Key points of investment
Hongbo Pharmaceutical is a one-stop CXO for the development and production of innovative small molecule drugs. The company builds core competitiveness around drug design. We are optimistic about the continuity of the company's new drug research and development business and the flexibility of Tigrello intermediates to go overseas. For the first time, it has covered and given a “gain” rating.
One-stop CXO: 60% drug discovery +20% process development +20% production The company's main business includes drug discovery, pharmaceutical process research and development, and commercial production of APIs and intermediates. Drug discovery is the company's main business. 2023H1 accounts for about 60% of revenue. By participating in the design and modification of target compounds, the company helps customers quickly discover clinical drug candidates. Commercial production is the company's second largest business segment. The main sales products are Tigrello API and a series of intermediates. The company also provides process research and development services to provide customers with new drug process chemistry services and innovative synthesis processes to help customers achieve commercial production of intermediates and APIs from kilogram to ton.
Pioneering drugs account for a high proportion of CRO/CDMO projects, and their technical strength has been verified. Judging from the delivery results, by the end of 2022, the company had delivered a total of 33 drug candidate molecules to customers, including 13 pre-clinical, 16 in the clinical stage, 4 on the market, and 27 pioneering drug projects. We believe that the company's drug development strength has been verified, and we are optimistic about the continuity of receiving orders for the company's new drug development business.
Strengthen R&D & sales to lay the foundation for the company's medium- to long-term growth
1) R&D: Since 2019, the company's R&D cost rate and number of R&D personnel have continued to grow. The company has 8 core technology platforms including CAD/AIDD (computer and artificial intelligence-assisted drug design). As of 2023H1, the CAD/AIDD platform has provided technical support for 52 new drug projects. Of these, 2 have entered clinical phase I, 3 are in the IND stage, and the purchasing company CAD/AIDD has 15 customers.
We believe that the company will continue to promote the construction of a technology platform to provide better technical support for receiving orders in the medium to long term.
2) Sales: 2022Q3 began to step up marketing efforts, and the sales expense ratio increased from 1.51% in 2023Q3 to 2.42% in 2023Q3. The strengthening of the company's marketing efforts has begun to show results. Judging from the increase in orders, the amount of orders in hand increased from 237 million yuan at the end of 2021 to 365 million yuan at the end of 2022, an increase of 54% over the previous year, and 160 million yuan of new 2023Q2 orders, an increase of 33% over the previous year. Looking at customer development, the company added 22 new customers in 2023Q2, an increase of 83% over the previous month. We are optimistic about the sustainability of the company receiving orders due to increased marketing efforts.
Commercial production: Tegrello's European and American patents expire. The main varieties commercialized by overseas or large incremental companies starting in 2024 are Tigrello API and its series of intermediates. In 2020-2022, sales revenue accounted for 87.16%, 91.68%, and 93.80% of the commercial production business, respectively.
1) Tigrello: Deeply binds to leading generic drug companies, and collection drives API demand growth. The company is the main supplier of tigrello intermediates in China. In 2021, the domestic market share was about 40%, and it has already entered the supply chain of many pharmaceutical companies that won the bid.
2) Overseas: Overseas demand will be flexible starting in 2024. European and American patents expire at the end of 2024. Driven by generic drugs, it is expected that overseas demand for Tigrello series products will increase dramatically, and sales will increase more than price fluctuations. Therefore, we believe that the company's Grello series products are expected to contribute significantly to overseas flexibility in 2024-2025.
Profit forecasting and valuation
Based on the above analysis, we believe that the company has strong R&D capabilities in the field of pioneering drug discovery, and its ability to obtain orders is sustainable. European and American patents expire for Grillo in 2024, and there is a strong possibility of order growth in the CMO sector, so we expect EPS to be 0.71/0.92/1.23 yuan respectively in 2023-2025, and the stock price on January 19, 2024 corresponds to 43 times PE in 2023 (33 times 2024). Considering the company's competitiveness and performance is expected to maintain a relatively rapid growth rate, the first coverage was given a “gain in weight” rating.
Risk warning
Risk of declining global innovation drug development boom, risk of exchange rate fluctuations, risk of competition risk, and risk of measurement bias.