceuticals suggested that the core motivation for the stake liquidation is profit-taking at elevated prices to secure long-term gains. As pre-IPO investors, Gu Xiaolei and Gu Meifang's decision to exit amid substantial stock price and earnings fluctuations aligns with typical financial investor behavior. The analyst noted that while the company's recent stock rebound from lows has been significant, the impressive 2025 forecast is primarily driven by fair value revaluation of biological assets due to rising prices of laboratory monkeys, rather than linear growth in core operations. Such profit surges from asset price fluctuations are often unsustainable, creating exit opportunities for capital. Combined with the shareholders' historical reduction patterns and recent moves by controlling shareholders, the market generally interprets this as a personal financial planning decision rather than a bearish view on the company's long-term value.
However, simultaneous stake reductions by controlling shareholders have indeed sparked concerns about the stability of Zhaoyan New Drug's corporate governance.
The announcement attributed the reduction to "personal funding needs." Yet, equating personal needs with complete liquidation during a period of multiplied profit growth has failed to fully alleviate market skepticism. Notably, Gu Xiaolei and Gu Meifang, who are aunt and nephew, constitute a concert party. Their shares were acquired before the company's IPO and through capital reserve conversions, identifying them as founding shareholders. A full exit by such shareholders is often viewed in primary markets as a pessimistic forecast of the company's future growth potential or stock price ceiling.
The securities analyst further pointed out that while a complete sell-off by founding shareholders doesn't necessarily indicate a fundamental rejection of the company, its timing and execution method significantly impact secondary market sentiment. With current stock prices not at historical highs, this exit approach inevitably fuels speculation about insiders' lack of confidence in future development.
In stark contrast to the shareholder reduction, the company's 2025 earnings forecast released on January 20 projected revenues between approximately 1.573 billion and 1.738 billion yuan, representing a year-on-year decrease of 13.9% to 22.1%. Despite the revenue decline, net profit attributable to shareholders is expected to surge 214.0% to 371.0% to between 233 million and 349 million yuan. Profit after deducting non-recurring gains or losses is projected to increase 945.2% to 1,467.7% to between 246 million and 370 million yuan.
While the profit growth appears impressive, a closer examination reveals underlying discrepancies. The company acknowledged that the primary driver is not robust core business recovery but fair value gains from rising prices and natural growth of biological assets—specifically, laboratory monkeys. Zhaoyan New Drug, nicknamed "Monkey King Biotech" due to its self-supply capability of laboratory monkeys, saw procurement prices for non-human primates peak at 150,000-200,000 yuan per monkey in the second half of 2022. Although prices fell to 70,000-100,000 yuan by the second half of 2024 due to weaker R&D demand, they have re-entered an upward trend in 2025 amid expected supply-demand gaps.
Meanwhile, the actual core business—laboratory services—showed weak performance. The company noted that revenue and gross margin from fulfilled contracts declined year-on-year due to lingering effects of previous intense industry competition, reducing profit contribution from laboratory services. This creates an awkward scenario where the core business contracts while monkey prices provide support, meaning the actual profitability of operational business remains on a downward trajectory even as markets cheer the profit multiplication.
The analyst emphasized that while holding laboratory monkeys serves as an asset appreciation method for preclinical CRO companies, it introduces earnings volatility and unsustainability. Fair value changes represent non-cash book gains rather than genuine operating cash flow. Once the price cycle reverses, this profit model can quickly deteriorate, potentially causing asset impairment losses.
Zhaoyan New Drug's challenges reflect broader CRO industry cyclical fluctuations over the past two years. Although 2025 has seen improved industry sentiment with Federal Reserve rate cut expectations and a recovery in global biopharmaceutical investment, the translation of funding warmth into order execution for preclinical CROs requires time. Contracts fulfilled in 2025 were largely signed during the industry downturn in 2024 or earlier at lower prices, explaining the revenue contraction despite rebounding investment data.
Industry reports indicate that domestic clinical CRO order prices declined for two consecutive years in 2023 and 2024, with new order prices only beginning to show recovery signs in 2025. This means companies like Zhaoyan New Drug can sense "the footsteps of spring" while still experiencing "the tail of winter." This context explains why founding shareholders chose to exit: even if the industry cycle has bottomed, a full earnings turnaround requires time, leading early investors to lock in profits during market enthusiasm over monkey price increases rather than waiting for uncertain business recovery.
Despite short-term earnings pressure, institutions generally believe laboratory monkey price cycles could continue benefiting Zhaoyan New Drug over the next few years. Huatai Securities analysis suggests that prices may approach the higher range of 150,000-200,000 yuan per monkey within 2-3 years due to expected supply-demand gaps, potentially sustaining positive fair value for biological assets. However, this benefit increases earnings volatility. Should drug R&D demand growth slow or monkey supply expand, companies holding significant biological assets could face substantial fair value losses. This earnings model dependent on monkey prices deters some long-term investors seeking stable growth.
Industry insiders also advise investors to monitor details in the formal annual report to assess actual business performance, as monkey price impacts on profits persist.
Viewed broadly, Zhaoyan New Drug's situation is not isolated but reflects the CRO industry's deepening differentiation. Wanlian Securities reports show that WuXi AppTec is expected to achieve 45.456 billion yuan in revenue for 2025 (a 15.84% year-on-year increase), with net profit margins steadily climbing from 18.06% in 2020 to 37.15% in Q1-Q3 2025, significantly above the industry average (21.67%-22.99%). The industry has formed a clear hierarchy with WuXi AppTec, Tigermed, Pharmaron, and Asymchem as the first tier and specialized leaders like Zhaoyan New Drug and Jiuzhou Pharmaceutical as the second tier, reinforcing a "strong get stronger, specialists focus" trend driving China's CXO industry toward specialization, internationalization, and high-quality development.
Simultaneously, smaller and medium-sized enterprises are accelerating their exit. According to Tigermed presentation materials, the number of domestic clinical CRO companies has declined substantially since 2021, with a cumulative drop of 69% by 2025. The largest decrease occurred in 2024, and the number continued falling in 2025 despite industry demand recovery, indicating capacity elimination at the cycle bottom and gradual market exit for smaller players. Earlier years of insufficient demand led to intense domestic competition and order price pressure, forcing smaller companies to withdraw.
For Zhaoyan New Drug, the core challenge lies in maintaining its moat within this "strong get stronger" landscape and leveraging its key resource advantage in laboratory monkeys to gain greater pricing power.