A Brighter Outlook In 2024
Easing pressure from the anti-corruption campaign will result in stronger sales growth for medical products. Moreover, after years of persistent R&D efforts, many Chinese biopharmaceutical companies now expect a fruitful year of innovation in 2024. In addition, potential US interest rate cuts will also provide liquidity for R&D investment and support the development of biotech and CRO segments in 2024. We expect a brighter outlook in 2024. Maintain OVERWEIGHT.
WHAT’S NEW
- Most healthcare companies saw significantly slower revenue growth in 3Q23 due to the disruption caused by the anti-corruption campaign. However, as pressure from this campaign is easing in 4Q23, hospital diagnosis and treatment activities are gradually returning to normal.
ESSENTIALS
- Anti-corruption campaign promotes a healthy business environment and enhances operating efficiency of the healthcare industry. In 1Q23, the unprecedented COVID-19 outbreak significantly disrupted the business activities of China’s healthcare industry. The anti-corruption campaign also caused a significant slowdown in revenue growth in 3Q23. Our industry check indicates that hospital surgeries and diagnostic activities have improved significantly and are continuing to recover in 4Q23. Looking ahead, we believe 2024 will be a stronger year for revenue and earnings growth as: a) the COVID-19 pandemic and anticorruption campaign in 1Q23 have created a low base for growth in 1Q24, and b) the anti-corruption campaign promotes a healthy business environment which will help to enhance operating efficiency of the industry in the longer term.
- Potential US interest rate cuts will help promote liquidity and support a significant recovery of the biotech and CRO/CDMO segments. Biotech and CRO/CDMO segments continue to be impacted by the weak global biotech funding environment. A possible easing money policy in the US will definitely support a rally of these segments.
- Innovation efforts bearing fruit. Biopharmaceutical companies under our coverage have put persistent efforts in R&D and further enhanced their pipelines. Innovent (1801 HK) has quickly extended its commercial product portfolio to 10 products in the past few years. Among its 30 innovative portfolios, seven are in pivotal studies. CSPC (1093 HK) has successfully obtained four new product approvals in 2023 and targets seven and 10 in 2024 and 2025 respectively, and around 12 per year from 2026 onwards. Hansoh Pharma (3692 HK) successfully launched Pegmolesatide in 1H23 and expects to receive market approval for Aumolertinib’s adjuvant therapy in 2024. It targets to have 15 innovative drugs (including new indications) that could account for over 80% of total revenue in 2025. Aside from actively engaging in business development activities, Sino Biopharma (1177 HK) also expects market launch of three/four/six innovative blockbusters in 2023/24/25 respectively. 2024 will be a fruitful year of innovation for biopharmaceutical companies.
- GPO tenders on medical devices and drugs will continue to foster innovation. The ninth round of national drug group purchasing organisation (GPO) tender was held on 6 Nov 23. Shanghai Sunshine Medical Procurement Group later released the proposed bidding results. 205 companies (including five MNCs and 200 domestic companies) won the bids for 266 products, with an average price cut of 58%. The bidding results will be implemented in Mar 24. Sino Biopharm (1177 HK), CSPC (1093 HK), and Hansoh Pharma (3692 HK) have eight, four and three drugs included in this round of national GPO tender respectively. They won the bids for six, one, and two drugs with average price cuts of 75.7%, 81.4%, and 90.8%, respectively. We expect this GPO tender to have limited impact on Sino Biopharm, CSPC and Hansoh Pharma, as all these products involved are relatively new to the market. Tender wins may bring them market expansion and margin improvement opportunities.
ACTION
- Mindray (300760 CH) expects domestic and overseas businesses to regain momentum in 2024. The company reported relatively slower revenue growth of 11.2% and 17.2% yoy in 3Q23 and 9M23 respectively, as hospital procurement was disrupted by the anti-corruption campaign. Mindray expects the campaign to continue to pressure its domestic business in 4Q23 and 1H24. However, it believes that purchase activities for medical equipment will regain pace given the rigid demand for medical products, and expects its domestic revenue growth to regain momentum in 2024. Moreover, its overseas market expansion effort will also start to bear fruit from 2024. We expect Mindray’s revenue growth to accelerate from 15% yoy in 2023 to 18% yoy in 2024.
- Aier (300015 CH) expects to maintain solid revenue and earnings growth despite weak economic conditions. Aier Eye Hospital Group (Aier) achieved satisfactory results with 23.0% yoy growth in revenue and 24.0% yoy increase in adjusted earnings in 9M23, despite the weak economic condition, which impacted the growth of some high-end businesses to some extent. Aier’s market penetration strategy via acquisitions and steady organic growth will continue to enable the company to expand market reach and maintain its leading market position in 2024. We forecast Aier’s revenue to grow 28% and 18% in 2023 and 2024 respectively, factoring in China’s weak economic condition.
- WuXi AppTec (2269 HK) sees resilient revenue expansion in non-COVID-19 business. The company reported revenue growth of 0.3% and 4.0% yoy in 3Q23 and 9M23, respectively. It further guided down 2023 revenue growth from 5-7% to 2-3% yoy as the company sees considerable challenges in such a weak business environment for drug innovators. Given considerably high funding costs, WuXi AppTec sees weak demand for early-stage R&D services. Taking into account the resilient revenue expansion of its nonCOVID–19 business and potential easing US monetary policy that will revive biotech R&D investment, we expect the company to regain revenue momentum of over 20% yoy from 2024.
Innovent (18001 HK) experienced robust drug sales growth of over 45% yoy in 3Q23; smooth progress in commercial portfolio expansion and R&D. Innovent expanded its commercial product portfolio from eight to 10 products. It experienced robust and accelerated pharmaceutical product revenue growth of over 45.0% in 3Q23, up from 35% yoy in 2Q23 and 6.7% yoy in 1Q23. The robust product revenue growth was mainly due to: a) the continued diversification of product portfolio, and b) an enhanced commercial team and improved sales strategy. Its pipelines are also well on track. It submitted new drug application (NDA) for one product, IBI-376 (PI3K? inhibitor, for relapsed or refractory follicular lymphoma (r/r FL) and has progressed seven assets in pivotal or registration trials, which are IBI-362 (GLP-1R, for obesity), IBI-351 (KRAS inhibitor for NSCLC), IBI-344 (taletrectinib), IBI-126, IBI-112, IBI-311 and IBI-302. The robust and diversified pipeline of its >30 innovative drug candidates will yield continuous R&D and commercial achievement in the longer term. which caused a temporary decrease in hospital prescriptions and triggered general destocking at distribution channels; and b) the impact of GPO tenders on TCM formula granules. The company believes the policy impact should be temporary, and remains optimistic on achieving its revenue growth targets in 4Q23 and 2023. We lower our 2023 revenue growth estimate from 24.6% yoy to 23.2% yoy for the company to reflect the weakerthan-expected 2H23 revenue outlook. We expect revenue CAGR of 20% for Shineway in 2023-25, supported by strong TCM formula granules and injections business expansion.
- Venus Medtech (2500 HK) achieved satisfactory TAVR implants of around 1,100 sets and 3,400 sets in China in 3Q23 and 9M23 respectively. The number of TAVR implants was around 300 sets in Sep 23, impacted by the anti-corruption campaign and effect of the low season. The company maintains its targeted TAVR implants of around 5,000 sets (+42.8% yoy) in 2023, with easing pressure from the anti-corruption campaign in 4Q23. It expects to further enrich its product portfolio by launching two more products in 2024, ie Dragonfly (transcatheter mitral valve repair (TMVr) product) in 4Q23-1Q24 and Liwen Ablation System (percutaneous myocardial ablation product) in 2024.
- Henlius (2696 HK) plans to publish its 9M23 results on 15 November, and expects an unqualified opinion from auditor on its 9M23 financial statements. Henlius indicates it had completed an independent investigation and internal control review assessment on its financial investment with AMTD, which found that two former CFO were knowingly and extensively involved in the investment, and some employees did not adhere to the internal control rules of the company. Henlius has decided to adopt all five recommendations from the Independent Investigation Committee. It has also appointed Ernst & Young (EY) to conduct a review on its 9M23 consolidated financial statements, and expects an unqualified review opinion to be given by the auditor(s) after further communication. The company will provide more details regarding this issue on 15 Nov 23. We expect Henlius’ 3Q23 results to remain satisfactory, and expect the potential unqualified opinion from the auditor on 9M23 financial statements to be a key catalyst for the company’s stock price.
RISKS
- Risks include: a) worse-than-expected risks from the anti-corruption campaign; b) intensifying competition; c) possible failure in the development of new products and market launches; d) geopolitical risks and weakened global economic conditions, and e) other policy risks, such as GPO/volume-based procurement (VBP) tenders, and medical insurance payment reform programmes, such as diagnosis-related group (DRG) and diagnosisintervention packet (DIP).
VALUATION/RECOMMENDATION
- Maintain OVERWEIGHT on China’s healthcare sector. We believe the easing anticorruption campaign and potential US interest rate cuts in 2024 bode well for the future growth outlook of healthcare companies. Moreover, 2024 will be a fruitful year of innovation for many Chinese biopharmaceutical companies as they have been making continued R&D efforts in the past few years. With their pipelines generating promising clinical and commercial results, the biopharmaceutical companies are gradually transforming themselves into true drug innovators. Our top picks are Innovent (1801 HK), Mindray (300760 CH), CSPC (1093 HK), Aier Eye Hospital (300015 CH), and TUL (3933 HK). Most of these stocks are trading at 0.4-1.7 SD below average forward PE and/or P/B, which is attractive in our view. Our top SELL pick is MicroPort (853 HK).