CSPC delivered YoY decline both in topline and bottom line in 3Q with revenue down 17.8% YoY and net profit slumping by 50.4% YoY, due to the tight medical insurance fund, strict medical expenses control, impact of centralised procurement, and the negative impact will continue in 4Q24 and 2025. Hence, we expect that CSPC’s guidance of positive growth in 2025 will be challenging despite the contribution of new products. On the bright side, out-license might serve as a key driver as the management expects 1-2 out-license deals every year to offset the increased R&D expenses. Post results, we cut our 12-month DCF-based TP to HK$5.8 and keep an eye on the data readout of EGFR ADC in 1H25 and more BD collaboration.
　　Key Factors for Rating
　　Disappointing 3Q24 results in line with previous profit alert: CSPC announced disappointing 3Q results with revenue down 17.8% YoY to RMB6.4bn and net profit to shareholders slumping by 50.4% YoY to RMB758m, in line with the previous profit alert. Key matured products experienced sharp declines due to strict medical expense control in hospitals (NBP) and the impact of volume- based procurement (Duomeisu, Jinyouli, and Xuanning). As a result, CNS/ oncology/ anti-infective/ cardiovascular/ respiratory system/ digestion and metabolism/ other drugs recorded YoY declines of 16%/ 31%/ 10%/ 27%/ 35%/ 11%/ 9%, respectively. Blamed on the price cut on key products, gross margin declined by 3.7ppts YoY or 3.0ppts QoQ to 67.6%. Bulk products and functional food remained soft, with Vitamin C, antibiotics, and caffeine changing by +1.0%, -9.0%, and -13.8% YoY, respectively, due to the decline in market demand and/or the price decline. Meanwhile, CSPC was dedicated to cost optimisation with selling expenses, admin expenses, and R&D expenses declining by 13%, 23%, and 3% YoY, respectively.
　　Out-license might serve as key driver: (i) the majority of the upfront payment from Astra Zeneca for the pre-clinical Lp(a) small molecule inhibitor at the upfront payment of US$100m and milestone payment of up to US$1.92bn will be recognised in 2024. (ii) SYS6010 (EGFR ADC), a key innovative product of CSPC having the potential to be out-licensed, is expected to have a total c.300 Chinese patient data by YE24 in the indication of NSCLC, NPC, HNSCC, etc., and to have data publish in 2025 AACR or ASCO. (iii) Besides, the management highlighted that there are 4-5 drug candidates under negotiation with MNCs and expects 1-2 out-license deals every year with larger deal sizes compared to the one with AZ, which will offset the increased R&D expenses. (iv) Moreover, CSPC sorted out its pipeline into 3 categories, including rarely known pre-clinical stage or early-stage candidates but being focused by MNC, candidates with competitive edges in the domestic market, and biosimilar and innovative formulation for overseas registration.
　　Key takeaways from the conference call: impact of centralised procurement: the active destocking of Duomeisu will continue until 4Q24 or 1Q25, and the implementation of the 10th batch national GPO is expected in 1H25, which might lead to c.RMB1bn sales decrease of Duomeishu. Share buyback: since the announcement of the RMB5bn share buyback scheme, CSPC has repurchased shares of RMB1.16bn, and expects to continue repurchasing shares depending upon market conditions. Outlook of 2025: the management expects positive growth in 2025, as innovative products contribute sales increment of RMB2bn-2.5bn, including RMB500m increment from Mingfule (at lease sales of RMB1bn in 2025), RMB300m from irinotecan, RMB500m from omalizumab, RMB400m from Glumetinib, RMB100m from both PD-1 and Amphotericin B, etc. For Opex, the management expects decreased selling expenses and double-digit growth in R&D expenses in 2025. 2024 NRDL negotiation: new innovative products such as RANKL mAb and PD-1 mAb were successfully included in the catalog at ideal prices. Mingfule was simply renewed with a new indication of AIS added with price cut. Although NBP was qualified for simplified renewal, given its medical insurance expenditure, the renegotiation of NBP with NHSA experienced slightly higher price cut than simplified renewal rule.
　　Key Risks for Rating
　　i) Slower-than-expected ramp-up of newly launched drugs; (ii) failure of R&D; and (iii) price cut on core drugs.
　　Valuation
　　The impact of GPO and medical expense control in hospitals on CSPC’s business was worse than our expectation, and we expect the negative impact to continue in 2025, given the tight budget of medical insurance fund, national centralised procurement of Duomeisu, and price cut of NBP in 2025. Meanwhile, we factored in the upfront payment from AZ in 2024-25. Therefore, we cut our 2024/25/26E revenues by 7%/12%/11% and correspondingly reduced our 2024/25/26E gross margins to 70.6%/69%/69%. We cut our 12-month DCF-based TP to HK$5.8 and maintain HOLD rating.