CSPC Pharmaceutical reported 9M24 revenue of Rmb22.69bn (-4.9% YoY) and net profit of Rmb3.78bn (-15.9% YoY). Its adjusted net profit reached Rmb4.0bn (-15.2% YoY), lower than our expectation, mainly due to the declining sales of finished drug sector given the GPO impact on key oncology products. Considering the relatively weak results in 3Q24, we lower our EPS forecast from Rmb0.51 to Rmb0.42 in 24E, from Rmb0.56 to Rmb0.42 in 25E, and from Rmb0.60 to Rmb0.43 in 26E. We lower our target price from HK$7.3 to HK$6.6. With 29% upside, we maintain BUY rating.
　　Key financial ratios. Its blended gross margin increased 0.1ppts YoY to 70.5% in 9M24 with the rising sales contribution of finished drugs (82.3% in 9M24 vs 81.0% in 9M23). Its selling expense-to-revenue ratio decreased 0.3ppts YoY to 29.2% in 9M24. In addition, CSPC’s R&D expenses increased 5.5% YoY to Rmb3.88bn, with the R&D expense-to-revenue ratio rising 1.7ppts YoY to 17.1% in 9M24.
　　Weak performance of finished drug sector due to the GPO impact. Sales of CSPC’s finished drugs declined 3.5% YoY (-20.0% YoY in 3Q24) to Rmb18.67bn in 9M24. Given the GPO price cut of Duomeisu and Jinyouli, sales of oncology products decreased 17.6% YoY to Rmb3.81bn in 9M24 (-31.2% YoY in 3Q24), representing 20.4% of the total sales of finished drugs. In addition, sales of cardiovascular disease products decreased 11.2% YoY in 9M24 (-26.8% YoY in 3Q24) due to the GPO impact of Xuanning. Meanwhile, due to the medical use control of NBP in hospitals, sales of nervous system disease products declined 15.8% in 3Q24. As for the API sector, given the declining demand, revenue of vitamin C and antibiotics API business declined 3.4% YoY and 7.2% YoY to Rmb1.46bn and Rmb1.26bn in 9M24. In addition, revenue of functional food and others business decreased 21.9% YoY to Rmb1.29bn mainly due to the declining caffeine price.
　　Achievements of innovative pipelines. In October of 2024, CSPC reached a license-out agreement with AstraZeneca for the global development, manufacturing and commercialization of Lipoprotein(a) (YS2302018). According to the agreement, CSCP will receive an upfront payment of US$100m, and potential development milestone payments of US$370m and sales milestone payments of up to US$1.55bn. In terms of its key innovative pipelines, the company currently has 23 products under phase II/III pivotal clinical trials, including 11 biologics, seven chemical drugs and five new formulation products. As for the ADC pipelines, DP303C (HER2 ADC), SYS6010 (EGFR ADC) and SYSA1801 (Claudin 18.2 ADC) are under phase II/III trials. In addition, SYS6010 (EGFR ADC) is under phase III trial for EGFRm NSCLC and SYSA1801 (Claudin 18.2 ADC) is under phase III trial for CLDN18.2-positive HER2-negative GC. In terms of the GLP-1 pipelines, TG103 (GLP-1) is under phase III trial for obesity and type 2 diabetes, with the BLA expected in 25E and 26E, respectively.
　　Maintain BUY. Considering the relatively weak results in 3Q24, we lower our EPS forecast from Rmb0.51 to Rmb0.42 in 24E, from Rmb0.56 to Rmb0.42 in 25E, and from Rmb0.60 to Rmb0.43 in 26E. We lower our target price from HK$7.3 to HK$6.6. With 29% upside, we maintain BUY rating.
　　Risks: Lower-than-expected product sales; delay of key pipeline products.