Event: Haichen Pharmaceutical released its 2018 performance report. In 2018, the company achieved operating income of 712 million yuan, an increase of 56.45% over the previous year, and net profit of 83.237 million yuan, an increase of 26.88% over the previous year. Key investment points: 1. R&D investment is expanding at an accelerated pace, and the performance after deduction in 2018 is in line with expectations. The company released its 2018 annual performance report. In 2018, net profit was 83.237 million yuan, an increase of 26.88% over the previous year. Near the middle of the forecast range, the apparent performance was in line with expectations. Considering that the company's profit base is small, the two factors have a great influence on the company's apparent performance, and the actual net profit growth rate after deducting non-net profit is expected to remain at 30% +. ① Recurring profit and loss have decreased, and the growth rate after deduction is in line with expectations: non-recurring profit and loss in 2018 is about 1.26 million yuan, a year-on-year decrease of about 2.74 million yuan, so net profit after deductions is expected to be about 81.717 million yuan, an increase of about 33% compared to the same period in 2017, and the growth rate of net profit after deduction is in line with expectations; ② Significant increase in R&D investment: Considering that the company has multiple injections, oral consistency evaluations, and commissioned R&D projects in progress, we expect the full year of 2018 The company's R&D expenses are around 50 million yuan, and the year-on-year increase is expected to be 50% +, slightly exceeding expectations. Injectable BE and registration: In 2018, the company mainly promoted the review of 3 injection programs, including landilol hydrochloride and its powder injections, esomeprazole sodium and its powder injections, and vinpocetine injections, and simultaneous verification tests related to consistency evaluation. Currently, esomeprazole sodium was approved for listing in December 2018, and landiprolol is currently undergoing three rounds of supplementary data compilation. Vinpocetine has completed submission of supplementary data, pending CDE review; oral preparation BE and registration: during the same period, phenylchlordipine tablets are also being promoted, rivaroxaban tablets, dabigatran ester capsules 3 Consistency evaluation and BE testing of various oral formulation projects. Rivaroxaban has completed BE tests, and the data is to be reported; other commissioned R&D and independent R&D projects: R&D work on projects such as ligliptin, tofacitib, and self-developed phosphoripenofovir and apixaban developed by CRO is gradually being carried out. In 2018, it is expected that some commissioned R&D expenses have been confirmed, so Q4's apparent performance has been slightly affected; 2. Sales of core products have maintained high growth, and the approval progress of new generic drugs is in line with expectations and continued additional contributions. 1) The sales volume of the company's core varieties is expected to maintain high growth: torasemide for injections: According to the company's three-quarter report statistics, the sales revenue of torasemide for injections in the first three quarters of 2018 was 213 million yuan, up 139.89% year on year, sales volume was 16.41 million units (equivalent to 10 mg), up 59.22% year on year. Considering the substitution effect of competitor delisting, we expect to maintain 50% + sales growth throughout the year. It is expected that sales of torasemide for injection will reach about 23 million bottles throughout 2018; cefotian hydrochloride for injections: according to the company's third quarter report statistics In the first three quarters of 2018, sales revenue of cefotiam was 85.54 million yuan, up 116.61% year on year, sales volume of 5.56 million units (equivalent to 0.5 g), up 15.18% year on year. Considering the intense competition for cefotiam products, the annual sales growth rate is expected to decline slightly; lansoprazole for injection: According to the company's three quarterly report statistics, lansoprazole sales revenue for the first three quarters of 2018 was 54.26 million yuan, up 25.84% year on year, sales volume is 2.27 million units, up 11.67% year on year. Considering the intense competition for prazole products, it is expected to increase throughout the year The rate will decline slightly; tigecycline for injections: According to the company's three-quarter report statistics, tigecycline sales revenue for the first three quarters of 2018 was 21.38 million yuan, up 72.76% year on year, 54,000 bottles, up 110.0% year on year. Considering that the cold weather in Q4 is the peak season for anti-infective drug sales, and the tigecycline pattern is good, we expect the sales growth rate for the full year of 2018 to remain at least 100% +; cefuzidone sodium for injections: According to the company's three-quarter report statistics, cefuzidone sodium sales revenue in the first three quarters of 2018 increased by 1.96 million yuan, year-on-year 371.46%, sales volume is 230,000 sticks, up 48.11% year on year. Considering that the cold weather in Q4 is the peak season for anti-infective drug sales, the pattern is good and cefoxione sodium is the company's main product, we expect the annual sales growth rate to remain around 50%; 2) The approval of new incremental varieties is progressing smoothly: esomeprazole sodium: In December 2018, the company's esomeprazole sodium raw materials and needles were approved for sale, and sales are expected to begin in 2019; Landilol: The third round of supplementary data compilation is expected to be carried out in 2019. Resubmit at the end of Q1 The materials are expected to be approved for listing in 2019; Changchun xetine: completed submission of supplementary data, pending CDE review, expected to be approved in the first half of 2019; rivaroxaban: completed BE testing, data is being compiled, and production is expected to be reported in the first half of 2019, and is expected to be approved within 2019. 3. The progress of NMS R&D and integration is in line with expectations. Benchmarking LOXO's world-class original small molecule R&D platform ushered in a year of achievements. ① NMS announced the latest R&D pipeline, and the qualifications of LOXO's world-class original small molecule R&D platform are continuously verified: on November 7, 2018, the company announced its participation in the innovative pharmaceutical company Italy's NMS Group, which not only includes 9 small molecules and ADC innovative drugs, but also 1 innovative small molecule drug (Danusertib, targeting Asrore targets) in phase II clinical trials (Danusertib, targeting Asrore targets), and 13 new small molecule innovative drugs, 4 of which are expected to be Recently, it has advanced to phase 1 and 2 of international clinical trials. A variety of small molecule innovative drugs are potential first-in-class new targets. The NMS Group's R&D strength is further reflected. It is expected to target the US LOXO company (acquired by Eli Lilly in January 2019 at a valuation of 8 billion US dollars) in terms of small molecule original R&D systems, R&D team strength, and product reserves. The valuation of the innovative drug pipeline is expected to gradually be reflected as clinical trials progress. ② Encorafinib (Conefinib): NMS has authorized the first listed product in the pipeline. According to the company's announcement on the NMS Group Pipeline on November 7, the sales share ratio is about 2%. Melanoma indications are expected to become the best in class: Enkorafinib, a b-RAF inhibitor authorized by NMS to Array, was successfully approved for listing in the US by the FDA on June 27, 2018. It was used in combination with MEK inhibitors for BRAF positive advanced melanoma patients. MoS reached 33.6 months, significantly higher than the previous generation of BRAF targeting drug Roche's vermofini, which is expected to become the potential best in class variety in this field; triple use for colorectal cancer indications Groundbreaking therapy certification: Encorafinib's new triple therapy received US breakthrough treatment certification (BTD) in August 2018, and is expected to expand metastatic colorectal cancer indications (mCRC) in the future (August 2018, Encorafenib + Binimetinib +Cetuximab (cetuximab) in combination to treat patients with BRAF-V600E mutant metastatic colorectal cancer who had failed 1-2 times before received breakthrough treatment certification (NMS) from the US FDA It is currently the second drug in the pipeline to receive FDA approval as a breakthrough therapy)). Entractinib (entrectinib): The US, Europe, and Japan has entered the FDA priority review sequence. It is expected to become the second NTRK target target drug in the world, and peak sales are expected to reach at least 1 billion US dollars or more. According to Roche's annual report, Entractinib (authorized by NMS in 2013 to Ignyta in the US; Roche spent 1.7 billion US dollars to acquire Ignyta in December 2017 to obtain subsequent market development rights for emtrutinib) has submitted entrutinib's listing applications for NTRK+Solid Tumour and ROS1+NSCLC in the US, Japan, and Europe from December 2018 to January 2018, and obtained in February 2019 FDA priority review qualification, expected to be the first to be approved for listing in the US in Q3 2019! According to the NMS Group pipeline announcement announced by the company on November 7, 2018, entrutinib has been granted breakthrough therapy (BTD) by the FDA; priority drug (PRIME) by EMA; and pioneer drug (Sakigake) by PMDA (Ministry of Health of Japan). It is currently the only anti-cancer drug product from Roche that has received the honorary certification of innovative drugs in the US, Europe, and Japan. We expect this variety to become the best inclass variety with Ntrk/Ros1/Alk fusion gene mutations (Ros1 target is expected to be the best in class variety, Ntrk target is expected to be the second listed variety, second only to LOXO's Larotrectinib, which was listed in 2018). After listing, the sales share ratio for NMS is about 10%, and the peak annual sales share for NMS is expected to reach more than 100 million US dollars. ④ The newly owned pipeline will enter the first year of clinical progress in 2019. NMS-P088: the “best-in-class” drug that is expected to become an FLT3/KIT/CSF1R inhibitor. Phase I clinical trials have been carried out in Italy, and patient enrollment is expected to begin soon; currently, for recurrent/refractory acute myeloid leukemia with FLT3 mutations, it is expected that indications will be further expanded in the future. It is expected that clinical trials will be submitted in the US and China in the first half of 2019; NMS-P293: is the only selective PARP1 inhibitor currently being developed in the world, no ion barrier; more potent than competing products, It is safe and low in dosage. It can be used as a single drug or in combination, and is expected to treat BRCA mutant tumors. At the same time, it has blood-brain barrier penetrating properties, so it can be expected to treat CNS lesions, prevent or delay metastatic brain cancer, or be used in combination with the treatment of glioblastoma. It is expected to become the “best in class” drug for PARP inhibitors, and preclinical studies have now been completed; it is expected that a global multicenter clinical trial application will be submitted for triple-negative breast cancer indications with brain metastases at the end of Q1 in 2019; NMS-P338: a second-generation highly active and highly selective RET inhibitor that has completed preclinical studies, benchmarked LOXO292, and is expected to submit a global multicenter clinical trial application for solid tumors with RET mutations within 2019; NMS-P812: a small molecule PERK inhibitor, is expected to become the world's first innovative drug. NMS-P812 has shown good safety characteristics and no pancreatic toxicity in preclinical studies. Good data has been obtained in exploratory studies. It is expected that multiple myeloma will be treated in combination with medication. It is expected that a global multi-center clinical trial application will be submitted in 2020. Profit forecast and investment rating: In the short term, we are optimistic about the continuous expansion of the company's core diuretic market and the promotion of new products; in the medium to long term, we are optimistic that the innovative drug platform NMS Group will cooperate more deeply with the company in the Chinese market to promote the comprehensive transformation and upgrading of Haichen Pharmaceutical. Considering that the company's main business is currently still at a low stage of performance base, the apparent data is greatly affected by expenses and non-recurring profit and loss, we have lowered the company's profit forecast. The company's EPS for 2018-2020 is expected to be 0.69, 0.96, and 1.31 yuan respectively, corresponding to the current PE 39.94, 28.99, 21.18 times, maintaining the “buy” rating. Risk warning: Clinical progress of products under development falls short of expectations, sales of new varieties fall short of expectations, sales of existing core varieties fall short of expectations, merger and acquisition integration falls short of expectations, and the company's future performance is uncertain