Kelun Pharma is a highly specialized and innovative pharmaceutical group, with its business scope covering such key fields as large-volume parenteral (LVP) products, generic drugs, active pharmaceutical ingredient (API) intermediates, and innovative drugs. The Company has adopted a three-pronged development strategy. Its LVP division has been upgrading products to anchor leadership. Its non-infusion generic drugs division is expanding the product matrix through innovations. Chuanning Biotech (301301.SZ), its subsidiary and a leader in antibiotic API intermediates, has created a new growth curve by building a presence in the synthetic biology field. Kelun-Biotech (06990.HK), a holding subsidiary of Kelun Pharma and a leader in antibody-drug conjugate (ADC) technology, ranks at the forefront of Chinese peers, leveraging the R&D progress of several products. Since its partnership with MSD has accelerated the globalized sales of its products, Kelun-Biotech is about to monetize on the R&D of innovative drugs. Based on absolute and relative valuation methods, we estimate the Company's 2023E fair equity value at Rmb59,608mn and arrive at a target price of Rmb40. We initiate coverage with a "BUY" rating.
A traditional LVP manufacturer that has adopted a three-pronged development strategy to accelerate innovation-driven transformation.
Kelun Pharma has always implemented a three-pronged development strategy for innovation-driven growth: 1) maintaining its leadership in infusion products through continuous industrial upgrading and variety mix restructuring; 2) establishing competitive advantages in antibiotic intermediates, APIs and preparations through the innovative development and utilization of high-quality natural resources; 3) accumulating momentum for perpetual corporate development through the construction of the R&D system and diversified technological innovation. With the successful spin-off listings of Chuanning Biotech and Kelun-Biotech, Kelun Pharma has formed an operating pattern supported by three capital platforms.
Steady growth and improving operational efficiency.
Under Kelun Pharma's three-pronged development strategy, the LVP division has developed steadily; the Chuanning Biotech initiative has gradually materialized, generating fruitful outcomes from the R&D of innovative drugs. In 1-3Q23, it achieved revenue/attributable net profit (ANP)/ex-one-off ANP of Rmb15,734mn/1,963mn/1,922mn (+12.93%/+39.70%/+40.14% YoY), while its blended expense ratio of selling, administrative and financial expenses stood at 20.64%, down by 3.65ppts from 24.28% in 1-3Q22.
LVP: A dug-in leader that keeps upgrading its products.
China's LVP market is dominated by several leading companies, and the industry's supply and demand dynamics are basically stable. In 2022, Kelun Pharma achieved LVP sales revenue of Rmb9,451mn. We estimate that the Company has a market share of more than 30% in the LVP field. Kelun Pharma has kept adjusting the structure of its infusion products. The proportion of closed intravenous infusion products has been improving.
Innovative products such as three-chamber bags for parenteral nutrition and two-chamber bags for powder and liquid have been approved one after another. All these have helped maintain its core competitiveness in the infusion preparation field. Kelun Pharma also proactively participates in local-level centralized procurement schemes for LVP products, so as to continuously increase its market shares in corresponding regions. The Company's several products, including three-chamber bags for parenteral nutrition and two-chamber bags for powder and liquid, will be included in the 2023 medical insurance negotiations. Currently, Kelun Pharma's two-chamber bags for powder and liquid are in short supply. New production lines to be put into operation in 2024 will help the Company achieve rapid sales growth.
Kelun Pharma's LVP division still has headroom for continuous growth.
Non-infusion generic drugs: Making continuous efforts and proactively embracing policy changes to boost the generic drug business. "Relying on the generic drug business to promote innovation and innovation to shape the future" is a key development strategy of Kelun Pharma. With its transformation thus far in 2013, the Company's generic drug R&D has successfully made a turnaround with comprehensive changes to go beyond infusion products. Of the 410 generic drug research projects launched by Kelun Pharma, 152 products have been approved so far. Although the sales of non-infusion preparations declined in 1H23 due to external factors such as centralized procurement at national and local levels, the sales of plastic hypodermic needles still increased significantly. The Company also achieved sales growth for its Empagliflozin Tablets, Tofacitinib Citrate Sustained-release Tablets, Ambroxol Hydrochloride Injection, Ceftriaxone Sodium for Injection, Ceftazidime for Injection, and Roxithromycin Tablets. These new generic drug varieties will become new growth drivers for Kelun Pharma's non-infusion drug division in the future.
Chuanning Biotech: An industry leader in antibiotics that aims to build an industrial platform for synthetic biology.
Chuanning Biotech is a core manufacturer in the field of antibiotic intermediates, with its output of erythromycin thiocyanate, cephalosporin intermediates (7-ACA, 7-ADCA, D-7ACA) and penicillin intermediates (6-APA, penicillin G potassium salt) ranking at the forefront among those of its Chinese peers. Chuanning Biotech was the first to apply biological fermentation and extraction technologies with a high conversion rate to the industrial production of antibiotic intermediates. Its production capacity and output of related products have reached a high level. Thanks to the booming production and sales of antibiotic intermediates and revenue from the sales of new synthetic biological products, Chuanning Biotech maintained good momentum in 1-3Q23, generating revenue/ANP of Rmb3,581mn/640mn (+21.83%/+92.65% YoY). Meanwhile, Chuanning Biotech is proactively building integrated R&D and production capacity in the synthetic biology field. Its Shanghai Research Institute has delivered products such as bisabolol, 5-hydroxytryptophan and erythrothioneine. Synthetic biology may become the second growth curve of Chuanning Biotech.
Kelun-Biotech: A world-renowned ADC pioneer.
As an international biotech firm with leading ADC technology, Kelun-Biotech has 14 drugs in the clinical pipeline, five of which are in the stage of critical clinical trials or new drug applications (NDAs). Its core product, SKB264, has undergone the fastest R&D progress among Chinese-made TROP2 ADC products, where significant clinical needs for triple-negative breast cancer (TNBC), HR+/HER2 breast cancer, epidermal growth factor receptor-mutant non-small-cell lung cancer (EGFRm NSCLC) and other indications have not been tapped. We estimate that the product will become a heavyweight with global retail sales of nearly US$5bn. Kelun-Biotech has submitted NDAs for HER2 ADCs, PD-L1 monoclonal antibodies and cetuximab analogues, gradually reaping the rewards from R&D achievements. Kelun-Biotech has reached in-depth cooperation with MSD. With technological strength recognized by multinational corporations (MNCs), it is accelerating the penetration of its products in the global market. The innovative drug division will become a key driver for the Company's long-term earnings growth.
Potential risks: Larger-than-expected changes in industry policies; a sharp drop in product selling prices; promoting the centralized procurement of drugs across the nation; issues related to environmental protection; intensifying market competition; uncertainties in the R&D of innovative drugs.
Earnings forecast, valuation and rating: Kelun Pharma is a highly specialized and innovative pharmaceutical group, with its business scope covering such key fields as LVP products, generic drugs, API intermediates, and innovative drugs. The Company has adopted a three-pronged development strategy. Its LVP division has been upgrading products to anchor leadership. Its non-infusion generic drugs division is expanding the product matrix through innovations. Chuanning Biotech (301301.SZ), its subsidiary and a leader in antibiotic API intermediates, has created a new growth curve by building a presence in the synthetic biology field. Kelun-Biotech (06990.HK), a holding subsidiary of Kelun Pharma and a leader in ADC technology, ranks at the forefront of Chinese peers, leveraging the R&D progress of several products. Since its partnership with MSD has accelerated the globalized sales of its products, Kelun-Biotech is about to monetize on the R&D of innovative drugs. Based on absolute and relative valuation methods, we estimate the Company's 2023E fair equity value at Rmb59,608mn and arrive at a target price of Rmb40. We initiate coverage with a "BUY" rating.
