2021 results in line with our expectation
　　SciClone Pharmaceuticals Holdings (SciClone) announced 2021 results: Revenue grew 31.3% YoY to Rmb2.52bn, and attributable net profit increased 22.5% YoY to Rmb923mn, in line with our expectations. The firm has proposed a dividend of HK$0.35/sh. It also announced that the Board of Directors has approved a proposal to repurchase no more than 10% of the firm’s total shares.
　　Trends to watch
　　Zadaxin maintained rapid sales growth; in-licensed products hitting　the market. The firm’s revenue grew 15% in 1H21 and 57% in 2H21, and attributable net profit rose 4% in 1H21 and 92% in 2H21. Zadaxin (thymalfasin), SciClone’s core, proprietary product, generated sales of Rmb1.98bn in 2021, up 26.1% YoY from a high base in 2020. We attribute this to robust sales from its direct-to-patients (DTP) channel (this channel contributed over 62% of the firm’s total sales in 2021). In terms of in- licensed products, the sales value of Zometa (Zoledronic acid) was Rmb170mn in 2021. SciClone initiated the pilot launch of Naxitamab in Bo’ao (Hainan province) and China (Tianjin) Pilot Free Trade Zone in June and December 2021. The drug was included on the list of Jing Hui Bao overseas specialty-care drug insurance in October 2021. We expect Naxitamab to receive approval for sale in China in 2Q22. Oravig (a miconazole buccal tablet) was approved for sale in China in November 2021. The firm disclosed that it has established sales channels in more than 30 cities.
　　R&D team expanding steadily; R&D spending increasing. In 2021, the　firm’s gross margin fell 0.9ppt YoY to 76.8% in 2021. Its sales team consists of about 720 employees, covering around 4,000 Class II and Class III hospitals. Selling expense ratio declined 0.8ppt YoY to 23% in 2021. G&A expense ratio dropped 3.1ppt YoY to 8.2%. The firm’s product development team has expanded steadily. As of end-2021, this team consisted of about 100 employees (vs. around 80 at end-2020). R&D expenses jumped 78.2% YoY to Rmb134mn in 2021, with R&D expenses as a percentage of revenue rising to 5.3%.
　　Watching progress in clinical trials of in-licensed products in the　pipeline. SciClone has announced a strong in-licensed product pipeline composed of four late-stage drug candidates and four early-stage drugs.
　　We expect SciClone to apply for the sale of omburtamab (an antibody developed for the treatment of patients with neuroblastoma) in China in 2022. The enrollment of patients for the domestic Phase III research on RRx-001 has started, and the domestic investigational new drug (INR) application of PEN-866 will likely be completed in 2022, in our view. We expect SciClone to gradually shift towards innovative products as their pipeline begins to hit the market.
　　Financials and valuation
　　Given the firm’s growing investment in drug pipelines, we lower our net profit forecast for 2022 by 5.2% to Rmb959mn and for 2023 by 6.1% to Rmb1.04bn. The stock is trading at 5.2x 2022e P/E and 4.8x 2023e P/E.
　　We adopt the SOTP valuation methodology. The firm’s business is progressing smoothly. Considering changes in share capital, recent adjustment in EPS estimate and corrections and falling valuation of the H- share pharmaceutical sector, we maintain OUTPERFORM and cut our TP by 10.0% to HK$13.50, implying 7.6x 2022e and 8.2x 2023e P/E, offering 59.6% upside.
　　Risks
　　Product portfolio disappoints; centralized purchase of drugs with expired patents; drug R&D disappoints.