Company Reports

We reinitiate coverage of one of the largest Chinese drugmakers, Sino Biopharmaceutical. We downgrade the moat rating to none from narrow. However, we think Sino Biopharm is potentially moaty if it successfully transforms its diversified generic-dominant drug portfolio into a patent-protected portfolio. Our fair value estimate is HKD 3.01 per share, underpinned by a 7.5% revenue compound annual growth rate in the next five years. We think the shares are fairly valued currently. The key upside to our current valuation depends on whether Sino Biopharm brings out more patent-protected new drugs.

Sino Biopharmaceutical was initially anchored in hepatitis medicines with its flagship drug Tianqing Ganmei, which was approved in 2005 in China. Since the introduction of China’s volume-based procurement policy in 2018, Sino Biopharm has increased its research and development spending for a more innovative pipeline. VBP purchases pharmaceutical products in bulk from drugmakers at a lower price for national public hospitals using national public healthcare funds. Generic or biosimilar drugs have the most severe price cuts in VBP. In 2023, generics and biosimilars contributed around 70% of Sino Biopharm’s total revenue. Hence, we believe the company’s transformation strategy makes sense, as it will increase Sino Biopharm’s competitive advantage while helping to mitigate the impact of VBP.

We are placing coverage of narrow-moat-rated Sino Biopharmaceutical under review pending the transfer of coverage to a new analyst. We expect to revisit our coverage of this company over the next three months. Our most recent fair value estimate was HKD 6.50.

Sino Biopharmaceutical, or SBP, is one of the four "Big Pharma" drugmakers in China, and operates in a fast-growing and rapidly changing environment. Drug manufacturing is growing faster than the gross domestic product, and we project it to grow at high single digits over the next decade. Additionally, the industry is undergoing massive regulatory change. The most impactful policy is centralized procurement, which is drastically cutting prices for commonly used chemical generics and has hurt SBP's growth.

Narrow-moat Sino Biopharmaceuticals, or SBP, reported full-year earnings that exceeded our expectations due to significantly lower sales and distribution expense. Revenue for the second half and full year was CNY 13.6 billion and CNY 28.8 billion, respectively, or 8.6% and 7.1% growth. Although the top line was within 2% of our expectations, operating profit margin (calculated with cost of sales, other expenses, and sales, general, and administrative expenses) was 20.4% for the full year, which is a 4.8 percentage point improvement over 2021 and 2 percentage points better than our expectation. This was primarily driven by lower sales expenses in the second half. However, we expect this to be temporary as the company will likely need to increase spending to prepare for new product launches.

On March 7, F-Star announced that its acquisition by narrow-moat Sino Biopharmaceutical, or SBP, was finally cleared by the Committee on Foreign Investment in the U.S. SBP first announced the proposed acquisition in June 2022. Despite the long timeline of the committee's review, we view this outcome as positive for SBP and clears up long-standing uncertainty.

Chinese healthcare companies have rallied dramatically in the past month. Within our coverage, biotech names Innovent (narrow moat), Junshi (narrow moat), I-Mab (no moat), and Genscript (no moat) have rallied 39%, 47%, 5%, and 45%, respectively, since Oct. 11. Big pharma names CSPC and Sino Biopharm (both narrow moat) have rallied 26% and 16% in the same period. CR Pharma and Shanghai Pharma are narrow-moat drug distributors with drug manufacturing segments and have rallied 15% and 14%. No-moat WuXi Biologics has lagged, having sold off 6% despite rallies from other CDMOs. 3SBio (narrow moat biopharma) and Sinopharm (narrow moat distributor) have also lagged their respective comparables.

Narrow-moat Sino Biopharmaceutical, or SBP, reported interim earnings that were slightly below our expectation. Revenue for the six months was CNY 15 billion, or 6% higher year on year, which is a minor disappointment. Much of this was due to an 8% decline in respiratory drugs, attributed to centralized procurement of budesonide. Although net profit fell 67% year on year, this was caused by last year’s large associate income from SBP’s investment in SinoVac, which is not recurring. Operating profit margin was almost unchanged and in line with our expectation.

Sino Biopharmaceutical, or SBP, is one of the four "Big Pharma" drugmakers in China, and operates in a fast-growing and rapidly changing environment. Drug manufacturing is growing faster than GDP, and we project it to grow at high single digits over the next decade. Additionally, the industry is undergoing massive regulatory change. The most impactful policy is centralized procurement, which is drastically cutting prices for commonly used chemical generics and has hurt SBP's growth.

Sino Biopharmaceutical, or SBP, is one of the four "Big Pharma" drugmakers in China, and operates in a fast-growing and rapidly changing environment. Drug manufacturing is growing faster than GDP, and we project it to grow at high single digits over the next decade. Additionally, the industry is undergoing massive regulatory change. The most impactful policy is centralized procurement, which is drastically cutting prices for commonly used chemical generics and has hurt SBP's growth.

Sino Biopharmaceutical, or SBP, is one of the four "big pharma" drugmakers in China, and operates in a fast-growing and rapidly changing environment. Drug manufacturing is growing faster than GDP, and we project it to grow at high single digits over the next decade. Additionally, the industry is undergoing massive regulatory change. The most impactful policy is centralized procurement, which is drastically cutting prices for commonly used chemical generics and has hurt SBP's growth.

Narrow-moat Sino Biopharmaceuticals reported full-year earnings that were in line with expectations. Revenue was CNY 26.9 billion for the full-year and CNY 12.5 billion for the past six months, both representing 14% year-on-year growth. Gross profit margin for the year improved to 80%, which is 2 percentage points better than last year and in line with our expectation due to ramp up of new drugs.

On Dec. 1, the Chinese biotech company BeyondSpring Pharmaceuticals (Nasdaq: BYSI, not covered) received a complete response letter, or CRL, from the U.S Food and Drug Administration, or FDA, regarding its application for approval of plinabulin for the prevention of chemotherapy-induced neutropenia, or CIN. Although this is likely contributing to the negative sentiment weighing on the Chinese biotech sector, we believe the read-through to other companies should be limited. We are not updating our fair value estimates s at this time.

Sino Biopharmaceutical, or SBP, is one of the top four drugmakers in China, and operates in a fast-growing and rapidly changing environment. Drug manufacturing is growing faster than GDP, and we project it to grow at high single digits over the next decade. Additionally, the industry is undergoing massive regulatory change. The most impactful policy is the Group Purchasing Organization, or GPO, which is expected to cut prices for several hundred commonly used chemical generics over the next few years. Although the near-term impact from regulatory reform will be negative for SBP, we believe in the long-term it will be supportive of SBP’s manufacturing capabilities and somewhat differentiated pipeline.

Narrow-moat Sino Biopharmaceuticals, or SBP, reported second-quarter earnings that were in line with our expectations. Revenue for the quarter was CNY 7.1 billion, or 10% year-on-year growth, which is lower than our expectation given that it enjoys a comparison with a low base from the pandemic. However, gross profit margin jumped 5 percentage points, which brings operating profit in line with our estimate. We maintain our fair value estimate of HKD 6.50 per share, and view the stock as fairly priced right now.

Sino Biopharmaceutical, or SBP, is one of the top four drugmakers in China, and operates in a fast-growing and rapidly changing environment. Drug manufacturing is growing faster than GDP, and we project it to grow at high single digits over the next decade. Additionally, the industry is undergoing massive regulatory change. The most impactful policy is the Group Purchasing Organization, or GPO, which is expected to cut prices for several hundred commonly used chemical generics over the next few years. Although the near-term impact from regulatory reform will be negative for SBP, we believe in the long-term it will be supportive of SBP’s manufacturing capabilities and somewhat differentiated pipeline.

Narrow-moat Sino Biopharmaceuticals, or SBP, reported first-quarter earnings that were in line with our expectations. We maintain our fair value estimate of HKD 6.50. With the stock trading at a 33% premium to our fair value, we view the stock as overpriced and believe other stocks offer better value, especially smaller and nimbler biotech companies like Innovent and Junshi.

Narrow-moat Sino Biopharmaceutical, or SBP, reported fourth quarter earnings that underperformed our core operating profit estimate, primarily due to high sales, general, and distribution costs, or SG&A. We maintain our fair value estimate of HKD 6.50, and although the stock trades at an 18% premium to this it remains a 3-star stock given its very high uncertainty rating and within the range of what we consider a fair price. After falling more than 40% peak-to-trough last year, we think SBP should enjoy better sentiment this year due to ramp-up of new drug sales, as well as the likely approval of its PD-1 drug, penpulimab.

Sino Biopharmaceutical, or SBP, is one of the top four drugmakers in China, and operates in a fast-growing and rapidly changing environment. Drug manufacturing is growing faster than GDP, and we project it to grow at high single digits over the next decade. Additionally, the industry is undergoing massive regulatory change. The most impactful policy is the Group Purchasing Organization, or GPO, which is expected to cut prices for several hundred commonly used chemical generics over the next few years. Although the near-term impact from regulatory reform will be negative for SBP, we believe in the long-term it will be supportive of SBP’s manufacturing capabilities and somewhat differentiated pipeline.

We upgrade Innovent’s moat to narrow from none. We raise our fair value estimate to HKD 80.00, from HKD 33.00, which implies a 12-month forward price/sales ratio of 21. While our price remains below the market value, we believe this is primarily due to discount rate assumptions rather than a difference in view on earnings. The stock now has a 3-star rating, and we believe sentiment toward it will remain strong given positive pipeline developments expected over the next year.