In 1H23, Simcere reported RMB3.38bn (+25% YoY) revenue from drug sales and promotion services. Revenue from innovative drugs increased 37% YoY to RMB2.41bn (accounting for 71% of 1H23 total revenue, vs 65% in FY22 and 62% in FY21). In 1H23, revenue from oncology, autoimmune and other fields recorded 35%, 30%, and 63% YoY growth, respectively, while the sales of CNS products decreased 1.5% YoY in 1H23. The GP margin decreased to 75.8% in 1H23 from 79.4% in 1H22, mainly due to the reduced proportion of sales from high-margin Sanbexin, and relatively high manufacturing cost of Xiannuoxin (3CL) at the initial commercialization stage. Operating cash outflows in 1H23 was RMB82mn, compared to cash inflow of RMB685mn in 1H22, mainly due to the raw material stocking for Xiannuoxin in 1H23. R&D ratio decreased to 36.9% in 1H23 from 38.0% in FY22, and SG&A ratio also fell to 44.5% from 45.1% for the same period. Simcere recorded an attributable net profit of RMB2.27bn in 1H23 (incl. RMB1.14bn from fair value change of investment portfolio and RMB0.79bn from disposal of subsidiaries), while the core net profit was stable (RMB395mn in 1H23 vs RMB393mn in 1H22).
　　Oncology business recorded growth recovery. The sales of Endostar　in 1H23 increased 51% YoY to RMB434mn. According to 3D Medicines, Enweida (PD-L1) realized RMB353mn sales in 1H23 (+70% YoY). Cosela was at early stage of sales ramp-up, and may obtain approval for domestic production in 1Q24, which will boost the GP margin for the product. We expect Cosela to be added to the NRDL for ES-SCLC in early 2024. In addition, the Ph3 trial of Cosela in TNBC will release data in 1H24. The Company is also exploring the potential of Cosela in combination with ADC or IO drugs. Besides the commercialized assets, the Company recently in- licensed CMAB009 (EGFR) which is currently under the NDA review by CDE for CRC. CMAB009 could potentially become the first domestic EGFR mAb in China.
　　Non-oncology portfolio continues to grow. In the CNS field, sales of Sanbexin remained stable YoY in 1H23 at RMB1.03bn (22% market share of stroke injection), with a significant 33% increase in patient numbers offsetting the 32% price cut due to NRDL renewal effective in Mar 2023.The NDA of Sanbexin sublingual tablet for acute ischemic stroke (AIS) was accepted by CDE in Jun 2023. Upon the approval expected in 1H24, the tablet will become a sequential therapy of Sanbexin injection and provide better flexibility for stroke treatment. Additionally, Sanbexin is assessed in a Ph2 trial for hemorrhagic stroke. Daridorexant, a differentiated anti- insomnia drug potentially with better safe profile and no withdrawal symptom, has recently obtained Ph1+3 IND approval in China, which could lead to an NDA in 2024. Meanwhile, Xiannuoxin (3CL) has filed the full approval application, being the first COVID-19 small molecule drug in China to apply for full approval in China.
　　Maintain BUY. To factor in the challenging business environment in China, we revise our DCF-based TP from HK$12.12 to HK$8.15 (WACC: 11.1%, terminal growth rate 3.0%), implying 27x/17x FY23/24 PE.