occurrences

On August 24, 2023, Hualing Pharmaceutical announced its 2023 semi-annual results announcement, announcing that it had achieved revenue of 70.3 million yuan, an increase of about 299.6% over the previous year. In the first half of the year, Huatangning, the company's leading sugar-reducing product, sold about 212,000 boxes, and achieved total sales of RMB 87.9 million since its launch in October 2022. As of June 30, 2023, the company's cash balance was RMB 800 million, an increase of about 79.6% from the cash balance of RMB 490 million as of December 31, 2022.

Comment:

The milestone in the first half of the year was very fruitful. Looking forward to health insurance, Huatang Ning sold more than 200,000 boxes in the first half of 2023, reaching a new milestone. It will receive 800 million irrevocable milestone payments from Bayer in Q3. The total amount of cash and government funding received by the company from Bayer in the first half of the year was RMB 402 million. Currently, Hualing Pharmaceutical has received 1.5 billion dollars in revenue from Bayer. At the same time, Huatangning was included in the preliminary medical insurance review list in this round. As the world's first innovative drug, its special mechanism brought clear diabetes relief benefits and received a good reputation among patients. If it successfully enters health insurance, it will greatly increase the company's in-hospital sales ratio and achieve further expansion through medical insurance payments. Hualing Pharmaceutical, in collaboration with Changzhou Hequan Pharmaceutical, Zhejiang Ruibo, and Shanghai Diseno, has already deployed production capacity ahead of schedule to meet post-health insurance demand. In the future, there will be a scale effect and further increase profit margins.

Targets for segmented diabetics are clear, and the socioeconomic benefits are remarkable. By regulating the enzyme activity of GK, Huatang Ning restores beta-cell protective function, improves glycogen reserves, and achieves the goal of restoring blood sugar stability. In June 2023, the company's SEED study revealed a significant improvement in beta-cell function and disposal index, a decrease in postprandial blood sugar, and a significant increase in TIR after treatment with dogliletin. Research has proved that improvements in TIR can effectively reduce the occurrence of complications such as cardiovascular, cerebrovascular mortality, and peripheral neuropathy, greatly reduce medical expenses caused by diabetes complications. It is a major savings in medical resources, and shows the social and economic benefits of Huatang Ning. At the same time, based on the different performance of Chinese and American diabetics, Chinese patients mainly have high blood sugar after meals, while European and American patients mainly have high fasting blood sugar. Targeted research and development has been carried out to significantly reduce blood sugar after meals.

Huatangning showed multiple potential curative effects. Active deployment of collaborative pipelines US clinical verification showed that in obese diabetics, doglieletin can endogenously repair GLP-1 secretion function, which is superior to other drugs by injecting GLP-1. This discovery shows the potential of dogliletin combined with GLP-1 receptor agonists to control postprandial blood sugar. The company team also demonstrated the positive effects of doglietin in preventing diabetes and memory impairment in GK rats at the American Diabetes Association (ADA) conference held in San Diego in June 2023, demonstrating the potential therapeutic advantages of Huatoning in diabetes prevention, cognitive impairment, and neurodegeneration. Based on Huatoning's successful commercialization and various potential indications, the company's current collaborative pipeline: second-generation GKA (US), a fixed-dose combination of doglieletin with metformin, sigliptin, and englitrin, also continues to advance steadily. At the same time, new layouts have been added: single-gene rare diseases, neonatal hyperinsulinosis, and metabolic diseases caused by abnormal NASH glycolipid metabolism, and drug development for major diseases that have not met demand. The company is deeply involved in the life cycle management of doglieletin and has made full use of its own R&D patents in the field of diabetes. If it successfully expands indications or is approved for combination therapy in the future, it will bring impressive growth to the company.

Investment advice

We expect Hualing Pharmaceutical's revenue from 2023-2025 to be 167 million yuan, 672 million yuan, and 1,386 million yuan respectively, with year-on-year increases of 849%, 303%, and 106%, respectively; we expect net profit from 2023-2025 to be -188 million yuan, -121 million yuan, and 0.17 billion yuan, with year-on-year increases of 7%, 36%, and 114% respectively. We are optimistic about the rapid dosage trend of Huatangning after marketing, its clinical benefits for the restoration of function in diabetics, the broad application space for type 2 diabetes as a single drug and in combination with other hypoglycemic drugs, and the potential milestone revenue that future second-generation GKA promotion can bring to the company. We maintain our “increase in holdings” rating.

Risk warning

Risk of insufficient production capacity, risk of falling short of expectations in entry, risk of cost increase, risk of sales fluctuation, industry policy risk