The market value has evaporated by 400 billion!

Only when the tide goes out can you find out who is true love

During the annual report season, pharmaceutical companies with poor expectations have experienced oversold valuations, and the market attempts to avoid risks by predicting in advance

Some people gloat at misfortune and think that the valuation bubble can be squeezed again, and the 35 times price-earnings ratio is still too high;

Some people are downcast, thinking that Hengrui Medicine can no longer afford the name of the carrier of innovative drug research and development;

Some people are gearing up, preparing to enter the game at the bottom to enjoy the benefits of the fisherman

It has been falling for more than a year, and the market value has fallen by 70% from the highest point.

From the end of 2021 to the present, too many major events have occurred

All walks of life are going downhill, and the Shanghai Composite Index almost fell below 3,000 points at one point

Valuations in the innovative drug sector have fallen for more complicated reasons

Take Hong Kong stocks that are crowded with unprofitable biotech companies as an example.
When Hong Kong stock 18A was first launched, the scarcity of innovative targets quickly attracted a large number of investors who were optimistic about the long-term development of medicine
.
Until mid-2021, 18A companies that can successfully list on the Hong Kong Stock Exchange can get a good valuation premium
.

This valuation premium peaked at the end of June 2021
.
In July 2021, in response to the phenomenon that "pharmaceutical companies gather to develop relatively mature targets, resulting in homogenized competition that greatly reduces the profit margins of products", CDE released the "Guidelines for Clinical Research and Development of Antitumor Drugs Oriented to Clinical Values".
"Draft for Comments
.
At this point, the inflection point appears, and all the way down
.
The 18A company that has been listed since the second half of 2021 has experienced a large-scale break
.

The Hong Kong-listed Biotechnology Index (HSHKBIO) has fallen since July 2021.
Although it has rebounded, it has fallen by more than 50% since then
.

Figure 1.
Trend chart of Hong Kong-listed Biotechnology Index (HSHKBIO), source: Straight Flush

The innovative drug representative PD-1/L1 will cut prices again in the medical insurance negotiation in November 2021
.
So far, the annual fee for domestic PD-1 has been reduced from 300,000 yuan to 100,000 yuan, and then to about 50,000-80,000 yuan, up to 40,000 yuan
.
The 5th CP Tianqing/Kangfang Bio PD-1 Piamprilumab, which has been approved for marketing, has reduced the annual treatment cost to less than 30,000 yuan
.
Unsurprisingly, the revenue growth of Hengrui Medicine's PD-1 camrelizumab in 2021 will not be very good
.

This also makes it clear to the market that even for innovative drugs developed at a huge cost, the high-profit period will not be too long, and the value of innovative drugs has been greatly weakened at a time when domestic R&D is becoming more homogenized
.

The prospect of the domestic market is not optimistic, and going out to sea carries more hope
.
However, in December 2021, the relevant attitude of the US FDA indicated that the logic of drugs going overseas may change
.
Sure enough, in February 2022, the application for the launch of the PD-1 antibody sintilimab jointly developed by Innovent and Eli Lilly was rejected by the Oncology Drug Advisory Committee (ODAC)
.
This means that it will be more difficult for domestic innovative drugs to go overseas, and the cycle will be lengthened
.

In the face of internal and external troubles, Hengrui Medicine is not immune to it alone
.

And an embarrassing reality is that Hengrui Medicine in the transition period not only has to bear the crit caused by the centralized procurement of generic drugs, but also bear the damage of the bursting of the valuation bubble of innovative drugs
.
Under this pressure, Hengrui Medicine was forced to make some changes
.

In the past impression, Hengrui Medicine is like a stubborn conservative, sticking to its own bottom line, such as insisting on self-research, insisting on capitalizing research and development expenditure , etc.

But in the past 2021, we found that Hengrui has changed
.

In the whole year of 2021, Hengrui Medicine has a total of four "License-in" drugs under development, costing billions of yuan
.
This is considered by the market as a "compromise" to the current situation.
At an earlier media communication meeting, Hengrui Medicine said that it was not that it did not pay attention to "License-in", but searched around and found that there are not many cost-effective projects outside.
, better to do it yourself
.

On the one hand, it shows that Hengrui Medicine has full confidence in the self-developed team, but the disadvantage is that the BD team has not been fully trained, so that it encounters "Waterloo" as soon as it is shot
.
In August 2021, Hengrui announced that it signed a strategic cooperation agreement with Wanchun Brin to introduce the joint development rights and exclusive commercialization rights of GEF-H1 activator Punabulin in Greater China at a cost of 1.
3 billion, but after 4 months , Wanchun Pharmaceutical reported that its new drug "Punabulin" was rejected by the US FDA for approval
.

Figure 2.
2018-2021 Hengrui License-in Layout

In addition to preparing to break through in the R&D pipeline, facing the embarrassing situation of the first decline in revenue in 16 years and the worst semi-annual report in ten years, Hengrui Medicine announced in November 2021 that it would capitalize its R&D expenses, which is the first time since its listing.
situation that did not occur
.
A week before the public accounting change, Zhou Song, the chief financial officer of Hengrui Pharmaceuticals, who had worked for 18 years, resigned, and was succeeded by the "Hong Kong->
.

A series of financial actions have caused a lot of discussion in the market.
Some people speculate that Hengrui has begun to make demands on the capital market, such as planning to go to Hong Kong for a secondary listing or additional issuance and refinancing, so it caters to the market; some people think that it is to help senior management unlock equity incentive conditions , or to quantify the progress of later research and development
.

Capitalizing R&D expenses can indeed whitewash financial statements in the short term, profits will rise, and price-earnings ratios will fall
.
However, this impact is only short-term.
In the absence of fundamental changes, these financial measures cannot change the reality of Hengrui Pharmaceutical's slowing revenue growth and declining profits
.

This reality cannot be changed even if Sun Piaoyang comes out again
.

In July 2021, Hengrui Medicine announced that Mr.
Zhou Yunshu, the chairman and general manager of the company, resigned from the company's chairman, general manager and the corresponding positions of the special committee of the board of directors due to physical reasons.
Identity appears in the public eye
.

In June 2021, just one month before this announcement, Hengrui Medicine's iodixanol injection unexpectedly lost the bid
.
As one of the main business areas of Hengrui Medicine, the contrast agent had sales of nearly 3.
63 billion yuan in the previous year, accounting for 13.
09% and contributing 10.
78% of the profit
.
As one of the core products in contrast media, iodixanol injection and glycopyrronium bromide injection were both rejected, and the impact on Hengrui Medicine is self-evident
.
The impact of this shock may last as long as two or three years
.

Zhou Yunshu's resignation was also interpreted as his resignation due to the failure of centralized procurement
.

The general environment is sluggish, and its own strategic adjustment has encountered many mistakes.
Has Hengrui Medicine lost its vigorous vitality?

The future of Hengrui Medicine is hidden in the R&D pipeline
.

In the mid-year report of 2021, Hengrui Medicine unveiled the mysterious veil for the first time, and made public its R&D pipeline across the board, which may be a measure to integrate with internationalization
.

According to the data disclosed on the R&D day in the third quarter of last year, Hengrui Medicine currently has more than 50 innovative products in the clinical development stage, of which 15 have submitted marketing applications or Phase III clinical trials, 40+ are in Phase I and Phase II clinical trials, and more than 20 are in Phase I and Phase II clinical trials.
This innovative molecule is about to enter the clinical development stage, and there are more than 240 clinical research projects under development
.

So far, Hengrui Medicine has launched 10 innovative drugs in China
.
But what is the gold content of these innovative drug R&D pipelines?

In 2021, the PD-L1/TGF-β bifunctional fusion protein developed by Merck suffered a four-game losing streak.
Hengrui Medicine was the first to develop the same target "Fast-Follow" in China.
The internal R&D code for this project is SHR.
-1701
.

According to the research and development pipeline disclosed in its 2021 semi-annual report, Hengrui Medicine has as many as 11 clinical projects for SHR-1701, among which, the combination of bevacizumab + XELOX for the treatment of advanced colorectal cancer and the combination of chemotherapy for the treatment of advanced or metastatic disease Gastric cancer or gastroesophageal junction cancer has been in clinical stage III; the remaining 7 are in clinical stage II, and 2 are in clinical stage
I.
The accumulated R&D cost of SHR-1701 has exceeded 222 million yuan
.

The failure of several clinical projects of Merck's PD-L1/TGF-β has also completely exposed the risks of Hengrui Medicine's "Fast-Follow" strategy
.

Figure 3.
Hengrui Medicine's SHR-1701 R&D pipeline, source: Hengrui's 2021 semi-annual report

In addition, Hengrui Medicine's existing innovative drug products are facing the pressure of many similar competing products
.

In January 2022, Hengrui Medicine's Dalsili tablets were approved for marketing
.
Prior to the approval of Dalcelix, four CDK4/6 inhibitors had been approved globally, including Pfizer's palbociclib, Eli Lilly's abexili, Novartis' libecili, and G1/ Simcere's tralacil , the first two have been approved for listing in China
.

As a star target, CDK 4/6 has become a crowded track in China
.
There are more than 20 companies in generic drugs alone
.
Qilu Pharmaceutical’s 4 generic drugs, Pipercelli Capsules, were approved for listing in December 2020, and won the first domestic imitation; the rest, including Kelun, Osaikang, Haosen, Simcere and Shanxiang Pharmaceuticals, have submitted listing applications.
In addition, 4 companies including Chia Tai Tianqing have carried out bioequivalence tests, and 11 companies have been approved for clinical trials
.

Figure 4.
Domestic research and development status of CDK 4/6 inhibitors, source: Yaodu

Although Dalsili of Hengrui Medicine enjoys the treatment of the first domestic CDK 4/6 inhibitor, the dividend period that he can enjoy may not be too long
.

Similar situations also include BTK inhibitors, JAK1 inhibitors, SGLT-2 inhibitors, ADCs, etc.
in the pipeline
.
Therefore, these "Fast-Follow" products that are already on the market or under research can only play a role in "guaranteeing revenue" for Hengrui Medicine.
To achieve the goal of "steady growth", Hengrui Medicine still lacks a "popular model" "Product
.

In terms of forward-looking strategy, Hengrui Medicine has solidly missed the "new crown special medicine" market
.
In fact, among the large domestic pharmaceutical companies, not only Hengrui, but also Yangzijiang, Qilu, Haosen, etc.
all missed the best period for the development of "new crown special drugs"
.
At a time when policies are encouraging the development of drugs to treat the new crown, the absence of large pharmaceutical companies is puzzling
.

However, the recent success of the Phase III clinical trial of Prokluamide by Kintor may bring some imagination to Hengrui
.
Because Hengrui's pipeline also has SHR3680, which is the same AR inhibitor as Prokluamide
.

Even if there are mistakes of one kind or another, it is undeniable that Hengrui Medicine is still one of the most innovative pharmaceutical companies in China
.

Although its investment in research and development expenses has been overtaken by BeiGene, Hengrui is more stable with its own hematopoietic ability
.
At present, the most important thing is not to enhance investor confidence by capital means such as repurchase, but to build capacity other than R&D such as internationalization construction, BD capacity building, and means of overcoming abnormal competition
.

Maybe we should give Hengrui some more time
.
Yaodu will continue to pay attention to the follow-up development
.