Key points of investment
Enhua Pharmaceutical: Deeply cultivating the field of hemp refining, building high technology and policy barriers to gather influence, revenue and profit are expected to resume steady growth. The compounded growth rate of the company's revenue in 2017-2022 reached 4.8%, and the compound annual growth rate of net profit was 17.9%. In 2020, the company's revenue and profit growth declined due to the withdrawal of subsidiary Enhua Helun from the scope of the merger combined with public health events, collection, etc. Looking ahead to 2023-2025, we expect revenue and profit to resume steady growth with the recovery of diagnosis and treatment, clarification of the impact of collection, and product restructuring. According to product structure analysis, the share of narcotics revenue is increasing year by year, contributing mainly to the increase. The year-on-year growth rate of 2023H1 anesthetic products was 29.68% (higher than the company's overall revenue growth rate in the first half of the year:
19.95%), the share increased from 22.8% (2013) to 52.84% (2023 H1), contributing mainly to the increase. Gross margin has been steadily rising, building an echelon of refined hemp products with high technology and policy barriers. The share of the commercial pharmaceutical sector with low gross margin declined year by year in 2013-2021, driving a steady increase in gross margin. In 2022-2023, the share of low-margin retail business is expected to increase slightly, and gross margin may decline slightly; looking ahead to 2024-2025, judging from the existing product layout and project development, the company will iteratively upgrade from new dosage forms and structures to innovative drugs to create a more advantageous high-tech and policy barrier product chain. We expect that the launch and volume of innovative products with high gross margin will drive the company's gross margin to further increase.
Beta upward: Strong regulations, high barriers, and large room for improvement in the refined hemp market. Recovery: the growth rate of narcotic analgesics is higher than that of the industry, and their share continues to rise. According to wind sample hospital neurological drug sales data, the compound growth rate of China's central nervous system drug market in 2017-2022 was -0.98%, and growth almost stagnated. Looking at the variety structure, the compound growth rate of the market size of narcotics and analgesics in 2017-2022 reached 8.9%, higher than the growth of the central nervous system industry; among them, the share of analgesics increased from 15.7% in 2017 to 27.1% in 2022, and the share of narcotics increased from 14.1% in 2017 to 20.7% in 2022, and the share continued to rise.
Increased volume of surgery+expansion of scenarios, high certainty in the growth of anesthesia and analgesia. According to Wind sample hospital data, the market size of narcotics and analgesics increased from 4.23 billion yuan in 2013 to 11.25 billion yuan in 2022, and the total market share increased from 2.3% to 3.9%. As the number of surgeries has picked up, the application of anesthetics in technical fields such as cancer pain relief and painless delivery has gradually been promoted. China's narcotic analgesics market has shown a new driving force of demand growth. The application fields are more extensive, and the certainty of growth is high.
The prevalence of mental illness continues to rise, and the market space for psychotropic drugs is expected to continue to expand. In 2013-2018, the psychiatric prevalence rate in China increased from 3.0 to 6.2. The prevalence of mental illness continues to rise, and the number of people being treated has further increased. Since most mental illnesses require long-term drug maintenance treatment, the psychotropic drug market will expand further.
Alpha breakthrough: the upgrading and release of refined hemp products, innovation to support medium- to long-term growth of old varieties: the impact of collection is basically clear, and steady growth can be expected. As of November 2023, 22 of the company's varieties have passed the consistency evaluation. According to our estimates, in 2023, the proportion of the company's total revenue that has participated in national collection has dropped to less than 10%. Combined with the continuous expansion of the three terminals and the decline in channels, the impact on performance is expected to decrease.
Upgrading: Core products still have room for growth, new products strengthen competitiveness, and the continuous enrichment of the product hierarchy is expected to support the company's narcotics sector to reach a compound growth rate of 29.1% in 2022-2025. By type, the company's midazolam and etomide are the company's core varieties. The sales of 2023H1 midazolam and etomide account for 61% of the total sales of the company's sample hospitals. We expect the compound sales revenue growth rate in 2022-2025 to reach 15%, with continued growth. “Hydroxyreshua” has the potential to be released quickly as a single product. Hydroxyreshua (oxycodone, rifentanil, sufentanil, and alfentanyl) are the four major new varieties of the company's anesthetic line. It has large market space and good competitive pattern, and has the potential to become a major single product. We expect that as the company's products accelerate admission to hospitals and product promotion continues to advance, the combined sales revenue of these four varieties is expected to reach 50% in 2022-2025, and the revenue share will increase from 10% to 20%, becoming an important source of company growth.
Increased potential: Generic drug pipelines with high barriers are abundant, and medium- to long-term growth momentum is sufficient. The company's generic drug research and development focuses on projects with technical or policy barriers. As of H1 in 2023, the company has 43 generic drug projects under development, and 4 varieties are already in the declared production stage (dizocin injections, clonazepam injections, pregabalin capsules, and lacoxamide injections). Among them, the market space for dizocin injections is large and the competitive pattern is good. In October 2023, the State Drug Administration issued a generic drug research notice without reference preparations. The review of dizocin is expected to proceed; based on the company's R&D stage judgment, we expect that dizocin injection may be approved in 2024, and that 2025 will gradually contribute to performance growth.
Innovative drugs: Major new drugs are already on the market, so we expect innovation to accelerate. TRV130 was approved in May 2023, focusing on acute pain such as perioperative period and ICU. The market size is expected to reach 2 billion yuan. We believe that TRV130 has a certain competitive advantage in efficacy and safety. The sales volume is expected to reach 405 million yuan in 2025, supporting the company's performance to continue to rise in the medium to long term. We are optimistic that the company will use its technical advantages in the central nervous system to accelerate the layout of differentiated product pipelines through self-research, introduction and cooperation. We recommend focusing on the clinical progress of innovative projects such as the NH600001 emulsion injection.
Profit forecasting and valuation
Based on the above analysis, we expect the company's 2022-2025 revenue CAGR to be 21.43%, net profit CAGR to be 23.59%, EPS for 2023-2025 to be 1.07, 1.33, and 1.69 yuan/share, respectively, and the closing price on December 12, 2023, corresponding to the company's 2023 PE of 25 times, which is lower than the average of comparable companies. We are optimistic about the company's central nervous system product & follow-up pipeline layout and competitiveness. The impact of stock drug collection has declined, and high-barrier generic drugs/innovative drugs have been listed one after another, supporting steady growth in revenue and profit, and continuous improvement in operating efficiency. For the first time, we have been given a “buy” rating.
Risk warning
Risk of loss/price reduction in collection; risk of product sales promotion falling short of expectations; risk of product development and registration progress falling short of expectations; drug quality risk