Hua Medicine is an innovative pharmaceutical company focusing on diabetes and metabolic diseases. The core product doglidine (trade name: Huatangning) was approved by the China Drug Administration for the treatment of type 2 diabetes mellitus (T2DM) in October 2022. It is the only approved glucokinase activator (GKA) in the world.

For the following reasons, we are optimistic about the commercialization of Huatangning:

1) Type 2 diabetes has a large market space and high acceptance of oral new drugs: IDF data show that there are 140 million patients with diabetes in China in 2021 and are expected to exceed 170 million in 2045, of which type 2 diabetes accounts for as much as 90%. According to the diagnosis and treatment guidelines, the treatment of early T2DM patients is mainly to improve their lifestyle and take oral drugs. If oral drugs can not control blood sugar, they can be combined with other oral drugs. Patients with early T2DM have a high demand for new drugs to improve islet function and delay the use of insulin as much as possible, and are willing to pay.

2) the development of GKA hypoglycemic drugs is difficult and the competition pattern is good: because it is difficult to balance efficacy and safety, the GKA pipelines of multinational pharmaceutical companies such as Roche, Eli Lilly and Co and Merck & Co Inc all stop at the clinical stage. Huatangning is the Only-in-class in the field of GKA, and there is no competition in the world in the short term. There are only 2 types of GKA pipelines under development in China (Paige Biological PB-201 and Yabao Pharmaceutical Algradine Hydrochloride). It is expected that the launch time of the competitive products will not be earlier than 2026. Huatangning has a market monopoly period of at least 3 years.

3) Huatangning has solid evidence of evidence-based medicine: the company has completed two phase 3 clinical studies of SEED and DAWN, including more than 1200 patients with T2DM. The results showed that Huatangning alone / in combination with metformin reduced glycosylated hemoglobin (HbA1c) by more than 1% compared to the baseline. The results of two complete clinical studies were published in the top academic journal Nature Medicine (impact factor 87). The company's latest dream study shows that among patients with an average course of 1 year, about 65.2% of patients who were treated with doglidine alone achieved remission after drug withdrawal for at least 12 months.

4) strong commercial partners are expected to accelerate the volume: according to the commercial cooperation agreement reached in August 2020, Hualeng received a down payment of 300 million yuan from Bayer and a milestone of up to 4.18 billion yuan. Bayer will be granted the right to Huatangning's exclusive commercial promotion in China and will receive service fees based on a certain percentage of net sales. After acarbose was included in the collection, Bayer has a certain product vacancy, and Huatangning, which is also an oral hypoglycemic drug, has rich experience and motivation to promote it.

Profit forecast

We forecast that the annual operating income of the company in 2023-24-25 will be 1.277 billion yuan, and the net profit will be-1.67 billion yuan. The DCF model includes Huatangning's domestic sales revenue and Bayer milestone income, with a target market capitalization of 4.683 billion yuan and a corresponding share price of HK $4.78 (exchange rate 0.93). For the first time, coverage gives a "buy" rating.

Risk hint

Lower-than-expected risks in R & D; lower-than-expected risks in health insurance negotiations; higher-than-expected risks in pharmaceutical industry policies