High-end chemical platforms support performance growth, and innovative traditional Chinese medicine platforms open up long-term space. Warner Pharmaceuticals has been deeply involved in the industry for more than 20 years and has gradually established a high-end chemical industrialization platform with the advantage of “integration of raw materials and formulations”. The products cover a wide range of key treatment fields such as digestion, respiratory, and anti-infection. While ensuring independent supply of APIs, they can also be sold abroad. Facing a complex and changing macroeconomic environment, the company closely follows industry trends, accelerates the consistency evaluation and review of generic drugs, and actively embraces volume procurement. Revenue in 2023 was 1.433 billion yuan, up 10.84% year on year; net profit to mother was 0.211 billion yuan, up 15.6% year over year.

The innovative traditional Chinese medicine platform focuses on the replacement of endangered rare medicinal herbs, and the three existing pipelines will enter the clinical trial stage one after another. In the long run, demand for endangered and rare medicinal herbs is huge, there are many types of preparations, and there is a large potential market space.

The main single products have been steadily winning bids to support performance, and the integration of raw materials and formulations has established a scale advantage. In the stock business, acetylcysteine solution for inhalation, montmorillonite powder, colloidal bismuth pectin capsules, lansoprazole enteric tablets, metformin glipizide tablets, and polyethylene glycol 4000 dispersion won stable bid collection. Ferrous succinate tablets, fosfomycin, trometamycin, etc. have passed the consistency evaluation. Market competition is moderate, and the company's market share has increased steadily. At the same time, the main categories have basically achieved supporting supply of APIs and formulations, giving full play to the company's advantages in scale. With steady revenue growth, profit elasticity is expected to become more apparent.

The promotion prospects for exclusive and specialty products are promising, and are expected to contribute to growth in the short term. Docusate sodium tablets are mainly used to treat chronic constipation. They are the company's exclusive product, and the production process is difficult to build a moat. Chronic constipation is more common among the aging population. As China's aging problem becomes more severe, the potential market demand is broad. Faropenem sodium granules are penicillene antibiotics, and the scope of use is expected to expand as restrictions on cephalosporin-resistant or severely infected children are removed from the 2023 medical insurance catalogue. The company has an exclusive granular dosage form, which has good prospects for promotion and application. Bromavudine tablets are specific drugs for the treatment of acute shingles. Currently, only domestic companies and China Resources Shuanghe have approved them. The company is actively promoting product sales, and is expected to achieve rapid revenue growth in the future with the advantages of integrated raw materials and formulations.

The forward-looking layout is to replace endangered and rare medicinal herbs, and multiple pipelines are about to enter clinical trials. The company participated in Tianji Precious in 2018. According to the 2023 annual report, the shareholding ratio is 20%. Tianji Precious is a company specially registered with the Beijing Pharmaceutical Institute to jointly carry out research on artificial substitutes for rare and endangered animal medicinal materials. Currently, it has three pipelines: ZY-022, ZY-023, and ZY-025. ZY-022 has completed preclinical research, and ZY-023 and ZY-025 are in the preclinical stage. On February 5, 2024, the Drug Evaluation Center of the China Drug Administration drafted and issued the “Technical Guidelines for Research on Artificial Manufactures of Endangered Animal Chinese Herbal Medicines (Draft for Comments)” and “Technical Guidelines for Research on Substituting or Subtracting Endangered Medicinal Flavors in Prescriptions of Marketed Traditional Chinese Medicines (Draft for Comments)”. The two technical guidelines regulate technical paths and standards for research on artificial substitutes for endangered rare medicinal herbs; at the same time, they are expected to promote the start-up and development of related industries. The company's forward-looking layout in this field is expected to seize the high ground and establish long-term space.

Investment advice: The company has a high-end industrialization platform integrating raw materials and formulations, and its products cover a wide range of digestive, respiratory, and anti-infectious fields. Six major technology platforms have built a moat. Research and development work on generic drugs, consistency evaluation, and innovative drugs is progressing steadily, and R&D transformation efficiency is high. The short-term memory volume category has steadily won bids to support performance, and the scale advantage gives profits high elasticity. Looking at the long term, the company is forward-looking to lay out endangered and rare medicinal herbs to replace the new blue ocean, and multiple pipelines are about to enter clinical trials. The gradual implementation of relevant policies is expected to regulate and promote industrial development. In the future, the company is expected to reap a first-mover advantage and open up a second growth curve. We expect the company's net profit to be 0.263/0.321/0.378 billion yuan in 2024-2026, and the predicted PE corresponding to the current stock price is 15/12/10 times, which is covered for the first time to give a “buy” rating.

Risk warning: drug development risk, national centralized drug procurement risk, consistency evaluation risk, business violation risk, dealer management risk, product cooperative research and development risk