The uncertainty of the development of KN046 lung cancer is increasing, and the future will focus on the clinical data of pancreatic cancer. The III phase trial of KN046 combined with chemotherapy for sq-NSCLC (KN046-301) recently completed the first mid-term analysis. The results showed that the trial reached the preset end point of PFS, but because the OS did not reach a statistically significant difference, the trial could not be successfully blinded. It is expected that the time of OS readout and submission of NDA will be delayed to the end of 2023 / 1Q24, respectively. Even if the final trial reaches the end point of OS and the indication is successfully approved, considering that PD-1 McAb has accumulated a certain market positioning in NSCLC and the competition is fierce, we think that there will be more challenges for KN046 to infiltrate the target patient population. We recommend that we focus on the data readout (3Q23) of the phase III trial of pancreatic cancer. In the previous II phase clinical, the mOS/mPFS reached 12 months / 6 months, the ORR reached 47.9%, the survival benefits of the subjects were obvious; if the III phase is successful, the company will declare to be listed around the end of the year. The annual incidence of pancreatic cancer in China is about 100000. Because of the limited efficacy and low permeability of PD- (L) 1 monoclonal antibody in "cold tumor", we think that the clinical and commercial value of KN046 will be mainly reflected in similar indications such as pancreatic cancer.

The layout of HER2 field is getting better and better: the company and partner CSPC Pharmaceutical recently launched a phase III clinical study of KN026 first-line treatment of breast cancer (KN026+ albumin docetaxel vs. The previous II phase clinical results showed that the monthly OS rate of mPFS/24 was 25.4 months / 91.2%, significantly higher than the current standard therapy of 16.5 months / 79.5% (non-head-to-head comparison). We expect the trial to be read out before and after 2026; if successful, KN026 is expected to challenge the gold standard status of trail + paracetamol in first-line treatment of breast cancer with considerable long-term potential. Phase I trials of HER2 dual targeting ADC JSKN003 based on KN026 have been carried out in Australia and China.

Although the competition in the field of HER2 is increasing day by day, we expect the company to form a multi-indication layout in the future, with the help of two double-target molecules to challenge trastuzole in front-line therapy and differentiate over HER2 single-target ADC such as Enhertu in back-line therapy.

Downgrade to neutral: we downgraded the company's annual revenue forecast for 2023-24-25 from 14-34% to 250 million / 460 million / 650 million yuan, mainly reflecting more uncertainty in KN046's NSCLC development; the net loss forecast expanded accordingly, and the break-even time was postponed to 2027. Based on the DCF model, we lowered our target price to HK $10.0; considering that the heavy catalyst has been largely reflected in the stock price over the next 12 months and the future upside is limited, we downgraded the company from buy to neutral.

Core risks: the progress of research and development is not as expected, competition for similar products is intensified, and sales are not as expected.