Revenue in the first half of 2002 increased 15% year-on-year to 2.2 billion yuan, of which product sales revenue was 2 billion yuan (10% year-on-year increase)

With the completion of the reorganization of the sales force and the improvement of production efficiency, the management expects the gross profit margin and operating expenses rate to pick up in the future.

We maintain INNOVENT BIO's overweight rating and lower the target price to HK $70 based on the category-plus valuation method. The company's R & D catalysts and excellent Becton Dickinson & Co capabilities are expected to lead to a revaluation of steady revenue growth in the first half of the year; fees are expected to improve in the second half of the year; overall revenue growth in the first half of 22 is mainly contributed by three biosimilar drugs (up 70 per cent year-on-year), offsetting the impact of weak sales of Dabeshu (about 1 billion yuan, down 25 per cent year-on-year). The weak sales of Dabeshu in the first half of 22 were mainly affected by the price reduction of the health insurance catalogue, as well as by the epidemic, the adjustment of the structure of the sales force and increased market competition, but were partially offset by the increase in Dabeshu sales. Gross profit margin decreased by about 10 percentage points to 78.9%, mainly due to the price reduction of Dabeshu and changes in income structure (biological similar drugs and newly introduced cooperative products have lower gross profit margin). However, the company believes that with the further improvement of production efficiency, gross profit margin will pick up to a good trend. The sales expense rate rose 10 percentage points to 68.5%, mainly due to more business promotion and the expansion of the sales force (the sales force increased by about 600,000 to 2745 compared with the same period last year). The company said that the reorganization of the sales force has been completed, and there are six new BU: IO, VEGF, TKI, Blood, GBU and non-tumor. The company believes that the new BU architecture can more effectively promote the launch of new products and achieve maximum commercial value. Due to higher R & D and sales expenses, the company still recorded a net loss in the first half of 2022 (a net loss of approximately RMB 1.1 billion, compared with a net loss of RMB700 million in the first half of 21).

A number of catalysts in 2022 are worth looking forward to

Key regulatory and clinical catalysts in the second half of 2022 include: 1) Dabeshu supplementary indication approval for the treatment of EGFR-positive non-small cell lung cancer; 2) Retsevmo (RET inhibitor) domestic listing approval for the treatment of non-small cell lung cancer / medullary thyroid carcinoma; 3) ramucirumab: supplementary indication approval for the treatment of second-line liver cancer 4) the reading of PoC data of four molecules, including the update of IBI-110 (anti-LAG3) data, IBI-939 (anti-TIGIT) for the treatment of non-small cell lung cancer, IBI-322 (CD47/PDL1) for the treatment of lymphoma, and IBI-302 (VEGF/C) for the treatment of wet macular degeneration.

Based on the classified plus valuation method, the target price is reduced to HK $70 and the overweight rating is maintained. We have lowered our sales forecast for fiscal year 22 by 3% and 3% respectively. At the same time, we expect the full-year net loss to be higher than our original forecast due to pressure on gross profit margin (the net loss for 22 / 23 was raised from 2 billion yuan / 500 million yuan to 2.6 billion yuan / 1.3 billion yuan respectively). At the same time, we have lowered the target price based on the category-plus valuation method from HK $90 to HK $70 to reflect earnings forecast adjustments and pipeline valuation updates (for example, we have lowered the valuation of the company's CD47 due to setbacks in recent clinical studies of CD47's peers in pipeline development). We maintain our overweight rating on the company, and we believe that the company may have weathered the trough (e.g. weak PD-1 sales and sales restructuring) and expect a global M&A/BD recovery in the second half of 22 (for example, Sanofi's equity investment in Cinda at a premium of approximately 29%) is expected to further drive mood repair in the innovative drug sector and revaluation of innovative drug leaders. Investment risk: clinical delay / failure, sales below expectations, regulatory risk, price reduction risk.