Three Major Campaigns of Hengrui Pharmaceutical _ Sina Finance

In 2024 Hengrui Pharmaceutical The 54th year of its establishment.

In the past 54 years, Hengrui Pharmaceutical has grown from a small pharmaceutical factory producing purple potions to a pharmaceutical enterprise with a market value of * in China. However, with the intensive procurement of generic drugs and the roll in of PD-1 inhibitors, the performance of "Pharmaceutical First Brother" suddenly fell into a low point, ending the continuous performance growth in 2021.

Hengrui can be said to be the first traditional pharmaceutical enterprise in China to transform into innovative drugs, but subject to the traditional concept of imitative innovation, except for the brief highlight of PD-1, it did not have much success. Review competitors Baekje China Zebotini keeps breaking new sales records of innovative drugs. How can Hengrui Pharmaceutical, the "Big Brother", hold the title of "No.1 Pharmaceutical Brother"?

Standing at the crossroads of destiny, Hengrui will finally start a comprehensive transformation in 2023, focusing on the two directions of "innovation" and "going to sea". Based on this strategic layout, what factors will affect the judgment of investment value of Hengrui Pharmaceutical? We think it mainly depends on the following three aspects.

01 $6 billion in hope

One month after the delivery of the first quarterly report of 2024, Hengrui Pharmaceutical immediately started a big move.

On May 16, Hengrui Pharmaceutical announced a BD transaction involving three GLP-1 product pipelines with a total contract amount of up to US $6 billion. The counterparty is Hercules, a company specially established in May for this cooperation, which was jointly invested by Bain Capital, tlas Ventures, RTW Capital and Lyra Capital for 400 million dollars.

According to the terms of the contract, Hercules will obtain * the right to develop, produce and commercialize Hengrui's GLP-1 product portfolio worldwide except for Greater China; Through this cooperation, Hengrui Pharmaceutical will obtain a down payment of $110 million, a potential milestone payment of $200 million, and a sales milestone payment of no more than $5725 million. At the same time, Hengrui will also obtain 19.9% of the equity of Hercules.

The "GLP-1 Product Portfolio" of this transaction includes three products:

HRS-7535 (oral small molecule GLP-1R agonist) is used to treat type 2 diabetes mellitus (T2DM) and weight loss, of which T2DM indications have entered clinical phase II;

HRS9531 (injection and oral product of polypeptide GLP-1/GIP double receptor agonist), used to treat T2DM and weight loss, and the two indications will enter clinical phase II in 2023;

HRS-4729 (incretin product), which is in the pre clinical development stage, can improve insulin secretion and control blood sugar while protecting the islets of langerhans. Its indications are weight loss and treatment of metabolic dysfunction.

Although the total amount of this transaction exceeding US $6 billion is amazing, most of them are uncertain milestone payments, and the real down payment is only US $1.1.

In these three products, Hengrui Pharmaceutical has invested a total of 160 million yuan in R&D expenses, so the down payment of 110 million dollars is not too high. In particular, compared with the down payment of 185 million dollars obtained by Chengyi Biology last year when it authorized a GLP-1RA to AstraZeneca, Hengrui Pharmaceutical has not made much cheaper down payment.

The core of this transaction is the 19.9% equity of Hercules. Hengrui Pharmaceutical can participate in the company's decision-making through equity, and can also participate in the company's profit distribution to shareholders or capital gains brought by the company's own value improvement. However, there is a prerequisite for all this, that is, the quality of Hengrui's three GLP-1 products must be excellent. Hengrui Pharmaceutical can obtain the corresponding equity income no matter whether the pipeline is listed for profit or sold to other companies. Even if Hercules is acquired, it can also receive the corresponding transfer amount according to the shares.

Figure: Hengrui Pharmaceutical obtained 19.9% equity, source: announcement

After being put together by One Bio last year, Hengrui Pharmaceutical has obviously become more rigorous. This cooperation with Hercules fully takes into account the unlimited possibilities of GLP-1 in the future.

From the perspective of enterprise development, the cooperation between Hengrui Pharmaceutical and Hercules is of great significance, which marks the recognition of overseas investment institutions for Hengrui's technical strength. In a sense, if there is a big explosion this time, there may be more Hengrui innovation pipelines going to sea through similar cooperation paths in the future, opening up the infinite possibility of Hengrui's future.

02 Can "Shuangai" land at sea?

Recently, Hengrui Pharmaceutical has once again encountered the test of FDA on the issue of going to sea.

On June 6, FDA inspected Hengrui Lianyungang Problems were found in the preparation production site, and form 483 (field observation report) was sent to it. In this regard, Hengrui Pharmaceuticals said that it had replied to the defect rectification, which would not affect the subsequent export of American preparations. But even so, it can't help but make people sweat when Hengrui goes to sea.

Under the background of the deepening of generic drug procurement and the increasing volume of innovative drugs, "going to sea" is the only way for Chinese innovative pharmaceutical enterprises, especially the European and American markets are the most critical core battlefield. According to the data of Evaluate Pharma, the global innovative drug market in 2021 will be about 830 billion dollars, of which the U.S. market will account for 55%, compared with China's innovative drug market accounting for only 3% of the world.

Focusing on the current situation, PD-1/L1 is the most mature track for innovative drugs in China, and also the most introverted track. Up to now, 12 domestic PD-1/L1 McAbs have been approved for listing in China. With multiple rounds of medical insurance price reduction, PD-1 domestic track has no initial expectation.

Figure: List of domestic PD-1 monoclonal antibodies listed in China, source: Brocade Research Institute

From the perspective of domestic sales, the sales of Tirelizumab in Baekje Shenzhou are about 3.8 billion yuan *, and the sales of Cindelimab in Xinda Biology, Kadunilimab in Kangfang Biology, and Slullimab in Fuhong Hanlin also exceed 1 billion yuan.

In the original competition pattern of PD-1, Karelizumab of Hengrui Pharmaceutical is one of the leaders. It was approved in May 2019 and is the third domestic PD-1 anti-cancer drug after teriprizumab and cindilimab. After being approved, the sales of carrelizumab will reach an astonishing 4.89 billion yuan in 2020. However, with the increase of homogenized products in the market, it is difficult for carrelizumab to maintain its advantages in efficacy and price. Since then, no sales will be announced from 2021 to 2023, which should not exceed 2020 according to calculation.

*Under the internal volume, domestic PD-1 products began to explore international opportunities in an all-round way. Throughout the global market, PD-1 is still a blockbuster product. MSD's K drug sales will increase by nearly 20% in 2023, reaching $25 billion, successfully topping the global bestselling drug list, and finally become a new generation of drug king after nearly 10 years of listing.

It is easy to see that whoever can do a good job of "sailing" can reactivate the value of PD-1 inhibitor.

On October 27 last year, Junshi creature Terepril McAb became * the Chinese PD-1 product approved to enter the US market, with a bottle price of US $8892.03, 33 times the domestic price. Different from Junshi Biological's choice of nasopharyngeal cancer as a breakthrough, the Tirelizumab from Baekje Shenzhou was approved by the FDA for marketing on March 15 this year. Its indication is esophageal squamous cell carcinoma, which is a high incidence cancer in the world and China.

In the aspect of PD-1 "going to sea", Hengrui Pharmaceutical chose the combination of CARELIZAB and Apatinib (the "double Ai" combination), and submitted a marketing application to FDA last August for first-line treatment of patients with unresectable or metastatic hepatocellular carcinoma.

In January 2023, the "Shuangai" combination was successfully approved by China as the first line treatment indication for advanced hepatocellular carcinoma, and it is the combination of PD-1 inhibitor and small molecule anti angiogenesis drugs approved by the Chinese government for the treatment of advanced hepatocellular carcinoma. The research results show that the first-line treatment of advanced liver cancer with "Shuangai combination" has significant survival benefits and tolerable safety, with a median total survival time (mOS) of 22.1 months, which is the longest treatment scheme in the key research of first-line treatment of advanced liver cancer with published data.

Although the combination of "Double Ai" has great potential, Hengrui Pharmaceutical announced the delay of listing in the United States on May 17. Hengrui said that it would actively keep close communication with the FDA and resubmit the listing application as soon as possible. Obviously, the "Double Ai" combination went to sea not as smoothly as expected.

The listing of the "Double Ai" portfolio in the United States has encountered setbacks, which has filled the license agreement between Hengrui Pharmaceutical and Elevar Therapeutics with uncertainty.

According to the license agreement reached between Hengrui Pharmaceutical and Elevar Therapeutics in October 2023, Elevar Therapeutics will only pay the subsequent sales milestone of 600 million dollars after the commercial sale of CARELIZAB, and make additional payment after exceeding a certain cumulative net sales, Elevar Therapeutics will also pay a sales commission of 20.5% of the actual annual net sales to Hengrui Pharmaceutical.

If the "Shuangai" combination fails to land in the United States as scheduled, it will undoubtedly affect the overseas performance of Hengrui Pharmaceutical, otherwise it will boost the company's performance expectations. The outbound performance of this drug combination will directly affect the short-term expectation of Hengrui Pharmaceutical.

03 What surprises can Jiang Ningjun bring?

The entry of Jiang Ningjun, the founder of the original Cornerstone Pharmaceutical, can be seen as the inflection point of Hengrui Pharmaceutical's BD strategy.

Jiang Ningjun has worked in Sanofi for ten years, served as the global vice president of Sanofi and president of Asia Pacific R&D Center, and accumulated rich contacts. In 2016, after joining Cornerstone Pharmaceutical as the founder, the focus shifted to business strategy and expansion areas, and demonstrated the ability of * in BD. Under its plan, Cornerstone Pharmaceutical successfully listed on the Hong Kong Stock Exchange three years after its establishment through the business model of "self research+BD", which amazed its peers.

After joining Hengrui Pharmaceutical, Jiang Ningjun led the major adjustment of Hengrui Pharmaceutical's BD business and hired Zhang Su, who has experience in Pfizer, domestic biotechnology and enterprise consulting, to serve as the Global BD Head. From the BD performance in the past two years, Hengrui Pharmaceutical's BD capability has been significantly enhanced.

From 2015 to 2022, before Jiang Ningjun entered the market, Hengrui Pharmaceutical had only conducted six BD transactions in total, three of which were also transactions with Korean companies on the Korean single market, with a total transaction amount of about 100 million dollars; After Jiang Ningjun joined, Hengrui completed five BD transactions in 2023 alone, and there are many old MNCs like Merck.

Figure: List of BD transactions of Hengrui Pharmaceutical in 2023, source: Brocade Research Institute

Hengrui Pharmaceutical has always been a typical representative of traditional pharmaceutical companies, with more technical capabilities and less strategic vision. BD needs not only a global vision, but also acquaintances in the global BD circle. Hengrui Pharmaceuticals needs international talents such as Jiang Ningjun and Zhang Su. Their participation also indicates that Hengrui Pharmaceuticals has turned its development strategy around and started to embrace BD.

Hengrui Pharmaceuticals in the future is likely to accelerate on the License out.

After all, as of 2023, Hengrui Pharmaceutical has 91 pipelines at or above the clinical stage, most of which are self-developed. On the one hand, the BD team of Hengrui Pharmaceutical needs to dig high value pipelines to sell at a good price, and on the other hand, it needs to focus on core pipelines by selling some marginal pipelines.

Of course, BD has a license in as well as a license out.

Among the 16 innovative drugs that Hengrui Pharmaceuticals has listed on the market, 2 are introduced through authorization, including the PI3K δ inhibitor Linpriese introduced from Yingli Pharmaceutical, and the new oral azole antifungal drug Oteconazole introduced from Mycovia in the United States.

In addition, in the field of ophthalmology, Hengrui Pharmaceutical introduced two drugs for dry eyes from Novaliq, SHR8058 (perfluorohexyl octane eye drops) and SHR8028 (cyclosporine eye drops), and obtained their rights to clinical development, production and marketing in China. Among them, SHR8058 eye drops were approved by FDA for marketing in May 2023.

From a macro perspective, Hengrui Pharmaceutical has hundreds of R&D pipelines, and the demand for Licence in is not urgent. As long as the self research project is realized, it will be enough to return to glory. However, from the perspective of improving R&D and innovation capability, if there are suitable advanced innovative drugs and technologies abroad, it is also worth introducing.

04 epilogue

"Innovative medicine+internationalization" will be the core theme of Hengrui Pharmaceutical's development in the future.

In the domestic market, Hengrui Pharmaceutical has a basic market, and this value has been realized in the share price. The variable of Hengrui Medicine * is whether it can exceed expectations in terms of "innovation" and "going to sea". If this part of value can fully blossom under the guidance of Jiangning Army, Hengrui Medicine will enter a new growth cycle.

Whether it is GLP-1 BD transaction or "Shuangai" combined outbound, it is actually an important benchmark in the transformation and development process of Hengrui Pharmaceutical. It will not only affect the company's performance, but also play an exemplary role, and even affect Hengrui Pharmaceutical's future BD transaction expectations.

In a word, the future of Hengrui Pharmaceutical lies in "innovative medicine+internationalization". In this process, Jiang Ningjun's play will play a decisive role, and the overseas report card may become the focus of the market's follow-up attention.

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