BeiGene achieved 3Q23 product revenue of US$595m, +70% YoY, mainly driven by the US sales of zanubrutinib, which grew 150% YoY to US$270m. As operating expenses slightly rose 9.3% YoY, which was significantly slower than that of product revenue, operating loss improved US$304m to US$134m in 3Q23. We revised our revenue forecasts for BeiGene by +11%/+8%/-0.4% for 2023E/24E/25E, factoring in 1) deferred revenues from the Novartis collaboration, 2) strong global sales of zanubrutinib, and 3) lower-than-expected sales of tislelizumab in China. The POS estimations for key product candidates has been adjusted, with an increase for BGB-11417 based on its progress in pivotal studies for 1L CLL, and a decrease for ociperlimab to reflect its weaker-than-expected PhII clinical data for 1L HCC/2L CC/2L ESCC released in ESMO 2023. In the meantime, we raised our estimations for its R&D expenses for investment in last-stage assets, such as Sitravatinb, Zanidatamab and Tarlatamab, and SG&A expenses to accommodate the expected intensive new product launches in 2025. Overall, our TP is tuned down to HK$193/US$320 for HK/ADR shares. We believe that BeiGene’s fundamentals remain intact. Reiterate BUY.
　　Key Factors for Rating
　　Steady product revenue growth driven by the US sales of zanubrutinib. In 3Q23, BeiGene generated revenue of US$781m, +102% YoY, driven by growth in product revenue and the recognition of remaining deferred revenues from the Novartis collaborations. 3Q23 product sales was US$595m, +70% YoY, primarily due to increased sales of zanubrutinib and tislelizumab, as well as increased sales of in-licensed products from Amgen. Global sales of zanubrutinib totalled US$358m, +130% YoY, thanks to continuing global launch momentum across multiple indications. Zanubrutinib’s US sales was US$270m, +150% YoY and +21% QoQ, and China sales was US$47m, +21% YoY.
　　Effective improvement in operating leverage. GPM in 3Q23 improved 5.7ppts YoY to 83.8%, due to higher sales mix of zanubrutinib compared to lower-margin in-licensed products in the portfolio. Operation expenses slightly increased 9.3% YoY to US$819m in 3Q. Moreover, BeiGene recorded a positive net profit of US$215m in the quarter, including a non-operating gain of US$363m related to the BMS arbitration settlement. Operating loss improved by US$304m to US$134m in 3Q23, attributable to 1) increased operating leverage driven by product revenue growth and management of expenses, and 2) deferred collaboration revenue from the reacquisition of the full global commercial rights to ociperlimab and tislelizumab. As of 30 September, 2023, BeiGene’s cash on hand was US$3.2bn, compared to US$3.5bn as of 30 June, 2023.
　　Anticipated upcoming milestones. 1) Zanubrutinib’s sNDA approval in the US for 3L r/r FL in March 2024; 2) tislelizumab’s BLA approval in the US for 2L ESCC in YE23 or 1H24, and for 1L mESCC with PDUFA date set in July 2024; 3) tislelizumab’s sBLA filing in the US for 1L GC in YE23, and MMA filing in Japan for 1L/2L ESCC in1H24, sBLA filing in China for neoadjuvant treatment for NSCLC in 1H24, sBLA filing in EU for 1L ESCC in1Q24; 4) BCL-2i’s initiation of global pivotal trial in combination with zanubrutinib in 1L CLL in 4Q23; 5) BTK CDAC’s data readouts from PhI study in B-cell malignancies at ASH in December 2023; 6) ociperlimab’s enrollment completion in the PhIII AdvanTIG-302 trial in 1L NSCLC in 1Q24.
　　Key Risks for Rating
　　1) Delay or failure in clinical development of key products; 2) lower-than- expected global product sales; 3) breakdown of key partnerships.
　　Forecasts Revision and Valuation
　　We revised our revenue forecasts for BeiGene by +11%/+8%/-0.4% for 2023E/24E/25E, taking into account: 1) deferred revenues from the Novartis collaboration, 2) strong sales of zanubrutinib driven by continuing global approvals across multiple indications, and 3) lower-than-expected sales of tislelizumab in China due to increased competition.
　　The probability of success (POS) estimations for key product candidates has been adjusted, with an increase for BGB-11417 (BCL-2 inhibitor) based on its progress in pivotal studies for 1L CLL, and a decrease for ociperlimab (TIGITi) to reflect its weaker-than-expected PhII clinical data for 1L HCC/2L CC/2L ESCC released in ESMO 2023.
　　In the meantime, we raised our estimations for its R&D expenses for investment in last-stage assets, such as Sitravatinb (multi-kinase inhibitor) Zanidatamab (ZW25, HER2 bsAb) and Tarlatamab (AMG757, DLL3 x CD3), and SG&A expenses to accommodate the expected intensive new product launches in 2025.
　　Overall, our DCF (WACC: 11.5%, terminal growth: 4.0%) TP is tuned down from HK$199/US$329 to HK$193/US$320 for HK/ADR shares. We believe that BeiGene’s fundamentals remain intact. Reiterate BUY.