Hengrui Medicine:Updates on middle/late-stage pipeline

Multiple catalysts ahead; late-stage pipeline represents 17% market cap by DBe.

    We update pipeline progress following the meeting with Chairman Sun. Majorcatalysts are: 1) approval of 19K and Abraxane generic by YE17; 2) resubmissionof retagliptin in the near term; 3) clarity on pyrotinib development, includingan earlier submission of marketing approval; 4) updates on clinical progressfor camrelizumab; and 5) phase 3 data release on Incyte's ECHO-301. We alsohighlight potential upside from additional US IND approval and clinical progressof its novel compounds in the US. Our NPV analysis indicated the pipeline valueis RMB9.2 per share. This comprehensive report includes key ongoing clinicalstudies for all mid/late study compounds, as well as competitors' studies.

    Camrelizumab as the largest driver; IDO inhibitor provides significant upside.

    We have updated our peak sales for camrelizumab to RMB5-6bn in China andincreased the probability of success to 75-85%, based on the strong ORR datafrom the phase 1 study. Four registration trials are being conducted at present.

    We expect Hengrui to get the first domestic PD-1 approval, with safe data fromsufficient number of patients required by the CFDA. Additionally, we expect INDapproval for its IDO inhibitor from CFDA in the near term, following US INDapproval in May. We believe it would be significantly positive to the IO franchiseand we forecast RMB3-4bn peak sales for the IDO inhibitor.

    DB proprietary patient-based PD-1/PD-L1 model.

    Our model indicates that the addressable market for PD-1/PD-L1 would beRMB19bn in China in 2017 and RMB29bn in 2030, representing a CAGR of 15%.

    NSCLC and GC are likely to be the largest indications due to a large patient baseand unmet medical need. Our model is based on 14 tumor types, including theapproved indications and major indications being investigated. Among domesticnames, we identified six companies that are conducting late stage studies fortheir PD-1/PD-L1 with Hengrui being the leader.

    Valuation and risks.

    Our current valuation for the late stage pipeline represents 17% of the market cap,vs. 15% as of our first attempt in September 2016. Our TP of RMB58.5 is basedon 42x 2018E EPS. We believe 42x is justified, as A-share peers are trading at 29xwith 18% EPS growth in 2017 (vs. the 24% we model for Hengrui). We believethe premium is justified, given the top China pipeline, major upside from exportsand the potential earnings growth acceleration driven by blockbuster launches.

    Key risks include product launch delays and price cuts.