JIANSU HENGRUI MEDICINE CO., LTD. is a China-based company, principally engaged in themanufacture and distribution of pharmaceutical tablets, injections and raw materials. The Company'smain products portfolio consists of antineoplastic drugs, angiomyocardiac drugs, drugs for surgery,contrast agents, antibiotics, specialty infusions and others. The Company distributes its productswithin domestic market and to overseas markets. (Source: Reuters)Investment Highlights
Jiangsu Hengrui Medicine (the company) announced its annual financial reports of 2019 on March22nd, 2020. During the reporting period, the company’s operating revenue was CNY 23.29 bn, up by33.70% YoY; its net profit attributable to shareholders was CNY 5.33 bn, up by 31.05% YoY; itsnon-deducted net profit was CNY 4.98 bn , up by 30.94% YoY; and its EPS stood at CNY 1.20 based onthe latest share capital.
The company’s 2019 performance meets out previous expectation.
Rising sales volume of innovative drugs became an important driving force, making the company’searnings growth accelerate quarter by quarter.
During the reporting period, the company’s net profit attributable to shareholders posted a 35.70%YoY growth after deducting stock incentive compensation of about CNY 189 mn, showing a significantincrease compared with the growth of 2017 and 2018.
The increasingly growing performance may be supported by the effect of the company's marketingreform and the successive launch and rising sales of a large number of new products.
The innovative model is stepping up to a new level. The company's innovation model has graduallymoved from "me-too" and "me-better" in an initial stage to original innovation. The layout ofinnovative drugs is changing from small molecule drugs to large molecule drugs, which has produceda technology platform of antibody toxin fusion compound (ADC) with independent intellectualproperty rights and has mastered the proprietary technology of tumor immune antibody seriesproduct development.
Many varieties won the bid of centralized procurement; the company obtained good results ofconsistency evaluation at the current stage.
It is a long-term trend that China procures generic drugs qualified by consistency evaluation withpromised quantity. The centralized procurement can significantly reduce drug prices, relax the burdenof patients' drug costs and lower the transaction costs of pharmaceuticals manufacturers. The company will actively respond to the policy trend and maintain the positive growth of relatedvarieties.
The marketing distribution system of the company’s business unit system has been continuouslyimproved, further enhancing market promotion ability.
Since 2018, the company has gradually established and improved the sales management system of abusiness unit system. At the same time, the company has strengthened the construction of medicalaffairs system and market academic team, focused on strategic cooperation and resource integration,accelerated the transformation of old and new capacity, promotion of innovative drugs, and rapidlytapped OTC market, third terminal market and county markets.
R&D expenses and administrative expenses increased rapidly; profitability improved steadily.
In 2019, the company's sales/administrative/R&D expenses increased by 31.87%/37.81%/45.90% YoY,respectively. The rapid growth of sales, administrative and R&D expenses was mainly due to the largeinput in new product marketing, the increase expenditure of stock incentive compensation plan, anda substantial increase of clinical trials and R&D projects.
Earnings forecast and investment recommendationJiangsu Hengrui Medicine, the leading player of A-shares pharmaceutical listed enterprises, ownsmature product structure, strong R&D capacity and professional sales system. At present, thecompany's R&D achievements have been gradually coming on the market---many core varieties suchas PD-1 monoclonal antibody and rimazolum have gained approval. The subsequent launch of severalinnovative drugs and generic drugs will provide new growth momentum for the company. In 2020, asthe innovation model will be further deepened, the company's performance will enter a new round ofgrowth, showing an uptrend in business.
We estimate the company’s EPS to be CNY 1.55/2.02/2.63 for year 20/21/22, implying a P/E ratio of53.17/40.82/31.28x (based on the closing price of March 23rd, 2020). We are positive about thecompany’s future growth with strong certainty and maintain a “Buy” rating.
Potential risks: impacts of COVlD-19; over-expected price reduction due to procurement biddings inmany regions; new drugs that may come on the market more slowly; over-expected price reductionof anti-tumor drugs