Core views

New Novus's revenue declined in the first half of 2024, mainly due to pressure on caffeine prices, which are close to historic lows. We believe there is limited room for caffeine export prices to continue to decline. The company acquired Jushi Biotech, a subsidiary of Shiyao Group, and Shiyao Baike's innovative drug business to form a new growth point for Jushi/Baig dual-wheel drive performance, and introduced a number of innovative assets such as monoclonal antibodies, ADC, mRNA vaccines, and GLP-1. Among them, PD-1 monoclonal was approved for listing in June 24, and omalizumab is expected to be approved in the second half of this year and will soon contribute revenue. The company accelerates the deployment of innovative pharmaceuticals and opens up room for future growth.

occurrences

On August 17, New Novi released an interim report. In the first half of 2024, the company achieved revenue of 9.7.2 billion yuan, a year-on-year decrease of 27.71%, and net profit to mother of 0.137 billion yuan, a year-on-year decrease of 48.27%. After deducting non-return net profit of 0.134 billion yuan, a year-on-year decline of 65.87%.

Brief review

The performance of APIs is under pressure in the short term, and we are optimistic about a steady recovery throughout the year

New Novi released an interim report. In the first half of 2024, the company achieved revenue of 0.972 billion yuan, a year-on-year decrease of 27.71%, and net profit to mother of 0.137 billion yuan, a year-on-year decrease of 48.27%. After deducting non-return net profit of 0.134 billion yuan, a year-on-year decrease of 65.87%. The company's revenue has declined, mainly due to pressure on the price of its main product, caffeine, which is close to a historic low. We believe there is limited room for caffeine export prices to continue to decline.

Caffeine prices are under pressure in the short term, and the API business is expected to recover steadily: caffeine prices are close to historic lows, and production capacity of acarbose raw materials has increased dramatically.

Caffeine export prices have continued to fall since April 2022, and are close to their lowest value since 2015. Due to the simultaneous decline in the price of cyanoacetic acid, the main raw material for caffeine, the company's gross margin remained flat in the first half of 2024. The Acarbose green factory upgrade technology transformation project was completed and put into operation. The company's production capacity of acarbose raw materials reached about 260 tons/year in 2024, making it the largest producer of acarbose raw materials in China. With the acceleration of domestic substitution of acarbose raw materials and the expansion of the company's production capacity, it is expected that the company's acarbose raw material business will usher in steady revenue growth.

Increase capital of Dushi Biotech to lay out innovative drug business. In January 2024, New Novus completed its holding in Jushi Biotech, increased its capital in cash, and acquired 51% of the company's shares to achieve control and consolidation of Jushi Biotech, extending the business chain to the field of innovative biopharmaceuticals, and building a biomedical innovation industry platform. Currently, the research pipeline includes ADC, mRNA vaccines, and antibody drugs. The estimated value of Jushi Biotech is 1.798 billion yuan, and the total amount of this capital increase is 1.871 billion yuan, which does not constitute a major asset restructuring.

Jushi Biotech is an innovative biomedical enterprise with independent research and development capabilities as the core driving force. It focuses on the fields of antibody drugs, antibody conjugate drugs (ADC), and mRNA vaccines. Currently, there are more than 20 research projects. Of these, 1 COVID-19 mRNA vaccine product has entered the commercialization stage, and 10 products are being manufactured domestically at different stages of clinical trials or are being declared for listing. Of these, 1 product is in clinical phase II/I stage, and 4 products are in clinical phase I stage.

The second half of the year was rich in catalytic events. Jushi Biotech's PD-1 monoclonal antibody was approved for marketing in June '24. Omalizumab was accepted by the NDA in '23, and is expected to be approved for marketing in the second half of the year. Among them, PD-1 enranzubizumab (trade name Enshuxing) was approved as an indication for cervical cancer, and combined chemotherapy will be commercialized. Omalizumab is expected to be the first domestically produced biosimilar, and the market prospects are broad. Meanwhile, the three bioanalogues usinumab, pertuzumab, and HER2 ADC SYS1501 are expected to be submitted for marketing in the second half of the year. EGFR ADC SYS6010 has entered Phase II clinical trials.

Acquisition of Shiyao Baike: Enriching the product layout and ushering in a new revenue growth point. On January 10, 2024, New Novell announced that it is planning to acquire Shiyao Group's Baike. New Novartis plans to purchase 100% of the shares held by Vitamin Pharmaceuticals, CSPC Shanghai, and Enbipu Pharmaceutical through the issuance of shares and cash payments. The final transaction consideration for Shiyao Baig has not yet been determined, and the proportion of shares issued and cash paid to the counterparty in this transaction has not yet been determined. The cash payment ratio in the transaction does not exceed 10%, and the rest is paid by issuing shares. The price of issued shares is not lower than 80% of the average stock trading price for the 120 trading days before the pricing benchmark date, or 20.91 yuan/share.

Shiyao Baike is mainly engaged in R&D, production and sales in innovative biopharmaceuticals such as long-acting protein drugs. Currently, its main product is the self-developed long-term whitening preparation Jin Youli. It is the first long-term recombinant human granulocyte-stimulating factor injection with independent intellectual property rights in China. It was approved and marketed in 2011 to increase the number of white blood cells to ensure anti-tumor treatment effects. In recent years, Tianjin Youli's sales have continued to grow steadily. In 2022, sales of sample hospitals reached 2.53 billion yuan, accounting for about 33.4% of the market share; 2023Q1-Q3 sales were 2.44 billion yuan, which is a strong support for the basic revenue market. At the same time, Shiyao Baike is actively promoting the development of TG103 injection. Its component category is antibody-like fusion protein, the target is GLP1R, which was first clinically approved in 2018. Currently, it has entered phase III clinical phase III clinical phase in China, and announced two phase III clinical trials in February this year, including monotherapy and treatment with metformin. It is expected that the pace of progress will continue to accelerate in the future.

Financial analysis: sales expenses are controlled, R&D expenses have declined

In the first half of 2024, the company's sales expenses were 73.26 million yuan, a year-on-year decrease of 35.68%, mainly due to the reduction in the company's health food product marketing expenses. The management fee was 43.08 million yuan, which is roughly the same as in the first half of 2023. R&D expenses were 25.19 million yuan, a year-on-year decrease of 15.97%, mainly due to the reduction in external research and development expenses commissioned by the company.

Profit forecasts and investment advice

Without taking into account Shijiyao 100g, we expect the company's revenue for 2024-2026 to be 2.013 billion yuan, 2.717 billion yuan, and 4.387 billion yuan, and net profit to mother of 0.439 billion yuan, 0.631 billion yuan, and 0.963 billion yuan respectively, corresponding to 75, 52, and 34 times PE, maintaining 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.

Risk of revenue falling short of expectations: Continued decline in the price of raw materials such as caffeine causes revenue to fall short of expected risk.

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: After the drug is marketed, there are risks such as possible insufficient logistics capacity and insufficient production capacity during the sales process. We also need to be wary of risks such as changes in core technical personnel and increased market competition.