"Innovative drugs + AI medical" strategy recognized by "Northern Water", exploring the allocation logic after reviewing HEC CJ PHARM's (01558) annual report"

After the entry of HEC CJ PHARM (01558) into the market, "Inclusion" in 2024 has become an inevitable topic. Shortly after the company's stock was included in September of last year, the Hong Kong market opened a crucial window period for "Northbound inflows", and the choice of "Northbound inflows" has gradually become an important indicator for Hong Kong investors to allocate HEC CJ PHARM. Since the beginning of this year, Northbound inflows have been making significant investments in the Hong Kong stock market. For example, in February of this year, the net inflow through the Hong Kong stock connect exceeded 150 billion Hong Kong dollars, and in the first half of March, the net inflow was close to a trillion. As of the first quarter of this year, Southbound funds have made investments exceeding 420 billion Hong Kong dollars, setting a new historical high, which has pushed the average shareholding ratio of Hong Kong Stock Connect to about 17.2%. In terms of specific industries, technology stocks are undoubtedly favored by "Northbound inflows" in this round of market trends. In contrast, the Hang Seng Healthcare Index, representing the medical and healthcare sector, saw a cumulative decline of 5.39% in the first quarter, indicating that the overall medical sector has not yet entered the allocation cycle. However, this indirectly highlights the underlying value behind the continuous increase in holdings of HEC CJ PHARM by "Northbound inflows". Despite the volatility of HEC CJ PHARM's stock price in the recent period due to sectoral corrections and market fluctuations influenced by the flu pandemic, Hong Kong Stock Connect funds have consistently maintained their strategy of increasing holdings. Data shows that since the inclusion last year, investments through Hong Kong Stock Connect have steadily increased their shareholding ratio of HEC CJ PHARM, from 11.99% on September 11 last year to 25.57% as of March 28th this year, ranking among the top 30 in terms of increased holdings by Hong Kong Stock Connect. The main reason why HEC CJ PHARM continues to be favored by Hong Kong Stock Connect funds is the company's recent proactive development strategy of "Innovative Drugs + AI Healthcare". Therefore, investors can use this as a starting point to explore the increasing investment certainty in the company's latest disclosed 2024 report. Differentiated innovation reaps rewards In recent years, HEC CJ PHARM has been leveraging its strong and efficient R&D capabilities to accelerate innovation-driven transformation based on the actual clinical needs of patients, resulting in a comprehensive harvest phase for its innovation pipeline. According to the latest disclosed 2024 annual report from HEC CJ PHARM, the company achieved revenue of 3.724 billion RMB during the reporting period, with a gross profit of 2.794 billion RMB and a net profit attributable to shareholders of 483 million RMB. Steady scale revenue and cash flow have provided strong support for the company's innovative R&D efforts. In terms of R&D investment, the company's R&D expenditures have increased annually at a double-digit growth rate in recent years, and this year is no exception. The financial report shows that the company's R&D investment in the current period was 493 million RMB, a significant increase of 156.62% year-on-year. With robust investment support, the company's differentiated innovation pipeline has made steady progress in R&D. As one of the new performance growth curves under HEC CJ PHARM, the chronic disease product line represented by insulin has performed well in 2024, achieving revenue of 137 million RMB during the period, a significant increase of 101.14% compared to the same period last year. Behind the financial performance growth, all five insulin products developed independently by the company, including recombinant human insulin injection, insulin glargine injection, insulin aspart injection, insulin aspart 30 injection, and insulin human isophane injection, have been approved for market launch. The specifications of these products are highly consistent with original biologic preparations in terms of efficacy, safety, and stability. Moreover, all five insulin products have won tenders through centralized procurement. With the further promotion of the insulin product series, it is expected to bring significant performance growth to the company's chronic disease business. Meanwhile, leveraging its deep accumulation in the field of metabolic disease treatment, the company's innovation pipeline for diabetes treatment is progressing smoothly. For example, a class of innovative drug SGLT-2 inhibitor rosiglitazone, used to treat type 2 diabetes, has already submitted a new drug marketing application. SGLT-2 inhibitors have gradually become frontline oral medications for diabetes treatment, and the market is in a rapid growth phase, promising continuous thickening of the company's performance in the future. It is worth mentioning that in November of last year, HEC CJ PHARM announced a high milestone exclusive licensing agreement worth 938 million US dollars with Apollo Therapeutics for the company's in-house developed FGF21/GLP-1 bifunctional fusion protein HEC88473 (APL-18881). This collaboration set a new record for the transaction amount of domestic GLP-1/FGF21 bifunctional molecules. From a market perspective, GLP-1 has become the cornerstone of treatments for various diseases like diabetes and obesity, and its corresponding global weight loss market has been popular in recent years. According to Pfizer's expectations, GLP-1 drug sales are expected to reach 90 billion US dollars by 2030, and Frost & Sullivan predicts that the global GLP-1 drug market will reach 115 billion US dollars by 2030. As a dual-action Fc fusion protein FGF21/GLP1R developed independently by Guangdong Hec Technology Holding, and also the first domestically approved clinical GLP-1/FGF21 dual-action stimulator, the successful commercialization of HEC88473 outside the Greater China region is expected to bring royalty usage fees to Guangdong Hec Technology Holding from high single digits to low double digits over the next ten years. This undoubtedly marks a key step for HEC CJ PHARM towards advancing international commercialization. In addition to the chronic disease business line, the innovative drug business line is also gradually becoming an important contributor to the company's performance. It is understood that the company's first approved innovative drug, phosphoramide ribavirin capsules, achieved an income of 89.49 million yuan within the period, a significant increase of 120.06% compared to the same period last year, as the market penetration of the product continues to increase. The continuous growth in revenue and market penetration rate is due to its outstanding efficacy and safety. Since its inclusion in the medical insurance catalog in 2023, phosphoramide ribavirin has seen a steady increase in market penetration and revenue.The Liaojie has received unanimous praise from the terminal market. At present, the sales of the single product of EIDD-2801 have accumulated to over one billion scale, and the market share has also significantly increased. By 2024, it has successfully entered the top three in the industry.Currently, the company's innovative value is also gaining increasing recognition from industry peers. On November 25 last year, the company signed an authorization agreement with 3SBIO regarding the sulfonic acid clioquinol. According to the agreement, Guangdong Hec Technology Holding will receive a first payment of 60 million yuan and subsequent research and commercial milestone payments. The term of the authorization agreement is at least 15 years from the date of signing to the first commercial sale. It is understood that clioquinol tablets (HEC73543) as a new generation, highly specific FLT3 inhibitor in Guangdong Hec Technology Holding's innovative pipeline, can block the continuous activation of the FLT3 signaling pathway caused by FLT3-ITD mutations, thereby inhibiting the unlimited proliferation and anti-apoptotic effects of AML cells, ultimately achieving the effect of treating AML. Compared to first-generation drugs, it has the advantage of low off-target effects and higher safety. In terms of research and development progress, the single-agent treatment of relapsed/refractory AML with clioquinol is currently undergoing Phase III clinical trials in China, making it the first domestically produced highly selective FLT3 inhibitor to enter Phase III clinical trials. Simultaneously, the Phase Ib/II clinical trials targeting newly diagnosed AML patients with combination chemotherapy are also underway. Early Phase I results have shown high CR/CRh rates and good tolerance in AML patients. With the successive completion of commercial potential in BD deals of heavyweight products such as HEC88473 and clioquinol sulfonic acid, Guangdong Hec Technology Holding has gradually built a solid foundation for commercializing innovative drugs internationally. Currently, Guangdong Hec Technology Holding has more than 100 drugs in its R&D pipeline, covering areas such as infection, chronic diseases, tumors, among others. Many of these innovative drugs are in the middle to late stages of development and have the potential for License-out, opening up broader BD transaction and cooperation opportunities for the company. AI-driven innovative research and development paradigm innovation In November last year, the State Health Commission and other departments jointly issued the "Reference Guidelines for Artificial Intelligence Applications in the Health Industry," clearly listing "AI + drug R&D" as a key breakthrough area and encouraging companies to accelerate the development of innovative drugs using AI technology. Under favorable policies, the market scale of the domestic AI medical industry is experiencing rapid growth. Frost & Sullivan predicts that by 2033, the market size of China's AI medical industry will grow from 8.8 billion yuan in 2023 to 315.7 billion yuan, with a compound annual growth rate of 43.1%. As one of the pioneers in the domestic AI medical field, Guangdong Hec Technology Holding has been committed to applying AI technology at all stages of drug development and has established multiple advanced AI-driven models to enhance the company's innovation capabilities. On December 16 last year, Guangdong Hec Technology Holding's AI-driven Class 1 new drug, the first small molecule innovative drug HEC169584, was approved for clinical trials for non-alcoholic steatohepatitis (NASH). HEC169584 is the first candidate drug obtained by Guangdong Hec Technology Holding through its AI-driven small molecule drug design platform. The team used the HEC-GEN model (a molecular fragment generation model based on sparse graph attention neural networks) to generate a large number of structurally diverse ligand molecules based on the THR- target pocket and evaluated their affinity with the target protein using molecular docking technology. Through the above AI technology, the company ultimately determined the candidate drug HEC169584 with good in vivo and in vitro efficacy, drug-like properties, and safety. Previous preclinical research results have shown that HEC169584 has high in vitro activity against THR- cells; strong liver targeting, with a liver blood ratio of 24.5 (AUC ratio), reducing the impact on tissues such as the thyroid axis and heart; and in a mouse model of NASH with liver fibrosis, it has shown effects in improving liver function, blood lipids, liver lipids, liver inflammation, liver NAFLD activity score, and liver fibrosis. This demonstrates Guangdong Hec Technology Holding's deep and successful exploration of AI-assisted innovative drug development. There is currently no similar drug on the market in China, and HEC169584 is expected to rapidly advance in clinical trials, bringing new treatment options to patients. In addition to independently researching AI large models to assist in innovative research and development, Guangdong Hec Technology Holding is also strengthening external cooperation, continuously providing its AI-driven research and development capabilities. Starting in 2023, Guangdong Hec Technology Holding has collaborated with Huawei Cloud on AI drug research and development to optimize the high-precision molecular properties and drug structures, creating an all-in-one large model drug research platform from drug discovery to pharmaceutical production to help the company improve its small molecule drug virtual screening efficiency by 20% and design efficiency by 30%, significantly shortening the drug development cycle. At this critical juncture of accelerating innovation transformation, Guangdong Hec Technology Holding's innovative "AI + expert experience" collaborative research and development model - with AI responsible for screening and preliminary design by Beijing Vastdata Technology, while scientists focus on key decisions and optimization verification - combines to release exponential innovation efficiency, further unlocking the company's innovative value. Summary With the recent continuous interest rate cuts by the Federal Reserve, the global biotechnology capital market is entering a critical period of thawing ice, with more and more companies having "investment certainty."The leading pharmaceutical company in the field of sexual health is currently gaining market favor.Relying on the systematic advantages formed by the gradual construction of globalization innovation research and development, overseas registration, and international market commercialization, the growth logic of HEC CJ PHARM has departed from the traditional logic of pharmaceutical industry development and shifted towards a new emerging growth logic centered on innovative drugs and AI healthcare, which has higher valuation potential. Moreover, looking at the continuous increase in Hong Kong stock connect funds, in the current market environment that favors "more certain companies," as a rare high-value biopharmaceutical investment target, Guangdong Hec Technology Holding not only holds cutting-edge AI pharmaceutical technology but also has numerous potential assets in innovative drugs. Its new allocation value logic is gradually being recognized by market pricing funds.