Incident: The company released its 2022 annual report, achieving operating income of 790 million yuan (+49.2% year-on-year), net profit of 131 million yuan (+614.2% year-on-year); after deducting net profit of non-return mother of 80 million yuan, compared to -60 million yuan for the same period last year. 2022Q4 achieved operating income of 270 million yuan (+546.9% year-on-year), net profit of 80 million yuan (+165.7%), and net profit of 0.6 billion yuan (+142.5%) after deducting net profit of non-return to the mother. The company's overall gross profit margin in 2022 was 96.0% (down 3.0 pct from year on year), net profit margin of 16.5% (up 13.0 pct year on year), annual sales expenses rate of 54.6% (up 3.9 pct year on year), management expenses rate of 11.7% (down 6.8 pct year on year), and R&D expenses ratio of 24.2% (down 17.8 pct year on year). The company released the first quarter report of 2023:2023Q1 revenue of 280 million yuan (+148.8% year-on-year), net profit of 0.3 billion yuan (+253.8% year-on-year), net profit of the non-return mother of 0.2 billion yuan (+153.0% year-on-year). The company's 2023Q1 gross profit margin was 97.0% (up 1.6 pct from the previous year), and net profit was 12.6%, compared to -20.4% in the same period last year. The company's 2023Q1 sales expenses ratio was 58.3% (down 9.7 pct from the previous year), the management expenses rate was 8.3% (down 9.9 pct from the previous year), and the R&D expenses rate was 23.0% (down 21.6 pct from the previous year).

Sales of volmetinib increased rapidly, and commercialization continued to advance. The commercialization and promotion of the company's core product, volmetinib, progressed steadily. Its second-line treatment indications were included in the national medical insurance catalogue at the end of 2021, and sales volume was achieved throughout 2022; its first-line treatment indications were approved in June 2022, further boosting product sales. 2022 was the second year of domestic sales after the product was launched, and sales revenue of 790 million yuan (+235.3% year on year) was achieved rapidly, achieving a significant increase over the previous year. In March 2023, first-line treatment indications were included in the scope of national medical insurance reimbursement, and we think it is expected that product launch will be further promoted. Through independent commercial team building, the company has formed a marketing team of nearly 650 people, covering 30 provinces and cities, covering about 1,000 hospitals in the core market area, and reached an “Exclusive Promotion Agreement” with Jiangsu Fosun Pharmaceutical, a subsidiary of Shanghai Fosun Pharmaceutical Holdings, which granted Jiangsu Fosun exclusive promotion rights to volmetinib in more than 2,000 hospitals.

At the same time, the company has set up a formulation production workshop that meets GMP requirements, which can provide sufficient production capacity for volmetinib.

Continue to explore the clinical advantages of volmetinib and reserve abundant backup pipelines. The company fully exploited the clinical advantages of the volmetinib variety and actively carried out clinical trials for various non-small cell lung cancer (NSCLC) indications of volmetinib. Among them: (1) adjuvant treatment indications are in phase III clinical trials; (2) EGFR 20 exon insertion mutation second-line treatment indications were included in the list of breakthrough treatment varieties in May 2022 and approved for phase II registration clinical trials in August; (3) IND of EGFR 20 exon mutation mutation first-line treatment indications in April 2023 Approved; (4) NSCLC with EGFR or HER2 activation mutation is in phase I clinical trials; (5) advanced NSCLC is treated with volmetinib in combination with the FAK small molecule inhibitor IN10018; (6) A phase Ib/II clinical trial of volmetinib combined with an RC108 antibody conjugated drug to treat advanced NSCLC was approved in April 2023. In addition, many pipelines such as RET inhibitors, KRAS G12C inhibitors, KRAS inhibitors, SOS1 inhibitors, etc. are in the pre-clinical research stage.

Profitability and valuation. We expect net profit to be 267 million, 455 million, and 645 million yuan respectively in 2023-25, with year-on-year increases of 104.5%, 70.5%, and 41.6%, respectively, and EPS of 0.59, 1.01, and 1.43 yuan respectively. Considering that the company's third-generation EGFR-TKI product has excellent curative effects, continuous expansion of indications, and broad market space, we gave it a “superior market” rating, which corresponds to a reasonable value range of 35.59-41.52 yuan in 2023.

Risk warning: new drug development risk, new drug approval risk, new drug marketing risk, technology iteration risk, etc.