HUADONG MEDICINE(000963)2022 EARNINGS REVIEW：CONTINUOUS IMPROVEMENT OF INDUSTRIAL SEGMENT AND STRONG GROWTH OF MEDICAL AESTHETICS

According to Huadong Medicine’s 2022 annual report, the Company achieved revenue and attributable net profits (ANP) of Rmb37.715bn and Rmb2.499bn in 2022, respectively, representing a YoY growth of 9.1% and 8.6%. As the haze of centralized procurement (from lowering drug prices) gradually fades, the Company’s pharmaceutical segment has continued to improve and its industrial microorganisms segment was developing rapidly. The Company continues to promote its innovative R&D to gain new momentum in the segment. Its liraglutide injection for diabetes indications was approved in Mar 2023 and the application for overweight indications may be approved within this year. The commercial segment has been cultivating innovations while enhancing the traditional business, achieving steady growth. The Company’s medical aesthetics achieved robust growth and the new product layout is steadily progressing as planned.
Huadong Medicine’s revenue and net profit continues to improve and steadily rebounds.
According to the 2022 annual report, the Company posted revenue and ANP of Rmb37.715bn and Rmb2.499bn in 2022, respectively, representing a YoY increase of 9.1% and 8.6%. If calculated by deducting the profit and loss of participating R&D institutions, the Company realized a profit of Rmb2.598bn, with a YoY growth of +13.24%. In 4Q22, the Company achieved revenue and ANP of Rmb9.856bn and Rmb0.518mn, with a YoY growth of +14.13% and +27.45%. Huadong Medicine's revenue and ANP growth improved quarter by quarter and maintained a steady upward trend, demonstrating the Company's strong operating resilience.
The pharmaceutical segment is continuously optimized and industrial microorganisms is developing rapidly.
In 2022, Zhongmei Huadong Pharma ( including contract sales organization (CSO) business) recorded revenue and non-GAAP net profit of Rmb11.244bn and Rmb2.093bn, with a YoY growth of +10.88% and +4.71% respectively. As some of the products from the Company has participation in the centralized drug procurement and the inclusion in the national medical insurance catalogue, the price reduction pressure has eased gradually. Among them, ① Bailing capsule was selected by the Hubei Chinese medicine centralized procurement alliance and its sales showed rapid growth; ② Bailing capsule and acarbose tablets were successfully added to the national medical insurance catalogue. Mycophenolate mofetil capsules, pioglitazone hydrochloride tablets, and ornidazole tablets were selected in the seventh batch of national centralized procurement of drugs; ③ Acarbose tablets and pantoprazole sodium injection completed multi-provincial alliance centralized procurement due renewal. The Company continued to expand the sales channels of related products and increase the market share and coverage of products in retail and online channel. The industrial microorganisms segment developed rapidly in 2022, achieving sales revenue of Rmb510mn, with a YoY growth of +22%. The Company continued to implement the development strategy of industrial microorganisms and established five major directions of innovative drugs (nucleic acid & antibody-drug conjugate (ADC) drugs) raw materials, pharmaceutical raw materials & intermediates, general health & medical aesthetic raw materials, pet animal health care and characteristic biological materials. It has carried out a total of more than 130 R&D projects, including 17 innovative raw materials such as xRNA and ADC (including 71 sub-projects), 30 pharmaceutical raw materials & intermediates, and a total of 18 items in general health & medical aesthetic raw materials, pet animal health care, characteristic biological materials and others. In the future, the Company will actively expand into the fields such as pet animal health care and characteristic biological materials, and continue to increase its industrial layout, thus the industrial segment may maintain a rapid development.
The Company deepens its R&D abilities and a number of advantageous products continues to enter the harvest period.
The Company's R&D expenses in 2022 were Rmb1.016bn, with a YoY growth of +3.71%. The total investment in R&D in the pharmaceutical segment was Rmb2.68bn, +44.8% YoY, of which direct R&D expenditure was Rmb1.196bn, +24.2% YoY. And the investment in product introduction and R&D was Rmb1.484 bn. During the reporting period, the Company reserved 52 innovative drugs and biosimilar drug projects, of which 5 products were in the phase III clinical trials, and 3 products in the phase II clinical trials, including therapeutic areas such as tumors, endocrine and autoimmunity. At present, many R&D pipelines are about to enter the application trials. In the endocrinology field: ①Liraglutide for diabetes indications was approved for sale in Mar 2023 and the application for obesity or overweight indications may be approved in 2023. ②Semaglutide injection has completed the administration and follow-up of all subjects in the phase I clinical trials; ③The investigational new drug (IND) of degusulin injection was approved for clinical trials in Sep 2022, and all phase I clinical trials have been completed. In the oncology field: ①ELAHERE (HDM2002) completed the enrollment of all subjects in the China phase III single-arm clinical trial in Dec 2022 and the pre biologics license application (BLA) submission in Mar 2023. The Company expects to submit the BLA application in 2023. ②Meivatinib tablets: the enrollment of phase III clinical subjects has been completed and the listing application may start after obtaining the number of progression-free survival (PFS) events in phase III studies in 2Q23. In the autoimmunity field: ARCALYST submitted a Pre-BLA application for catastrophic antiphospholipid syndrome (CAPS) indications in Jul 2022 and has received feedback. The Company expects to submit a BLA application in China in 2023.
The commercial segment has been cultivating innovations while enhancing the traditional business, achieving steady growth.
In 2022, the commercial segment reported revenue of Rmb25.553bn, +10.55% YoY, and ANP of Rmb397mn, +3.85% YoY. The Company’s pharmaceutical commercial segment shoulders the important responsibility of ensuring medical supplies during special circumstances and achieved stable business growth. The Company strengthened its traditional business by optimizing the organizational structure, reducing costs and increasing efficiency. In hospitals, the Company gradually optimized the product structure and expands the share of high-value products, focused on over-the-counter (OTC) products for medical insurance designated hospitals, hospital affiliates and chain pharmacies, and continued to develop self-operated stores in hospitals and direct-to-patient (DTP) stores to achieve new sales breakthroughs. The Company’s innovative business mainly focuses on product agency and high-end cold chain logistics, leading the high-quality performance development of the commercial segment.
The medical aesthetics segment achieved outstanding growth, and new product layout progressed steadily as expected.
In 2022, the medical aesthetics segment posted revenue (excluding internal offsets) of Rmb1.915bn, with a YoY increase of +91.11% (excluding Huadong Ningbo Medicine), reaching a historical high both domestically and overseas.
Among them: 1) The Company’s subsidiary Sinclair Pharma achieved the operating income and EBITDA of ?134.57mn (approximately Rmb1.144bn) and ?23.04mn, with a YoY growth of +76.90% and +245.95%, respectively, realizing positive annual operating profit for the first time since the acquisition.
The demand in overseas markets is strong, among which: ①MaiLi hyaluronic acid has been well accepted by consumers since its launch, with a YoY growth of +190%; ②Lanluma is the only regenerative product approved for butt and thigh filling in the world, with a YoY growth of +44%; ③Viora achieved better-than-expected growth in North America. In terms of new products, Sinclair Pharma launched Sculpt & Shape in 1Q23, which is a new energy-based device for body shaping and facial rejuvenation in the European market, and has received good feedback from consumers. The Company will start the registration process of Ellanse and MaiLi in the US market in 2Q23. 2) In China, the Company achieved domestic medical aesthetics operating income of Rmb626bn in 2022 and achieve relatively good profitability. Ellanse has contracted with more than 500 medical aesthetics institutions and trained more than 1,100 certified doctors. Ellanse has become a star product in the field of medical aesthetic injections in China and may continue to grow rapidly.
Glacial Spa has cooperated with more than 40 domestic medical aesthetic institutions. The Company will continue to promote the registration and commercialization of core products in both China and overseas. ① The Company expect that the multifunctional facial skin management platform preime derma facial will be listed in China in 2023. ② The bipolar radiofrequency anti-aging device “Reaction” completed the domestic agent change in 2022. The Company expects to start domestic sales promotion in 2Q23. ③ The V-type and X-type of the poly-L-lactic acid collagen stimulant Lanluma V have been approved to land in Hainan Boao Lecheng in Dec 2022. The “MaiLi Extreme” and “Ellanse M” types of hyaluronic acid fillers completed the enrollment of all China clinical trial participants in 1Q23 and began follow-up visits.
Potential risks: Drug prices sharp drop due to volume purchases; slower-than-expected new product development, registration progress and promotion; intensified market competition; slower-than-expected the pace of consumption recovery; stricter regulation.
Investment strategy: Huadong Medicine covers the entire pharmaceutical industry chain. As the haze of centralized procurement gradually fading and rebounding, the Company’s pharmaceutical segment has continued to improve and industrial microorganisms segment has been developing rapidly. The Company continues to promote its innovative R&D to gain new momentum in the segment. The liraglutide for diabetes indications was approved for market entry in Mar 2023, and the application for obesity or overweight indications may be approved within 2023. Its medical aesthetics segment achieved superior performance growth. Considering the Company's continued sales and R&D investment in the future, we maintain the 2023E EPS forecast of Rmb1.76, lower the 2024E EPS forecast to Rmb2.17 (the prior forecast was Rmb2.26), and add the 2025E EPS forecast of Rmb2.73. With the valuation of comparable companies as references (based on Wind consensus estimates), including Hengrui Pharma (600276.SH, innovative drug leader): 62x 2023E PE, Fosun Pharma (600196.SH, innovation-driven healthcare industry group in globalization): 17x 2023E PE, Livzon Pharma (000513.SZ, a specialty pharmaceutical bellwether in China accelerating the transition to an innovative pharmaceutical company): 16x 2023E PE, and the average valuation of 32x 2023E PE), we assign Huadong Medicine (000963.SZ) 32x 2023E PE to derive a target price of Rmb56, and reiterate the "BUY" rating.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。