As the earnings season approaches, once again listed pharmaceutical companies are attracting the attention of the public. Recently, China Medical System Holdings Limited (CMS or the Company) has released its annual results, with both revenue and profit higher than market expectations. According to its 2020 annual results, turnover is up by 14.4% to RMB6.946 billion; net profit up by 30.7% to RMB2.556 billion; basic earnings per share up to RMB1.024, with a proposed final dividend of RMB0.20 per share.

In the past, influenced by expectations of the effects of China’s centralized procurement policy and the Company’s product transition, CMS’s valuation in the capital market was once under pressure, but with the Company’s strategic transformation from a CSO to an innovative pharmaceutical company, coupled with its own solid business growth, its share price has gained a significant increase in the past few months but is still relatively low in the capital market. The Company’s current dynamic P/E ratio is only about 13x, with a market value of HK$ 39.4 billion. However, market values of innovative pharmaceutical companies without profits such as BeiGene and Junshi Biosciences have well exceeded HK$50 billion or even HK$100 billion in HKEX. This shows that the share price of the Company does not reflect its real value after its transformation. It’s worth digging deeper into the innovative pipeline of the Company to take a look at its long-term growth potential and the inevitability of valuation increase.

1. Firm in transition, the Company is using the S&D model to drive its innovative development

Looking back at its history, the Company began introducing exclusive or original dr*gs from multinational pharmaceutical companies through rights control or exclusive sales agreement early in 2010, creating a unique “CMS Model”. Under this model, the Company has accumulated a strong network of overseas upstream resources and a good reputation, and formed a strong product evaluation system. However, considering the potential impacts of the Company’s existing products, which are all original or exclusive dr*gs with expired patents or no patents, and China’s centralized procurement policy on performance growth, CMS began to actively adjust its business strategy and transformed into an innovative pharmaceutical company at full speed since the end of 2017.

The true meaning of rebirth lies in the courage to k*ll your past self. As a CSO leader, CMS takes advantage of its competencies in the deployment of innovative dr*gs in its gradual transformation and has formed a development path that is different from most other biotechs and innovative pharmaceutical companies.

First of all, the Company’s original business has maintained steady growth over the years and generated strong cash flow, which has given it the confidence to further expand its business, while its long-term accumulated resources and networks overseas have also given it more opportunities to quickly deploy overseas innovative resources. For various reasons, CMS has transformed itself into a venture investor in overseas pharmaceutical companies and actively promoted its presence in the innovative drug field. Through equity investment in overseas biotech companies and strategic cooperation, the Company has rapidly formed an R&D pipeline covering a number of innovative products in just around three years.

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