Hengrui Medicine:More catalysts ahead

25% growth target for 2016 achievable.

    Hengrui reported sales/core EPS of RMB2.6bn/0.27 in 2Q16, representing YoYgrowth of 20%/23%. The strong growth was led by the export and oncologybusinesses, which grew 48% and 30% YoY respectively in 1H16. Managementexpects the growth momentum in the export business to continue with thelaunch of sevoflurane, and the domestic business to continue to deliver. Thecompany thus expects slightly better growth in 2H16 vs. 1H16. Going into2017, we expect slight growth deceleration due to the delayed approval of 19Kand retagliptin. However, the potential RDL inclusion of apatinib/imrecoxib inYE16/1H17 could add another leg for growth.

    Strong growth momentum in oncology, contrast agents, and exports.

    Management indicated that oncology and contrast agents each achieved 30%growth in 1H16, compared with 18% and 20% in 2015 respectively. Weattribute the growth acceleration to the ramp-up of apatinib for oncology andlimited competition for contrast agents. We also highlight the export business’strong growth at 48% in 1H16, driven by backloaded revenue booking forcyclophosphamide. We expect growth for exports to remain strong assevoflurane ramps up. The company indicated that growth in anesthetics was10-15% in 1H16 vs. 20% in 2015, which was likely due to growth moderationin sevoflurane and dexmedetomidine in China.

    On margins and pipeline progress.

    GM increased to 87.7% in 2Q16 from 85.1% in 2Q15, mainly driven by thechange in product mix as apatinib and the export business ramped up. OPMregistered at 26.6% in 2Q16 vs. 27.3% in 2Q15. The decline was due to higherR&D spending, which accounted for 9.3% of total sales in 1H16 vs. 8.0% in1H15. On the pipeline, management expects the re-filing of 19K and retagliptinin 2H16. In 1H16, the company received 37 clinical trial approvals, includingthree for innovative drugs, and five ANDA are pending US FDA approval.

    Increasing our price target to RMB50.0 from RMB49.5; risks.

    Our price target is based on 35.5x 2017E EPS of RMB1.41. We believe 35.5x isjustified as A-share peers are trading at 29x with 19% EPS growth in 2017E(vs. 22% for Hengrui). We believe its premium is justified by higher growthsustainability, multiple innovative product launch opportunities, and its exportbusiness. Key risks are delays in product launches and price cuts.