Core views:
　　Simcere Pharmaceutical is focusing on differentiated innovation and accelerating business transformation. Driven by both independent and cooperative R&D, the Company is targeting the three disease fields of the central nervous system, oncology and autoimmunity, and has developed a diversified pipeline of innovative drugs. Sanbexin, a blockbuster novel drug for stroke treatment, has been driving rapid earnings growth. Blockbuster products with distinctive advantages such as Trilaciclib, Envafolimab and Sevacizumab are bearing fruit, and we see broad market prospects ahead. Simcere will likely become the first manufacturer to market 3CL oral small molecule inhibitors in China given the industry-leading progress of its clinical study of Xiannuoxin (SIM0417), which should have vast headroom for commercialization. We combine both absolute and relative valuation methods and arrive at a fair equity value of Rmb40.762bn (HK$47.310bn), corresponding to a target price of HK$18, and initiate coverage with a "BUY" rating.
　　Abstract:
　　Focusing on differentiated innovation and accelerating business transformation. Simcere Pharmaceutical is a long-established pharmaceutical company striving for innovation and transformation. With a profound foundation, the Company has developed a system of "R&D + production + commercialization” across the value chain of the industry to support its innovation and transformation. Innovative drugs are dominating its revenue and driving faster profit growth. The Company has a concentrated shareholding structure, which should support stable operations in the long term. It continued to upgrade its management in 2022 to promote innovation and transformation. The Company has been increasing its R&D investment and optimizing its employee structure. Its growth was driven by both independent and cooperative R&D, and its business development (BD) team has competitive strengths. With a focus on differentiation, the Company has developed innovative pipelines. With industry-leading R&D efficiency and commercialization, the Company is likely to see strong growth in its innovative pipelines.
　　Central nervous system: Sanbexin taking the lead. Central nervous drugs have a high barrier for R&D and are in high clinical demand, meaning the market is a potential blue ocean. The Company is a pioneer in China's central nervous market and is leading in several fields. Stroke has become the leading cause of death in China as there is a lack of effective clinical treatments, resulting in huge unaddressed clinical needs. As a blockbuster novel drug for stroke, Sanbexin has brought a new option for stroke treatment. With more and more clinical evidence emerging, the drug is likely to be a new blockbuster that alters the clinical treatment pattern of stroke, as suggested by the sales of NBP. Sanbexin sublingual tablets are a supplement to sequential therapy that can increase the availability and flexibility of stroke regimens and improve medication compliance. In addition, the Company has set foot in cerebral edema, Alzheimer's disease, insomnia and other fields, and has maintained a leading position in the domestic central nervous market in terms of clinical progress.
　　Oncology: Focusing on differentiated innovation and new generation of blockbusters. The Company is committed to differentiated development of cancer drugs to support its innovation and transformation. Trilaciclib is a CDK4/6 inhibitor co-developed by Simcere and G1 Therapeutics, which has shown a promising clinical prospect for bone marrow protection against CDK4/6 insensitive tumors. Envafolimab is the first approved subcutaneous injected PD-1/PD-L1 antibody in the world that was co-developed by the Company, Alphamab and 3D Medicines, with remarkable advantages in convenience, efficiency and safety. Endostar is the first anti-angiogenesis targeting drug approved in China focusing on unmet clinical needs; its expansion of indication to malignant thoracoabdominal effusions may boost a new round of growth. Sevacizumab is a new vascular endothelial growth factor (VEGF) antibody co-developed with Apexigen, and has the advantages of "higher efficiency and lower toxicity" compared with bevacizumab.
　　Autoimmunity: Focusing on unmet clinical needs. China's autoimmune disease market is still in its infancy and is expected to grow rapidly. The Company's autoimmunity pipeline focuses on unmet clinical needs and has huge market potential. Iremod is a traditional synthetic disease modifying antirheumatic drug (DMARD) with validated efficacy and safety and improving clinical evidence; its indications are likely to be expanded to cover Sj？gren’s syndrome. Abatacept is a novel biological DMARD with excellent sales overseas and is likely to boost the Company's revenue.
　　Xiannuoxin: 3CL oral small molecule inhibitor with leading domestic clinical advances. In China, as the shift in Covid-19 prevention and control policy from "prevention" to "treatment" is fueling demand for Covid-19 drugs, the approval of new Covid-19 drugs is likely to speed up. As suggested by overseas experience, oral 3CL inhibitors are quite effective and could completely alter the market pattern. Xiannuoxin (SIM0417) is an oral 3CL small molecule inhibitor co-developed by the Company with the Shanghai Institute of Materia Medica and Wuhan Institute of Virology, Chinese Academy of Sciences. The phase II/III clinical trial of Xiannuoxin has made leading progress in China with all patients recruited in Dec 2022. Simcere will likely become the first manufacturer to market 3CL oral small molecule inhibitors in China.
　　Several milestones are coming up in the next 12 months: (1) Xiannuoxin: We expect a data readout before Mar 2023 for the treatment of mild to moderate Covid-19 symptoms. (2) Sanbexin: We expect patient enrollment and a data readout of TASTE-2 study to be completed in 2023. (3) Sanbexin sublingual tablets: We expect a new drug application (NDA) to be submitted in 1H23. (4) Trilaciclib: We expect the drug to be marketed in China in 1H23, and NDA for the indication of metastatic colorectal cancer (mCRC) to be submitted in 2023. (5) Endostar: We expect NDA for the indication of malignant thoracoabdominal effusions (a tumor complication) to be submitted in 2H23. (6) Sevacizumab: We expect interim analysis of phase III clinical trial for the second-line treatment of ovarian cancer to be carried out in 1Q23 and NDA to be submitted in 2H23. The phase II clinical study of Sevacizumab in combination with Envafolimab for the treatment of patients with solid tumors is expected to complete proof of concept in 2023 and be followed by pivotal clinical registration.
　　Potential risks: Potential price markdowns of the Company's products; drug R&D progress disappoints; product sales falling short of expectations; new product launches falling behind schedule; potential technological upgrades and product iteration; potential competition related to intellectual property.
　　Investment recommendation: Simcere Pharmaceutical focuses on differentiated innovation with accelerating innovation and transformation driven by independent and cooperative R&D. It has also developed a diversified pipeline of innovative drugs that are bearing fruit. We forecast 2022E/23E/24E revenue to be Rmb6,280mn/7,918mn/ 9,821mn and attributable net profit (ANP) to be Rmb464mn/1,314mn/ 1,420mn. Based on the absolute valuation method (the discounted cash flow, or DCF, model) and relative valuation method (the PE model), we estimate that the Company’s fair market cap should range between Rmb39.097bn- 43.759bn and fair equity value should be Rmb40.762bn (equivalent to HK$47.310bn), corresponding to a target price of HK$18. We initiate coverage with a “BUY” rating.