20230217-招银国际-诺诚健华-B-09969.HK-Breakup_with_Biogen_on_orelabrutinib_for_the_treatment_of_autoimmune_diseases_5页_1mb

InnoCare Pharma (9969 HK) Summary

Core Content

InnoCare Pharma has terminated its partnership with Biogen regarding the development of orelabrutinib for the treatment of multiple sclerosis (MS) and other autoimmune diseases. The collaboration was initiated in July 2021, with InnoCare receiving an upfront payment of US$125 million and being eligible for up to US$812.5 million in milestone payments and future sales royalties. However, with the termination, future payments will not occur, while the upfront payment remains with InnoCare.

Key Developments

• Ph2 MS Trial: The trial was partially placed on hold by the US FDA in December 2022 due to liver toxic issues. However, InnoCare claims only a limited number of liver transaminase increases were observed, which were transient and occurred only in the first two months of treatment. These effects are considered minimal compared to those observed in Sanofi's evobrutinib trial.
• Trial Continuation: InnoCare plans to continue the MS study and will release data from the 24-week treatment period in the second quarter of 2023 (2Q23E). If the results are positive, a Phase 3 trial may be initiated.
• Other Autoimmune Trials: Orelabrutinib is also being evaluated for other autoimmune diseases such as SLE, ITP, and NMOSD. A Phase 2b trial for SLE has already begun based on positive proof-of-concept data.

Financial Overview

• Net Cash: As of September 2022, InnoCare has RMB7.7 billion in net cash.
• Target Price: The target price has been revised from HK$20.14 to HK$10.84, with a potential upside of 22.5% from the current price of HK$8.85.
• Earnings and Profitability: InnoCare has reported negative net profits in recent years, with EBIT and net profit remaining negative in FY22E and FY23E. The company's gross margin is expected to improve from 75% to 79.5% by 2024E.
• FCFF and Valuation: The Free Cash Flow to the Firm (FCFF) is projected to turn positive in 2025E and increase over time, with a terminal value of RMB30,090 million in 2035E. The equity value is estimated at RMB16,259 million as of 2022E.

Share Performance and Structure

• Market Cap: HK$15,614.2 million.
• Shareholding: Hillhouse Capital and King Bridge Investments hold 11.8% and 9.2% of the shares, respectively.
• Share Performance: The stock has seen a decline in value over the past 12 months, with a 12-month price performance chart provided.

Analyst Ratings and Recommendations

• Rating: Maintain BUY, indicating the stock has potential for more than a 15% return over the next 12 months.
• Valuation Method: The valuation is based on a discounted cash flow (DCF) model with a WACC of 10.11% and a terminal growth rate of 3.0%.
• Sensitivity Analysis: The target price is sensitive to changes in the terminal growth rate and WACC. At a 3.0% growth rate and 10.11% WACC, the target price is HK$10.84.

Key Financial Metrics

Financial Ratios

• Current Ratio: Expected to decrease from 18.6x in 2022E to 8.5x in 2024E.
• Gross Margin: Projected to increase from 75% in 2022E to 79.5% in 2024E.
• Return on Equity (ROE): Expected to be 13.8% in 2022E, decreasing to 5.3% in 2024E.

Disclosures

• The analyst certifies that the views expressed in the report accurately reflect personal views and that no compensation is directly related to the report.
• CMBIGM is not a registered broker-dealer in the United States, and the report is intended solely for "major US institutional investors."
• The report is for the use of intended recipients only and may not be reproduced or distributed without prior written consent.

Conclusion

Despite the termination of the partnership with Biogen, InnoCare remains optimistic about the future of orelabrutinib in the treatment of autoimmune diseases. The company is focused on continuing its MS trial and exploring other autoimmune disease indications. Financially, the company has sufficient cash reserves and is projected to show improved profitability and cash flow in the coming years, which supports the BUY rating.