Salubris Pharma has built a deep presence in the R&D of drugs for cardiovascular and other chronic diseases. Since the adverse impact of its failed bid for centralized procurement of generic drugs has basically dissipated, the Company's blockbuster products from the R&D pipeline are entering the commercialization period, with 4 new drug applications (NDAs) having been submitted. Salubris has made a comprehensive presence around its core product Allisartan Isoproxil Tablets (S086), which is the world's second angiotensin receptor-neprilysin inhibitor (ARNI) drug benchmarked against Entresto and is likely to achieve domestic peak sales of more than Rmb4bn. Innovative biomedicines JK07 and JK08 highlight the Company's hardcore innovation capability and lay a solid foundation for the Company to tap overseas markets.

The sales of Taijia (Clopidogrel Bisulfate Tablets), a large generic drug variety of Salubris, are stabilizing. The Company's new varieties for centralized procurement are contributing stable cashflow, greatly mitigating centralized procurement risks going forward. Based on the results of the DCF and PE valuation methods, we arrive at a reasonable equity valuation of Rmb45.3bn, equivalent to a target price of Rmb41, and initiate coverage with a "BUY" rating.

A deep presence in the R&D of chronic disease drugs.

A leader in China's chronic disease drug sector, Salubris focuses on cardiovascular and cerebrovascular diseases (blood pressure reduction, heart failure, anticoagulation, lipid reduction, stroke, etc) and is expanding business footprints to nephrology, metabolism and other fields. So far, the Company has formed an advantageous product lineup. Taijia, a generic drug variety in the early stage, enjoys policy support. Salubris accelerated its innovation and transformation after losing a bid for centralized procurement in 2019. The temporarily adverse effects of the failure have basically dissipated, and growing sales of its core product Xinlitan (Allisartan Isoproxil Tablets) have driven the Company's earnings to rebound rapidly. Salubris’ innovative chronic disease drugs from its R&D pipeline are entering the commercialization period. After being approved for marketing, Enarodustat Tablets, a renal anemia drug of Salubris, has seen growing sales. The Company's heavyweight ARNI drug S086 has huge market potential. The marketing of new products may drive the Company's earnings to grow rapidly.

A highly synergistic cardiovascular drug R&D pipeline.

The sales of Allisartan Isoproxil Tablets, Salubris’ Class-I new hypertension drug, totaled nearly Rmb1bn in 2022, and there is still a large headroom for improvement, forming product synergy with compounded preparations SAL0107 and SAL0108. The hypertension indication of Salubris’ heavyweight product S086 may be approved in 2024 for marketing. As the Phase III clinical trials of heart failure indication is coming to an end, and S086 may become the world's second ARNI drug benchmarked against Entresto, a heavyweight product of Novartis, and is likely to achieve domestic sales peak of Rmb4bn.

JK07, an innovative biomedicine independently developed by Salubris, is under phase I clinical trials in China and the US simultaneously. JK07 fuses NRG-1 protein and HER3 monoclonal antibody to effectively promote myocardial cell regeneration and avoid gastrointestinal side effects, highlighting Salubris’ hardcore innovation capability.

Enarodustat Tablets may achieve peak sales above Rmb2bn.

Enarodustat Tablets, introduced by Salubris from Japan Tobacco, was approved in Jun 2023 for the treatment of non-dialysis renal anemia in China.

It is China's second hypoxia-inducible factor-prolyl hydroxylase inhibitor (HIF-PHI) benchmarked against Roxadustat Capsules, a similar drug.

Compared with Roxadustat Capsules, Enarodustat Tablets have obvious advantages in safety and efficacy. Low-dose administration of Enarodustat Tablets can steadily increase hemoglobin to physiological concentration, with significantly lower incidence of cardiovascular and cerebrovascular adverse reactions than Roxadustat Capsules. It is not necessary to adjust the dose of Enarodustat Tablets according to the patient's body weight, and the drug is administered once a day to improve the compliance of patients. Given that, we expect the domestic peak sales of Enarodustat Tablets to reach Rmb2bn.

New drug for diabetes may be launched in 2024.

Recombinant Teriparatide for Injection will form a combination of long-acting and short-acting preparations in orthopedics. There is huge demand for oral treatment drugs for diabetes, and the DPP-4 inhibitor has a unique mechanism of action. Salubris’ application for marketing of Geliptin has been accepted and may be approved in 2024. In addition, an oral GLP-1 receptor agonist of Salubris may start phase II clinical trials in 2024, indicating broad application prospects. Recombinant Teriparatide for Injection is China's only bone growth promoter. At present, Salubris has two conventional dosage forms, namely, Recombinant Teriparatide powder for injections and injectables, ranking first in this regard among its Chinese peers. The phase III clinical trials of long-acting Recombinant Teriparatide for Injection in the R&D pipeline will be completed soon. After this variety hits the market, Salubris will have a highly competitive product portfolio to provide better drug options for osteoporosis patients.

New bid-winning drug varieties contribute to the cashflow.

Taijia's failed bid in China's centralized procurement dented Salubris’ earnings in 2020. At present, the Company enjoys stable revenue from Taijia, and is about to create the second growth curve with Xinlitan and other innovative products. As a result, Salubris has greatly optimized its revenue composition, and the unfavorable factors of the failed bid for centralized procurement basically dissipated. The new drugs for centralized procurement, such as Cefuroxime Sodium for Injection, won the bid to and achieved rapid sales growth, bringing stable cashflow and profit to Salubris. As a result, risks in subsequent centralized procurement of generic drugs have been greatly mitigated.

Potential risks: Disappointing R&D progress or R&D failure; slower-than-expected marketing of products; intensified market competition; disappointing monetization progress; unexpected changes in medical policies; core technology iteration; disappointing clinical data.

Earnings forecast, valuation and rating: Salubris has built a deep presence in the R&D of drugs for chronic diseases including cardiovascular diseases. Xinlitan and Enarodustat Tablets are likely to see sales growth. Three new drugs (S086 for hypertension, SAL0107, and Geliptin) may be approved in 2024 for marketing, which will greatly boost Salubris' earnings growth. We estimate the Company's 2023E/24E/25E attributable net profit (ANP) to be Rmb646mn/709mn/897mn. Based on the results of the DCF and PE valuation methods, we arrive at a reasonable equity valuation of Rmb45.3bn, equivalent to a target price of Rmb41, and initiate coverage with a "BUY" rating.