Action

We downgrade SL Pharmaceutical to HOLD and cut TP toRmb26.

What’s changed

Major products under pressure; profit shrank. In1H17, SL Pharmaceutical’s revenue declined YoY dragged bysluggish growth of major products （incl. Beikeneng） underthe policy changes in the state health insurance plan. Profitfell more sharply than revenue due to soaring sellingexpense after implementation of a new taxation policy.

Drug-approval process for lenalidomide accelerated;drug now included in the national drug negotiationlist. The approval for SL’s lenalidomide product has beenprioritized to accelerate its clinical application. As Celgene’sblockbuster drug, global sales of lenalidomide have reachedaround US$5bn. Lenalidomide has been included in thenational drug negotiation list, and we estimate the potentialmarket for it in China at Rmb1bn.

New products to boost growth. SL Pharma is to shift itsfocus to diabeties drugs. It has filed for the clinical trials fordapagliflozin and canagliflozin. GLP-1 analogs have begunpre-clinical safety evaluation. The firm will improve itsproduct mix to offset the sluggish growth of existingproducts. In recent years, SL Pharma has been acceleratingits R&D in cancer, cardiovascular diseases and diabetestherapies. New prodcuts should secure sustained growth.

How do we differ from the market The retail sales ofcoenzyme complex may still be under pressure due to thecontrols on health insurance expenses.

Potential catalysts: Obtaining approval for lenalidomide.

Financials and valuation

We cut our forecast for 2017/18e EPS 9% and 3% toRmb0.63/0.68 （-5%/+9% YoY）。 We cut our TP 16% toRmb26. Downgrade SL Pharma to HOLD.

Risks

Retail sales of star products under pressure; products in pipelinedelay.