We are initiating coverage on Simcere Pharmaceutical which is well- positioned to transform to an innovative pharmaceutical company, by leveraging its differentiated products and pipeline via in-house R&D, business development collaboration and strong commercialisation capability. We like Simcere for its attractive valuation and solid short term growth prospects. We believe the impact from anti-graft activities has largely price in, and Sanbexin has digested impact of price cut in 2023 and return to rapid growth in 2024. Initiate Simcere with BUY rating and DCF-based 12-month TP of HK$10.6.
　　Key Factors for Rating
　　Undemanding valuation has largely priced in pessimistic market sentiment and the soft results this year. Simcere’s stock price has declined significantly in YTD, mainly due to (i) China healthcare space valuation de-rating, (ii) devaluation of COVID-19 oral drug, (iii) slowed growth of Sanbexin on 32% price cut implemented from March 2023, and (iv) negative impact from anti-graft activities. Still, we expect Simcere to deliver soft topline results in 2H23 amid on- going graft activities, given disrupted hospital entry for COSELA and off-label usage of ENWEIDA, etc. However, we believe the impacts from anti-graft activities has largely priced in, and we expect Simcere return to rapid growth in 2024, driven by sales ramp-up of core innovative products such as Sanbexin, COSELA, and ENWEIDA, etc. We expect Sanbexin to be back to rapid growth in 2024 after digested price cut impact in 2023, thanks to broad medical institution coverage, AIS treatment guideline recommended, and more affordable treatment costs compare to the competitor. Besides, we expects to see sale ramp-up of COSELA after being included NRDL. Furthermore, Simcere has built differentiated pipeline in CNS and oncology to further (i) strengthen its leading position in stroke management and expand into insomnia and Alzheimer's disease, (ii) expand its influence in oncology therapeutic field with innovative molecules.
　　Key catalysts in 2023-24 include (i) Xiannuoxin’s full NDA approval in 2023, (ii) Sanbexin sublingual tablet to be approved in 2024 in China, (iii) phase III data readout for TNBC in 1Q24 for 2025 sNDA approval, and (iv) Endostar’s phase III data readout as treatment of pleural effusion in 2024 for 2025 NDA approval, etc. Key to watch in 2023 NRDL negotiation is (i) COSELA (ii) Xiannuoxin and (iii) Endosta.
　　Valuation
We adopt a DCF model to value Simcere, with a WACC of 10.5% and terminal growth rate of 2.0%, and derive 12-month DCF-based TP of HK$10.6 and BUY rating. Simcere is currently trading at 13.7x 2024 PE, and our TP implies 20.4x 2024 PE. We believe Simcere currently is undervalued, considering 17.8% and 35.5% of 2023-25E CAGR in topline and bottom line, respectively, faster growth in bottom line thanks to gross margin recovery and cost control in regard to R&D and selling and marketing expenses. Key risks: commercialisation uncertainty, delay/failure in clinical trials, and price cut on key products.