Incident: The company recently announced that its core product under development of low-concentration atropine (NDA) has been officially accepted by the CDE. The approval journey has officially begun, and the 10 billion mega-product has entered the approved market.

Low-concentration atropine exceeded expectations by filing an NDA and being accepted. It will be approved at least one year in advance, which will drive explosive growth in revenue and performance. On the 25th, the company announced that its application for atropine sulphate eye drops (0.01%) was officially accepted by the National Drug Administration, and the expected approval market for 10 billion grade products officially began. According to our forecast, low-concentration atropine myopia prevention and control is mainly used for children and young people aged 5-16. The total number of myopic people in this age group is nearly 100 million. Currently, the annual cost of mainstream atropine in-hospital preparations is about 3,600 yuan. Under neutral conditions, we expect Xingqi products to reach a peak of sales of 10.18 billion yuan in the 3rd full year of marketing (that is, 2027), which will reshape the ophthalmic drug market pattern. According to normal 24H1 approval expectations, the company will experience increased revenue and performance in 2024.

Analysis of the 22nd Annual Report and the 23Q1 Quarterly Report: Influenced by the new Internet hospital policy, the release of cyclosporine newly introduced into medical insurance will continue to accelerate. The company's 22-year revenue was 1.25 billion (+21.6%), and the net profit of the mother was 212 million (+8.7%). By product, revenue from eye drops and medical services was 450 million and 40 million respectively, with year-on-year growth rates of 47.9% and 27.8% respectively. The high growth rate of eye drops is mainly due to the rapid release of cyclosporine eye drops, the first generic drug for dry eyes, after being added to the medical insurance negotiation catalogue in 2021. Relying on the huge dry eye market and imitation status, it is expected that they will be released even faster in '23. The high growth in medical service revenue is mainly due to the fact that sales of 22H1 low-concentration atropine preparations in hospitals were not affected by the ban policy. In July 2022, a new Internet hospital policy was introduced prohibiting the sale of in-hospital preparations through Internet hospital channels, which had a certain impact on the company's 22H2 atropine eye drops sales. Guimu's net profit increased 8.7% year over year. The growth rate was lower than the revenue growth rate. The main reason was the sharp increase in R&D expenses. The gross margins of the two major business segments of pharmaceutical manufacturing and medical services increased by 0.12 pct and 0.97 pct respectively over the same period last year, with steady increases. Expense rate situation during the period: 1) The sales expense ratio was 37%, an increase of 4.1 pp over the previous year, due to the increase in employee remuneration, conference fees and equity incentive fees during the reporting period; 2) the management expense ratio was 10.6%, a decrease of 0.9 pct, which remained stable; 3) the R&D cost rate reached 11.7%, an increase of 3.1 pct, mainly due to the increase in R&D investment and equity incentive fees during the reporting period. 23Q1 revenue was 287 million (-5.1%), and net profit was 19.35 million (-73.9%). The decline in revenue and performance in 23Q1 was mainly due to: 1) the impact of the policy prohibiting online sales of in-hospital preparations, which led to a significant year-on-year decline in atropine drug sales; 2) sales expenses increased sharply year-on-year, with sales expenses of 133 million, an increase of 41% over the previous year.

The new Internet hospital policy will only affect the company's performance for a short time, and is expected to usher in rapid growth in '24. In July '22, the Internet Hospital officially implemented a policy prohibiting the sale of in-hospital formulations, which had an impact on the company's 22nd annual report and 23Q1 quarterly report. We believe that after 24H1 atropine is officially approved, the company's operations may no longer be affected by this policy. Therefore, the policy will only briefly affect business performance in '23. It is expected that in 2024H2, the company's revenue and performance may grow rapidly, entering a new rapid growth cycle.

Investment advice: If atropine is approved in 2024H1 for the time being, it is estimated that in 2023-2025, the company will achieve revenue of 15.1/20.0/2.63 billion yuan, achieve net profit of 30/43/570 million yuan, and maintain the “buy” rating.

Risk warning: Atropine approval progress is lower than expected; competition for cyclosporine eye drops intensifies or there is a risk of price reduction in collection; promotion and sales of traditional eye medicine products fall short of expectations and the risk of entry into collection.