Federal Pharmaceuticals 1H23's performance was significantly higher than our expectations
The company announced 1H23 results: revenue of 6.91 billion yuan, up 33.3% year on year; net profit of 1.28 billion yuan, up 104% year on year. Due to the rapid growth of the intermediates and APIs business, the company's revenue and net profit to the parent group have greatly exceeded our expectations.
Development trends
Volume and price have risen sharply, and the intermediates and APIs business is growing rapidly. 1H23,1) Intermediates: Revenue was 1.05 billion yuan (+41.4% YoY), and the segment EBIT profit margin was +8.4 ppts to 30.3% year-on-year. Among them, 6-APA/penicillin industrial salt revenue was 600 million/450 million yuan, up 51.6%/29.7% year on year respectively. The average sales price rose 7.1% and 20.2% year on year respectively to 237 yuan/kg and 95 yuan/BOU, and capacity utilization rates increased to 100% and 85.3% respectively (1H22 was 91.2% and 29.6%). 2) APIs: Revenue was 3.42 billion yuan (+34.1% YoY), and the segment EBIT profit margin was +4.7 ppts to 11.1% year over year.
Among them, semisynthetic penicillins/beta-lactamase inhibitors/cephalosporins earned 2.59 billion/650 million/160 million yuan (+50.6%/+13.6%/-22.9% YoY). The capacity utilization rate was 100%/92.8%/62.7% (1H22 was 98.2%/90.8%/64.4%), and the average sales price of semisynthetic penicillins rose 12.6% year on year. The company is optimistic about the price trend in the second half of the year and is expected to remain at a high level.
Antibiotics and veterinary drugs drive growth in the formulation business. 1H23,1) Antibiotics for human use: Revenue of 1.16 billion yuan (+27.8% YoY), of which revenue from semisynthetic penicillins/cephalosporins/beta-lactamase inhibitors/carbapenem increased 12.1%/43.4%/21.5%/128.8% year-on-year to 3.1/0.9/5.7/140 million yuan.
2) Insulin: Revenue was 50 billion yuan (-19.7% YoY). The decline was mainly due to the partial impact of national insulin collection policy regulation on sales and the high base for the same period. Among them, the revenue of human insulin/insulinoglycogen/amendon insulin was 230 million/180 million/83.7 million yuan (-33.6%/-22.7%/+137.8% YoY), and the sales volume of the three was -18.3%/+13.8%/160.4%, respectively. The company expects to gradually resume normal sales progress in the second half of the year. 3) Veterinary medicine: Revenue is 530 million yuan (+158.5% YoY). In March of this year, the construction project for a new federal mobile insurance plant in Inner Mongolia was officially launched. The company expects to add more than 2 billion yuan in annual output value.
The R&D pipeline is progressing smoothly. 1H23 has invested 350 million yuan in R&D (+44.4% YoY). Of these, the marketing application for the liraglutide diabetes indication has been accepted, and the company expects to be approved in 2024; the diabetes indication for simeglutide injection was completed in phase III clinical enrollment in July, and the weight management indication was approved clinically in April; and the innovative drug Three Agonists. UBT 251 injection (GLP-1/GIP/GCG triagonist) was approved for clinical use in August, and clinical applications for weight management and NASH indications were submitted.
Profit forecasting and valuation
As growth in intermediates and APIs exceeded expectations, we raised our 2023/2024 EPS forecast by 14%/20% to 1.06/1.16 yuan. The current stock price corresponds to 6.0/5.3 x 2023/2024 P/E. Maintaining an outperforming industry rating, the target price was raised by 27% to HK$8.0 to reflect its profit growth prospects, corresponding to 6.8/6.0 x P/E 2023/2024, with 13.3% upside from the current stock price.
risks
R&D progress falls short of expectations; release of insulin products falls short of expectations; risk of falling intermediate prices.