We recently conducted research on the company. The company's core industrial varieties were affected by 4+7 volume procurement, causing profit growth to fluctuate, but the company responded positively: while promoting the consistency evaluation of generic drugs of its own varieties, actively promoting the development of non-standard terminals, we estimate that revenue from core varieties has improved marginally.
Commercially, the impact of the two-vote system (specifically the divestment of the transfer business) on the company's commercial revenue is gradually being eliminated, and we expect the 19H2 commercial endogenous revenue to pick up. The layout of Zhongjian has basically been completed. After experiencing policy turmoil, existing varieties have been sorted out and adjusted, and efforts will be focused on refining investment promotion in the later stages. The company responds positively to changes in the industry, looks forward to steady growth in performance, and maintains recommendations.
The decline in industrial operating profit was clearly greater than revenue, mainly the change in revenue structure. The pharmaceutical industry of the 19H1 company was 2,647 billion yuan, -7% year on year, and operating profit decreased 47% year on year; of this, industrial formulation revenue was 2.06 billion yuan, -1.69% year on year. Revenue from highly profitable varieties Ato capsules and blood products (discontinued) declined, and revenue from general pharmaceuticals increased, so the decline in revenue was not significant, but the decline in profit was quite obvious. It is expected that as Ato capsule revenue improves and the impact of the blood products incident is eliminated, the profit side will gradually stabilize. Also, since marketing system adjustments and reforms are still in progress, production has not yet reached maturity, which also has a certain impact on profits. The revenue of raw materials from 19H1 was 517 million yuan, -11% compared to the previous year. The main reason was a decrease in demand for raw materials due to policies such as “anti-resistance restrictions” and increased competition.
4+7 volume procurement affects core varieties of the industry. After a positive response, we estimate that there are already marginal signs of improvement. . We estimate that revenue from atorvastatin calcium capsules, the core variety that accounted for more than 30% of pharmaceutical revenue in 2018, fell by about 30% year-on-year, mainly in sales. The company is actively responding: increasing terminal development in the off-standard capsule market and actively promoting research and development of atorvastatin calcium tablets. Following a positive response, we estimate that the income margin of atorvastatin calcium capsules has shown signs of improvement, and the decline has begun to narrow.
Response on the industrial product side: 1. At present, the company has initiated a consistency evaluation of 44 product regulations, including injectables, including injectables, of which 32 are oral formulations, and metformin hydrochloride sustained-release tablets have passed the consistency evaluation. It is expected that Rishu can pass the consistency evaluation within the year; 2. A new drug, YPS345, has entered clinical trials, and the new drug TPN729II clinical trial has begun to recruit test subjects; 3. We expect the company will also make arrangements for oncology drugs, gene drugs, etc.
The industrial sales side responds: 1. Sorting out the product line, focusing on highlighting clinical efficacy to position the target market, and complementing and improving the existing product line; 2. Use the foundation of oral formulations to strengthen the development of non-standard markets such as end markets 2 and 3 to avoid policy risks; 3. Establish and improve a refined investment system to enhance control over terminals.
The impact of the two-vote system (specifically the transfer business) on the company's commercial revenue is gradually being eliminated, and we expect endogenous commercial revenue to pick up in 19H2. The 19H1 company's pharmaceutical business revenue was 10.8 billion yuan, +22% year on year. We estimate that the company's commercial growth was mainly driven by the merger of new subsidiaries, and endogenously affected by the transfer business (divestment began in 18H2). It is expected that by 19H2 this impact will gradually be eliminated, and business endogenous revenue will return to a state of rapid growth. Furthermore, the company's financing costs have been reduced, which is conducive to increased profitability and business expansion.
Profit forecast: We expect the company's net profit to the mother in 19-21 to -9%/+9%, respectively, compared to -9%/+9%, corresponding to EPS of 1.32/1.44/1.56 yuan respectively, corresponding to PE valuation 10x in '19.
Give it a “Cautious Recommendation - A” rating. The company is currently affected by policies, and its industrial performance has fluctuated, but the company is actively making adjustments on the product side and sales side. Revenue from some varieties has improved marginally. We look forward to a steady recovery in overall industrial performance in the future. As an enterprise at the forefront of domestic industrial and commercial integration, the company has broad follow-up market space and has been given a “careful recommendation - A” rating.
Risk warning: product sales fall short of expectations, R&D progress falls short of expectations, product quality and regulatory risks.
