3SBio’s 1H19 revenue grew 21.6%, adj. net profit grew 28.7% (excluding one-off stock options). 3SBio has multiple short-term catalysts, which may accelerate its sales growth onwards. Maintain BUY with new target price of HK$17.70.
- Inline topline with improving margins. 1H19 revenue was up 22% YoY with TPIAO surging 42% YoY, Yisaipu up 13% YoY and EPO (EPIAO and SEPO) up 5.8% YoY. TPIAO became 3SBio’s largest source of revenue, contributing 45% of total revenue. 1H19 GPM improved 2.4ppts to 82.7% thanks to higher proportion of high-margin products. R&D cost was up 48% YoY 1H19, accounting for 10.0% of revenue. Admin expense ratio increased from 6.2% in 1H18 to 18.2% in 1H19 due to one-off expenses of options granted on 2 Feb 2017 and award shares under the ESOP by Sunshine Guojian. Excluding one-off items, adjusted net profit was up 28.7% YoY.
- Significantly benefit from NRDL revision. New NRDL was released on 20 Aug. Yisaipu and EPO both saw expanded reimbursement coverage for additional indications, namely psoriasis indication for Yisaipu and oncology indication for EPO. We believe sales of Yisaipu and EPO will accelerate thanks to better reimbursement coverage. Bydureon and Byetta are in the list of 128 drugs for price negotiations. We believe these two drugs are very likely to be included into the NRDL, which will largely drive the penetration of Bydureon and Byetta among diabetes patients. In addition, we believe TPIAO will continue strong growth momentum by further substituting IL-11 which still took c.73% market share in 2Q19, according to data from IQVIA.
- Blockbuster approval expected in 4Q19E. NMPA has completed technical reviews and on-site clinical trial inspections for inetetamab (anti-HER2 antibody), which may become the first domestic anti-HER2 antibody in China to be approved in 4Q19E. 3SBio has submitted application to NMPA for approval of pre-filled aqueous injection of Yisaipu in July 2019. The pre-filled formulation is more convenient for injection and could help to further extend the product life cycle for Yisaipu.
- Attractive valuation and maintain BUY with new TP of HK$17.70. We lift FY19/20 revenue forecasts by 2.5%/ 7.3%, benefiting from the updated NRDL. We raise SG&A and R&D cost ratio forecasts and trim FY19/20 adj. net profit forecasts by 11.5%%/ 11.4%. We expect revenue to grow 21.5%/ 23.7% YoY and adj. net profit to grow 29.3%/ 20.7% YoY in FY19/20E. 3Sbio currently trades at 17.6x FY20E P/E. Valuation is attractive. Catalysts: 1) GLP-1s’ inclusion into NRDL, 2) earlier-than-expected launch of new products, 3) stronger-than-expected product sales, 4) successful IPO of Sunshine Guojian on China sci-tech innovation Board.
