Affected by factors such as weakened demand for pandemic-related products, Fosun Pharma has suffered short-term downward pressure on its earnings. As influence from weakened demand for pandemic-related products basically dissipated, the Company's revenue from the new products of its pharmaceutical business increased by over 30% YoY in 3Q23. Thanks to continuous increase in R&D investment, Fosun Pharma is progressing rapidly in the R&D of innovative drugs. The Company has built internationalized presence in the innovative drug business, and achieved win-win goals in business development (BD) cooperation. Despite increased expenses, Fosun Pharma has achieved steady operations. With the valuations of comparable companies as references, and considering the short-term downward pressure caused by weakened demand for pandemic-related products, we assign 33x 2023E PE to arrive at a target price of Rmb38 and reiterate the "BUY" rating.

Short-term downward pressure on earnings caused by factors such as weakened demand for pandemic-related products.

For 1-3Q23, Fosun Pharma posted revenue/attributable net profit (ANP)/recurring ANP/operating cash flow of Rmb30.7bn/2,283mn/1,474mn/2,462mn (-2.92%/-6.29%/-48.45%/-21.70% YoY) respectively. In 3Q23 alone, the Company achieved revenue/ANP/recurring ANP of Rmb9,305mn/506mn/101mn respectively (-9.44%/-43.85%/-89.84% YoY). Temporary downward pressure on the Company's earnings was caused by factors such as weakened demand for pandemic-related products and US interest rate hikes.

Influence from pandemic-related products basically dissipated, while revenue from the new products of its pharmaceutical business increased by over 30% YoY.

Sharp YoY decline in 3Q23 profits was mainly due to: (1) influence from about Rmb510mn related to disposal of pandemic-related products and assets with signs of impairment, as well as to provision for asset impairment of corresponding inventories, receivables and long-term assets; and (2) YoY increase in administrative and financial expenses. Excluding pandemic-related products, the Company's revenue increased by about 11% YoY in 1-3Q23, with revenue from the new products & secondary new products of its pharmaceutical business growing by more than 30% YoY during the same period. Considering that the influence from weakened demand for pandemic-related products has basically dissipated, we believe that the growing sales of new products may drive the Company's earnings to rebound rapidly.

Continuous increase in R&D investment, and accelerated progress in R&D of innovative drugs.

In 1-3Q23, Fosun Pharma's R&D expenses totaled Rmb4,291mn (+13.67% YoY). Since the start of 3Q23, the Company has made several R&D progresses: (1) PD-1 monoclonal antibody added ESCC indication, totaling　　four approved indications (MSI-H solid tumor, sqNSCLC, ES-SCLC, ESCC) so far; (2) PD-1 combined with chemotherapy and radiotherapy completed the first patient administration in the European Union (EU) during the international multi-center Phase III clinical trials of LS-SCLC; (3) FCN-159 (MEK1/2) was used for neurofibroma type I, and ET-26 (methoxyetomidate hydrochloride) was used for general anesthesia induction, and started Phase III clinical trials in China; and (4) FCN-338 (Bcl-2) combination therapy for hematological malignancies started Phase II clinical trials in China.

Internationalized presence in innovative drug business, and win-win goals in BD cooperation.

Fosun Pharma's announcement shows that the Company's application for marketing of Trastuzumab for breast cancer and metastatic gastric cancer has been accepted by the US Federal Food and Drug Administration (FDA), and its Songjiang base has undergone pre-approval inspection (PAI) in Aug 2023.

The Company's application for the marketing license of PD-1 for extensive SCLC indications has accepted by the European Medicines Agency (EMA), and the bridging study of clinical trials in the US progresses at an accelerated pace. The Company's production base has passed the GMP certification for Trastuzumab and Rituximab by the Brazilian Health Regulatory Agency (Anvisa) and the GMP certification of PD-1 by the Indonesian Food and Drug Authority (IFDA). Against such a backdrop, Fosun Pharma may start tapping overseas markets soon. BD: (1) Henlius reached an agreement with KGbio on PD-1 monoclonal antibody, and the scope of cooperation between the two parties was further expanded to 12 countries in the Middle East and North Africa other than the original 10 countries in Southeast Asia; (2) In Oct 2023, Henlius granted Intas the exclusive commercialization rights for PD-1 monoclonal antibody in Europe and India, with a down payment of EURO42mn and milestone payments of up to EURO143mn.

More expenses and steady operations.

For 1-3Q23, Fosun Pharma posted gross profit margin (GPM) of 48.60% (+2.09ppts YoY), and selling/administrative/R&D expenses of Rmb7,227mn/3,169mn/3,155mn (+11.47%/+21.07%/+10.76% YoY) respectively. The Company's selling/administrative/R&D expense ratios stood at 23.54%/10.32%/10.28% (+3.03ppts/+2.04ppts/+1.27ppts YoY) during the same period. Due to the marketing of new products and the M&As of subsidiaries, Fosun Pharma's selling and administrative expenses increased to some extent, while its R&D expenses were mainly used to promote the clinical research of new products and the construction of R&D platforms.

Potential risks: Disappointing progress in the monetization of the Company's products; R&D failure or progress missing expectations; slower-than-expected review and approval progress; intensifying market competition; unexpected changes in medical policies.

Earnings forecast, valuation and rating: Unfavorable factors such as weakened demand for pandemic-related products have caused short-term downward pressure on Fosun Pharma's earnings. The Company's disposal of pandemic-related products has basically completed in 3Q23. Going forward, the growing sales of new products and secondary new products may drive Fosun Pharma's earnings to rebound. Based on the Company's 1-3Q23 earnings and the potential impact of China's anti-corruption campaign in the healthcare field on the marketing of new products, we lower our 2023E/24E/25E EPS forecast to　　Rmb1.15/1.50/1.74 (from Rmb1.44/1.72/2.03). Wind consensus estimates assign 66x 2023E PE for Hengrui Medicine (600276.SH, because the Company has several innovative drugs in its R&D pipeline), 29x 2023E PE for Hansoh Pharmaceutical (03692.HK) and 16x 2023E PE for Livzon Pharmaceutical (000513.SZ). With the average 37x 2023E PE of these three comparable companies as a reference, and considering short-term downward pressure on the Company's earnings, we assign 33x 2023E PE to arrive at a target price of Rmb38 and reiterate the "BUY" rating.