Core views

In 2023, Colon Pharmaceuticals revenue was 21.454 billion yuan, up 12.69% year on year; net profit was 2,457 billion yuan, up 44.05% year on year. The large infusion sector is the company's revenue pillar, with a year-on-year increase of 6.96% in 23 years. The company actively continued to optimize the product structure, and the proportion of sealed infusion volume increased 4.25 percentage points in 23 years. The non-infusion formulation sector was affected by multiple external factors such as collection, and sales revenue fell 6.93% in '23. It is expected that overall sales will improve this year as the impact of collection is gradually cleared and several new products are approved. The company has a stable position as a leader in large infusions and antibiotic intermediates. Innovative drugs are gradually entering the harvesting stage. Cooperation with MSD, a major overseas pharmaceutical company, opens up more room for growth for the company. We are optimistic about the company's long-term development.

occurrences

On April 24, Colon Pharmaceuticals released its 2023 annual report, achieving total revenue of 21.454 billion yuan for the whole year, an increase of 12.69% over the previous year. Net profit attributable to mother was 2,456 billion yuan, up 44.03% year on year, after deducting non-net profit of 2,366 billion yuan, up 43.77% year on year.

The company released its performance report for the first quarter of '24. The company's Q1 revenue was 6.219 billion yuan, an increase of 10.32% over the previous year. Net profit attributable to mother was 1,026 million yuan, up 26.00% year on year; after deducting non-net profit of 992 million yuan, an increase of 25.67% year on year.

The company's 2023 profit distribution plan is to distribute a cash dividend of 8.00 yuan (tax included) to all shareholders based on the total share capital of implementing the equity distribution registration diary. As of December 31, 2023, the total share capital of the company was 1.59 billion shares. Based on this calculation, the total proposed cash dividend of 1.27 billion yuan (tax included) is calculated, accounting for 51.82% of the net profit attributable to shareholders of listed companies in the company's 2023 consolidated statement.

Brief review

Performance is in line with expectations, and the major infusion and API sectors are growing steadily

Colon Pharmaceuticals released its 2023 annual report, achieving total revenue of 21.454 billion yuan for the whole year, an increase of 12.69% over the previous year. Net profit attributable to mother was 1,026 million yuan, up 26.00% year on year; after deducting non-net profit of 992 million yuan, an increase of 25.67% year on year. The company's overall revenue in Q1 in '24 was 6.219 billion yuan, up 10.32% year-on-year. Net profit attributable to mother was 1,026 million yuan, up 26.00% year on year; after deducting non-net profit of 992 million yuan, an increase of 25.67% year on year. The main reason for the increase is due, on the one hand, to the company's active exploration of the infusion market and the increase in sales volume of infusion products; and the proportion of sealed infusion volume increased by 4.25 percentage points due to continuous optimization of the product structure; on the other hand, due to the price and market recovery of the main API intermediates products, the overall revenue of the API sector maintained steady growth.

Infusion sector: Revenue grew steadily, and the proportion of sealed infusions increased in 2023. The company's infusion segment revenue was 10.109 billion yuan, up 6.96% year on year; sales volume was 4.378 billion bottles/bags, up 10.60% year on year. The company further promoted the process of replacing semi-sealed infusions with safe airtight infusions. The proportion of sealed infusions increased by 4.25 percentage points throughout the year, and achieved effective growth in five provinces and regions, including Guangdong Union and Henan, where basic infusion delivery volume and price linkage (including collection) have reduced sales expenses and increased net sales revenue.

In terms of key varieties, levofloxacin sodium chloride injection is the company's newly approved consistency evaluation variety. It achieved sales revenue of 488 million yuan in 23 years, an increase of 8.01% over the previous year. Thanks to a sharp increase in sales volume in selected regions, the market share ranked first among selected companies. Moxifloxacin hydrochloride injection achieved a year-on-year increase of 175.11% year-on-year due to the recovery of the diagnosis and treatment market, combined with favorable factors of the expansion of the collection and renewal area.

In the parenteral nutrition sector, the company sold more than 20 million bags of parenteral nutrition in '23, of which 6.13 million bags were sold in three-chamber bags. The number of products on sale has reached more than 10. Newly marketed and sold varieties include Duozhen/Dorui's two industrialized three-chamber bags and Duoyi Xindian parenteral nutrition double chamber bags.

Non-infusion preparations: Sales of stock products declined due to collection, actively promoting the approval of new products. In 23, the company's sales revenue of non-infusion drugs was 3,955 billion yuan, down 6.93% from the previous year. Sales of some of the company's stock products declined, mainly due to multiple external factors such as national and local procurement. The company responds positively by continuing market expansion, increasing market coverage, adjusting the product structure, and continuing to promote newly approved varieties. The andrology sector's revenue for the full year of '23 was 34 million yuan, down 84.07% year on year. Mainly due to intense market competition in the andrology sector, the company adjusted product prices, which had a great impact on the revenue side, but the sales side was stable, with a year-on-year increase of 4.11%. Other key products, rehabilitation solutions, were affected by the procurement price of the Proprietary Chinese Medicine Alliance. Combined with declining demand in the terminal market, the revenue for 23 years was 227 million yuan, a year-on-year decrease of 36.17%.

Sales revenue of escitalopram oxalate (Bairot) was 194 million yuan, down 43.57% year on year due to reasons such as contract renewal and provincial alliance collection.

Antibiotic intermediates and APIs: Benefiting from the recovery in terminal market demand and steady revenue growth, the company's antibiotic intermediates and APIs segment's revenue was 4.843 billion yuan in 2023, an increase of 23.78% over the previous year. Revenue from cephalosporin intermediates was 963 million yuan, up 15.01% year on year; revenue from penicillin intermediates was 1.935 billion yuan, up 40.94% year on year.

Bisabolol, the first cosmetic ingredient in synthetic biology, was successfully commercialized and brought to market. Prepare for large-scale production and sale of this product by participating in related exhibitions and key customer development. At present, Twining Biotech has developed more than 100 kinds of active ingredients. The products cover glycosides, terpenes, flavonoids, amino compounds and their derivatives. Functional active ingredients such as bisabolol, ergothione, squalane, and inositol are being thoroughly connected with suppliers and customers.

Columbite: SKB264 cooperates with MSD, and is expected to become the best-in-class TROP-2 ADCSKB264 as the core pipeline layout of Colombotai. Currently, through monotherapy, the company has quickly entered the market for target indications with limited treatment options. Among them, the 3-line TNBC indication NDA was accepted on December 9, and the TKI-resistant EGFR mut NSCLC and HR+/HER2- BC (2L+) indications have entered critical phase III; at the same time, SKB264 has also carried out clinical trials with chemotherapy, self-developed PD-L1 monoclonal antibody (A167) or PD-1 monoclonal antibody (K drug), etc., to explore more indications and actively pursue Frontline advance.

The product with the fastest cooperation progress, and the Phase III clinical layout is being accelerated. The SKB264 is currently the fastest progressing product in the collaborative pipeline between Columbotai and MSD.

In May 2022, the company reached an agreement with MSD for the first time to authorize its SKB264 overseas interest, and the company received a total one-time payment of US$102 million and a potential milestone payment of US$1.16 billion. SKB264 is being promoted using MK-2870 as the MSD pipeline. Since the second half of '23, MSD has carried out 7 phase 3 clinical trials. MSD's planning and rapid layout of the MK2870 single drug or combination indications also further demonstrated MSD's confidence in the product.

Future outlook: The structure of the large infusion sector continues to improve. A number of innovative drugs are expected to be approved for marketing this year, and the overall demand in the infusion market is currently expanding, and the industry as a whole is showing a growing trend. The company expects to use market opportunities and brand advantages to further promote the process of safe sealed infusion to replace semi-closed infusion, and the company's large infusion product structure is expected to continue to improve in the future. Continue to promote the increase in the volume of key products and the market share of major products; sales of key products such as powder two-chamber bags, three-chamber bags, and parenteral nutrition will further increase.

The company's production capacity for penicillin intermediates, cephalosporin intermediates and erythromycin thiocyanate is at the top of the industry. Backward production capacity in the industry has been gradually eliminated, and the competitive pattern of major varieties is expected to remain stable for 24 years. The improvement in the competitive pattern of cephalosporins may bring about a correction in the price of the variety. India's PLI plan has limited total investment and single product investment in the field of APIs, and there are shortcomings in fermentation conditions, energy and electricity supply, and industrial chain support. The short-term impact is expected to be limited.

The innovative medicine sector expects the company's A167 (RM-NPC), A166 (3L advanced HER2+BC), and SKB264 (3L advanced TNBC) to be approved for listing in 2024; SKB264 3L EGFRMT NSCLC indications are expected to submit NDA, A400 for advanced RET+ NSCLC indications are expected to submit NDA; SKB264 for 1L phase II clinical trials for TNBC and NSCLC and phase III for 3L treatment of TNBC Clinical trials are expected to read out data this year. So far, MSD has initiated 6 global phase III clinical trials, covering 4 lung cancer studies, as well as other indications such as endometrial cancer. It is expected that more phase III clinical trials will be carried out this year.

Analysis of financial indicators: increased profitability, significant cost control

The gross profit margin for the full year of 2023 was 52.43%, down 0.16 percentage points from the full year of '22. The net interest rate was 11.45%, an increase of 27.81% over the full year of '22, mainly related to the company's strengthening of cost management to reduce costs and increase efficiency. The cost rate for the full year of '23 declined, with sales expenses of 4.450 billion yuan, a decrease of 5.89% over the same period last year; the sales expenses ratio was 57.27%, a decrease of 3.92 percentage points from '22. The cost reduction was mainly due to expanding market demand and optimization of marketing strategies. Management expenses were 1,142 billion yuan, up 22.93% year-on-year, and the management expense ratio was 14.70%, an increase of 25.51 percentage points over '22. R&D expenses were 1,944 billion yuan, up 8.27% year on year. The R&D cost rate was 25.02%, an increase of 10.54 percentage points over 2012, mainly due to increased salary increases for R&D personnel, increased R&D material costs, and new product R&D investment costs, and the company continued to promote an “innovation-driven” strategy. Financial expenses of $234 million, a decrease of 51.28% from '22, mainly due to lower financing scale and interest rates, reduced interest expenses, increased interest income, and increased exchange earnings.

Profit Forecasts and Ratings

The company has a stable position as a leader in large infusions and antibiotic intermediates. Generic drugs have entered the mass marketing stage. Twining Biotech is expected to accelerate growth, innovative drugs are gradually entering the harvesting stage, the ADC platform continues to launch new products, and overseas cooperation with MSD opens up more room for the company to grow. Net profit due to mother in 2024-2026 is expected to be 2,788 billion yuan, 3.171 billion yuan, and 3.506 billion yuan respectively, with increases of 13.5%, 13.7%, and 10.5%, respectively. Corresponding PE valuations are 18X, 16X, and 14X, respectively, maintaining the purchase rating.

Risk warning

Market risk. On the one hand, drug sales are affected by industry competition, and there is a risk of price cuts and market share being taken. Furthermore, the entire industry is affected by medical insurance, bidding, and collection policies, and pharmaceutical manufacturing companies face continuous pressure to reduce sales prices.

R&D innovation risks. New drug research and development innovation has the attributes of high investment, long cycle time, and low success rate, resulting in high risk. The R&D process includes many complex steps such as drug design, synthesis, biological screening, pharmacology, toxicology, etc., drug prescriptions and stability tests, amplification tests, human clinical trials, registration and marketing, and after-sales supervision. Any deviation in decision-making or technical mistakes during this period may have a major impact on drug development, and may even fail.

Risk of fluctuating API prices. The antibiotic intermediate industry is greatly affected by factors such as market demand, the downstream API industry, environmental protection policies, and market competition patterns.