Hansoh Pharmaceutical Group (Hansoh) announced 2023 revenue of Rmb10.10bn (+7.7% YoY) and net profit of Rmb3.28bn (+26.9% YoY), beating our expectation. Its selling expense-to-revenue ratio declined 2.9ppts YoY to 35.0% in 2023. Hansoh’s blended gross margin decreased 1.0ppts YoY to 89.8% in 2023. Its R&D expenses reached Rmb2.1bn (+24% YoY), with R&D expense ratio of 21% in 2023. As of end-2023, Hansoh had Rmb22.4bn cash on hand. Given the upfront payment from GSK and sales ramp up of innovative products, we raise our EPS forecasts from Rmb0.45 to Rmb0.63 in 24E (+15% YoY), from Rmb0.48 to Rmb0.65 in 25E (+4% YoY) and forecast Rmb0.73 in 26E (+12% YoY). We raise our target price from HK$11.1 to HK$17.1. With 15% upside, we upgrade to Outperform rating.
　　Sales ramp up of innovative drugs. Revenue of innovative drugs and collaborative products reached Rmb6.9bn (+37% YoY) in 2023, representing 68% of Hansoh’s revenue in 2023 (vs 53% in 2022). In terms of sales by therapeutic fields, sales of oncology, CNS sectors and anti-infective, reached Rmb6.2bn (+12% YoY), Rmb1.4bn (-9% YoY) and Rmb1.3bn (+2% YoY) in 2023, representing 61%, 14% and 13% of its total revenue, respectively, with a total revenue contribution of 87%. The company has launched seven innovative drugs, which have all been added into the 2023 version of NRDL. With the sales ramp up of innovative drugs, the company expects the revenue contribution from innovative drugs to be increased to over 70% in 2024E.
　　R&D achievements of innovative pipeline. Hansoh has over 30 innovative drugs under development, with over 50 clinical trials ongoing in 2023. In addition, the company’s eight innovative drugs entered the clinical stage in China in 2023, covering oncology and non-oncology fields, such as HS-20117 (cMET-EGFR) for advanced solid tumor, HS-20105 (Trop2) for advanced solid tumor, HS-10516 (HIF-2α) for renal cell carcinoma, etc. In terms of the R&D progress of key pipelines, HS-20094 (GLP-1/GIP) is under phase II clinical trials for patients with type 2 diabetes and patients with overweight or obese.
　　ADC collaboration agreements achieved with GSK. In terms of license-in collaborations, the company had achieved a cumulative total of nine clinical-stage collaborative projects as the end of 2023. Its total expense on BD projects reached Rmb229m in 2023. As for the license-out agreements, Hansoh licensed out the global rights (ex-Greater China) of HS-20089 (B7-H4 ADC) and HS-20093 (B7-H3 ADC) to GSK in 2H23, with upfront payments of US$85m and US$185m, respectively and milestone payments of US$1.49bn and US$1.53bn, receptively. Now, HS-20089 (B7-H4 ADC) is under phase II clinical trial for ovarian cancers and endometrial cancers. Meanwhile, HS-20093 (B7-H3 ADC) is under phase I and II clinical trial in China for multiple tumors, including lung cancer, sarcoma, head and neck cancers and other solid tumors. In addition, Hansoh recently expanded its collaboration with Biotheus to use HS- 20117/PM1080 (EGFR/cMet bispecific) for the development ADC products. We expect the BD collaborations to further enhance potentials and competitiveness of its innovative pipeline.
　　Upgrade to Outperform. Given the upfront payment from GSK and sales ramp up of innovative products, we raise our EPS forecasts from Rmb0.45 to Rmb0.63 in 24E (+15% YoY), from Rmb0.48 to Rmb0.65 in 25E (+4% YoY) and forecast Rmb0.73 in 26E (+12% YoY). We raise our target price from HK$11.1 to HK$17.1. With 15% upside, we upgrade to Outperform rating.
　　Risks: Lower-than-expected product sales; delay of R&D process.