【True Insight Hong Kong Stock Masters】Akeso Biopharma (09926.HK) ignites the biotech sector, China's innovative drugs expected to usher in a new cycle

Recently, the Hong Kong stock market has shown a fluctuating pattern, with the Hang Seng Index (800000.HK) hovering around the 17,000-point mark. The U.S. stock market, on the other hand, has been much stronger, with both the S&P 500 and the Dow Jones Industrial Average nearing record highs. If we're talking about the most impressive stock in the U.S. market recently, we have to mention the biotech company Summit Therapeutics, which rose for five consecutive days last week, with its stock price soaring from around $12 to a high of $33.6 in just one week. Often, people can only watch as these U.S. stocks surge, but this time, there are also related stocks in the Hong Kong market.

Summit is a partner of $AKESO(09926.HK). The author mentioned Akeso Biopharma back in 2022. At the end of that year, it entered into a collaboration agreement with Summit, granting Summit the development and commercialization rights for its PD-1/VEGF bispecific antibody, eftansomatropin, in the U.S., Canada, Europe, and Japan for an upfront payment of $500 million. Including development, registration, and commercialization milestone payments, the total deal value could reach up to $5 billion. Recently, this PD-1/VEGF bispecific antibody, eftansomatropin, achieved a significant victory in a Phase III head-to-head clinical trial, outperforming the world's top-selling "blockbuster drug"—Merck & Co.'s (MRK) $Merck(MRK.US) star product, pembrolizumab (Keytruda).

This achievement is of great significance, not only for Akeso Biopharma but also for all Chinese biotech companies. As a bispecific antibody entirely "born" in China, it has managed to outperform the world's top drug, which will undoubtedly make overseas pharmaceutical companies and institutional investors pay more attention to China's original innovative drugs.

Taking the same PD-1/VEGF bispecific antibody field as an example, ImmuneOnco-B (01541.HK) has entered into a collaboration agreement with Instil Bio (TIL) worth over $2 billion, with the core pipeline including the PD-L1/VEGF bispecific antibody IMM2510. So far, the project has received a total of $15 million in upfront and second-phase payments. Instil Bio's recent surge also drove ImmuneOnco's stock to rise nearly 50% last Thursday and Friday combined. The explosive growth of these stocks proves that the "license out" model is full of opportunities.

It's worth noting that mentioning Akeso Biopharma and ImmuneOnco, as well as their U.S. partners, is not to encourage everyone to chase these stocks at high levels. Especially since ImmuneOnco's IMM2510 is still in Phase II, while Akeso Biopharma's eftansomatropin has reached Phase III, they cannot be directly compared, and the current situation is still largely speculative.

Instead, everyone should start paying more attention to China's entire biotech sector. The first reason is as mentioned above. Additionally, the broader environment is improving. The U.S. has entered an interest rate-cutting cycle, allowing many long-term unprofitable biotech companies to borrow at lower costs to sustain daily operations. Moreover, financing and M&A activities in the biotech field are expected to pick up again. In this context, not only U.S. biotech companies but also global biotech firms stand to benefit. Therefore, Chinese biotech companies, especially those engaged in license-out deals, are worth watching.

At the same time, good news also includes supportive domestic policies. The "Implementation Plan for Full-Chain Support of Innovative Drug Development" has been approved, which will comprehensively strengthen policy support, coordinate pricing management, medical insurance payments, commercial insurance, drug allocation, and investment financing policies, optimize review and approval mechanisms, and promote the breakthrough development of innovative drugs. The demand for innovative drugs in China is expected to bottom out and rebound.

In fact, in the first half of 2024, many innovative biotech companies began turning losses into profits based on commercial development, sales growth, and operational efficiency improvements. Leading pharmaceutical companies are gradually overcoming the impact of generic drug centralized procurement, vigorously promoting the domestic rollout of innovative products, and benefiting from overseas licensing deals. The number of domestically developed innovative drugs entering the market is expected to hit a new high, with the next two years being a period of concentrated revenue realization for innovative drug products. China's innovative drug industry is poised to enter a new cycle.

For example, Innocare Pharma (09969.HK), which recently rebounded from lows to cross the 200-day moving average and formed a technical "head and shoulders bottom" pattern, released its 2024 first-half results not long ago. Revenue reached 420 million yuan, up 11.17% year-on-year, while net profit attributable to shareholders was -262 million yuan, narrowing losses by 37.98% year-on-year. This was driven by a 30.02% increase in sales of its core product, orelabrutinib, to 417 million yuan, as well as improved operational efficiency. In the first half of the year, Innocare's gross margin reached 85.7%, up 5.8 percentage points year-on-year.

The company expects orelabrutinib's strong growth to continue in the second half of 2024. Recently, the U.S. Food and Drug Administration (FDA) agreed to initiate a Phase III clinical study of orelabrutinib for primary progressive multiple sclerosis (PPMS) and recommended starting a Phase III clinical study for secondary progressive multiple sclerosis (SPMS) to address the unmet medical needs of MS patients. The overseas market potential of orelabrutinib for MS indications is highly regarded by the market.

Beyond orelabrutinib, Innocare's other pipelines also show promise. For example, the clinically effective tafasitamab is expected to launch domestically in the first half of 2025; the autoimmune core pipeline TYK2 inhibitor ICP-332 has received FDA approval for clinical trials and completed the first patient dosing, with a Phase III trial for atopic dermatitis set to begin in the second half of this year; and the TYK2 allosteric inhibitor ICP-488 for psoriasis treatment has completed patient enrollment for its Phase II trial. Clearly, Innocare is slowly emerging from its 低谷。

In summary, China's bispecific antibody has defeated the world's "blockbuster drug," shocking the world. Coupled with interest rate cuts, an improving macro environment, and supportive national policies, China's innovative biotech companies are once again attracting market attention. The author admits to not being an expert in biotech technology and can only look for hidden gems through stock price movements. If any of you are following other biotech companies, feel free to share your thoughts.

Disclaimer

The above is purely personal research and does not represent the stance of any third-party institution. This commentary should not be construed as an offer, solicitation, invitation, or recommendation to buy or sell any investment product or make any investment decision, nor should it be interpreted as professional advice. Readers should fully understand the risks and relevant legal, tax, and accounting implications before making any investment decisions and determine whether the investment suits their financial situation and objectives. Seek appropriate professional advice if necessary. The author or related parties do not hold any financial interests in the listed companies discussed in this commentary.

Author: Li Jiacong