Henlius delivered strong 1H results with revenue up 94% YoY to RMB2.5bn, beating BOCIe and market consensus. Net profit realised a turnaround to RMB240m thanks to decent optimisation in OPEX ratio though partly offset by GPM contraction. The commercialisation accelerated rapidly with sales per capita in 1H23 of HANQUYOU and HANSIZHUANG at RMB400K+/RMB210K+ per month respectively, significantly higher than domestic peers. Henlius expects serplulimab to submit the BLA for 1L ES-SCLC treatment in the US in 2024. We revise up our 2023-24E revenue to reflect the strong 1H sales. We see the near-term growth momentum unlikely to last in 2024/25 given the fiercer competition in biosimilar products, say trastuzumab, potential GPO risk, and lack of catalysts. Maintain HOLD and revised down our 12-month TP to HK$12.6.
　　Key Factors for Rating
　　Topline beats with NP turnaround. Henlius delivered strong 1H results with revenue up 94% YoY to RMB2.5bn, beating BOCIe and market consensus. By product, 1) HANQUYOU (trastuzumab biosimilar) kept its strong momentum and recorded sales of RMB1.28bn, up 55% YoY; 2) HANSIZHUANG (serplulimab, PD- 1i) soared by 623% YoY and realised revenue of RMB556m; 3) HANLIKANG (rituximab) and HANDAYUAN (adalimumab) generated sales of RMB254m/RMB21m, representing -7%/+5% YoY respectively; 4) HANBEITAI (bevacizumab) contributed revenue of RMB44.9m in the first half-year. Gross margin dropped by 5.2ppts YoY to 71.1% while Opex ratio saw decent optimisation, as R&D expense and administrative expense ratios reduced by 19.5ppts and 5.9ppts to 21.9% and 6.5% respectively, thanks to rapid sales ramp-up. Consequently, net profit realised a turnaround to RMB240m (vs. net loss of RMB252m in 1H22), broadly in line with previous positive earning alert.
　　Accelerated commercialisation in 1H23: 1) HANQUYOU: per management, the sales per capita in 1H23 improved to over RMB400k per month (vs RMB370k/month in 2022), significantly higher than domestic peers (c.RMB120k-180k/m). The market share of HANQUYOU reached 50% in June with monthly sales of over RMB200m since March. Besides, FDA has completed the on-site inspection of HANQUYOU in early August and the management expects to have the final result by mid or late September. 2) HANSIZHUANG: the management attributes the rapid ramp-up to (i) wider recognition on inclusion of guidelines and favourable clinical data, (ii) differentiated niche to focus on SCLC, and (iii) enhanced accessibility on patient assistance programmes covered in Huiminbao. The commercial team expanded to c.550 people from c.400 in 2022, with sales per capita in 1H23 at RMB210k per month.The management highlights that HANSIZHUANG has covered c.35% patients under 1L SCLC treatment in top accessible hospitals.
　　Key Risks for Rating
　　1) Price cut from GPO on biosimilar drugs; 2) slower-than-expected sales ramp of new drugs; 3) failure of major clinical trials.
　　Valuation
　　Post result, we revised up our 2023-24E revenue by 32%/19% to factor in strong 1H sales. We nudged up selling expense while revised down administrative and R&D expense ratio. In the long term, we revised down GPM and lifted selling expenses ratio. Meanwhile, we remain conservative on long-term prospects of biosimilar drugs. Although Henlius demonstrated encouraging sales ramp-up in 1H23, we see the near-term momentum unlikely to last in 2024/25 given (i) HANQUYOU’s higher market share in trastuzumab (50%) and fiercer competition, (ii) potential headwinds from potential GPO risks, and (iii) lack of short-term catalysts. Besides, Hansizhuang is not participating in this year National Reimbursement Drug List negotiation, and we expect its short-term sales to be hindered by on-going anti-corruption activities in China. Maintain HOLD.Updated RMB/HKD FX rate to 1.12 and revised down our 12-month TP to HK$12.6 (WACC of 10.7% and terminal growth of 3%).
　　Eyes on Serplulimab Indications Expansion & Overseas Foray
　　In China, NSCLC: Henlius expects serplulimab to complete the pivotal clinical trial for 1L nsqNSCLC treatment and to submit the NDA in 2H23. GC: The phase III trial for neoadjuvant treatment in combination with chemotherapy / adjuvant with serplulimab only, has enrolled c.400 patients and expects to have data readout in 2Q25. LS-SCLC: Phase III MRCT of serplulimab combined with concurrent chemoradiotherapy has begun with 222 enrolled patients, including 9 in the US, and the enrolment in Europe will kick off soon. Henlius expects data readouts in 1Q25.
　　In US, serplulimab is expected to complete the bridging study for 1L ES-SCLC treatment and submit the BLA in 2024.
　　We see KEYNOTE-585, the clinical study in which KEYTRUDA plus chemotherapy as neoadjuvant treatment for GC/GEJ adenocarcinoma, has failed to reach the primary endpoint of event-free survival (EFS) in the interim analysis. Nevertheless, the management expects the different clinical trial design of serplulimab to make a difference, in that (1) only patients with TPS>50% (high PD-L1 expression) are enrolled; and (2) after-surgery regimen focuses on long-term effect brought by PD- 1 inhibitor itself rather than that brought by PD-1i plus chemo.
　　Enhanced Production Efficiency
　　Henlius highlighted its lean operations and superior supply chain to improve the production efficiency. The batch output increased 10% compared with 2022 for serplulimab and the direct material cost was 11.4% lower than that in 2022.