Core views

First Pharmaceutical Holdings released its 24-year report. The company's revenue decreased by a certain margin compared to the same period last year. Since the products developed by the company have not yet achieved sales revenue, the current revenue comes from cooperative R&D revenue. R&D expenses continue to grow steadily as new drug research and development projects and innovation projects continue to advance. The company is committed to developing innovative drugs targeting small molecules. Currently, it has developed 24 research pipelines with independent intellectual property rights. Among them, the core product SY-707 is already in the pre-NDA communication stage, and both SY-3505 and SY-5007 have entered the critical registration phase II/III clinical trial stage. We believe that the company's product development covers a wide range of targets, a clear hierarchy, and outstanding product competitiveness; as future core products gradually enter the market, it is expected that the first domestic replacement of three generations of ALK will be achieved, and the company's sufficient cash flow has laid the foundation for its long-term development. Although the company will continue to lose money for some time, the future development prospects are worth looking forward to.

occurrences

On August 25, Shoupharmaceutical Holdings released its 24-year report. 2024H1 achieved total revenue of 0.004 billion yuan, down 24.00% year on year; net profit to mother was -0.103 billion yuan, down 10.46% year on year; net profit after deducting non-return to mother was -0.11 billion yuan, down 15.83% year on year.

2024Q2 achieved operating income of 0.004 billion yuan, down 24% year on year; net profit to mother was -0.05 billion yuan, down 7.65% year on year, up 7.06% month on month; net profit without return to mother was -0.053 billion yuan, down 12.58% year on year, up 6.64% month on month.

Brief review

The revenue mainly comes from cooperative research and development, and the capital reserves are sufficient

In the first half of 2024, Shouyao Holdings's revenue was 0.004 billion yuan, down 24.00% year on year; net profit to mother was -0.103 billion yuan, down 10.46% year on year; net profit after deducting non-return to mother was -0.11 billion yuan, down 15.83% year on year. Mainly due to the fact that the products currently developed by the company have not achieved sales revenue, the revenue mainly comes from cooperative R&D projects. In the first half of the year, some technical receipts were confirmed according to the contract and the cooperative R&D milestones with Chia Tai Tianqing, but the revenue scale was insufficient to cover R&D and operating costs, leading to cumulative losses, and operating income declined year-on-year. Furthermore, in the first half of the year, First Pharmaceutical Holdings held a total of 0.965 billion yuan in cash and cash equivalents, which was sufficient to support the company until the early stages of commercialization. Currently, operating capital mainly comes from external investment and milestone payments for cooperative projects. As major capital investment continues to be made in new drug research and development, clinical trials, and commercialization processes, sufficient capital reserves protect the continuous advancement of the company's R&D strategy.

Overall, Shouyao Holdings has maintained strong research and development efforts, and future development depends on the progress of its research product pipeline and market performance.

Focusing on innovative drugs targeting small molecules, all drug candidates are self-discovered drug candidates. The R&D pipeline covers key tumor indications such as non-small cell lung cancer, lymphoma, hepatocellular carcinoma, pancreatic cancer, thyroid cancer, etc., as well as other important disease fields such as type II diabetes. Currently, there are 24 research pipelines with independent intellectual property rights, including 12 independent R&D pipelines and 12 cooperative R&D pipelines. In the independent R&D pipeline, 1 model is already in the pre-NDA communication stage, 2 are in critical phase II/III clinical registration, 1 is in phase II clinical trials, 3 are in phase I clinical trials, 1 is applying for IND, and a number of forward-looking high-quality pre-clinical candidate compounds; in cooperative research and development projects, Yibong Ack capsules were approved for marketing in the first half of the year, and the marketing application for 1 drug candidate has been accepted.

Focusing on the field of non-small cell lung cancer, ALK also has the third largest mutation among common driving gene mutations in non-small cell lung cancer, accounting for 5%-7% of the total number. Judging from clinical application and market size, in the field of targeted lung cancer treatment, ALK mutations are the second-largest market-scale mutation target, and ALK positive patients are often not sensitive to chemotherapy. The market space for inhibitors is broad. Currently, such drugs have been developed to the third generation, and the Chinese ALK inhibitor market has large market demand and development potential.

As a second-generation ALK inhibitor, SY-707 showed higher efficacy and safety than crizotinib in critical phase III clinical trials for advanced ALK positive non-small cell lung cancer, and had the same excellent tolerability, reaching the main endpoint PFS. First Pharmaceutical Holdings has initiated pre-NDA communication with CDE and plans to submit a listing application after obtaining CDE approval. Additionally, SY-707 has shown potential therapeutic effects on pancreatic cancer in preclinical studies, particularly when combined with PD-1 antibodies and gemcitabine. The company has obtained approval from the National Drug Administration to conduct a phase IB/II clinical study of SY-707 combined with treprilizumab and gemcitabine in the treatment of advanced pancreatic cancer. Currently, the study has completed the phase I dose escalation phase and is undergoing dose expansion.

SY-3505 is the first fully domestically produced third-generation ALK inhibitor that has entered the clinical stage and is currently the fastest progressing clinically. It is mainly used to treat advanced ALK positive NSCLC. Currently, only one third-generation ALK inhibitor has been approved for marketing in the world, and SY-3505 has significant inhibitory effects on wild-type ALK and various generation/second-generation inhibitor resistant mutants (such as F1174L, L1196M, etc.). There is a huge unmet clinical need for ALK-positive non-small cell lung cancer patients resistant to ALK inhibitors in China. In January 2024, the clinical phase I/ II study results of SY-3505 not only showed long-lasting efficacy, but also showed advantages in terms of safety. Compared with existing competitors, it has obvious market competitiveness, and is expected to provide new treatment options for patients with advanced ALK positive NSCLC. Furthermore, SY-3505 also showed a strong inhibitory effect on LTK protein kinase in preclinical studies. Currently, two key registration trials are ongoing: a key phase II clinical study on patients who failed to be treated with second-generation ALK-TKI, and a key phase III clinical study of patients with initial ALK positive NSCLC compared to crizotinib. The enrollment progress is in line with expectations; phase Ib studies on patients with advanced solid tumors positive for LTK gene fusion have begun.

First domestically produced highly selective RET inhibitor SY-5007

SY-5007 was the first to enter clinical research, and is currently one of the completely domestically produced selective RET inhibitors with the fastest clinical progress. Two key registered clinical studies of SY-5007 achieved critical progress in the first half of the year: 1. The phase II clinical study to treat RET positive NSCLC (initial treatment and treatment) reached the main research end, with comparable efficacy and good safety and control compared with imported similar products; 2. Clinical phase III has successfully completed patient recruitment and is being followed up. Currently, 0.01-0.02 millionRet fusion positive NSCLC patients are added every year in China. Most cases are advanced at the time of diagnosis, and the efficacy of existing treatments is limited. SY-5007 is expected to fill a gap in the market by providing new treatment options for these patients. Furthermore, in terms of exploring new indications, SY-5007 also showed good clinical activity and tolerability in RET positive thyroid cancer patients.

First Pharmaceutical Holdings increased investment in R&D and continued refinement of financial management capabilities. The management expenses in 2024 were 0.005 billion yuan, a year-on-year decrease of 1.51%, mainly due to the increase in the company's improved management and other expenses related to the company's personnel in the first half of the year. Financial expenses were -0.002 billion yuan, up 67.56% year over year, mainly due to reduced interest income due to bank policy adjustments. R&D expenses were 0.054 billion yuan, an increase of 2.51% over the previous year, mainly due to the increase in the company's investment in clinical and pre-clinical trial services, R&D materials, and personnel during the reporting period as new drug research and development projects continued to advance. The net cash flow from operating activities was -0.097 billion yuan. The change was mainly due to the progress of R&D and the continuous advancement of innovation projects in the first half of the year. First Pharmaceutical Holdings will continue to increase capital investment in new drug research and development, clinical trials, and product commercialization. As multiple products enter the clinical stage, it is expected that R&D expenses will continue to be funded. In addition, it will continue to strengthen cash management, rationally allocate and use existing funds, improve the efficiency of the use of funds, and improve the efficiency of internal and external collaboration by establishing process mechanisms, etc., to achieve the goals and effects of the company's refined financial management.

Profit forecasts and investment advice

First Pharmaceutical Holdings is making every effort to push forward the progress of key clinical trials and application for marketing of drug candidates close to commercialization. At the same time, cooperative R&D projects have made key progress one after another, further confirming the company's early research capabilities. Furthermore, financial management capabilities are continuously refined, and sufficient capital reserves drive the progress of R&D strategies. We expect the company's revenue for 2024-2026 to be 0.005 billion yuan, 0.139 billion yuan, and 0.24 billion yuan, and net profit to mother of -0.22 billion yuan, -0.226 billion yuan, and -0.217 billion yuan, respectively. The corresponding PE is -22.82, -22.27, and -23.19 times, covered for the first time, giving it a “buy” rating.

Risk analysis

Risk of uncertainty in new drug development: New drug development has the characteristics of long R&D cycle, high investment, high risk, and low success rate. From laboratory research to approval and marketing of new drugs, it is necessary to go through many complicated steps such as pre-clinical research, clinical trials, new drug registration and marketing, and after-sales supervision. Every step is at risk of loss.

Industry policy risks: Risks such as changes in research design requirements, price changes, volume procurement policy changes, and changes in the scope and ratio of medical insurance reimbursement due to industry policy adjustments.

Product price reduction risk: Pharmaceutical companies face the risk of drug price reduction due to intense market competition, especially under the influence of various industry policy factors such as medical insurance negotiations, tenders, and volume procurement. We also need to be wary of risks such as changes in core technical personnel and increased market competition.

Research and development falls short of expectations: In the development process of new drugs, from drug discovery, pre-clinical research, clinical trials to commercial marketing, there are not only problems that companies may face due to poor technology, procedures, etc., but also risks such as lack of timely communication with supervisors and non-compliance.

Risk of sales falling short of expectations: Newly launched drugs face risks such as market entry, market acceptance, product competitiveness, product competition pattern, and changes in market demand. Sales of marketed products are risky. Innovative drugs marketed by the company have a risk that medical insurance products are being released slowly and sales fall short of expectations. We quantitatively measure the risk that the revenue forecast for SYS-3505, the main third-generation ALK product in profit forecasting will not be established. Assuming that 2026 revenue is 80% of the current forecast, based on current 2026 sales of 0.385 billion yuan, it is 0.308 billion yuan, accounting for 17.34% of Shouyao Holdings's total revenue in 2026, then the company's total revenue is 1.776 billion yuan. Considering that many drugs have already been launched in 2026, we believe the impact on the company's valuation is limited.