Company Reports

We raise Innovent Biologics’ fair value estimate to HKD 50.80 per share from HKD 43.50, after strong 2023 results that led us to lift key growth assumptions. Revenue of CNY 6.2 billion, up 36.2% year over, surpassed our estimated CNY 5.4 billion. Growth was driven by its core asset Tyvyt, a PD-1 drug being included in the Chinese national drug reimbursement list. Tyvyt contributed revenue of USD 393.4 million in 2023 compared with USD 293.3 million in 2022, according to Eli Lilly's recent disclosures. It validates the view of a more dovish price cut on innovative drugs during China's national volume-based procurement. As such, we think the pricing of PD-1 drugs is likely to remain relatively stable in 2024 and 2025.

Innovent is a leading biotech company in China with strong roots in oncology, anchored by its core PD-1 drug Tyvyt. The price cut for PD-1 drugs has stabilized gradually. Hence, we expect stable revenue growth from Tyvyt in the next three years as Tyvyt has more indications approved.

No-moat Innovent Biologic's first weight-loss drug Mazdutide was accepted as a new drug application by Chinese regulators on Feb. 7. The NDA is the final step in the regulatory approval process before market commercialization. NDAs have a high rate of regulatory approval. The progress is two quarters ahead of our expectations. If approved, Mazdutide can enter the market by the end of 2024. We view the business update very positively because it gives Innovent a first-mover advantage in the Chinese market for longer without intense competition from next-generation weight-loss drugs in the oral dosage format. Our fair value estimate is unchanged at HKD 43.50 per share as potential approval of Mazdutide is already reflected in our base-case earnings projections. Innovent is currently trading at a 20% discount to our fair value estimate largely due to selloffs in the sector.

We transfer coverage of Innovent Biologics with a change in its moat rating to none from narrow. The change in moat rating is driven by the potential threat of value destruction should its next core drug, Mazdutide, fail to obtain regulatory approval. Our view on Innovent's strong research and development capabilities is unchanged. Specifically, we still consider its core assets Tyvyt, a PD-1 inhibitor, and three biosimilars of bevacizumab (Avastin), adalimumab (Humira), and rituximab (Rituxan) as the near-term growth drivers of Innovent's earnings.

Innovent is a leading biotech company in China with strong roots in oncology, anchored by its core PD-1 drug Tyvyt. The price cut for PD-1 drugs has stabilized gradually. Hence, we expect stable revenue growth from Tyvyt in the next three years as Tyvyt has more indications approved.

Narrow-moat Innovent’s share placement at approximately HKD 34.66 per share (net of fees) sent its share price down as much as 8% on the morning of Sept. 12 following the news release. We believe the market is overly concerned with the move as it raises worries over its financial position, which we think is unfounded. Also, the dilution to earnings is minimal. The issuance raises Innovent’s total enlarged number of shares by 4.2%-4.4%, so the total dilutive effect is less than 1%. We are seeing Innovent’s share price recover from the initial negative reaction.

Innovent is an emerging Chinese biotech company that develops drugs for a wide spectrum of diseases, especially cancers. Its core assets are Tyvyt, a PD-1 drug that was approved in 2018, and biosimilars of Avastin, Humira, and Rituxan, which were approved in 2020. It also has a rich pipeline of in-house and in-licensed drugs at various stages of development. We award it a narrow moat due to its excellent market positioning in PD-1 treatments and our view that the price for this class of drugs will be dovish enough to generate decent returns on equity. Additionally, its strong early stage pipeline justifies a positive moat trend.

Narrow-moat Innovent’s 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.

Narrow moat Innovent’s results were in line with our expectations. Revenue in the second half was CNY 2.3 billion, or a 0.5% year-on-year decline and 3.4% sequential growth, which was expected given the effect of the COVID-19 lockdowns and outbreak and the Tyvyt price cut that took effect in March last year. Full-year revenue was CNY 4.6 billion, or 6.7% growth. Tyvyt revenue for the second half and full year was USD 134.4 million and USD 293.4 million, respectively, according to Eli Lilly’s disclosures, which were 34% and 30% year-on-year declines.

Innovent is an emerging Chinese biotech company that develops drugs for a wide spectrum of diseases, especially cancers. Its core assets are Tyvyt, a PD-1 drug that was approved in 2018, and biosimilars of Avastin, Humira, and Rituxan, which were approved in 2020. It also has a rich pipeline of in-house and in-licensed drugs at various stages of development. We award it a narrow moat due to its excellent market positioning in PD-1 treatments and our view that the price for this class of drugs will be dovish enough to generate decent returns on equity. Additionally, its strong early stage pipeline justifies a positive moat trend.

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 Innovent’s results were better than expected due to high growth in sales of non-Tyvyt drugs. Revenue for the six months was CNY 2.2 billion, or a 15% year-on-year growth. Although Tyvyt revenue declined 26% to USD 159 million (according to Eli Lily’s disclosures), we estimate that non-Tyvyt drug revenue was CNY 850 million, or about 150% growth. We think most of this was due to strong sales in its bevacizumab biosimilar. Cost of sales as a percentage of revenue from product sales doubled to 21.4% (from 10.2%), which is in line with our expectation due to price cuts in drugs such as Tyvyt and TNFa inhibitors.

Innovent is an emerging Chinese biotech company that develops drugs for a wide spectrum of diseases, especially cancers. Its core assets are Tyvyt, a PD-1 drug that was approved in 2018, and biosimilars of Avastin, Humira, and Rituxan, which were approved in 2020. It also has a rich pipeline of in-house and in-licensed drugs at various stages of development. We award it a narrow moat due to its excellent market positioning in PD-1 treatments and our view that the price for this class of drugs will be dovish enough to generate decent returns on equity. Additionally, its strong early stage pipeline justifies a positive moat trend.

Innovent is an emerging Chinese biotech company that develops drugs for a wide spectrum of diseases, especially cancers. Its core assets are Tyvyt, a PD-1 drug that was approved in 2018, and biosimilars of Avastin, Humira, and Rituxan, which were approved in 2020. It also has a rich pipeline of in-house and in-licensed drugs at various stages of development. We award it a narrow moat due to its excellent market positioning in PD-1 treatments and our view that the price for this class of drugs will be dovish enough to generate decent returns on equity. Additionally, its strong early stage pipeline justifies a positive moat trend.

Narrow-moat Innovent’s results were in line with our expectations. Revenue was CNY 4.3 billion, or 11% year-on-year growth. Our fair value estimate is HKD 50.00 per share, and Innovent is our top pick in Chinese healthcare companies right now.

Innovent is an emerging Chinese biotech company that develops drugs for a wide spectrum of diseases, especially cancers. Its near-term core assets are Tyvyt, a PD-1 drug that was approved in 2018, and biosimilars of Avastin, Humira, and Rituxan, which were approved in 2020. It also has a rich pipeline of novel drug candidates, mostly in early clinical development. We award it a narrow moat due to its excellent market positioning in PD-1 treatments and our view that the price for this class of drugs will be dovish. Additionally, its strong early stage pipeline justifies a positive moat trend.

We lower our fair value estimates for Innovent to HKD 50.00 per share (from HKD 80.00 per share) and for Junshi to HKD 56.00 per share (from HKD 84.00 per share). The primary driver is a significant downgrade of all fast follower pipeline programs we previously deemed to have global potential. This reflects the scenario where Chinese drugmakers will have great difficulty commercializing fast follower drugs in global markets.

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.

Innovent is an emerging Chinese biotech company that develops drugs for a wide spectrum of diseases, especially cancers. Its near-term core assets are Tyvyt, a PD-1 drug that was approved in 2018, and biosimilars of Avastin, Humira, and Rituxan, which were approved in 2020. It also has a rich pipeline of novel drug candidates, mostly in early clinical development. We award it a narrow moat due to its excellent market positioning in PD-1 treatments and our view that the price for this class of drugs will be dovish. Additionally, its strong early stage pipeline justifies a positive moat trend.

Narrow-moat Innovent’s results were in line with our expectations. Despite price cuts for other PD-1 drugmakers starting in March, we estimate Tyvyt sales were CNY 1.4 billion in the six months, which is admirable. We estimate biosimilar sales were CNY 463 million (25% of product sales), compared with only CNY 77 million in the second half of last year (5% of product sales).