In 2022, the transformation of traditional pharmaceutical companies entered the most difficult year. Since the beginning of the year, the market value of many leading pharmaceutical companies listed in the Hong Kong stock market has declined.

How can Hansoh Pharma, as a typical case in the transformation of traditional pharmaceutical companies, get out of the dark?

Looking back to January 1, 2021, the market value of Hansoh Pharma once reached RMB 222.6 billion, even surpassing that of Hengrui today (August 4, a market value of RMB 221.3 billion). 

However, the market value of Hansoh Pharma halved to RMB 112.5 billion by January 1,2022 and dropped below the 100 billion level to RMB 93.7 billion on August 3. 

How is Hansoh Pharma doing today? Let's find the answers from its performance, business strategy, and R&D pipelines. 

01 Answer 1: significantly lower impact from generic drugs and centralized procurement

At present, innovation has become the top priority in the transformation of pharmaceutical companies, but innovative business will inevitably be constrained by traditional business.

To measure the impact of traditional business on pharmaceutical companies, we need to look at the existing revenue share of generic drugs and whether the revenue contribution of innovative drugs can cover the decline brought about by centralized procurement.

In its annual report, Hansoh Pharma did not mention centralized procurement and generic drugs, but instead placed emphasis on innovative drugs. 

For Hansoh Pharma, past revenue was mainly contributed by chemical generics, including blockbuster products such as Oulanning (olanzapine tablets), Pulaile (pemetrexed disodium for injection) and Zefei (gemcitabine hydrochloride for injection) With the continuous expansion of the varieties for volume-based procurement, Hansoh Pharma's generics business has also been impacted.

Moreover, the continuous price reduction of a number of products has affected the company's performance and made it determined to innovate and transform in an all-round way.

However, from another perspective, the biggest adverse impact from the inclusion of Hansoh Pharma's blockbuster varieties in the scope of centralized procurement has been fully released.

In addition, the subsequently filed generic drug varieties, including enzalutamide, cabozantinib, varenicline and deferasirox, provide new performance support for the generic drug segment, and these subsequent performance growth drivers will shift to innovative drugs, providing abundant funds for the company's switch from generic drugs to innovative drugs.

In 2021, Hansoh Pharma's sales revenue of innovative drugs was RMB 4.202 billion, up 168.9% YoY, and the revenue share rose from 18.0% in 2022 to 42.3%, becoming the main driver for Hansoh Pharma's business growth.

In just one year, Hansoh Pharma has increased its share of innovative drugs by 24.3%, which is a significant share. Innovative drug revenue includes the combined revenue of five products, aumolertinib (Ameile), flumatinib (Hansoh Xinfu), morinidazole (Mailingda), loxenatide (Fulaimei) and tenofovir amibufenamide (Hengmu). All the five products have now been included as Class B drugs in the National Reimbursable Drug List.

In terms of the filing rate of new innovative drug programs:

§ Prior to 2021, Hansoh Pharma maintained an average annual filing rate of 1-3 new innovative drug programs, while in 2021, 5 new programs were filed in the first half and 9 were filed in the second, leading to a total of 14 new programs.

From these, we can see that Hansoh Pharma's future new drug development, filing and marketing will be accelerated, and the influence of generic drugs and centralized procurement will be significantly lowered.

02 Answer 2: Focus on R&D and establish a solid presence in the oncology field

To measure a pharmaceutical company, the first consideration is R&D. As the Chinese proverb says, the more, the better. The number of R&D personnel represents the innovation strength of a company to some extent.

Hansoh Pharma has 1,650 R&D employees (2021), ranking fifth among Hong Kong listed pharmaceutical companies. Its ranking in the A-share market is also high, second only to the seventh-ranked Humanwell (1,682). According to the publicly available data from 2020 to H1 2022, we can see that the number of R&D personnel at Hansoh Pharma is still increasing.

In terms of R&D investment, Hansoh Pharma has a proportion basically higher than that of Hong Kong-listed pharmaceutical companies of the same size.

From 2018 to 2021, Hansoh Pharma's R&D investment share was 11.41%, 12.91%, 14.41 and 18.09% respectively.

Comparison with pharmaceutical companies of the same size:

§ From 2018 to 2021, CSPC Pharma's R&D investment share was 7.53%, 9.05%, 11.59% and 12.32% respectively; 

§ From 2018 to 2021, Sino Biopharm's R & D investment share was 10.01%, 9.9%, 11.11% and 14.22% respectively;

§ From 2018 to 2021, Fosun Pharma's R&D investment share was 5.94%, 7.14%, 8.51% and 9.83% respectively.

It can be seen that Hansoh Pharma has a much higher share than these three pharmaceutical companies.

Moreover, in terms of business segments, the hottest oncology business now accounts for half of Hansoh Pharma's revenue.

In 2021, its revenue reached RMB 5.481 billion, an increase of nearly RMB 1.5 billion over the previous year, accounting for more than 55% of total revenue. The ramp-up of the company's two new original drugs, Ameile (aumolertinib mesylate tablets) and Hansoh Xinfu (flumatinib mesylate tablets), has contributed greatly.

In terms of therapeutic areas, Hansoh Pharma has been strengthening its position in oncology in recent years and weakening its share in neurology, anti-infectives, metabolism and diabetes.

Currently, there are 8 oncology products:

§ The revenue is rising year by year. In 2019, the revenue was RMB 3.53 billion, accounting for 40.6%; in 2021, the revenue was RMB 5.481 billion, an increase of nearly RMB 2 billion, accounting for 55.2% the group's total revenue.

2 drugs for CNS diseases:

§ The revenue share decreased. In 2019, the revenue was RMB 2.171 billion, accounting for 25%; in 2021, the revenue was RMB 1.678 billion, accounting for only 16.9%.

5 anti-infection drugs:

§ The revenue share decreased. In 2019, the revenue was RMB 1.829 billion, accounting for 21.1%; in 2021, the revenue was RMB 1.503 billion, accounting for only 15.1%.

6 products in metabolism, diabetes and other areas:

§ The revenue share decreased. In 2019, the revenue was RMB 1.153 billion, accounting for 13.3%; in 2021, the revenue was RMB 1.273 billion, accounting for only 12.8%.

In addition, regarding the pipelines, Hansoh Pharma currently has 36 clinical stage programs in development, including more than 25 clinical programs for innovative drugs in the clinical stage, most of which involve the oncology field.

03 Answer 3: go beyond a market value of 100 billion

Even with all the talk of a pharmaceutical innovation bubble in the industry, the logic that the strong will always be strong holds true.

It is a direct signal that Hansoh Pharma can be favored by capital under the impact of centralized procurement.

On April 8 this year, Hansoh Pharma's market value fell to HKD 77.9 billion. But four months later, the figure has risen by HKD 15.8 billion to HKD 93.7 billion today, approaching a market value of 100 billion.

This also proves that, under the market perception of China's pharmaceutical innovation classification, it is very commendable for enterprises to stick to the development model of first generic + innovation, continuously enrich their pipelines through innovation, and develop high-end generic drugs with barriers.

After the downturn, truly innovative pharmaceutical companies will eventually be recognized by the market!

Furthermore, Hansoh Pharma has its own unique model of R&D innovation: In order to save R&D cost, Hansoh Pharma did not choose extensive layout, but made an early selection of its R&D pipelines, showing strong R&D pipeline control. This will also help gain the favor of capital.

Currently, Hansoh Pharma has a portfolio of nearly 100 product varieties under development in China, some of which have begun to enter the innovation harvest period. In the first half of this year, and a number of products have been approved for marketing in the first half of this year.

Hansoh Pharma plans to submit 8-10 new drug clinical trial applications (including 1-2 biological drug pipelines) and 1-3 new drug marketing authorization applications per year starting in 2021.

Favored by the capital and market, we believe that Hansoh Pharma will maintain a market value of 100 billion despite the roller coaster changes.

In the next step, it may be critical for Hansoh Pharma to:

§ identify innovative products with existing proof of concept and highly differentiated early-stage programs to fill the clinical stage and commercialization pipeline; and 

§ develop highly competitive potential first-in-class new drugs and bring truly clinically valuable new drugs to clinical practice faster.

In the future, as Hansoh Pharma gradually enters the harvest period, its overall competitiveness will be further enhanced.

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With the further implementation of the volume-based procurement policy in China, the performance of generic drug companies will continue to suffer.

For Hansoh Pharma that has shifted from a focus on generic drugs to a combination of generic and innovative drugs and to a focus on innovative drugs, it is definitely good news!