FY21 revenue reached RMB244mn, in line with CMS. est. Product sales started in 2021 and recorded RMB163mn sales in 8 months
We think CStone’s biopharma transformation deepens in 2022 as Co. stands out from its peers with four innovative drugs launched
Maintain BUY with SOTP-based TP revised down to HKD12.3
　　Product sales starts in 2021 with two products
　　FY21 total revenue declined 77% to RMB244mn due to decrease of license fee income （in 2020, Co. had ~RMB1bn of licence fee income from EQRx out-licensing deal for ex-China rights of its sugemalimab and CS1003）。 In 2021, Co. started to generate product sales to RMB163mn （vs. nil in FY20）， driven by two new product launches during May 2021, namely GAVRETO （pralsetinib） and AYVAKIT （avapritinib）。 Adj. net loss （excluding the share-based payment and non-recurring items） widened by ~70% to RMB1,746mn in FY21, mainly owing to continued heavy R&D expenses （RMB1.3bn vs. RMB1.4bn over 2019-20） and increased selling expense （up to RMB364mn from RMB142mn in 2020） for expanding sales team and promoting the product sales. Mgmt. expects its current cash reserves （RMB1.6bn as of YE21） would be sufficient to provide cash runway into 2024E.
　　CStone’s biopharma transformation deepens in 2022
　　With new addition launches of sugemalimab （CDE approval in Dec 2021） and ivosidenib （CDE approval in Jan 2022）， Co. now has four commercial products. We believe CStone is on track to maximize its commercial potential, supported by its dedicated in-house commercial team （~160-70 reps covering 600+ hospitals in 130+ cities） for three precision drugs and Pfizer’s well-built oncology franchise （>1k oncology sales reps and >4.6k hospital coverage） for sugemalimab. We reckon this strategy will continue to smooth more future indication launches （i.e. sugemalimab received sBLA approval for Stage III NSCLC in June 2022 in China）。
　　Catalyst to watch in 2022E/1Q23E
　　1） sugemalimab （PD-L1）： a） first NDA filing outside China by EQRx, b） sBLA filing for r/r ENKTL in 1H22E in China, c） topline data readout for 1L GC/GEJ in YE22E/1Q23E; 2） pralsetinib （RET）： sNDA filing for 1L RET fusion+ve NSCLC in 2H22E in China; 3） ivosidenib （IDH1）： sNDA filing for IDH1-mutant 1L AML in 2H22E in China; 4） avapritinib （KIT/PDGFRA）： topline data readout for ISM by Blueprint in mid-22E.
　　Maintain BUY with SOTP TP cut to HKD12.3
　　We revised down FY22E/23E revenue by 26%/1% to reflect COVID disruption in 1H22. We cut SOTP-based TP from HKD19.1 to HKD12.3 as we applied higher WACC （from 9.7% to 12.3%） to reflect broad-based risk-off sentiment and valuation reset weighing on biotech sector （IBB index down 35% from 52wk high）。 Investment risks: clinical delay/failure, lower-than-expected sales, regulatory risks, NRDL-driven price cut risk.