The 1H24 infusion business is under pressure, but the APIs performed excellently as we expected. The impact of generic drug collection is gradually stabilizing, new product substitution is accelerating, and the innovation pipeline is about to enter commercialization. We raised our target price to 42.5 yuan.

The 1H24 infusion was under slight pressure, and APIs continued to perform well: 2Q24 revenue and net profit after deducting non-net profit increased by 8.7%/35.6%, respectively (predicted). By business sector: 1) The revenue of the large infusion sector fell 7%, sales increased 0.3%, and the gross margin of the sector fell 1.9 percentage points. Affected by collection and falling demand for hospital-side diagnosis and treatment in the primary market, 2Q sales volume and product pricing are under some pressure, but 3Q has been relatively stable month-on-month, and we expect the sector's annual revenue to fall within 5%. The company continues to strengthen the development and promotion of new products, increasing the proportion of sealed infusions by 3.1 percentage points, and sales of parenteral nutrition three-chamber bags +25% to 3.49 million bags. Management expects to exceed 7 million bags for the whole year (more than +14% over the same period last year). 2) Non-infusion generic drugs were more resilient and revenue increased by 6%. The categories that performed well include plastic water injections (+19% sales) and andrology (daboxetine/vardenafil revenue +135%/+76%). 3) Revenue from the APIs and intermediates business increased by 38%. Thanks to increased downstream demand and a sharp rise in volume and price due to increased production after the company's process improvements, the revenue of sulphur red, penicillin intermediates, and cephalosporin intermediates increased by 28%/33%/43%, respectively. The company's production capacity is still at full capacity, and we expect the growth rate to remain high in the second half of the year. We have fine-tuned our profit forecast for 2024-26 and rolled the DCF start year to 2025, raising the target price to RMB 42.5.

Innovative R&D transformation is gradually improving: SKB264 already has two indications in the domestic marketing review stage, namely 3L TNBC and 3L EGFR+ NSCLC, respectively. The company expects the former to be approved before the end of this year.

The initial setup of a 300-person commercial team has been completed, and the scale will be gradually expanded as subsequent indications are approved.

MSD will choose the dual-antibody ADC SKB571 form and pay an exercise fee of 37.5 million US dollars. With OptiDC? Platform. On the one hand, the company insists on developing ADCs with new targets, new mechanisms, new toxins, and new coupling strategies, and on the other hand, it will continue to expand to more advanced racing tracks such as RDC, immunomodulatory ADC, targeted protein degradation technology, and non-tumors. In terms of generic drugs, the company declared 25 items and received 14 approvals in 1H24. It is expected that 50 items will be declared and 30 approved throughout the year. The subsequent focus will be on the launch and release of new products in the fields of anesthesia, chronic diseases, and parenteral nutrition.