China Merchants Pharmaceutical has successively issued 2 in-depth reports on Xianju Pharmaceutical. Judging from the company's operating stage, after the adverse effects of multiple factors in 2023, the company's formulation and API business all showed an upward trend in 2024, and we continue to be optimistic about the company's development.

The company's 2023 annual report: In 2023, the company achieved operating income of 4.123 billion yuan, a year-on-year decrease of 5.85%; net profit to mother was 563 million yuan, a year-on-year decrease of 24.86%; net profit after deducting non-return to mother was 538 million yuan, a decrease of 12.14% year on year. In the fourth quarter of 2023, the company achieved operating income of 886 million yuan, a year-on-year decrease of 4.41%; net profit to mother was 91 million yuan, a year-on-year decrease of 58.46%; net profit after deducting non-return to mother was 76 million yuan, a year-on-year decrease of 33.34%.

The company's 2024 quarterly report: In the first quarter of 2024, the company achieved operating income of 1,038 billion yuan, an increase of 8.42%; net profit to mother was 151 million yuan, an increase of 13.53% year on year; net profit after deducting non-return to mother was 145 million yuan, an increase of 9.83% year on year.

Formulation: High-end product upgrade+sales system innovation, entering a new stage of development. 1) On the product side, the impact of the reduction in collection is basically clear. Sales of specialty generic drugs are expected to accelerate, and differentiated and innovative products are gradually being implemented.

2) On the sales side, sales efficiency and specialization capabilities have improved markedly. In 2023, the company's pharmaceutical business was affected by multiple factors such as national collection of rocuronium bromide injections, provincial alliance collection of progesterone capsules, and in-hospital sales policies, and the performance was under pressure. In the first quarter of 2024, the company adopted a series of innovative measures in the formulation sales system to effectively improve the efficiency and sales performance of the OTC team by optimizing personnel structure and improving team motivation. The company comprehensively promotes the three-tier product sales model. By distinguishing the three-tier market, the company matches the capabilities of products, terminals, and personnel, enhances the specialized capabilities of the company's sales system, and achieves good growth.

2023: Pharmaceutical sales revenue was 2,278 billion yuan, down 12.4% year on year, of which sales revenue of proprietary pharmaceutical products was 2.09 billion yuan, down 15% year on year; pharmaceutical development department's pharmaceutical distribution sales revenue was 169 million yuan. By treatment sector, 1) sales revenue of gynecological family planning products was 445 million yuan, down 18% year on year due to collection; 2) sales revenue of anaesthetic muscle relaxation products was 100 million yuan, down 80% year on year due to collection; 3) sales revenue of respiratory products was 672 million yuan, down 1% year on year; 4) dermatology products were 197 million yuan, up 9% year on year; 5) sales revenue of generic drug products was 688 million yuan, up 27% year on year.

Q1 2024: Formulation sales revenue of $570 million, up 13% year over year. By treatment area, 1) revenue from gynecological family planning was 123 million yuan, up 15% year on year, mainly from progesterone capsules, mifepristone, and the new product norethisterone enanthate injection; 2) revenue from anaesthetic muscle relaxants was 30 million yuan, up 100% year on year, mainly rocuronium bromide injection and sodium sulgenglucose injection; 3) revenue from respiratory products was 180 million yuan, up 28% year on year; 4) revenue from dermatological products was 51 million yuan, up 38% year on year, mainly lactomisone furoate Same as cream Comparative increase; 5) Generic drug revenue was 160 million yuan, down 8% year on year. The main reason was the year-on-year decrease in revenue after collection of dexamethasone sodium phosphate injections.

APIs: After a year of standardized market inspection in 2023, 2024 will enter the cashout period. In 2023, the company's API business was affected by increased competition in the industry market, sales prices of products in the non-regulated market fell, downstream customers were affected by inventory removal, and the profit side of the API business was under pressure. In 2023, the company went through various official audits by the FDA, WHO, Brazil, Japan, etc., and obtained EcoVadis certification. The sterile ingredient for medroxyprogesterone acetate passed WHO PQ certification, and the prednisolone ingredient passed the Japanese PMDA certification. We believe that 2024 will be the first year of accelerated expansion of the company's API regulation market. It is expected that the gradual expansion of APIs in the standardized market will drive rapid profit growth, and profit margins are expected to increase steadily.

2023: Sales revenue of APIs and intermediates was 1.786 billion yuan, up 3% year on year. Among them, sales revenue of the main proprietary APIs was 800 million yuan, up 10% year on year, sales revenue of the Italian subsidiary was 684 million yuan, down 3% year on year, Xianyao Trading Company's sales revenue was 217 million yuan, and other API trade was 0.05 billion yuan.

First quarter of 2024: Revenue from proprietary APIs was 238 million yuan, an increase of 1.8% over the previous year. Newchem's API revenue was 150 million yuan, down 9% year on year, mainly due to the 23Q1 high base. Revenue from trade in other APIs was 76 million yuan, an increase of 23 million yuan over the previous year. In the first quarter of 2024, the price of APIs declined compared with the same period in '23. The increase in API sales in the first quarter made up for the impact of the price decline, reflecting the market competitiveness of the company's APIs.

Profit forecasting and investment rating: The company focuses on building long-term development capabilities, because the company believes that only performance built on competency is stable and sustainable, and we have also seen the company's all-round improvement on the ability side. In the future, the company will focus on the steroidal hormone field, focus on innovation opportunities with an open mind, complete the sperm hormone industry chain, continuously enrich the API and formulation product structure, and focus on improving comprehensive capabilities.

Looking at the pharmaceutical sector by sector, the growth momentum of the formulation sector is clear in the short, medium and long term (see our “Xianju Pharmaceutical In-depth Report (2): Years of refining a sword, upgrading formulations and APIs to the high-end”, with the dismantling of specific product pipelines). The product and sales system have both been upgraded, and good growth is expected to resume in 2024. The API sector has begun a period of rapid expansion in the global standardized market, which is expected to drive rapid profit growth in the API sector. Considering that the company's formulation business in 23 years was affected by multiple factors of collection and in-hospital policy adjustments, and the API business was affected by price reductions in the irregular market, we adjusted the company's profit forecast. The company's net profit forecast for 2024-2026 is 70/8.6/1.09 billion yuan, a year-on-year growth rate of 25%/22%/27%, corresponding PE is 17/14/11 times, maintaining a “highly recommended” investment rating.

Risk warning: Risks such as R&D and sales falling short of expectations, negative policies, safety and environmental protection, and impairment of goodwill.