Hengrui Medicine:Deep dive into late stage pipeline

Thirteen compounds with blockbuster potential in late stage; Maintain Buy

    Seven innovative compounds with blockbuster potential We have conducted a deep-dive analysis of Hengrui’s pipeline with a focus on late stage compounds. Our analysis indicates that the company is developing 17 class 1.1 new chemical drugs, 7 biological compounds, and 50 class 3 new chemical drugs. By our estimates, seven innovative compounds and six generics with at least RMB1bn peak sales potential are set to be launched within the next 3-4 years. Our NPV analysis indicates that these compounds combined represent RMB6.80 per share on a risk-adjusted basis.

    Seven innovative compounds with blockbuster potential

    We expect 19K, retagliptin, famitinib, and pyrotinib to be launched in 2H17, 1H18, 1H18, and 2H19, respectively, with peak sales of RMB1.2-1.5bn, RMB1.6-2.2bn, RMB1.8-2.6bn, and RMB1.2-1.6bn. We note that retagliptin might be the first DPP4 inhibitor launched in China by a domestic player. For pyrotinib, Hengrui is targeting different indications in the US and China for the respective pathways. As this is an EGFR/HER2 inhibitor, the peak market opportunity is likely to be smaller than for other multi-kinase inhibitors such as apatinib and famitinib. Additionally, we expect three product launches in 2020: remimazolam, henagliflozin, and hetrombopag olamine, with RMB0.8-1.2bn, RMB1.0-1.4bn, and RMB0.8-1.2bn peak sales opportunities, respectively. Our analysis indicates a NPV of RMB4.59/share for these seven drugs.

    Six generic drugs with RMB1bn peak sales potential

    We believe several generics may reach RMB1bn peak sales, including mimics of Cialis, Celebrex, Exforge, Abraxane, Advair, and Lyrica. While the applications for Cialis, Celebrex, and Exforge were withdrawn in 2H15/1H16, re-filing is likely to ensue in 1H17. We believe that its Advair mimic, targeting asthma/COPD, is likely to become a multi-billion drug. We anticipate significant growth opportunities for domestic respiratory players given that 1) respiratory therapeutics have achieved the highest growth rate (15% in 1H16) among the seven largest disease areas, largely due to heavy pollution; and 2) domestic players have less than a 10% market share. These six generics combined could have a NPV of RMB2.21/share, on our estimates.

    Maintaining price target of RMB50.0; risks

    Our price target is based on 35.5x 2017E EPS. We believe 35.5x is justified as A-share peers are trading at 29x with 19% EPS growth in 2017E (vs. 22% for Hengrui). The premium is justified by superior growth, a strong pipeline, and its export business. Key risks are delays in product launches and price cuts.