China Medical System (867.HK) 2023 Annual Results: Despite of the Temporary Financial Performance Pressure Fresh Catalysts Emerged from Successive Innovation Breakthroughs

SHENZHEN, CHINA – On March 27, 2024, China Medical System (“CMS” or the “Company”) released its 2023 annual results. The Company recorded a turnover of RMB8,013 million, a year-on-year decrease of 12.4%; in the case that all medicines were directly sold by the Group, the turnover would be RMB 9,472 million, a year-on-year decrease of 9.8%. Profit for the year was RMB2,384 million, and normalized profit for the year that excluding provisions of impairment losses on related assets was RMB2,709 million. The results announcement shows that in 2023, the Company has affected by the implementation of the National Volume Based Procurement (the “National VBP”) of its three marketed original products (sales of these three products recorded a decrease of RMB1,708.7 million, and the sales of them for the second half of the year declined approximately 50% compared with the second half of last year), resulting in temporary turbulence and decline of its overall operation performance. Although three products have not been selected in the National VBP, they are all original medicines for chronic diseases with oral administration, with good brand recognition and large retail market shares. Therefore, the overall impact from National VBP could be expected. The Company’s exclusive non-VBP products has continued to grow. In addition, the Company’s newly marketed innovative product portfolio has been expanded to 4 drugs, and the commercialization and large-scale clinical application of innovative products has provided the Company fresh driving forces. Based on above, CMS has successfully entered into its “New Period” of innovation and internationalization development.

4 innovative drugs have started large-scale clinical application, unveiling CMS’s first year of commercialization era of innovative drugs.

In 2023, CMS delivered quality innovation outcomes. Its three innovative drugs, Diazepam Nasal Spray (VALTOCO), Tildrakizumab Injection (ILUMETRI), Methotrexate Injection-psoriasis (METOJECT), have been included in the National Reimbursement Drug List (NRDL) after obtaining approvals of marketing in China, and have steadily entered into the commercialization stage, further enriching CMS’s marketed product matrix in the specialty therapeutical fields, and supporting CMS to accelerate commercialization process of innovative products.

In addition, in February 2024, CMS obtained the exclusive license of the first-line phosphorus-lowering innovative drug Sucroferric Oxyhydroxide Chewable Tablets (VELPHORO), which has been newly included in the China NRDL and issued its first prescription in China. As of now, CMS’s 4 innovative drugs have officially started large-scale clinical application in China, marked as the start of the CMS’s commercialization era of innovative products

The differentiated innovation pipeline stands as an important driver of the Company’s high-quality development. Driven by the twin-wheel of “Collaborative R&D and Independent R&D”, CMS has continuously deployed global first-in-class (FIC) and best-in-class (BIC) innovative products guided by patient and clinical demands, and has enhanced its R&D capabilities of differentiated innovative products to empower the continuous transformation of scientific research outcomes into clinical application. As of now, CMS has deployed approximately 30 innovative products. Among them, 2 products, Methotrexate Injection – rheumatoid arthritis (RA) and Methylthioninium Chloride Enteric-coated Sustained-release Tablets, are currently under NDA review in China. Meanwhile, over 10 innovative products are undergoing clinical trials in China, mainly randomized controlled trials (RCT). Furthermore, the Company has about 10 self-developed R&D innovation projects, covering large molecules, small molecules, siRNA, etc., among which Highly Selective TYK2 Inhibitor CMS-D001 tablets and GnRH Receptor Antagonist CMS-D002 capsules have obtained IND approvals in early 2024.

CMS states that innovation products expected to be continuously launched every year with higher efficiency and more controllable costs starting from 2023, continuing to energize the Company’s mid- to long-term development. CMS is ready to embrace a brighter future full of opportunities.

Rooted in specialty therapeutical fields, empowering products to achieve clinical and commercial values

Commercialization capability is one of CMS’s core competitiveness. By continuously reinforcing and integrating its commercialization platform, the Company has further consolidated its specialty therapeutic fields focused operation system, and has promoted the independent operation of its three major business segments including cardio-cerebrovascular/gastroenterology, dermatology/medical aesthetics, and ophthalmology. Simultaneously, by leveraging upgraded compliance control system and supporting digital tools, CMS has continuously optimized its professional academic promotion capabilities guided by clinical evidence, and built a number of agile and efficient specialty therapeutical fields-focused commercialization teams.

The Dermatology and Medical Aesthetic Business “CMS Skinhealth” regards dermatology prescription products as its core, and extends to dermatology-grade skincare products and light medical aesthetic products, continually optimizing full lifecycle skin-health management solutions. CMS Skinhealth has officially initiated the promotion of ILUMETRI, relying on the accumulated academic platform of existing marketed products including Hirudoid (the repair agent for skin barrier with multiple functions) and Aethoxysklerol (a German original brand for the treatment of sclerotherapy of varicose veins with years of clinical application). Meanwhile, CMS Skinhealth has obtained the exclusive licenses for the commercialization of three regenerative medical aesthetic products, including Poly-L-lactic Acid Microparticle Filler Injection, Polycaprolactone Microsphere Gel for Injection and Calcium Hydroxylapatite Microsphere Gel for Injection, enriching its regenerative medical aesthetic product portfolio and enhancing the Company’s competitiveness.

The Ophthalmology Business “CMS Vision” continues to improve its organizational structure and operating system, and actively promotes the identification, development and commercialization of urgently needed clinical solutions. Innovative medical device, EyeOP1 Glaucoma Treatment Device, has completed market access in many provinces and cities, and is synergized with the exclusive marketed product Augentropfen Stulln Mono Eye Drops in marketing and promotion. VEGFA/ANG2 Tetravalent Bispecific Antibody, a class I innovative biological agent, is under the phase I clinical trial stage in China.

The results announcement shows that as of the end of 2023, CMS has approximately 4,400 professional academic promotional personnel, and its promotion network has covered over 50,000 hospitals and medical institutions across China and nearly 250,000 retail pharmacies. CMS’s marketed products portfolio mainly includes exclusive branded drugs, with the successive approvals of innovative products in 2023, the Company’s future growth potential will be further released. At the same time, leveraging the accumulated advantages in cardio-cerebrovascular, gastroenterology, central nervous system, ophthalmology, dermatology and other specialty therapeutical fields, and its strong professional academic promotion capabilities, compliant and efficient management system, CMS has further enhanced its business efficiency and competitiveness to create broad commercial potential for its innovative products and exclusive products.

Accelerating international business development, forging new growth engines

Guided by the local unmet medical needs, CMS’s Southeast Asian business company “Rxilient Health”, leveraged the Group’s advantageous resource and operated by a local team with rich pharmaceutical industry expertise, has rapidly introduced a diverse product portfolio and established a business network covering various Southeast Asian countries. In March 2023, Rxilient Health entered into a collaboration agreement with Junshi Biosciences, leveraging Rxilient Health’s drug registration and commercialization advantages and Junshi Biosciences’s strong R&D strength, two parties to collaboratively develop and commercialize intravenous toripalimab, one of the key Chinese innovative drugs going overseas, in nine Southeast Asia countries.

In December 2023, CMS and Rxilient Health joined hands with Pharmaron and others to jointly complete the acquisition of a manufacture plant in Singapore and accelerate the process of CDMO business. This cooperation is expected to improve the accessibility of quality drugs with unmet clinical needs in emerging markets and help global pharmaceutical companies to quickly enter markets such as Southeast Asia. The acquisition of Singapore manufacturing plant will optimize the CMS’s overseas supply chain and manufacturing capabilities, and enhance the stability of its international supply chain. Moreover, it will facilitate CMS to carry out product collaborations with its global partners in the future, continuously building a collaborative, mutually beneficial pharmaceutical innovation ecosystem.

The Share Award Schemes enhances employee enthusiasm and creativity, enabling long-term binding towards a shared future for all.

In order to maintain the momentum of innovation and accelerate the commercialization process of innovative products, on March 27, CMS announced the adoption of the “Share Award Scheme Related to CMS New Products”, which using the Company’s own funds to purchase its shares. No more than 100 million Shares will be granted to the Group’s core management and key personnel at nil consideration, subject to the satisfaction of certain performance targets and in compliance with the CMS Scheme to encourage them to continue to make outstanding contributions to the launch and sales of new products.

According to the announcement, the schemes will determine “the stipulated performance targets” based on the overall financial performance of the Group, the cumulative sales revenue of a specified product or products, number of new products launched during any specified period. Among them, the “performance targets” associated with The First Batch of Share Awards include: launching 10 new products from 2020 to 2024. The cumulative total sales revenue of three blockbuster innovative drugs: METOJECT, VALTOCO, and VELPHORO in the three years from 2024 to 2026 will reach RMB2.5 billion. “Performance targets” associated with the future share awards include: the rolling share award scheme for the sales of new products, and to launch 12 new products from 2025 to 2027.

In addition, the three independently operated business segments of “CMS Skinhealth”, “CMS Vision” and “Rxilient Health” will formulate the separate Share Award Schemes based on their respective business development situations. ILUMETRI, as a significant innovative product of “CMS Skinhealth”, will be included in the assessment under the separate Share Award Scheme of “CMS Skinhealth”.

By continuously improving the long-term incentive mechanism, CMS closely links employee interests with the Company’s innovation development, maximizing employee enthusiasm to serve the Company’s long-term development diligently and responsibly. Furthermore, the schemes releases sufficient confidence to the capital market for the CMS’s steady development in the future.

Looking ahead, CMS will embrace “New CMS and New Era” after the short period of turbulence.

While accelerating its development under the guidance of innovation, CMS is firmly ushering in a new era. At the beginning of 2024, the term “innovative drugs” has been included in the government work report for the first time, indicating that innovative drugs have a leading strategic position among domestic emerging industries and have received great attention from the government. It will benefit pharmaceutical companies with advanced R&D capabilities, rich pipeline layouts, and mature commercialization systems.

CMS is diligent and devoted to innovation, and has always adhered to its mission of providing competitive products and services to meet unmet medical needs. With the gradual digestion of national VBP implementation impacts on its existing products, and the further deepening of its innovation development, CMS has been well-prepared for a brighter future going forward and will return to the track of sustained and healthy growth. Under its compliant and efficient commercialization system, the Company’s innovative products and exclusive drugs will grow steadily. Concurrently, it is expected that more differentiated innovative products will be continuously launched with higher efficiency and more controllable costs every year in the future, continuously optimizing the Company’s marketed product structure. As a mature pharmaceutical company with excellent historical performance, although the turbulence of adjustment period is inevitable, with the continuous enhancement of its innovation strength, CMS will surely usher in a new cycle of performance growth.

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Source: China Medical System Holdings Ltd.