Incident: Hengrui Pharmaceutical released its annual report for the year 23 and results for the first quarter of '24. In 2023, it achieved total operating income of 22.2820 billion yuan, up 7.26% year on year, net profit to mother of 4.302 billion yuan, up 10.14% year on year, net operating cash flow of 7.644 billion yuan, up 504.12% year on year, and innovative drug revenue of 10.637 billion yuan, up 22.10% year on year. In the first quarter of '24, we achieved total operating income of 5.998 billion yuan, an increase of 9.20% over the previous year, net profit of 1,369 billion yuan, an increase of 10.48% over the previous year, and operating cash flow of 1,255 billion yuan, an increase of 486.35% over the previous year.
Comment: Results for fiscal year 2023 and the first quarter of 2024 are in line with expectations.
1. Overall performance rebounded steadily: Generic drug revenue declined, and innovative drug revenue grew strongly.
After two consecutive years of decline in total revenue and net profit, Hengrui Pharmaceutical finally reversed the downward trend and returned to the right track of growth. However, on the generic drug side, collection still puts some pressure on sales. Generic drug sales decreased by 702 million yuan year over year in 2023. On the innovative pharmaceutical side, in 2023, Hengrui Pharmaceutical's innovative drug revenue reached 10.637 billion yuan, an increase of 22.1% over the previous year, accounting for 46.6% of total revenue. Hengrui Pharmaceutical was approved for marketing in 2023 with a total of 3 Class 1 innovative drugs and 4 Class 2 new drugs. In 2023, the company's total R&D expenditure was 4.954 billion yuan, accounting for 29.95% of revenue. The fields of breast cancer, lung cancer, and gastrointestinal tumors all achieved coverage of various new drugs. The innovative drug market performed well, and revenue continued to grow, driving the company's performance improvement.
2. In 2023, the company promoted the progress of internationalization. BD transactions exceeded US$4 billion, and the level of internationalization progressed by leaps and bounds.
The company had five license-outs in 2023, with a total transaction volume of over $4 billion. Among them, in October 2023, Hengrui Pharmaceutical announced that it had reached a cooperation with Merck in Germany, involving assets including the PARP1 inhibitor HRS-1167 and the CLDN18.2 ADC drug SHR-A1904. This is the first time Hengrui has reached cooperation with MNC. The deal between Hengrui and Merck of Germany symbolizes a big step forward in Hengrui's international BD level.
3. In the future, the company will focus on popular fields such as ADC, nuclear drugs, and GLP-1, and many innovative drug products will enter the NDA stage.
ADC is Hengrui's key layout field. Eleven novel and differentiated ADC molecules have been successfully clinically approved. Since 2023, Hengrui has approved four nuclear drug products for clinical trials. The company has also strengthened its strategic layout in the GLP-1 field and introduced potential therapeutics such as small-molecule GLP-1 receptor agonists, which are expected to bring new growth points to the company. PCSK9 ricarximab, the JAK1 inhibitor emaximab, and IL-17 funacizumab have all submitted marketing applications and are in the NDA phase.
Profit forecast: We expect the company's total revenue for 2024-2026 to be 270.00/314.00/3500 billion yuan, respectively, up 18.32%/16.30%/11.46% year-on-year; net profit to mother of 49.50/59.06/7.144 billion yuan, corresponding PE is 57/48/40 times, maintaining the “Highly Recommended” rating.
Risk warning: risk of clinical failure, risk of regulatory entry, risk of achieving economic effects of products