HUADONG MEDICINE(000963)：STEADY EARNINGS GROWTH AND CONTINUED ENRICHMENT OF MEDICAL AESTHETICS OFFERINGS

　　In 1-3Q23, Huadong Medicine posted operating revenue of Rmb30.395bn (+9.10% YoY), attributable net profit (ANP) of Rmb2.189bn (+10.48% YoY), and ex-one-off ANP of Rmb2.160bn (+13.62% YoY).
　　Excluding the gain/loss impact of equity incentives and R&D institutions in which it held controlling and non-controlling interests, it posted ex-one-off ANP of Rmb2.462bn (+19.36% YoY) for the period. The operations of its pharmaceutical industry segment were robust, and it generated fresh segment momentum by continuing to enhance its positioning in industrial microbiology and promoting innovative R&D.
　　Its medical aesthetics segment maintained relatively rapid growth and secured an exclusive botulinum toxin license. We maintain our forecast of the Company’s EPS in 2023E/24E/25E at Rmb1.71/2.06/2.54, respectively, and reiterate the “BUY” rating.
　　Steady earnings growth and continued improvement of operational efficiency.
　　In 1-3Q23, Huadong Medicine posted operating revenue of Rmb30.395bn (+9.10% YoY), ANP of Rmb2.189bn (+10.48% YoY), and ex-one-off ANP of Rmb2.160bn (+13.62% YoY). Excluding the gain/loss impact of equity incentives and R&D institutions in which it held controlling and non-controlling interests, it posted ex-one-off ANP of Rmb2.462bn (+19.36% YoY) for the period. In 3Q23, it posted revenue of Rmb10.009bn (+3.61% YoY), ANP of Rmb755mn (+17.84% YoY), and ex-one-off ANP of Rmb733mn (+16.43% YoY). It achieved steady earnings growth despite a complex market environment and uncertainties. There was slight optimization on the expense side and improvement of its operational efficiency. In 1-3Q23, it posted gross profit margin of 31.86% (+0.09ppts YoY), net profit margin of 7.22% (+0.02ppts YoY), selling expense ratio of 15.34% (-0.83ppts YoY), administrative expense ratio of 3.64% (+0.2ppts YoY), and R&D expense ratio of 2.77% (-0.06ppts YoY).
　　Robust operations of its pharmaceutical industry segment and continued enhancement of its positioning in industrial microbiology.
　　In 1-3Q23, Huadong Medicine’s pharmaceutical industry segment (including its contract sales organization (CSO) business) posted operating revenue of Rmb8.994bn (+9.48% YoY) and consolidated ex-one-off ANP of Rmb1.835bn (+13.41% YoY). In 3Q23 alone, the segment (including CSO) posted operating revenue of Rmb2.940bn (+8.34%) YoY and ex-one-off ANP of Rmb609mn (+10.13% YoY). Amid continued cost reduction and expense control measures, the segment’s operational efficiency continued to improve.
　　In 1-3Q23, the overall sales revenue of Huadong Medicine’s industrial microbiology segment excluding specific commercial products rose 36.22% YoY. The segment made positive progress in the expansion of the antibody-drug conjugate (ADC) and specialty raw materials market, reaching strategic and business cooperation agreements with several overseas customers. Huadong Medicine will fully focus on the four major fields of xRNA, specialty active pharmaceutical ingredients (APIs) & intermediates, general health & biomaterials, and animal health, and continue to enhance the positioning of its relevant segments. In Aug 2023, it established a holding　　subsidiary, Zhejiang Shengji Materials Technology, with the objective of building R&D technology platforms to undertake its global business capabilities in medical aesthetics CMC (chemistry, manufacturing, and controls). The subsidiary will build three major technology platforms for biodegradable material polymerization, microsphere preparations, and nano-sunscreen & innovative carrier raw materials for skincare products, respectively, to support the commercialization of its pipelines and incubate global innovative products. In Oct 2023, Huadong Medicine’s subsidiary Jiangsu Nanjing Agricultural University Animal Pharmaceutical obtained the exclusive distribution and marketing rights in China for Baoshining, the first new veterinary opioid analgesic approved in the country.
　　Further deepening of innovative R&D, with many products in the pipeline about to bear fruit.
　　In 1-3Q23, Huadong Medicine’s investment in pharmaceutical R&D totaled Rmb1.650bn, which included Rmb1.022bn in direct R&D expenditures, an increase of 17.29% YoY. The Company continues to adhere to the strategy of differentiated R&D for innovative drugs, focusing on the three major fields of endocrinology, autoimmunity, and oncology as it remains committed to becoming a leader in the field of comprehensive metabolic diseases. Since the beginning of the year, it has implemented an early-stage exploratory project mechanism to accelerate innovation. It has embarked on 11 early-stage exploratory and forward-looking studies, which will likely yield first-in-class or best-in-class innovative drugs. As of Aug 15, 2023, it has a total of 82 ongoing pharmaceutical research projects, including 51 on innovative products and biosimilars. It will likely formally submit marketing applications for at least three innovative projects in 2023. In the field of
　　oncology: ①ELAHERE (HDM2002) has achieved the preset primary endpoint for Phase III single-arm clinical trial in China, with its pre-Biologics License Application (BLA) submitted in Mar 2023. Huadong Medicine projects that the
　　BLA will be accepted for review in China in 4Q23. The variety was granted
　　priority review by the Center for Drug Evaluation (CDE) of China’s National Medical Products Administration (NMPA) in Jul 2023 and will likely be marketed in 2024. ②Mefatinib: The drug received breakthrough therapy designation (for the treatment of patients with advanced non-small cell lung cancer harboring rare EGFR mutations) in May. Another ongoing Phase III clinical trial for advanced non-squamous non-small cell lung cancer with EGFR-sensitive mutations has successfully achieved its primary endpoint. In
　　the field of endocrinology: ①The Investigational New Drug (IND) application for HDM1002, an oral small-molecule glucagon-like peptide 1 (GLP-1)
　　receptor agonist independently developed by the Company, for the treatment of diabetes mellitus was approved in China and the US in May 2023, while that
　　for HDM1002 for the treatment of obesity was approved in China in Sep 2023.
　　②HDM1005, the long-acting GLP-1R/GIPR dual agonist independently developed by Huadong Medicine, has entered the research stage for IND, and the Company will likely submit the IND application in early 2024. ③Phase III clinical research has begun for semaglutide injection and insulin degludec injection. In the field of autoimmunity: The marketing authorization application of HDM3001 (QX001S), a biosimilar of ustekinumab, for the treatment of plaque psoriasis has been accepted by the NMPA in Aug 2023.
　　Steady annual growth in sight for its commercial segment despite quarterly slowdown.
　　In 1-3Q23, Huadong Medicine’s commercial segment posted revenue of Rmb20.291bn (+6.99% YoY) and net profit of Rmb316mn (+6.03% YoY). The segment will likely achieve steady annual growth despite the slowdown in quarterly growth. Adhering to the development principle of “High Quality + High Efficiency,” the Company’s pharmaceutical commercial segment engaged in in-depth cultivation of traditional businesses to enhance quality　　and efficiency and achieve rapid growth in market share. It continued to expand the out-of-hospital markets, with a significant increase in its coverage of private hospitals, clinics, and retail pharmacies. The innovative businesses were further advanced and more efforts were made in innovative products, innovative logistics, innovative services, etc. to facilitate multi-warehouse linkage, integrate internal and external resources, and improve the overall efficiency of the innovative businesses, thereby leading the high-quality development of the segment’s earnings.
　　Its medical aesthetics segment maintained relatively rapid growth and secured an exclusive botulinum toxin license.
　　In 1-3Q23, Huadong Medicine’s medical aesthetics segment maintained relatively rapid growth as its operating revenue increased by 36.99% YoY to Rmb1.874bn (excluding internal offsetting factors). Specifically: 1) Its subsidiary Sinclair recorded operating revenue of 110mn (c.Rmb973mn) (+23.27% YoY), and continued to achieve operating profit with an EBITDA of 17.29mn. Huadong Medicine expects Sinclair to maintain high annual growth and continue to increase its contribution to the Company's earnings. 2) In 1-3Q23, Huadong Medicine’s domestic medical aesthetics business posted operating revenue of Rmb824mn (+88.79% YoY). We are bullish that it will maintain good growth momentum. Ellansé has become a star dermal filler product in the domestic medical aesthetic injection market, with over 600 hospitals coming on board and more than 1,100 trained and certified physicians for the product as of Jun 2023. It is poised to maintain its growth
　　trajectory. Glacial Spa and dual-stage RF instrument Reaction will continue to offer one-stop facial rejuvenation and beauty solutions to meet consumers' anti-aging needs. In terms of R&D collaboration, in Oct 2023, the Company’s wholly owned subsidiary Huadong Medicine Aesthetics Investment was granted a global exclusive license (except India and non-exclusive for South Korea) by South Korean pharmaceutical firm ATGC to develop and commercialize the latter’s botulinum toxin type A product, ATGC-110, for all aesthetic and therapeutic indications. The Phase II clinical study of ATGC-110 in South Korea for improving the appearance of moderate to severe glabellar has been completed, and the preset endpoint has been met. Phase III clinical trial patient enrollment in South Korea has been completed. Going forward, as the overseas and domestic registration of botulinum toxin products continues to advance, Huadong Medicine's non-invasive and minimally invasive medical aesthetic offerings will be further expanded to provide more comprehensive solutions for consumers.
　　Potential risks: Sharp declines in drug prices due to volume-based procurements; disappointing product R&D and commercialization progress by Huadong Medicine; intensifying competition in the medical aesthetics market; tighter supervision
　　Earnings forecast, valuation, and rating: Huadong Medicine covers the entire pharmaceutical value chain. There is continued optimization of its pharmaceutical industry segment, while its industrial microbiology segment continues to improve its positioning in related fields. The Company continues to promote innovative R&D to generate fresh segment momentum. Liraglutide was approved for blood sugar control in the treatment of Type 2 diabetes in China in Mar 2023, and the marketing authorization application for obesity/overweight indication was granted in Jun 2023. This will likely boost the growth of the segment. Meanwhile, Huadong Medicine’s medical aesthetics segment continues to enjoy high growth momentum. In terms of its domestic business, Ellansé has become a star dermal filler product in the Chinese market, and will likely continue to　　contribute to the segment’s earnings elasticity. We maintain our forecast of Huadong Medicine’s EPS in 2023E/24E/25E at Rmb1.71/2.06/2.54, respectively. Considering the peer average of 31x 2023E PE (based on the Wind consensus of 59x 2023E PE for leading innovative drug maker Hengrui Pharmaceuticals (600276.SH), 18x 2023E PE for Fosun Pharmaceutical (600196.SH), an innovation-driven global pharmaceutical and health industry group, and 16x 2023E PE for Kelun Pharmaceutical (002422.SZ), a comprehensive pharmaceutical company spanning pharmaceutical manufacturing and innovation), we assign 30x 2023E PE to derive a target price of Rmb52 for Huadong Medicine 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。