HENGRUI MEDICINE(600276)：STEADY EARNINGS GROWTH ACCELERATED COMPREHENSIVE R&D RESULT MONETIZATION

　　Hengrui’s earnings grew steadily in 1Q-3Q23, meeting market expectations. The Company boasts a strong R&D momentum; its innovative R&D outcomes are leading in the industry. Amid steady progress in its business overseas expansion, Hengrui’s innovative products are going global through overseas peers. Its KRAS G12D appeared in the Oral Presentation of the European Society for Medical Oncology (ESMO), and its HER3 ADC has obtained impressive　preliminary clinical data. Thanks to growing R&D investment, the Company’s profitability is improving steadily. Therefore, we assign 78x 2023E PE to arrive at a target price of Rmb55 and reiterate the "BUY" rating.
　　Steady earnings growth in 1Q-3Q23.
　　In 1Q-3Q23, Hengrui posted revenue of Rmb17,014mn (+6.70% YoY, mainly thanks to the weakened marginal impact from centralized procurement of generic drugs and the surging sales of innovative drugs), attributable net profit (ANP) of Rmb3,474mn (+9.47% YoY), and ex-one-off ANP of Rmb3.36bn (+10.13% YoY). In 3Q23 alone, the Company achieved revenue/ANP/ ex-one-off ANP of Rmb5,845mn/1,166mn/1,117mn (+2.24%/+10.57%/+7.14% YoY; +2.98%/+9.01%/+9.16% QoQ), in line with market expectations against the backdrop that China is carrying out an anti-corruption campaign in the healthcare field.
　　Strong R&D momentum and industry-leading innovative R&D outcomes. Hengrui’s Weixin Official Account shows that in 3Q23, the Company obtained approval for one Class II new drug (Dexmedetomidine Hydrochloride nasal spray for children) and filed applications to the National Medical Products Administration (NMPA) for four innovative drugs (JAK1 inhibitor for compulsory spondylitis; Fluzoparib Capsules for first-line maintenance treatment for advanced epithelial ovarian cancer, fallopian tube cancer or primary peritoneal cancer; Combination of Henagliflozin Proline Tablets, Metformin hydrochloride and Retagliptin Phosphatef for the Treatment of Patients with Type 2 Diabetes; and introduction of innovative drug Linperlisib Tablets for R/R PTCL); gained approval by the US Food and Drug Administration (FDA) for one biologics license application (BLA), ie the combination of Camrelizumab and Apatinib for first-line treatment of liver cance, making the total approvals amount to 18 investigational new drugs (INDs). So far, Hengrui has 13 Class-I independently developed innovative drugs, one Class-II independently developed new drug and two introduced innovative drugs for marketing in the Chinese market. The Company also has more than 80 independently developed innovative products in the clinical trial stage, and is conducting over 270 clinical trials at home and abroad.
　　Steady progress in business internationalization, and innovative products going global.
　　In 3Q23, Hengrui completed three overseas business development (BD) authorizations. 1) In Aug 2023, Hengrui awarded the overseas rights and interests of thymic stromal lymphopoietin (TSLP) monoclonal antibody　　SHR-1905 to the US company One Bio, by which the Company will receive down payment and recent milestone payments of US$25mn, and a cumulative payment for R&D and sales milestones of up to US$1,025mn; 2) In Oct 2023, Hengrui licensed HER1/HER2/HER4 targeted drug Pyrotinib Maleate Tablets to the Indian company Dr. Reddy, by which the Company will receive a down payment of US$3mn and sales milestone payments totaling up to US$152.5mn; and 3) Recently, Hengrui licensed the combination of Camrelizumab and Apatinib for treating liver cancer indications to the US company Elevar Therapeutics, which will give the Company a cumulative payment for sales milestones of US$600mn after reaching a certain cumulative net sales revenue, and will pay extra after exceeding a certain cumulative net sales, in addition to a sales commission (20.5% of the actual annual net sales revenue). As of now, Hengrui has completed overseas authorization for seven innovative drugs, showing a steady progress in its overseas business expansion.
　　ESMO: KRAS G12D appeared in the Oral Presentation, and HER3 ADC has obtained impressive preliminary clinical data.
　　At the ESMO Congress 2023, Hengrui announced 36 research results of 13 innovative anti-tumor drugs. Among them, the first Phase I dose-escalation study of HRS-4642, an inhibitor of KRAS G12D, appeared in the ESMO Oral Presentation. The preliminary results show that dose limiting toxicity (DLT) was not observed in 18 patients under the dose gradient of 15mg-300mg once a week (QW), and the maximum tolerated dose (MTD) was not reached; and one case reached partial response (PR), and the disease control rate (DCR) was 77.8% for all cancer types and 90% for non-small cell lung cancer (NSCLC). All these have preliminarily verified the sound clinical efficacy and tolerance of KRAS G12D. Hengrui also released the Phase I clinical data of HER3 ADC SHR-A2009 in solid tumors. A total of 42 patients received 1.5mg-10.5mg/kg (Q3W, IV) for dose escalation according to i3+3 rules, and no DLT was found. Three patients stopped taking drugs due to treatment-related adverse events (TRAEs), and two patients developed interstitial pneumonia. Among evaluable patients, the objective response rate (ORR) was 25.0% for all cancer types and 30.0% for NSCLC; the median duration of response (mDoR) was 7.0 months; initially showing the acceptable safety and therapeutic potential of SHR-A2009 for solid tumors.
　　Continuous increase in R&D investment and steady improvement of profitability.
　　In 1Q-3Q23, Hengrui achieved gross profit margin (GPM) of 84.38% (+1.12ppts YoY). Its selling/administrative/R&D expenses tallied at Rmb5,409mn/1,676mn/3,725mn (+4.78%/+14.14%/+6.52% YoY); its selling/administrative/R&D expense ratios stood at 31.79%/9.85%/21.90% (-0.58ppts/+0.64ppts/-0.04ppts YoY), indicating the steady operation of the Company.
　　Potential risks:
　　Disappointing progress in the monetization of the Company's products; R&D failure or progress not up to expectations; slower-than-expected review and approval progress; intensified market competition; unexpected changes in medical policies.
　　Investment strategy:
　　Hengrui’s revenue structure is optimizing, and the proportion of its revenue from innovative products is growing. The adverse effects from centralized procurement of generic drugs have weakened marginally. The Company's　　new products and new indications will hit the market one after another, and its business internationalization drive is progressing steadily. Based on Hengrui’s 1Q-3Q23 earnings results and considering the potential impact of China’s anti-corruption campaign in the healthcare field on the sales of the pharmaceutical sector, we lower our 2023E/24E/25E EPS forecast to Rmb0.71/0.84/1.00 (from Rmb0.76/0.94/1.14). With Hengrui’s historical valuation level (according to Wind consensus estimates, the Company’s average PE were 94x/72x/63x, with 76x on average, in 2020A/21A/22A), as well as the expectations for the Company's innovative drugs going global and overseas business expansion, we warrant an appropriate valuation premium and assign 78x 2023E PE to arrive at a target price of Rmb55 (from the original TP of Rmb52) in 2023E, and reiterate the "BUY" rating.
【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。

   【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。