Matters:

On April 26, 2024, Kexon Pharmaceuticals announced its 2023 annual report, achieving revenue of 1,259 million yuan (-4.3%), net profit loss of 190 million yuan (-111.1%), and net profit loss after deduction of 210 million yuan (-108.1%). This was mainly affected by the cost of R&D expenses for the SHEN26 project, putting pressure on performance.

In 24Q1, the company achieved revenue of 361 million yuan (+11.8%), net profit of 12 million yuan, and net profit of 10 million after deduction. Initial losses were reversed, and profitability was repaired at an accelerated pace. Progress slightly exceeded expectations.

Ping An's point of view:

The company's 23-year performance is under pressure, and efforts to reduce costs and increase efficiency are remarkable. The company achieved revenue of 1,259 billion yuan (-4.3%) in '23, which was slightly reduced, mainly due to the impact of regional procurement policies, the unit sales price declined. The gross margin of the main product was 70.79% (-4.58pp), which declined, but the company's domestic product sales increased by 12% and continued to maintain its leading position in the market segment. The company's net profit after deduction in '23 was 210 million (-108.1%), mainly affected by increased R&D expenses. The company's R&D expenditure ratio in '23 was 27.39% (+12.70pp), mainly due to the total cost of current R&D expenditure of the COVID-19 drug SHEN26 capsules in 23 to reduce the burden of amortization on intangible assets in '24. In terms of marketing management, the company adopted a more accurate marketing strategy. The sales expenses ratio was 54.75% (-8.15pp), a significant decrease. In terms of expenses for other periods, there was a slight increase in the management cost ratio of 6.90 (+0.37pp). The financial expense ratio of 2.48% (+1.35pp) is mainly due to the year-on-year increase in loan size in 2023 and the corresponding increase in interest expenses.

Go to battle lightly, and 24Q1 profitability was restored at an accelerated pace. The 24Q1 company had revenue of 361 million yuan (+11.8%) and net profit of 10 million yuan after deduction. Initial losses were reversed, and progress slightly exceeded expectations. The gross margin of traditional main products was 72.64%, the same as the previous year, with a month-on-month increase. By optimizing production processes and improving intelligent applications, gross profit is expected to continue to improve. In terms of period expenses, the 24Q1 sales expense ratio was 49.20% (-5.22pp), and the management expense ratio was 5.47% (-0.62pp). Cost reduction and efficiency were unabated, and profitability restoration is expected to continue. The R&D cost rate is 9.76% (-5.31pp), mainly due to a reduction in R&D expenses for SHEN26. Other innovations such as phase III clinical trials of human interferon α1b inhalation solution are still progressing steadily in the research pipeline.

The amount of biopharmaceuticals being released overseas is imminent, and the EU is quite certain that white purple will go overseas. The company focuses on emerging market countries. The 12 products introduced have signed contracts with customers in more than 40 countries and submitted registration applications for the introduced products one after another. Among them, various major biosimilar drugs, such as infliximab, bevacizumab, and adalimumab, have successively completed on-site audits in Egypt, Brazil, Indonesia, etc., and have generated sales revenue in some emerging market countries in 24Q1. The urgent demand for imported biopharmaceuticals from emerging markets compounded the company's good foundation for overseas cooperation. We expect the net profit of related products to be at a relatively high level. In addition, the company focuses on exporting its large single product, albumin paclitaxel, to the European Union. It has successfully completed on-site inspections before EU approval in February '24, and has signed contracts with partners in 35 European and South American countries. It is expected to be commercialized in the EU by 24H2, making it the second white purple generic drug company in the world to enter the EU market, with strong certainty. Since the company built its own production line, we expect the gross margin of white purple to be relatively high.

Investment advice: Considering that the company's product release in emerging markets will take time to accumulate, we lowered the company's revenue forecast for 2024-2026 to 15.68/20.71/2,692 billion yuan (originally 2024/2025 was 21.82 billion yuan, respectively). Considering the company's significant cost reduction and efficiency effects, the profit side is expected to recover at an accelerated pace. Combined with White Purple EU, we raised the 2024-2026 net profit forecast to 0.35/1.18/257 million yuan (originally -0.47/52 billion yuan in 2024/2025, respectively). Considering that the company's various products under development and introduction will continue to promote clinical and overseas commercialization, the company's valuation is expected to further improve and maintain the “recommended” rating.

Risk warning: 1) Product development progress falls short of expected risk. The company has many research projects, and there is a risk that the R&D progress will fall short of expectations. 2) Overseas commercialization progress falls short of the expected risk. The company has introduced many varieties, and there is a risk that overseas listing progress will fall short of expectations. 3) Risk of changes in industry policies. The national health insurance catalogue will be adjusted from time to time, affecting the prices of the company's related products.