Orelabrutinib has seen growing sales, and achieved revenue of Rmb321mn in 1H23. Its second-line indication marginal zone lymphoma (MZL) was approved for marketing in Apr 2023. The data of 24-week clinical trial for multiple sclerosis (MS) indication have been announced. The recruitment of patients for its first-line indications chronic lymphocytic leukemia (CLL)/small lymphocytic lymphoma (SLL) has been completed. Moreover, several studies are progressing smoothly. Tafasitamab has been approved in Hong Kong SAR, and patients have been enrolled in China's bridging study of clinical trials. This means that Tafasitamab may become InnoCare's second commercialized product in the Chinese mainland.

Growing R&D expenditures, smooth progress in R&D on several novel targeted drugs, and comprehensive layout in the fields of tumor and autoimmune diseases (AD). InnoCare boasts abundant cash reserves, several multi-milestone events, and rapid progress in R&D of novel targeted drugs. To sum up, we reiterate the "BUY" rating for the Company's A-/H-shares.

Growing sales of Orelabrutinib, and abundant cash reserves.

In 1H23, InnoCare achieved a total revenue of Rmb378mn (+53.50% YoY) and attributable net profit (ANP) of Rmb-422mn (decline narrowed YoY).Orelabrutinib, InnoCare's first commercialized product, achieved 1H23 revenue of Rmb321mn (+47.81% YoY), with 1Q23/2Q23 revenues being Rmb151mn/170mn respectively. Since Orelabrutinib was approved in Singapore in Nov 2022, we expect that overseas revenue will bring earnings elasticity to the Company. As of Jun 30, 2023, InnoCare's cash and equivalents totaled Rmb8.74bn, boasting sufficient cash reserves.

The MZL indication of Orelabrutinib has been approved for marketing, and several clinical trials in and outside China are progressing smoothly.

In 1H23, Orelabrutinib, the core product of InnoCare, has made progress on several fronts: 1) In Apr 2023, refractory/relapsed marginal zone lymphoma (R/R MZL) indication was approved, becoming the first and only Bruton's tyrosine kinase (BTK) inhibitor approved for MZL indication in China; 2) The recruitment of patients for Orelabrutinib's first-line indications CLL/SLL has been completed, and InnoCare plans to submit a new drug application (NDA) to the Food and Drug Administration (FDA) in 2024; 3) The recruitment of patients for Phase II clinical trials of refractory/relapsed mantle cell lymphoma (R/R MCL) indication in the US has been completed, and InnoCare plans to submit an NDA to the FDA in mid-2024; 4) The recruitment of patients for Phase IIb clinical trials of systemic lupus erythematosus (SLE) has begun in 2Q23, and InnoCare plans to complete the enrollment of patients within 12 months and the mid-term analysis by the end of 2024; 5) The registered Phase III clinical trials of idiopathic thrombocytopenic purpura (ITP) in China is underway.

The 24-week clinical data of Orelabrutinib in the treatment of MS have been published, and the non-head-to-head data have advantages over competing products

In 2023, InnoCare published the 24-week data of the global Phase II clinical trials of Orelabrutinib in the treatment of multiple sclerosis (MS). 1) Efficacy: All three dose groups reached the primary endpoints. Compared with the placebo group (50mg quaque die (QD) Orelabrutinib after the 12th week), the cumulative number of new brain lesions (Gd+T1) in gadolinium-enhanced T1 group decreased by 92.3% in the 24th week. Compared with those of other approved or under-development MS drugs, this reduction is the most significant. 2) Safety: A total of two ALT/AST>8xULN cases were reported; one of which was in the 50mg bis in die (BID) group and the other in the 50mg QD group. The 80mg QD group had a safety similar to that of the placebo group. 80mg has the potential to become the optimal dose for treating MS.

According to its announcements, two Phase III studies of InnoCare's BTK inhibitor Remibrutinib in the treatment of chronic spontaneous urticaria reached all primary and secondary endpoints in Aug 2023. This proved the medicinal properties and potential of BTK inhibitor in the treatment of AD.

Hematoma: Patients have been enrolled in the bridging study of clinical trials of Tafasitamab, and several products are being actively developed for different indications. 1) Tafasitamab: Patients have been recruited for the bridging study of registered clinical trials, with the primary clinical endpoint being overall response rate (ORR), and InnoCare plans to submit an NDA in 2Q24. 2) ICP-490 (CRBN E3): The Phase I incremental study of relapsed/refractory multiple myeloma (R/R MM) has been advanced to the second dose group. 3) CM355 (CD3*CD20): The dose escalation for intravenous infusion (IV) preparation has been completed; the first-dose patient evaluation of subcutaneous (SC) preparation has been completed. 4) CM369 (CCR8): The investigational new drug (IND) application for non-Hodgkin's lymphoma (NHL) was approved in Mar 2023.

AD: The R&D of two TYK2 inhibitors is progressing smoothly. 1) ICP-332 (TYK-JH1 kinase inhibitor): The Phase II clinical trials of 80mg and 120mg QD groups for AD have been started in China. InnoCare plans to complete the enrollment of patients in Sep 2023 and achieve the readout of the Phase II clinical trial data in 4Q23. 2) ICP-488 (TYK-JH2 allosteric inhibitor): Escalating dose (1-36mg) and multiple-dose escalation with food effect dose groups have been completed, and InnoCare plans to complete Phase I clinical trials in 2H23 and achieve the readout of the proof of concept (PoC) data of psoriasis patients at the end of 2023.

Solid tumor: Registered clinical trials have been started for ICP-192 and ICP-723, and clinical trials of several products are well underway. 1) ICP-192 (pan-FGFR inhibitor): The registered study of treatment for cholangiocarcinoma has been started in 1H23. 2) ICP-723 (second-generation TRK inhibitor): The registered Phase II clinical trials for adults and adolescents have been launched in the Chinese mainland.

InnoCare plans to complete the enrollment of patients in the next few months, and the new-formulation IND for children (2-12 years old) was approved by the Center for Drug Evaluation (CDE) in Jul 2023. 3) Other products: In Jul 2023, ICP-189 (SHP2 inhibitor) and Furmonertinib combination drug therapies were accepted by the CDE.

YoY decline in selling/administrative expense ratios indicated initial results in reducing costs and increasing efficiency.

InnoCare's selling/administrative expense ratios were 50.64%/22.03% (-25.00ppts/-9.14ppts YoY) in 1H23, which indicated initial results in reducing costs and increasing efficiency.

Growing R&D expenditures, several milestone events in the next 12 months, and rapid progress in R&D of novel targeted drugs.

InnoCare's 1H23 R&D expenses totaled Rmb361mn, up by 29.79% YoY. As of the date of its 2023 interim report, the Company had 13 products in Phase I/II/III clinical trials. We expect InnoCare to achieve several milestones in the next 12 months: 1)Orelabrutinib: An NDA has been submitted for first-line indications CLL/SLL; an NDA has been submitted for R/R MCL in the US; the enrollment of patients for Phase IIb clinical trials of SLE has been completed and the readout of interim data is expected at the end of 2024; and the enrollment of patients for Phase III registered clinical trials of ITP has been completed. 2) Tafasitamab: An NDA will be submitted in the Chinese mainland in 2Q24. 3) ICP-248: Readout of preliminary data, an IND application has been submitted in the US; Orelabrutinib combination drug therapies for the treatment of CLL/SLL are being developed in the US and China; and Phase II key clinical trials of R/R CLL/SLL are underway. 4) ICP-332: Readout of the data of Phase II trials of specific dermatitis at the end of 2023, and Phase III clinical trials have been started. 5) ICP-488: The PoC and Phase II trials of psoriasis indications have been started. 6) ICP-189: Readout of Phase I trials data; clinical trials of EGFR inhibitor combination drug therapies for non-small cell lung cancer (NSCLC) are underway. 7) ICP-723: The enrollment of patients for registered clinical trials has been completed, and an NDA has been submitted. 8) ICP-192: Striving to complete the enrollment of patients for the registered clinical trials of cholangiocarcinoma patients.

Potential risks: Disappointing progress in the Company's R&D and marketing of new drugs or R&D failures; commercialization of the Company's new drugs missing expectations; the Company's products failing to become reimbursable under the medical insurance scheme; and unexpected changes in relevant policies.

Earnings forecast, valuation and rating: After becoming reimbursable under the medical insurance scheme, Orelabrutinib has seen the sales surge and cover more indications. This may expand Orelabrutinib's coverage of patients and bring sustainable sales growth in the future. InnoCare is also advancing R&D of AD indications. The Company has made positive progress in several clinical trials, thus improving its business layout in indications. InnoCare has business layout in several novel targeted drugs, and the width of its R&D pipeline is expanding. Based on the Company's 2023 interim report, considering that the sales growth rate of Orelabrutinib has slowed down, we lower our 2023E/24E/25E revenue forecasts to Rmb766mn/1,040mn/1,799mn (from 1,053mn/1,469mn/2,163mn). Given declining selling/administrative expenses, a rising GPM, and a YoY narrowed 1H23 loss, we lower our 2023E/24E/25E EPS forecasts to Rmb-0.49/-0.33-/0.25 (from Rmb-0.61/-0.39/-0.22). We　adopt DCF valuation method (absolute valuation) to estimate InnoCare's fair equity value to be Rmb25,206mn (corresponding to WACC 9.29%, stock beta value 1.3, and risk premium 5.5%; the beta value is the average of InventisBio (688382.SH), Akeso (09926.HK), CStone Pharmaceuticals (CSPHF.O/02616.HK), Zelgen Biopharmaceuticals (688266.SH), RemeGen (688331.SH), Ascentage Pharma (06855.HK) and Jacobio Pharmaceuticals (01167.HK); The risk-free interest rate is 2.6% for 10-year treasury bonds; considering that the Company now has not many long-term borrowings, and will increase R&D expenditures and expand production, which may lead to an increase in liabilities, we assuming the target capital structure to be 10%). We　give the Company a target price of Rmb14 for its A-shares and reiterate the "BUY" rating for its A-/H-shares.