RemeGen reported its 1H24 results with revenue up by 76.5% YoY to RMB739.7m, in line with our expectation, while net loss still widened to RMB780.5m despite the control on salesforce expansion, mainly due to higher R&D expenses. We see strong sales growth momentum of RC18 and RC48 on patient penetration, prolonged DOT, etc., and we believe the management’s guidance of at least 50% YoY growth in drugs sales is achievable. Post results, we fine-tuned the sales from drugs, decreased the collaboration revenue due to delay in overseas development of RC48, and increased R&D expenses forecasts. We do not expect RemeGen to achieve breakeven until 2027. We lifted the WACC from 10.9% to 11.1% and revised down the terminal growth rate from 4.0% to 3.0%, and derived the DCF-based TP of HK$25. Maintain BUY rating.
　　Key Factors for Rating
　　Topline was in line while net loss widened, and cash position remained tight: RemeGen reported its 1H24 results with revenue up by 76.5% YoY to RMB739.7m, in line with our expectation, while net loss widened from RMB703.4m in 1H23 to RMB780.5m in 1H24, mainly on the surge in R&D expenses (+49% YoY) due to RC18 overseas development. Gross margin improved 2ppts to 77%. Administrative expenses and selling expenses recorded changes of -8% YoY and +11% YoY to RMB155m and RMB390m, accounting for 21% and 53% of drug sales, respectively, demonstrating RemeGen’s effort to control costs. In 1H24, the revenues from RC18 (telitacicept) and RC48 (disitamab vedotin) were RMB380m and RMB350m, respectively, up 100% and 50% YoY, respectively. RC18/RC48 has c.800/580 salespersons and was admitted to 900/700 hospitals (+100/+50 hospitals in 1H24), respectively. As of 30 June 2024, RemeGen has cash and trading assets of RMB876m. The tight cash position remains the key issue of RemeGen despite its loan credits of RMB3bn. The interest-bearing bank and other borrowing increased from RMB1.1bn by YE2023 to RMB2.3bn as of 30 June 2024, including RMB932m short-term borrowing and RMB1.3bn long-term borrowing.
　　Management guidance: The management expects similar growth momentum of RC18 and RC48 in 2H24 compared to 1H24. RemeGen also expects slightly higher R&D expenses in 2H24 than in 1H24, and similar R&D expenses in 2025, depending on the progress of the overseas development of RC18. The management also expects a steady increase in gross margin due to improvements in manufacturing technology and the scale effect. The company will continue to refine its operating costs, including pipeline priority and selling & marketing expenses control, to reduce loss. The management expects RemeGen to largely achieve breakeven by YE26.
　　Key pipeline progress: RC18 was approved in China by NMPA as the treatment of RA; the phase III trial of RC18 in MG had positive results and RemeGen will submit BLA in 4Q24; the patient enrolment was completed for phase III trial of RC18 in pSS and IgAN in China, with BLA submission expected in 1H25. In overseas market, the phase III trial of RC18 in MG (N=180) had first-patient-in recently, and the management also expects the first-patient-in of stage 2 trial for SLE indication in 3Q-4Q24. For RC48, the patient enrolment of RC48+ PD-1 in 1L UC was completed; RemeGen expects to kick off the phase III trial of RC48+PD-1 in perioperative MIBC and RC48+PD-1 in 1L HER2+ GC; and RemeGen will submit BLA of RC48 in HER2-expressing BC with liver metastasis in October 2024. For RC88, the management is discussing with CDE about the clinical design of the pivotal trial. For RC28, the patient enrolment of Phase III trial in DME was completed, with expected data readout in 1H25; and phase III study of wAMD is expected to complete patient enrolment in October 2024.
　　Key Risks for Rating
　　(i) Slower-than-expected sales ramp-up of RC18 and RC48; (ii) delay or failure of major clinical trials; and (iii) change of key management.
　　Valuation
　　Post results, we fine-tuned our drug sales while decreasing the collaboration revenue due to delays in overseas development of RC48. Meanwhile, we increased our 2024-26E R&D expenses by 13%-37% to factor in the company’s devotion to overseas markets. Besides, considering its operating cash burn and tight cash position, we lifted WACC from 10.9% to 11.1%, and we revised terminal growth from 4.0% to 3.0% to factor in the pipeline streamlining (eg. RC48 in HER2-low expressing BC, RC118 (Claudin 18.2 ADC), etc). Revised down 12-month TP to HK$25, and maintain BUY rating.