Core views

Colon Pharmaceutical24's revenue for the first three quarters was 16.789 billion yuan (+6.64%) and net profit of 2.471 billion yuan (+25.85%). The profit side for the third quarter exceeded expectations, mainly due to the continuous improvement of the business structure of the large infusion sector and the confirmation of some cooperation payments with MSD in the third quarter. The loss in the single quarter was better than expected. The company has a stable position as a leader in major infusions and antibiotic intermediates. Innovative drugs are gradually entering the harvesting stage. Cooperation with major overseas pharmaceutical company MSD in the field of innovative drugs has opened up more room for growth for the company. We are optimistic about the company's long-term development.

occurrences

On October 28, Colon Pharmaceuticals released its 2024 three-quarter report. The company achieved total revenue of 16.789 billion yuan during the Q1-Q3 period, an increase of 6.64% over the previous year. Net profit to mother was 2.471 billion yuan, up 25.85% year on year, after deducting non-net profit of 2.447 billion yuan, up 27.32% year on year. In Q3, the company achieved a year-on-year decrease of 0.95% in operating income of 4.962 billion yuan, a 19.55% year-on-year increase in net profit of 0.671 billion yuan, and an increase of 21.16% year-on-year after deducting non-return net profit of 6.9.3 billion yuan.

Profit side growth in the third quarter exceeded expectations. Demand in the infusion market was relatively stable. Colon Pharmaceuticals released its 2024 three-quarter report. The company achieved total revenue of 16.789 billion yuan during the Q1-Q3 period, an increase of 6.64% over the previous year. Net profit to mother was 2.471 billion yuan, up 25.85% year on year, after deducting non-net profit of 2.447 billion yuan, up 27.32% year on year. In Q3, the company achieved a 0.95% year-on-year decrease in operating income of 49.6.2 billion yuan, a 19.55% year-on-year increase in net profit of 0.671 billion yuan, and an increase of 21.16% year-on-year after deducting non-return net profit of 0.693 billion yuan. The company's profit side maintained steady growth in the third quarter. We expect that it is mainly due to factors such as the continuous improvement of the business structure of the large infusion sector, optimization of the API intermediate sector pattern, further cost reduction and efficiency, and the fact that Columbite confirmed in the third quarter is partly related to MSD's cooperation payments. Demand in the large infusion sector of the main business is relatively stable, and at the same time, the combined profit ratio continues to improve. We expect to maintain this trend in the fourth quarter.

Antibiotic intermediates and APIs: Market demand is growing, and the synthetic biology business is expected to become the second growth curve subsidiary, Chuanning 24Q1-3, to achieve revenue of 4.456 billion, +24.43% year over year; net profit to mother was 1.076 billion, up 68.07% year on year. Overall revenue growth in Q3 was steady, and revenue in the single quarter declined month-on-month compared to Q2. It is expected that the year-on-year revenue side will continue to grow, mainly due to a decrease in infectious diseases in Q3.

The profit side is growing faster than the revenue side. It is expected to be related to factors such as the continuous improvement of the company's process technology, increased production, and effective reduction of production costs through energy saving and consumption reduction. The PHA project was successfully piloted, and the synthetic biology layout was deepened: In recent years, the company has vigorously laid out the field of synthetic biology through “biological fermentation” and “synthetic biology” dual-wheel drive strategies. The 2024Q3 company's PHA project was successfully piloted, and the fermentation and extraction process routes have all been completed.

Columbite: SKB264 was NDA accepted for 2L EGFR TKI-resistant NSCLC indications October 31, and SKB264 was accepted for locally advanced or metastatic NSCLC indications that progressed after EGFR-TKI treatment.

Given the large NSCLC patient population and the prevalence of EGFR TKI resistance, SKB264 has huge market potential for this indication. At present, the company has submitted marketing applications for 3 indications in China, and NSCLC indications are expected to be approved next year. At the same time, we expect SKB264 to be approved for domestic marketing in the fourth quarter. The indication is 3L TNBC.

Earlier, Colombotai announced a phase 1 clinical trial to treat advanced EGFR mutant non-squamous non-small cell lung cancer that progressed after EGFT-TKI treatment.

At the 2024AACR meeting, as of February 9, 2023, the study included 43 patients with non-small cell lung cancer who failed multi-line treatment, and the ORR was 44%. Among them, for the TKI-resistant EGFR mutant subgroup (50% failed at least first-line chemotherapy), ORR was 60% (12/20), DCR was 100% (20/20), median PFS was 11.5 months, and median OS was 22.7 months. Overall safety is manageable: The incidence of grade 3 and above TRAE was 67.4%, mainly blood-related adverse events, and no interstitial pneumonia (ILD) was observed.

First-line NSCLC clinical phase 3 with EGFR mutations was initiated. MSD actively deployed overseas clinical trials. On October 28, Collenbotte launched a new phase III clinical trial (SKB264-III-15) for SKB264 to evaluate the efficacy and safety of SKB264 (4 mg/kg, once every 2 weeks) combined with osidinib (40/80 mg, once daily) compared with the first-line treatment of locally advanced or metastatic non-squamous non-small cell lung cancer (NSCLC) with EGFR mutations. The study is to include 420 patients with non-squamous NSCLC who have not previously received systemic antineoplastic treatment for locally advanced or metastatic NSCLC. The primary endpoint was progression-free survival (PFS). This clinical phase III SKB264 is the product with the fastest progress in cooperation, and the phase III clinical layout is being accelerated. SKB264 is currently the fastest progressing product in the company's cooperation pipeline with MSD. In May 2022, the company reached an agreement with MSD for the first time to authorize its SKB264 overseas interest, and the company received a total one-time payment of $0.102 billion and a potential milestone payment of $1.16 billion. SKB264 is being promoted using MK-2870 as the MSD pipeline. Since the second half of '23, MSD has carried out 10 phase III clinical trials. MSD's planning and rapid layout of the MK2870 single drug or combination indications also further demonstrated MSD's confidence in the product.

Financial index analysis: Cost reduction and efficiency were obvious. The sales expense ratio declined, and the company's sales expense ratio in Q3 was 14.03%, down 7.33 percentage points from the previous year, mainly due to the reduction in the company's market development and maintenance costs and the decline in sales expenses due to the implementation of the collection policy. The collection policy can generally reduce procurement costs and improve procurement efficiency. The management cost ratio was 7.36%, up 3.20 percentage points from the previous year, mainly due to the increase in employee remuneration; the R&D cost rate of 10.20% decreased by 1.58 percent year on year. Although the company's investment in R&D declined slightly, it remained at a stable level, focusing on R&D and innovation to maintain product competitiveness. The financial expense ratio was 0.55%, down 0.25 percentage points from the previous year, mainly due to the company's continuous optimization of the financing structure, the reduction in the size of interest-bearing debt and financing interest rates, and the reduction in financial expenses.

Profit Forecasts and Ratings

The company has a stable position as a leader in large infusions and antibiotic intermediates. Generic drugs have entered the mass marketing stage. Twining Biotech is expected to accelerate growth, innovative drugs are gradually entering the harvesting stage, the ADC platform continues to launch new products, and overseas cooperation with MSD opens up more room for the company to grow. The estimated revenue for 2024-2026 is 23.18 billion yuan, 24.84 billion yuan, and 26.48 billion yuan, and net profit to mother is 2.97 billion yuan, 3.355 billion yuan, and 3.694 billion yuan respectively. The corresponding PE valuations are 18X, 16X, and 14X, respectively, maintaining a “buy” rating.