Description of the event

On October 25, 2024, the company released the 2024 three-quarter report. The company's revenue for the first three quarters of 2024 was 20.19 billion yuan (+18.7%), and net profit to mother was 4.62 billion yuan (+33.0%). In the third quarter, the company's revenue was 6.59 billion yuan (+12.7%), and net profit was 1.19 billion yuan (+1.9%).

On September 9, 2024, the company announced the employee stock ownership plan. According to the 100% unlocked performance target, the company's innovative drug revenue in 2024, 2025, and 2026 was 13 billion yuan, 16.5 billion yuan, and 20.8 billion yuan, compared with 23%, 27%, and 26%; the number of new molecular entity IND approvals was 12, 13, and 14, respectively; the number of innovative drug NDA applications (including new indications) was 6, 5, and 4, respectively.

Incident reviews

Streamline sales staff and increase investment in R&D. Sales expenses for the first three quarters were 6.11 billion yuan, and the sales expense ratio was 30.3% (-1.5pct), due to the company's streamlined sales staff. In the first three quarters, the company's R&D expenses were 4.55 billion yuan, and the R&D cost rate was 22.5% (+0.6pct). This is due to the fact that various pipelines are in the late clinical stage and the company increased investment in R&D.

Marketed new drugs have entered medical insurance, and the innovative drug business is growing rapidly. More than 10 innovative drugs, such as revelumide, darucilide, and hengagliptin, have been covered by medical insurance, and the number of admissions continues to increase. In 2024 H1, the company's innovative drug revenue was 6.61 billion yuan (+33%), and it is expected that innovative drugs will continue to grow rapidly in the third quarter. Adbelizumab significantly improved patients' OS, haitripopa was rapidly upgraded safely and efficiently, and the two new drugs were quickly commercialized.

The BLA of carrilizumab combined with apatinib has been accepted by the FDA and is expected to be marketed in the US.

New small-molecule, ADC, and dual-antineoplastic drugs are entering the advanced stage or marketing application stage one after another. The EZH2 inhibitor SHR2554 tablets have been accepted for marketing in PTCL; the marketing application for SHR-A1811 has been declared HER2-positive NSCLC; and the TROP2 and CLAUDIN18.2 ADC have entered clinical phase 3.

The marketing application for the G/GEJC indication for PD-L1/TGFbeta SHR-1701 has been accepted, and a number of 3 phases have been promoted. The next-generation TIGIT multi-antibody has already been clinically initiated, and more than 10 bi/polyspecific antibodies are under investigation.

The layout of new hypoglycemic drugs is rich, and the GLP-1 combination is authorized to go overseas. Companies in the field of hypoglycemia continue to promote commercialization of hengagliptin and relagliptin, and have launched various combination plans with metformin. The compound formulation HR20031 has already been NDA. The company licensed the GLP-1 combination HRS-7535, HRS9531, and HRS-4729 overseas rights to Hercules of the United States. The down payment, recent milestones, and sales milestones were $0.11 billion and no more than $5.725 billion, respectively, showing good market potential.

IL-17A monoclonal antibodies are already on the market, and new drugs JAK1, IL-5, and URAT1 will be launched one after another. The company is developing new drugs in the field of self-immunity, and is expected to be marketed one after another. IL-17A funacizumab psoriatic indications will be marketed first, and active ankylosing spondylitis in adults will be marketed. The JAK1 inhibitor SHR0302 is indicated for ankylosing spondylitis, moderate to severe atopic dermatitis, rheumatoid arthritis, and severe alopecia areata. IL-5 monoclonal antibody SHR-1703, URAT1 inhibitor SHR4640, and SHR-1819 IL-4Rα monoclonal antibody have entered phase 3 clinical trials.

Investment advice

The company has launched 17 innovative drugs and accepted NDAs for nearly 10 new drugs. According to the employee shareholding plan, 15 new drug NDA applications will be added in 2024-2026, providing growth impetus for the intensive marketing of new drugs.

The company's 2024-2026 revenue is estimated to be 26.94 billion yuan, 31.23 billion yuan, 36.07 billion yuan, 18.0%/15.5% YoY; net profit to mother is 6.08 billion yuan, 7.04 billion yuan, 8.01 billion yuan, 41.3%/15.7%/13.9% YoY; PE is 50.1\ 43.2\ 38.0, respectively, covered for the first time, giving a “buy-A” rating.

Risk warning

The performance of R&D and employee stock ownership plans falls short of risk: In recent years, policies and measures for the review and supervision of new drugs have been introduced continuously, and the country's evaluation standards for all stages of new drug development have also been continuously improved. The company has taken a series of measures to push innovation targets forward, and as a result, it will bear higher R&D risks. There is a risk that marketing applications for new drug development and new drugs entering the clinical stage fall short of expectations, so it will not be able to meet the performance risks brought about by research progress announced by employee shareholding plans.

Industry policy risks: The pharmaceutical industry is greatly affected by national policies. In recent years, industry regulations have become more and more strict, and the development is rapid and complex. As the “Three Medical Cooperation” continues to deepen the reform of the medical and health care system, and the advancement of policies such as volume procurement of drugs, dynamic adjustment of the medical insurance drug catalogue, and reform of medical insurance payment methods, the profit level of the company's drugs may be affected.

Market competition risk: With the gradual integration of the domestic drug review and approval system with the international community, the products of foreign pharmaceutical companies are entering the country at an accelerated pace. At the same time, homogenized competition in the pharmaceutical industry is fierce, and the company's product sales are under certain market pressure.

Quality control risks: Drug quality is related to people's health and lives, and drug regulators have increasingly strict requirements for production quality. Due to the large production process of pharmaceuticals, the company may face certain quality control risks due to raw materials, production, quality inspection, transportation, storage, and use.

Environmental protection risks: Contaminants generated during pharmaceutical production may adversely affect the environment if not handled properly. As society's awareness of environmental protection increases, the supervision of national and local environmental protection departments continues to improve, and the control of pollutant emissions continues to increase. The environmental pressure and risks faced by the company are gradually increasing, and it is possible that it will be necessary to pay higher environmental protection costs.

Milestones fall short of expected risks: The company's self-developed innovative drugs have successively obtained commercialization benefits through licensing overseas rights. Overseas licensing revenue usually includes down payments, R&D milestones, sales milestones, and shares. The company has a risk that the milestone benefits fall short of expectations due to poor development and sales progress of new drugs.