Innovent: Strong Interim Results; Valuation Lowered as a Result of Challenging Drug Pricing Outlook

Narrow-moat Innovent’s 01801 first-half 2023 results were better than expected, with revenue up 20.6% year on year to CNY 2.7 billion. Cost of sales as a percentage of total revenue was 18.7%, which is 2.4 percentage points lower than the same period last year. Despite this positive report, given the backdrop of a weak macroeconomic outlook and our expectation that the Chinese government will focus on controlling drug costs to reduce hospital expenditure, we have modestly lowered our revenue and gross profit margin forecasts. As a result, our fair value estimate falls by 8.4% to HKD 43.50 per share from HKD 47.50. We view the stock as modestly undervalued at current market prices.

We estimate Tyvyt revenue grew 9.5%, based on Eli Lilly’s disclosures, and non-Tyvyt drug sales grew 33%. Management thinks 2023 will continue to exhibit strong growth, despite planning fewer promotional activities in response to the possibility of a government antigraft campaign targeting healthcare.

We think the most significant catalyst is the approval filing for mazdutide, its GLP-1 and GCGR dual receptor agonist for obesity and diabetes. Filing for this potential blockbuster drug is expected in 2023, and we estimate that approval could be in 2024 or early 2025.

Despite a bright 2023 outlook, we continue to think that management’s goal of CNY 20 billion of annual revenue around 2027 is very optimistic. Most of Innovent’s key drugs are (or will be) early entrants in China, including Tyvyt and mazdutide. However, we don’t see much potential for its pipeline to produce globally innovative drugs, so its revenue will probably be constrained to the domestic Chinese drug market for the next five years or more. Given our pessimistic outlook on government price controls, we think it will be challenging for drugmakers to grow too quickly.