Yuheng Pharmaceutical, founded by Zhu Jiman, the "Northeast Medicine King", once became famous in the industry through continuous large-scale mergers and acquisitions of many pharmaceutical companies such as Auno Pharmaceutical and Shanghai Huatuo. In the end, it fell into a downturn due to frequent mergers and acquisitions.

Recently, Yuheng Pharmaceutical handed in its first semi-annual report after the reorganization. The net profit attributable to the parent company in the first half of 2024 was 125 million yuan, a year-on-year increase of 342.39%, and a substantial increase in profits.

How did Yuheng Pharmaceutical recover so quickly? We have to talk about PD-1.

There are many competitors in the PD-1/L1 field.

In June 2024, the listing application of Enlangsubai monoclonal antibody of Shijiazhuang Pharmaceutical Group was officially approved. So far, there are at least 15 PD-1/L1 monoclonal antibodies approved for listing in China. The PD-1/L1 track, which is being chased by major pharmaceutical companies, is as fiercely competitive as a siege. Those in the city want to get out, and those outside the city want to get in.

Innovation and transformation start with PD-1. In 2015, the State Council issued the "Opinions on Reforming the Review and Approval System for Drugs and Medical Devices", which kicked off the reform of the review and approval system for drugs and medical devices in China. This year also became a watershed in the development of China's pharmaceutical industry. Countless domestic pharmaceutical companies embarked on the road of innovation and transformation. Driven by K drug and O drug, PD-1 seemed to become a must-stop for innovation and transformation.

At that time, Yuheng Pharmaceutical was also thriving in the domestic pharmaceutical industry. In 2015, its revenue was 2.681 billion yuan and its net profit attributable to the parent company was 665 million yuan, up 40.69% and 49.81% year-on-year respectively, continuing to retain the title of China's top 100 pharmaceutical industry companies.

At the beginning of its innovative transformation, Yuheng Pharmaceutical was also attracted by the magic of PD-1. In 2015, it signed the "Anti-PD-1 Fully Innovative Antibody Drug Cooperative Development Agreement" with WuXi AppTec. In March 2017, the anti-PD-1 monoclonal antibody product GLS-010 jointly applied by it and WuXi AppTec obtained clinical approval, and Yuheng Pharmaceutical officially became a member of the PD-1/L1 track. It

is difficult to show your skills in such a crowded field. In order to make a name for itself in the PD-1/L1 track, in August 2018, Yuheng Pharmaceutical injected its biopharmaceutical products, assets and R&D team for tumor immunotherapy with GLS-010 as the core into its wholly-owned subsidiary Yuheng Biotechnology, and introduced strategic investors by increasing capital and expanding shares. After the transaction was completed, Yuheng Pharmaceutical held a 49% stake in Yuheng Biotechnology. Since then, Yuheng Biotechnology has experienced multiple capital increases, and Yuheng Pharmaceutical finally held a 42.12% stake in it.

Yuheng Pharmaceutical's R&D strategy in the PD-1/L1 track doomed the final outcome. In 2018, there were more than 20 domestic pharmaceutical companies developing PD-1/L1, and major pharmaceutical companies have made extensive layouts in many indications. However, Yuheng Biopharma has only conducted Phase 2 clinical studies in Hodgkin's lymphoma. In

August 2021, Yuheng Pharmaceutical's Sepalimab (GLS-010) was approved for marketing by the National Medical Products Administration for the treatment of adult patients with relapsed or refractory classical Hodgkin's lymphoma (CHL) after second-line systemic chemotherapy. At this time, among the 8 PD-1 drugs listed in China, only Junshi Biopharma's Teplizumab has not applied for this indication.

Although the objective response rate (ORR) of Sepalizumab for the treatment of r/r CHL is higher than that of the other six PD-1 drugs that were already available in China at that time, reaching 91.67%, as a "top student", it did not open up a big gap. Except for Merck's K drug ORR of 71.9%, the ORR of the other five products exceeded 80%, especially BeiGene's tislelizumab and Kangfang Bio's pamplimab, with ORR close to 90%, and the complete remission rate (CR) far exceeded Sepalizumab.

It is worth noting that the three products of Innovent Biologics, Hengrui Medicine and BeiGene have been commercialized in the domestic market for several years with the balanced advantages of ORR not inferior to O drug and CR higher than K drug. Sepalizumab is difficult to stand out in the CHL indication where there are many experts.

In order to be competitive in the PD-1/L1 track, in addition to breakthroughs in clinical data, it is also necessary to pursue the expansion of indications. Yuheng Pharmaceutical has targeted cervical cancer as the next indication for Sepalimab, which is indeed more powerful than the CHL indication, and has taken the lead in the PD-1 circle. In September 2023, Sepalimab was approved by the National Medical Products Administration for the treatment of patients with recurrent or metastatic, PD-L1-positive (CPS ≥ 1) cervical cancer who had previously failed platinum-containing chemotherapy, becoming the first and only PD-1 monoclonal antibody approved for cervical cancer in China.

However, cervical cancer therapy at this time has long been upgraded to the era of dual antibodies. In June 2022, Kangfang Bio's dual-antibody product, Cardunili, was approved by the National Medical Products Administration for the treatment of patients with recurrent or metastatic cervical cancer (R/M CC) who had previously failed platinum-containing chemotherapy. For patients with CPS ≥ 1, Cardunili's ORR reached 43.8%.

Even though Sepalizumab is more powerful than its PD-1 peers, it is a pity that it was born at the wrong time in the face of a "jianghu" full of "talents". In addition, Yuheng Pharmaceuticals fell into a financial crisis due to mergers and acquisitions, and was unable to continue to undertake the research and development of other products of Yuheng Biological. It had to make the decision to sell all its shares in Yuheng Biological before Sepalizumab's cervical cancer indication was approved.

Taking a step back, the sky is wide.

After divesting Yuheng Biological's equity, Yuheng Pharmaceuticals returned to its main business of generic drugs. This time, it will focus on re-arranging difficult-to-copy and improved new drugs.

Unload the burden and go into battle lightly. PD-1 assets have always been a big burden that has dragged down Yuheng Pharmaceutical's performance. In 2021 and 2022, Yuheng Biologicals affected the company's net profit by -38.6748 million yuan and -66.6588 million yuan, respectively. After unloading the burden, the number of new product projects in Yuheng Pharmaceutical's main R&D projects has increased significantly. According to the 2023 annual report, 8 drugs in the main R&D projects are new products, which is twice as many as in 2022. In 2021, there were no new product projects in the main R&D projects.

It is worth mentioning that although the new products are all generic drugs, there are some popular ones. In February 2024, Yuheng Pharmaceutical and Anbisheng cooperated to obtain drug approval for sitagliptin metformin sustained-release tablets. This product is a combination of dipeptidyl peptidase-4 (DPP-4) inhibitor and metformin. From 2018 to 2022, the sales of DPP-4i/metformin compound preparations had a five-year compound growth rate of more than 70%, and sales in 2022 were close to 1.2 billion yuan. In July 2024, Yuheng Pharmaceutical's sitagliptin metformin sustained-release tablets officially began to be sold, which is expected to become a new growth point for performance.

Among the 8 new products, except for sitagliptin metformin extended-release tablets, which have been approved, the details of the other products have not been made public. Based on the "product is king" strategy currently implemented by Yuheng Pharmaceutical, it is speculated that the other 7 products to be "unlocked" are also mostly large-scale generic drugs.
Yuheng Pharmaceutical's trial of innovative drugs has both bitterness and sweetness. The development idea of returning to the main business of generic drugs has not wiped out its dream of innovative drugs, because in the process of saving the company's financial crisis, it would rather sell the star calcium supplement company Auno Pharmaceutical for children than sell its investment shares in WuXi Healthcare Ventures II, LP.

Interestingly, one of the main investment targets of WuXi Healthcare Ventures II, LP is CStone Pharmaceuticals. Just last month, CStone Pharmaceuticals' Sugelimumab became the world's first PD-L1 monoclonal antibody listed in Europe for the first-line treatment of squamous and non-squamous NSCLC in combination with chemotherapy, and it is also the first domestically produced PD-L1 monoclonal antibody successfully launched in the international market.

The secret of reducing revenue and increasing profits. Judging from the revenue structure of Yuheng Pharmaceutical in the first half of 2024, it is really difficult to understand how the declining revenue can support the net profit that has increased several times.

Although many core products of Yuheng Pharmaceutical have firmly held the top spot in market share, the price reduction of the winning bid in the centralized procurement has led to an increase in sales and a decline in revenue. Among the core products, only An Nao Pills/Tablets achieved a sales revenue growth of more than 50% in the first half of 2024, supporting the traditional Chinese medicine sector to become the only sector with positive revenue growth, but it still failed to prevent the 1.04% decline in revenue of the cardiovascular and cerebrovascular drugs sector to which the product belongs.
Only unity can restore confidence. Since 2024, the concerted action persons of the largest shareholder of Yuheng Pharmaceutical have increased their holdings by a total of 10.2724 million shares. In addition, the company has implemented equity incentives and granted 72.3910 million restricted shares to 105 incentive targets that meet the conditions for the first grant. The two-pronged measures have stimulated the confidence and enthusiasm of core employees and ensured the smooth implementation of the company's cost reduction and efficiency improvement.

The 2024 semi-annual report shows that the company's sales expenses decreased by 28.03% year-on-year, management expenses (excluding equity incentive expenses) decreased by 20.20% year-on-year, and financial expenses decreased by 94.83% year-on-year. The total year-on-year decrease in expenses of the three is about 200 million yuan. It can be said that the profits in the first half of 2024 are largely "saved back".

Conclusion

"Moving towards innovative drugs at the right time" is the answer given by the management of Yuheng Pharmaceuticals to the company's future prospects in the investor survey in July 2024. This also proves that Yuheng Pharmaceuticals has not given up on innovative drugs. The substantial improvement in operating efficiency will also gather internal strength for its innovative transformation.

It is worth mentioning that Yuheng Pharmaceuticals is trying to enhance its R&D capabilities through CXO business, and has made preparations to transform to CDMO on the R&D side through the CMO business of its subsidiary Pude Pharmaceuticals. With the recovery of vitality, Yuheng Pharmaceuticals will eventually return to the innovative drug track.

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