Why This Chinese Biotech Could Be Pharma's DeepSeek

The drugmaker's shares rallied after the release of its strong annual report, up by a cumulative 18% over the next three trading days

Key Takeaways:

• Akeso's drug sales rose 25% last year to just above 2 billion yuan, setting a new high for the company
• A potential launch for the company's ivonescimab in the U.S. next year could bring it big new returns in licensing milestone and sales-related payments

After a four-year slump, a new spring has finally come for Hong Kong's innovative drug sector. Several factors are ushering in the new season, including improving market sentiment, policy tailwinds and greater commercialization by this previously revenue-challenged group. The result has been a more than 50% surge for the Hang Seng Innovative Drug Index since the beginning of the year, led by star performers with the best drug pipelines.

One of those, Akeso Inc. (9926.HK), hardly looks too promising at first glance, recently reporting its revenue fell 53% last year to 2.12 billion yuan ($290 million). But a closer look at the results, released at the end of last month, shows the drop was due to a steep decline in licensing income from 2.92 billion yuan in 2023 to only 122 million yuan last year. While the company swung to an annual loss of 510 million yuan from a profit of 1.94 billion yuan, its actual drug sales hit an all-time high of 2.03 billion yuan for the year, up 25% from 2023.

While licensing income can vary dramatically from year to year, as Akeso's financial statement shows, drug sales are far more stable and thus a better indicator of a company's health.

That's why the market shrugged off the steep overall revenue decline and loss and was quite excited by the results, sending Akeso's share price up by a cumulative 18% in the three trading days after the announcement. Investors are clearly more willing to pay for the company's longer-term prospects than its short-term profits. And while licensing windfalls look nice, such companies can only thrive longer-term by boosting sales of their own star products.

Akeso has six commercially available products, including cadonilimab, a PD-1/CTLA-4 bi-specific antibody launched in 2023; and ivonescimab, a PD-1/VEGF bi-specific antibody approved in May 2024. Cadonilimab is the world's first bi-specific antibody for cancer immunotherapy to be approved, and ivonescimab outperformed Merck's (MRK.US) rival Keytruda in head-to-head clinical trials. Those accomplishments have made Akeso a global leader in the field of bi-specific antibodies.

Akeso didn't break down its sales by product in its annual results. Some simple math using the company's previously released midyear report shows its drug sales rose from 940 million yuan in the first half of 2024 to about 1.1 billion yuan in the second, implying limited growth for ivonescimab since the first batch of shipments was delivered at the end of May last year. That could owe partly to the treatment's high cost, with units priced at 2,299 yuan, making the cost of annual treatment as high as 500,000 yuan. While the non-small-cell lung cancer that ivonescimab targets is relatively common with a large potential patient base, the treatment's medical affordability remains a hurdle for most.

Luckily for Akeso, two of its core products have been included in the catalog of drugs reimbursable under China's national health plan, and have been launched in hospitals at lower prices since this year, boosting their accessibility.

"It's not appropriate to give sales guidance now," said Chairman Xia Yu on the company's earnings call after the results announcement. "The reason is that demand could explode, and I don't know how much we will be supplying by the end of 2025. However, the data will definitely be impressive. I'm confident now."

It's also worth noting that despite having more than 50 projects in development and 24 products in clinical studies worldwide, Akeso still managed to reduce its costs and increase its efficiency last year. The company's R&D expense fell by 5.29% year on year to 1.19 billion yuan for the year, primarily due to the expansion and enhancement of its in-house clinical team in recent years, allowing it to internalize some research that was previously outsourced.

Big overseas potential

In a recent research report, investment bank Goldman Sachs said ivonescimab has high potential to treat many indications, and thus could dominate the field of PD-1/L1xVEGF bi-specific antibodies over the next few years. Goldman predicted ivonescimab sales could peak in 2041 at as much as $53 billion, exceeding the 2024 sales of $29.5 billion for Keytruda, currently the world's best-selling drug in terms of revenue.

Domestically, six of seven Phase 3 clinics trials for major tumor types targeted by ivonescimab, including lung cancer, biliary tract cancer, breast cancer and colorectal cancer, are showing promising results.

Akeso's overseas partner, Summit, is also actively advancing ivonescimab's development. In February, Summit announced that it had formed a clinical trial collaboration with Pfizer (PFE.US) to jointly advance the therapeutic application of ivonescimab in combination with a several of Pfizer's antibody-drug conjugates (ADCs) to treat a wide range of solid tumors.

Akeso disclosed on the earnings call that Summit was expected to release topline results from an international multicenter Phase 3 study of ivonescimab in the middle of this year. If the clinical progress goes well, ivonescimab could launch in the U.S. as soon as next year, potentially providing Akeso with a huge amount of new revenue in the form of licensing milestone and sales-based payments.

Akeso has plenty of ammunition in terms of financial resources to keep developing new drugs. It had 7.34 billion yuan in cash and financial products at the end of 2024, and more could come in as its drugs gain traction. That said, the stock isn't cheap at its current price, trading at a price-to-sales (P/S) ratio of about 34 times, or four times the 8 for Innovent Bio (1801.HK), another innovative drug company focused on oncology.

The inclusion of Akeso's core products in China's national health plan will mean greater revenue potential in the future. But that said, investors should also closely follow progress for its many drug trials to determine whether the stock's high valuation is justified.