A generic pharmaceutical company with integrated API formulations: Fuan Pharmaceutical was established in 2004. Its main products include antibiotics, anti-tumor drugs, specialty drugs, etc., such as cefazepam sodium, ceftazidime, gentamicin, ondansetron hydrochloride, and laoxicefin.

The formulation business has expanded from antibiotics to many treatment fields, and abundant reserve products have leveraged the collection volume:

The pharmaceutical sector generated revenue of 1.611 billion yuan in 2023, accounting for 60.8%. There are three main core pharmaceutical subsidiaries with 100% control: ① Ningbo Tianheng Pharmaceutical's revenue has stabilized at 0.6-0.7 billion in the past five years, with sales accounting for 0.477 billion yuan (yoy +28.57%) in sales: ondansetron hydrochloride, torrimifene citrate, sulinic acid, doxofylline, flumazenil, etc.; ② Qingyutang Pharmaceutical mainly focuses on antibiotic injections, and key products include ceftazolime, cefamezole sodium, and rocuronium bromide; 2023 revenue of 0.477 billion yuan (yoy +28.57%) Net profit was 0.074 billion yuan (yoy +131.25%), benefiting from the 2023 national procurement bid. According to pharmaceutical Rubik's Cube data, the sales scale of 2024Q1 terminal medical institutions increased 24.8% year on year, showing a good growth trend; ③ Hubei People's Pharmaceutical mainly focuses on hormonal injections, in the fields of digestive system, antibiotics, hepatobiliary drugs, glucocorticoids, anti-allergic drugs, piracetam, tigecycline, methylprednisolone sodium succinate, hydrocortisone sodium succinate, esomeprazole sodium hydrochloride, and tramadol hydrochloride, according to Rubik's Cube pharmaceutical varieties, etc. data, 2024Q1 The sales volume of terminal medical institutions increased 38.3% year over year.

Increased research and development has helped develop and register nearly 70 generic drug types, and it is expected that the company will gradually collect more than 0.18 billion after being approved for marketing: the company will invest nearly 0.18 billion in total R&D expenses in 2023, reserve or have already entered the registration process. On the basis of the original anti-infection, it will develop various therapeutic drugs such as anti-tumor, nervous system, digestion, and internal circulation. Starting in 2023, domestic production and provincial alliances will win bids one after another, driving the company's formulation business to increase. We believe that the collection of the original varieties will reduce the price, but the new varieties are expected to increase in volume collection. Pull the company's formulation Take business performance to the next level.

The API business maintained steady growth, and R&D promoted product development: in 2023, the API sector's revenue was 0.86 billion yuan, accounting for 32.5%, an increase of 12.28% over the previous year. The main varieties include gentamicin and other products from Yantai Zhichu Pharmaceutical. In the past 2 years, the company has promoted a wealth of new products through independent research and development. More than 20 active ingredient types, such as the psychoanesthetic midazolam hydrochloride and cardiovascular nimegoline, have entered the registration process or have been approved. Considering the restoration of the main product gentamicin market, we expect the company's business revenue in this section to increase 15% this year, and it is expected to continue to grow steadily by 10% over the next 3 years.

The burden of historical mergers and acquisitions was basically solved, and the risk of impairment of goodwill was basically digested: the company successively acquired companies such as Guang'an Kaite Pharmaceutical Chemical, Ningbo Tianheng, Yantai Chichu, and American Red Realty in 2015-2020, which brought about integration pressure and impairment of goodwill. The company's goodwill was reduced from 1.32 billion in 2017 to 0.26 billion at the end of 2023, and the risk of losses in the operation of various subsidiaries is low. We expect that subsequent depreciation pressure will be very small.

Profit forecast and investment rating: We expect the company's net profit to be 0.387 billion, 0.447 billion, and $512 million for 2024-2026, respectively; the corresponding PE for 2024-2026 is 12, 10, and 9 times, respectively. In view of the fact that the company has many products in reserve and is expected to benefit from collection, considering the growth and market potential of the products, it was covered for the first time and given a “buy” rating.

Risk factors: Market and policy risks; failure in R&D faces the risk of losing competitive opportunities to participate in the market and the risk of R&D investment not achieving the expected results; safety, environmental protection, and quality risks.