The pharmaceutical sector of Hong Kong stocks did not perform well in the first half of the year, but as the health care reform policy continues to land, the agency believes that there are still opportunities for the industry in the second half of the year:

The scope of procurement of drugs and high-value consumables continues to expand, health insurance negotiations are normalized, R & D innovation is continuously encouraged from drug review, approval and payment, and innovation R & D capability has become the core driving force of enterprises.

Under the background of medical insurance fee control, Shen Wanhongyuan said he was optimistic.Head CXO company, biotech company with innovative R & D capability, and characteristic private medical service institutions. In terms of specific targets, Wuxi Biologics, Kangfang Biology, Rongchang Biology, Nuocheng Jianhua, Jinxin Reproduction and CSPC Pharmaceutical are recommended.

General situation of Hong Kong stock pharmaceutical market: the number of biotech companies and hundreds of billions of market capitalization companies is growing rapidly.

Since the release of the new listing rule 18A on the Hong Kong Stock Exchange in April 2018, the number of unprofitable biotechnology companies on the Hong Kong Stock Exchange has reached 47. In addition, the number of leading enterprises with large market capitalization is also increasing at the same time, with six companies with a market capitalization of more than HK $100 billion.

In addition, the share of Hong Kong stocks continues to rise. Since 2022, the number of companies in the Hong Kong pharmaceutical sector has reached 82, accounting for 43% of the total number of companies in the Hong Kong pharmaceutical sector.

At present, the number of Hong Kong pharmaceutical companies has reached 17, including CXO, pharmaceuticals, commercial circulation and so on. Affected by liquidity, except for leading companiesThe Hong Kong shares of other AxiH pharmaceutical companies are trading at a discount of about 30% to 80% of the A shares.

Among them, CDMO (Contract manufacturing organization), that is, the contract R & D and production organization, is the highest proportion of the market capitalization of the Hong Kong stock pharmaceutical sector.

In terms of market capitalization, the subsections with the highest share of market capitalization are CDMO, chemicals and biological drugs, accounting for 70 per cent of the total market capitalization.

Since the beginning of the year, the performance of Hong Kong stock pharmaceutical sector is relatively weak, while the performance of pharmaceutical business and traditional Chinese medicine sector is relatively good. The sub-sections of biomedicine and Internet medicine are relatively the weakest.

The overall performance of Hong Kong-listed pharmaceutical companies has been weak since the second half of 2021, and the market is worried about the cash situation of innovative drugs and innovative device companies.At present, it seems that the head company has relatively plenty of cash on hand.

Since the beginning of 2022, 34 pharmaceutical companies have submitted prospectus materials on the Hong Kong Stock Exchange, including medical devices, medical services, Internet medical care and so on.

General situation of the industry: the examination and approval of domestic new drugs has been accelerated, innovation has become the core driving force, and drug collection shows a normal trend.

The total operating income and profits of the pharmaceutical manufacturing industry in 2021 were positive compared with the same period last year, and the growth rate of total profits has turned negative since 2022.

Affected by the domestic epidemic, as of April this year, the total profits of the pharmaceutical manufacturing industry fell by 14% compared with the same period last year.

Health insurance income is growing faster than spending:Before 2020, the expenditure growth rate of urban basic medical insurance (including workers and residents) exceeded the income growth rate for many years, and income growth exceeded expenditure growth for the first time in 2020.

The growth rate of the domestic pharmaceutical market is gradually slowing down, and the future growth of the industry will be mainly driven by innovative drugs.According to the forecast of Frost & Sullivan, the domestic innovative drug market will reach US $202 billion in 2024, with a five-year compound growth rate of 9%, exceeding the overall compound growth rate of the industry in the same period (about 6%).

With the reform of the domestic examination and approval system, the speed of approval of domestic new drugs has been improved, and more than 50 domestic innovative drugs have been approved and put on the market since 2019.

Normalization of drug procurement with volume.

January 2020The third batch of collective mining decreased by an average of 53%.In February 2021, the fourth batch of collection decreased by an average of 52%. In terms of dosage forms, 61 varieties were involved in the fifth batch collection, including 27 kinds of injections, and the proportion of injection forms was relatively high.The average decline is 56%.

The first national collection of insulin: November 2021The results of insulin collection were officially announced, with an average decrease of 48% and a maximum decrease of 74%.It includes 42 injection varieties of second-generation and third-generation insulin, covering 16 common name varieties.

The seventh batch of collection documents was officially released: on June 20, the National centralized Drug Procurement document was issued by the State Organization Drug Joint Purchasing Office, and the seventh batch of international collection was officially launched, involving a total of 59 varieties, including general oral dosage forms, injections and sustained and controlled release preparations.

The collection involves a number of large varieties, including nifedipine sustained-release tablets, meropenem injection and other large varieties, the number of approved manufacturers is more than 5, the competition is more fierce.

The number of varieties included in the health insurance negotiations is increasing year by year.

National Healthcare Security Administration has organized negotiations on the health insurance catalogue once a year since 2017, and the number of varieties included in the negotiations has increased rapidly from 3 in 2017 to 94 in 2021.

A total of 117 drugs were negotiated in 2021, 94 of which were successful, with an overall success rate of 80.34%. Among them, 67 of the 85 exclusive drugs outside the catalogue were discussed, with a success rate of 78.82% and an average price reduction of 61.71%.

On June 13 this year, National Healthcare Security Administration issued the work Plan for adjusting the Drug catalogue of National basic Medical Insurance, Industrial injury Insurance and Maternity Insurance in 2022. Compared with the 2021 adjustment plan, the new plan will be approved to be listed in the catalogue of encouraging generic drugs or encouraging R & D and declaration of drugs for children, as well as drugs for rare diseases before June 30, 2022.

Focus on the leader and look for structural investment opportunities

• Wuxi Biologics: leader of Biopharmaceutical CDMO

$Wuxi Biologics (02269.HK) $Is the world's leading biomedical contract research, development and production organization (CRDMO) platform, business in domestic and overseas markets. The company provides one-stop end-to-end services for pharmaceutical and biotechnology companies, covering the discovery, development and production of biopharmaceuticals.In terms of sales revenue in 2021, the company is the second largest company in the global biopharmaceutical R & D service outsourcing market, with a market share of 10.3%.

As of the end of April 2022, the company's pipeline contains a total of 526 comprehensive projects, including 32 phase III clinical projects and 9 commercial projects.

As of June 30, Wuxi Biologics was down 22.42% year-to-date.

Shen Wanhongyuan believes that the company has excellent past performance, and has a competitive technology platform, and is in a leading position in the market; commercialization projects are expected to further boost growth.

In 2021, the company's total revenue and adjusted net profit increased by 83% and 94% to 10.3 billion yuan and 3.3 billion yuan, respectively.The compound growth rates from 2017 to 2021 were 60% and 73%, respectively.This is mainly due to the rapid growth in the number of integrated projects, especially in the late stage of recent years.The number of comprehensive projects increased from 161 in 2017 to 480 in 2021, with a compound growth rate of 36%.

The company has established a comprehensive technology platform covering the whole life cycle of biopharmaceutical discovery, development and production, including double antibody, ADC and mRNA vaccines.

As the company's projects gradually enter the late development stage, the number of commercial projects has increased significantly from 2 in 2020 to 9 in 2021. The company expects to add 2-4 new commercial projects each year from 2022 to 2023, 4-6 commercial projects per year from 2024 to 2025, and more than 20 commercial projects in 2025.

The company's current pipeline covers 20 non-COVID-19 late-stage projects and is expected to contribute more than $2 billion to CMO revenue in the next 3-5 years.

• Kang Fang Bio: the leader of double anti-drug

$Kangfang Bio-B (09926.HK) $Is a leading R & D-driven biotechnology company in China, committed to independent research and development of the world's first and best therapies of its kind. The company currently has more than 30 innovative projects, mainly in the areas of oncology, autoimmunity and metabolism, and a total of 15 drug candidates have entered the clinical stage, including AK104 (PD-1/CTLA-4), AK112 (PD-1/VEGF) and AK105 (PD-1).

Kangfang Bio has fallen by 32.21% year-to-date.

Shenwan Hongyuan analysts believe that the company's AK105 has entered the commercialization stage, AK104 is expected to start commercialization, and the company has the core double resistance varieties of AK112 (PD-1/VEGF) in research.

In August 2021, the company has obtained NMPA's approval for the listing of AK105 in the treatment of third-line relapsed refractory classical Hodgkin's lymphoma.In 2021, the sales volume of the product reached 212 million yuan.The company has submitted to NMPA a listing application for piamizumab for the treatment of first-line non-small cell lung cancer and third-line nasopharyngeal carcinoma. In addition, the company has submitted an application for listing of third-line nasopharyngeal carcinoma to FDA in September 2021.

AK104 is expected to be commercialized. In September, 2021, the company submitted to NMPA the listing application of AK104 for the treatment of second and third line cervical cancer, and won the priority evaluation qualification.

We expect AK104 to be approved for listing in 2022, making it the first PD-1/CTLA-4 dual-antibody product to be approved.In June 2022, the company unveiled the data of phase II study of AK104 combined with standard therapy in the first-line treatment of recurrent / metastatic cervical cancer at the ASCO annual meeting, showing a good efficacy in the whole population.

AK112 (PD-1/VEGF), core double resistant varieties under development.AK112 is the first bispecific antibody to PD-1/VEGF in the world. The product is currently conducting a number of clinical trials in China, including lung cancer, gynecological tumors, gastric cancer and so on.

In addition, at the annual meeting of ASCO in 2022, the company revealed the trial results of AK112 monotherapy and combined chemotherapy in the treatment of advanced NSCLC, which showed good anti-swelling effect.

• Rongchang Biology: domestic ADC Leader

$Rongchang Bio-B (09995.HK) $Is a leading innovative biopharmaceutical company in China, focusing on the discovery, development and commercialization of antibody drug conjugates (ADC), antibody fusion proteins, monoclonal antibodies and bispecific antibodies. The company has built a pipeline of 17 products, including 2 commercial products RC18 and RC48 and 7 products under clinical development.

Rongchang biology has fallen 43.58% year-to-date.

Shen Wanhongyuan believes that the company is expected to achieve sales volume of Vidi Monoclonal Antibody and Tetaximab.

Sales of RC48 in 2021 were 84 million yuan.The indication of gastric cancer of this product was included in the 2021 edition of the national health insurance catalogue at the end of last year.After the inclusion of health insurance, with the improvement of patients' ability to pay, vidixitumab is expected to achieve sales volume.

In August 2021, the company entered into an overseas licensing agreement with Seagen for RC48, the total consideration of which includes a down payment of US $200 million and a milestone payment of up to US $2.4 billion. In addition, the company will receive a share of sales from the high digits of net sales of the product to more than ten percent. We believe that through this cooperation, it is expected to further expand the potential of RC48 overseas markets.

Vidixitumab continues to explore other indications.

At present, the company carries out a series of tumor-related clinical trials in China, including gastric cancer, urothelial cancer, breast cancer, non-small cell lung cancer, biliary cancer, and other HER2 positive advanced solid tumors.In addition, RC48's UC indications have been granted breakthrough therapy recognition and fast-track qualification by FDA in the United States. In June 2022, the company released three clinical data of RC48 at the annual meeting of ASCO, showing the good efficacy of RC48 in the treatment of urothelial cancer with single drug and combined with PD-1.

RC18 has been successfully included in the health insurance catalogue.Sales of RC18 in 2021 were 47 million yuan.At present, Tetasip was included in the 2021 edition of the national health insurance catalogue at the end of last year, and is expected to achieve sales volume with the improvement of patients' ability to pay.The company has conducted a number of clinical trials covering autoimmune diseases, such as systemic lupus erythematosus (SLE), optic neuromyelitis spectrum disorder (NMOSD), IgA nephritis, rheumatoid arthritis (RA), Sjogren's syndrome (SS) and so on.

• Nuocheng Jianhua: the first year of commercialization of Obutini

$Nuocheng Jianhua-B (09969.HK) $Is an innovative pharmaceutical company with an integrated biomedical platform dedicated to the development and commercialization of potential best-in-class and innovative treatments in the field of oncology and autoimmune diseases. The company has built a pipeline of 14 products, including 1 commercial product ICP-022, 10 clinical phase products and 4 drug candidates in the IND preparation phase.

Nuocheng Jianhua is down 12.55% year-to-date.

Shen Wanhongyuan mentioned that Aubutini is expected to achieve sales volume after it is included in health insurance, and that the company's pipeline focuses on hematoma, solid tumor and autoimmunity.

Obutinib (BTK inhibitor) is the company's first commercial product, which was approved by NMPA in December 2020 for the treatment of relapsed refractory chronic lymphoblastic leukemia (r/rCLL/SLL) and relapsed refractory mantle cell lymphoma (r MCL).Sales of Obutini reached 241 million yuan in 2021. With the improvement of patients' ability to pay after health insurance coverage, we believe that this variety is expected to achieve sales volume.

Obutinib continues to explore the areas of hematoma and autoimmunity. In July 2021, the company reached a cooperation agreement with Bojian, which will have the exclusive rights of Obutinib in the field of multiple sclerosis and certain autoimmune diseases outside the Greater China region. Currently, Obutinib is conducting a phase II clinical trial of MS in the United States.

In addition, the company is currently carrying out first-line CLL/SLL and first-line MCL registered phase III clinical trials of Obutinib in China. In June, 2022, the company released the real-world data analysis of the treatment of DLBCL with Obutini at the annual meeting of ASCO. For patients with DLBCL MCD subtype, the combination therapy of Obutini showed good tolerability and safety.

In terms of hematoma, the company introduced Tafasitamab (CD19 McAb) from Incyte to the development and commercial interests of Greater China, and the product has been approved by FDA and EMA for use in combination with lenalidomide in the treatment of r DLBCL.

In terms of solid tumors, ICP-192 (Gunagratinib) and ICP-732 (pan-TRK inhibitors) demonstrated their good tolerance and safety in head and neck cancer and solid tumors respectively at the 2022 ASCO annual meeting.

• Jinxin Reproduction: the leader in the field of assisted reproduction

$Jinxin Reproduction (01951.HK) $It is a leading private enterprise in the field of assisted reproduction in China. According to the number of IVF cycles and assisted reproductive income, the company ranked third and second in the domestic assisted reproductive market in 2018, with a market share of 3.1% and 3.9%, respectively. Calculated according to assisted reproductive income and the number of IVF cyclesIn 2018, the company was the second and fifth largest provider of assisted reproduction in the United States, with a market share of 2.5% and 1.9%, respectively.

Note: IVF refers to in vitro fertilization, that is, IVF.

More than 300000 IVF babies have been born in China in recent years, accounting for about 2.0 per cent of the annual number of babies born each year, compared with 5.5 per cent in neighboring Japan, according to the National Health Commission.With the rise in infertility rates and increased awareness of birth defects and prevention, Frost& Sullivan data show that the penetration rate of the domestic assisted reproductive market is expected to rise from 7.0% in 2018 to 9.2% in 2023.

Jinxin fertility has declined by 16.28% year-to-date.

Shen Wanhongyuan believes that the company's IVF business returns to growth; mergers and acquisitions continue to move forward.

In 2021, the company's revenue rose 29% year-on-year to 1.84 billion yuan, and net profit increased 35% to 340 million yuan. The overall number of IVF cycles in 2021 increased by 20 per cent year-on-year to 27354 (22pc879 in 2020, down 18 per cent from the same period last year).

From a regional point of view, the income of hospitals in Chengdu, Shenzhen and Wuhan was 822 million yuan, 427 million yuan and 55 million yuan respectively, up 12% and 29% respectively over the same period last year, accounting for 45% and 23% of the total income respectively. In addition, US business revenue rose 21 per cent year-on-year to 459 million yuan, accounting for about 25 per cent of the company's total revenue in 2021.

In addition, 2021 acquired four new IVF licenses, including two from Yunnan, one from Hong Kong, China, and one from California.

In June 2021, the company announced the acquisition of a 19.33% stake in Yunnan Jiuzhou Hospital and Kunming and Wanjia Maternity Hospital, both located in Kunming, Yunnan Province. In August 2021, the company acquired Hong Kong Reproductive Health Centre (RHC) and Hong Kong assisted Fertility Centre (ARC) to further expand its business to Hong Kong, China.

In October 2021, the company announced the acquisition of 100% equity in Sichuan Jinxin Women and Children Hospital (Jinxin Women and Children).

• CSPC Pharmaceutical: mRNA COVID-19 Vaccine continues to advance

$CSPC Pharmaceutical (01093.HK) $Is a research and development, production and sales as one of the innovation-driven pharmaceutical enterprises. At present, the company has more than 40 small molecule innovative drugs, more than 40 macromolecular innovative drugs and more than 30 new preparations. Since 2021, a total of 26 products have been approved.

CSPC Pharmaceutical is down 6.93% year-to-date.

Shen Wanhongyuan believes that the growth of the company's proprietary medicine sector is steady; the tumor product line continues to expand; and the Becton Dickinson & Co project has further enriched the product pipeline.

In the first quarter of 2022, the sales of the company's proprietary medicine sector increased by 15.0% year-on-year (9.1% in the same period last year) to 6.3 billion yuan, accounting for about 80% of the company's total revenue.

As far as the treatment field is concerned, the sales revenue of neurological diseases, anti-tumor, anti-infection and cardiovascular disease products was 1.9 billion yuan, 2.2 billion yuan, 900 million yuan and 785 million yuan respectively, an increase of 8%, 15%, 28%, 9% respectively over the same period last year.

In terms of tumor products, Dornda (mitoxantrone hydrochloride liposome injection) and Cobitol (doveriser capsule) were approved by NMPA in the first quarter of 2022.

Among them, Dornda has been approved for the treatment of recurrent or refractory peripheral T-cell lymphoma (PTCL), and many other indications are currently in clinical trials, and Cobitol has been approved for the treatment of adult patients with recurrent or refractory lymphoma.

In addition, the company expects to get approval for the listing of BPI-7711 capsules (third-generation EGFR) in 2022. We believe that the approval of new products is expected to become a new driving force for the growth of the tumor sector.

In terms of Becton Dickinson & Co's project, the company has completed the acquisition of a 51 per cent stake in Mingkang Bio, and the company has listed the third-generation thrombolytic product Mingfule.

In addition, in the first quarter, the company has obtained seven clinical approvals for NMPA, including COVID-19 mRNA vaccine and so on.

At present, the company has established eight innovative R & D platforms, including nano-preparations, mRNA vaccines, siRNA, ADC and so on. Through internal R & D and epitaxial mergers and acquisitions, the company is expected to launch more than 30 innovative drugs in China from 2022 to 2026, covering more than 50 indications.

Risk Tips:

Repeated outbreaks lead to less-than-expected commercialization.. Affected by the COVID-19 epidemic, terminal sales may be negatively affected, resulting in lower-than-expected performance.

The progress of the core pipeline is not as expected.Repeated outbreaks may affect clinical progress, resulting in lower-than-expected progress of research and development.

The growth rate of the industry is lower than expected.Affected by industry policies, such as drug and consumable collection price reduction, the price drop more than expected may lead to lower-than-expected growth of the industry as a whole.