Due to the impact of recent anti-corruption campaign, Zai recorded 3Q23 product revenue of c.US$69m, basically flattish QoQ. Of which, efgartigimod’s revenue was c.US$5m in the first two months of its launch, offsetting the quarterly sales decline of niraparib, TTFields and repritinib. During the same period of time, the company’s R&D spending vastly decreased 23% QoQ due to lower out-licensing fees, narrowing the net loss by 43% QoQ to US$69m in 3Q23. Factoring in the company’s 1) lower-than-expected overall commercialised product revenue, 2) potentially slower-than-expected sales ramp-up of new products to be launched, such as sul-dur, repotrectinib and TIVDAC, and 3) later-than-expected launch time of bemarituzumab, adagrasib and KarXT, we revised down our 2023/24/25 revenue forecasts for Zai by 8%/13%/27%, while lowering operation expenses forecasts by 5%/8%/9% to reflect its ongoing cost reduction. Therefore, our TP for HK/ADR shares is cut from HK$53/US$67 to HK$48/US$61.
　　Key Factors for Rating
　　Revenue growth slowed due to anti-corruption. Zai recorded 3Q23 product revenue of US$69m, basically flattish QoQ, of which efgartigimod revenue was c.US$5m in the first two months since its launch, offsetting the sales decline of niraparib (-3% QoQ), TTFields (-15% QoQ) and repritinib (-24% QoQ). The company’s revenue growth was slowed by the effects on hospital and physician practices from the recent anti-corruption enforcement in China.
　　Net loss narrowed due to expense control. Zai’s R&D expenses were US$59m (-23% QoQ) in 3Q23, and US$184m (-16% YoY) in 9M23, primarily due to lower licensing fees; SG&A expenses were US$69m (+1% QoQ) in 3Q23, and US$199m (+6% YoY) in 9M23, mainly due to higher selling expenses to support new product launches. As a result, net loss narrowed 43% QoQ to US$69m in 3Q and reduced 37% YoY to US$239m in 9M23. As to the outlook for FY23/24/25, the mgmt. expects R&D spending to slightly decrease and SG&A spending to maintain high-single digit growth.
　　Efgartigimod under the NRDL negotiation and expected for sBLA filings in 2024. In September 2023, Zai launched efgar for gMG in China, and is in the negotiation for NRDL inclusion starting from 2024. Besides, the CDE granted breakthrough therapy designation for efgar in CIDP, supported by its positive data (67%-78% response rates, HR: 0.39) from the ADHERE study. Zai is participating in the registration studies of efgar for ITP and PV, and plans to file sBLAs for CIDP in 1H24 and for ITP and PV in 2H24.
　　Key Risks for Rating
　　1) Slower-than-expected product revenue ramp-up; 2) delay or failure in R&D progress of key assets; 3) breakdown of key collaborations.
　　Forecasts Revision and Valuation
　　Medium term product sales ramp-up delayed. Factoring in the company’s 1) lower-than-expected overall commercialised product revenue, 2) potentially slower-than-expected sales ramp-up of new products to be launched, such as sul-dur, repotrectinib and TIVDAC, and 3) later-than-expected launch time of bemarituzumab, adagrasib and KarXT, we revised down our 2023/24/25 revenue forecasts for Zai by 8%/13%/27%, while lowering operation expenses forecasts by 5%/8%/9% to reflect its ongoing cost reduction.
　　Therefore, our DCF-based (WACC: 12.6%, terminal growth: 3.0%) TP for HK/ADR shares is cut from HK$53/US$67 to HK$48/US$61. Maintain BUY.