Key points of investment
Cooperation with Sanofi to support high CSO business growth in 2024, and a new window of cooperation with multinational pharmaceutical companies may have opened
In 2023, the company's CSO business revenue increased by about 50%. In the same year, the company reached a CSO contract worth more than 5 billion dollars with Sanofi, making it one of the largest CSO collaborations in China in recent years. Based on the incremental release of this contract, we expect that the company's CSO business may experience significant growth in 2024, and the company's acceptance of the compliance system and sales capabilities behind the Sanofi contract may support it to open up a new window for the expansion of the CSO business model.
The contract sales department of Shanghai Pharmaceutical was established in 2016. The company established a CSO partnership with the multinational pharmaceutical company Bayer in the early stages of business development. At the same time, this lofty strategic positioning may also have enabled Shanghai Pharmaceutical to establish a sales system that is more in line with global standards. Currently, scarcity is gradually becoming more prominent. Since 2024, Shanghai Pharmaceutical Holdings has signed strategic cooperation agreements with Ushibi, Convide, and Waters, and held high-level exchanges with MSD. The pace of expansion in the cooperative product field and customers has accelerated marginally. Looking ahead, we anticipate that the company may gradually expand from in-hospital marketing cooperation for mature varieties of multinational pharmaceutical companies to out-of-hospital promotion, and take on the new CSO demand brought about by the new stage of commercialization of innovative domestic drugs.
Looking at the major commercial promotion agreement for Alzheimer's disease (AD), the pharmaceutical innovation distribution platform's major cooperation timeline for scarce AD products: ① In November 2023, Shanghai Pharmaceuticals and Eisai reached a strategic cooperation of 1.5 billion yuan on imported drugs including luncanizumab. Luncanizumab is the first new AD drug fully approved by the FDA in 20 years. ② In February 2024, Meixin Health (Shanghai Pharmaceutical subsidiary) reached an agreement with Eisai to jointly establish a “brain health” health management system from prevention, early screening, early detection, treatment, and long-term disease management in the later stages. Meixin Health will cooperate with more insurance companies to support innovative pharmaceutical products through various payment methods such as commercial insurance. ③ In May 2024, Shangyao Kangdler and Novizan reached an agreement to launch a “pharmaceutical device linkage” commercial promotion business for exclusive domestic AD blood test products in some regions of the country. The initial cooperation period is two years.
Opinion: We believe that the cooperation between Shanghai Pharmaceutical Group and the world's major new drugs and related products can better reflect its strong competitiveness in the distribution of innovative drugs. On the one hand, this ability is based on Shanghai Pharmaceuticals' “internationalization and innovation genes” and capacity synergy brought about by Kantler's mergers and acquisitions, and on the other hand, it is based on its extremely scarce and continuously improved innovation and commercialization support ecosystem. In 2023, Shangyao Cloud Health and Meixin Health completed the C and C+ rounds of financing, respectively, to support the continuous improvement of their business scale and service capabilities. At the same time, we are also concerned about the gradual increase in cooperation and multi-dimensional support services between Shanghai Pharmaceutical subsidiaries and innovative pharmaceutical companies. Therefore, we are optimistic that the company's scarce innovative drug distribution service capabilities will support the continuation of its high growth rate.
What do you think about the impact of Shanghai's innovative payment environment and the strategic position of Shanghai Pharmaceuticals on its industrial and commercial business?
From a policy perspective, various ministries and commissions in Shanghai issued “Certain Measures to Further Improve Diversified Payment Mechanisms in Shanghai to Support the Development of Innovative Pharmaceutical Devices” in July 2023, and issued the “Shanghai Work Plan for Service Biomedical Innovation and Development” in August 2023, clarifying Shanghai's strategic position as a highland of domestic biomedical innovation. As a pharmaceutical business leader controlled by the Shanghai State-owned Assets Administration Commission, Shanghai Pharmaceutical plays a critical role in sales promotion, payment, and financing of innovative drugs, and the East China region itself has strong payment capacity for new specialty drugs. We believe this is also a key support for Shanghai Pharmaceuticals to take on the promotion of more innovative drugs in the future. It is also Shanghai Pharmaceutical's scarce geographical advantage in undertaking innovative business, which distinguishes it from other pharmaceutical commercial companies.
Profit forecasting and valuation
We believe that the high growth rate of Shanghai Pharmaceutical's innovative distribution business will continue. Considering the scarcity of its capabilities, the innovative distribution business is expected to support a steady recovery in the company's profitability. We expect the company to achieve operating income of 2859.1/3178.1/351.6 billion yuan in 2024-2026, up 9.84%/11.15%/10.63% year-on-year; achieve net profit of 50.45/57.53/6.447 billion yuan, up 33.90%/14.03%/12.05% year-on-year, corresponding EPS of 1.36/1.55/ 1.74 yuan/share. The closing price on June 6, 2024 corresponds to PE 14 times, maintaining the “gain” rating.
Risk warning
Risk of short-term fluctuations in upstream and downstream operations due to accelerated industry clearance; risk of R&D progress falling short of expectations; risk of financial leverage