Company Highlights:
Innovent Biologics is evolving from a biotech company to a major pharmaceutical player in China, driven by its diverse drug pipeline. Key drugs such as Sintilimab, the company’s leading anti-PD-1 antibody, and biosimilars like BYVASDA and HALPRYZA, have contributed significantly to its revenue growth since 2018. The company is on track to launch additional drugs, including the highly anticipated mazdutide for weight management, which is projected to drive the next phase of growth starting in FY25.

Investment Recommendation:
We initiate coverage on Innovent Biologics with a strong “Add” rating. The company has a target price (TP) of HK$55.92, offering a potential upside of approximately 32%. The recommendation is supported by clear revenue growth catalysts and a robust drug pipeline.

Investment Thesis:
Innovent Biologics is positioned for significant growth in the next five years. The company’s diverse drug pipeline, with 11 approved drugs and several in clinical trials, spans oncology, metabolism, autoimmune, and ophthalmology sectors. The company is heavily reliant on its flagship drug Sintilimab, which holds a 34% market share in China’s anti-PD-1 antibody market, and has potential for growth through combination therapies.

The second phase of revenue growth is expected from mazdutide, a blood sugar and weight control drug targeting the rapidly growing market for weight management in China. With potential approval in FY25, the drug is projected to generate a sales CAGR of 63% from FY25 to FY28, positioning it as a major revenue driver.

Innovent’s strong market position, its collaborations with global healthcare leaders like Eli Lilly and Sanofi, and the Chinese government’s supportive policies for innovative drugs all provide significant tailwinds for future growth. Risks include potential price cuts for inclusion in China’s National Reimbursement Drug List (NRDL) and R&D failures.

Detailed Company Analysis:

1. Financial Results:

   • Innovent’s revenue grew at a compound annual growth rate (CAGR) of 266% between FY18 and FY23, primarily driven by Sintilimab and biosimilars.
   • Looking ahead, the company is expected to achieve a 30% revenue CAGR from FY23 to FY28, bolstered by new drug approvals.
   • Innovent is forecasted to turn profitable by FY25, with expected net profits of RMB 5.9 billion by FY28, translating to a net profit CAGR of 124% between FY25 and FY28.

2. Stock Impact:

   • Innovent’s stock price currently trades at HK$42.25, with a target price of HK$55.92, implying a 32% upside potential. The company’s significant market cap of HK$68,912 million and a free float of 91.5% make it attractive to investors.

3. Earnings Revisions/Risks:

   • Positive earnings revisions are expected with the approval and commercial launch of new drugs, particularly mazdutide.
   • Risks to earnings include potential R&D failures, price reductions due to NRDL negotiations, and increased competition from generics and biosimilars once patents expire.

4. Valuation:

   • The valuation is based on a discounted cash flow (DCF) model using a weighted average cost of capital (WACC) of 10.7% and a terminal growth rate of 3%.
   • The company’s intrinsic value is estimated at HK$55.92 per share, supported by a visible growth trajectory driven by drug launches and expanding revenue streams.

5. Share Price Catalysts:

   • New drug approvals, particularly mazdutide for weight control and tigulixostat for gout treatment, are expected to boost the stock.
   • Government policies supporting innovative drug development and potential interest rate cuts in the U.S. could also be positive catalysts.

Financial Targets:

• Target Price: HK$55.92
• Stop-Loss Price: Not explicitly provided, but a conservative margin could be calculated based on market volatility and individual risk tolerance.

Recommendation Date:

• The recommendation was made on September 11, 2024.

Broker Information:

• This report is powered by CGSI Research.

Conclusion:
Innovent Biologics presents a solid investment opportunity for long-term investors, particularly with the upcoming approval of new drugs like mazdutide, which is expected to drive the company’s second revenue growth phase.