Ping An's point of view:

Fruquintinib maintained its leading position in the global third-tier colorectal cancer market, and was rapidly released after marketing in the US.

Fruquintinib is a VEGFR inhibitor with excellent target selectivity. It was approved for marketing in China in 2018. In 2023, sales were US$108 million, up 15% year on year, and increased 22% year on year according to constant exchange rate (CER), maintaining a high growth rate. With excellent clinical efficacy and safety characteristics, fruquintinib maintains a leading position in the third-tier colorectal cancer market and gradually widens the market share gap with regofinib. Takeda Pharmaceuticals has global sales rights for fruquintinib other than China. Fruquintinib was launched in the US in November 2023. It is the first innovative targeted therapy approved for the treatment of metastatic colorectal cancer in the US in more than 10 years. Only two months after launch, sales in the US market have reached 15.1 million US dollars, and the volume is rapid. Additionally, fruquintinib has submitted NDAs in Europe and Japan and is expected to be approved in 2024.

Fruquintinib is expected to be approved as an indication for second-line gastric cancer, and the peak domestic sales volume is expected to exceed 2 billion yuan. According to 2016 national cancer statistics released by the National Cancer Center, China adds nearly 400,000 new cases of gastric cancer every year. The incidence rate of gastric cancer is the third highest, and the death rate is high. According to the 2023 CSCO guidelines, for second-line gastric cancer, regardless of HER2 expression, the grade I recommendation is ramosulumab+paclitaxel combination treatment or paclitaxel monotherapy. Remocizumab is a VEGFR2 antagonist. It is the only targeted drug approved for second-line gastric cancer treatment in the world. It was approved for marketing in China in 2022, but it has not yet been covered by medical insurance. It requires injections and the cost of medication is as high as 30,000 yuan/month. Clinically, there is an urgent need for inexpensive and high-quality second-line gastric cancer treatment. Fruquintinib is the same VEGFR inhibitor as similar competitor ramocilumab. Fruquintinib is administered orally, and patients are more compliant. Judging from the comparison of non-head-to-head clinical data, the ORR, mPFs, and MoS of fruquintinib vs. remocimab were 42.5% vs. 26.5%, 5.6 months vs. 4.1 months, 9.6 months vs. 8.7 months, respectively. Fruquintinib was superior to remocilumab, and the cost of furoquintinib was expected to be only 7,500 yuan/month. Compared with ramosilumab 30,000 yuan/month, the price advantage is significant. Combining the above advantages, although the median OS data for fruquintinib is not statistically significant, we are optimistic that furoquintinib's second-line gastric cancer indications have been approved, and the peak sales of furoquintinib is expected to exceed 2 billion yuan due to improved clinical data, better patient compliance with oral administration, potential price advantage and probability of inclusion in medical insurance, and the current high incidence and high mortality rate of gastric cancer in China.

Continued efforts are being made in the research pipeline to catalyze the increase in the company's value. In addition to fruquintinib, the new indications for many of the company's major products are expected to be approved or declared for NDA this year. Is cevotinib developed by the company in collaboration with AstraZeneca for second-/third-line treatment of MET abnormalities? The phase III clinical study of refractory non-small cell lung cancer completed patient enrollment in February 2024. Based on the accelerated approval granted by the FDA, it is expected that a new drug marketing application will be submitted by the end of 2024. Solepinib is a second-line treatment for immune thrombocytopenia (ITP). The application for marketing of the new drug in January 2024 was accepted by the CDE and included in priority review, and is expected to be approved for marketing in 2024. The approval of new indications for a number of major products is expected to continuously catalyze the company's value increase.

Investment advice: Considering that furoquintinib sales are expected to maintain rapid growth due to the expansion of new indications such as second-line gastric cancer and the acceleration of overseas commercialization of fruquintinib. Sevotinib sales are affected by accelerated medical insurance and the promotion of global commercialization of refractory NSCLC related indications after line MET expansion, and the commercialization of solepinib. Affected by the three-year amortization of the final down payment of fruquintinib, we lowered the company's main business revenue forecasts for 2024-2026 to US$6.71, 8.61, and US$1,027 million (the original 2024-2025 were US$799 and US$894 million respectively), compounded by the positive impact of the company's R&D control fees, and lowered the company's net profit forecast for 2024-2026 to -1.07, 0.20, and 95 million US dollars, respectively (the original 2024-2025 were -0.47 million US dollars and 0.35 million US dollars, respectively). According to the DCF model of the listed products and research pipeline, we gave the company an overall reasonable market value of US$4,058 billion, or approximately HK$31,734 billion, and a corresponding reasonable share price of HK$36.43. Considering that the indications for the products listed by the company are still expanding, and the company is also rich in research pipelines, pipeline valuation is expected to further improve and maintain the “recommended” rating.

Risk warning: 1) Drug approval falls short of expectations: the company's innovative products may be delayed in approval; 2) the marketing volume of new drugs falls short of expectations: whether each node progresses smoothly after the launch of the company's innovative products has a significant impact on the company's product sales volume; 3) Impact of national policies: Health insurance negotiation policies may be adjusted, thereby affecting the company's innovative drug sales.