RemeGen recorded strong product sales growth in 3Q23, in a challenging environment, with revenue reaching RMB347mn, vs RMB254mn in 2Q23 (+37% QoQ) and RMB219mn in 3Q22 (+58% YoY). The strong growth in 3Q23 was mainly driven by RC18 (RMB180mn+ sales in 3Q23, +45% QoQ), while the sales of RC48 also recorded QoQ increase to RMB150mn+ in 3Q23. Recall that, in 1H23, the Company intentionally slowed down the shipment volume of RC18 to prepare for the NDRL renewal in late 2023 and the shipment has been back to normal since July. In 3Q23, the GP margin increased to 76.3% (vs 75.5% in 1H23). Thanks to the economy of scale, the SG&A expense ratio decreased to 77% in 3Q23 (vs 122% in 1H23). In 3Q23, the R&D expense rose to RMB318mn, vs RMB291mn in 2Q23. The Company narrowed its net loss to RMB327mn in 3Q23 (vs RMB380mn in 2Q23). As of Sep 2023, RemeGen had a cash balance of RMB791mn, and had secured around RMB4.9bn bank credit, according to the management.

Large global potential of RC18 in multiple autoimmune diseases. In China, besides adult SLE, RemeGen is also exploring RC18 for the treatment of child SLE (Ph1) and lupus nephritis (Ph2). The sNDA of RC18 for RA was submitted to the CDE in Aug 2023, and the Company will report the Ph3 data at the coming ACR Meeting in Nov. For the underserved markets of IgA, pSS and MG, RemeGen has completed the FPI for three Ph3 trials of these indications in 3Q23. Overseas, the Ph3 SLE MRCT trial of RC18 is enrolling patients across the US, Europe, APAC and other regions. The first stage of the Ph3 study may complete the 90 patient enrolment in 4Q23, which upon FDA approval, will remain blinded and be included into the second stage of the Ph3 study to speed up the clinical development. A Ph3 trial in MG has started in the US, and the Company has reached a consensus with FDA to initiate Ph3 studies in IgA and pSS. We expect RC18 to achieve a blockbuster out-licensing deal based on its strong profile in autoimmune diseases.

RC48 to mainly focus on UC market in the US. The Ph3 trial initiated by Seagen evaluating RC48 + Keytruda for 1L HER2-expressing UC in the US (link) has achieved FPI, which is an important milestone, in our view. Patient enrolment of the pivotal Ph2 trial of RC48 mono for 2/3L HER2-expressing UC in the US progressed smoothly. In China, to enhance the advantages in UC, RemeGen is exploring RC48's potential in earlier lines of UC treatment, including first-line, neoadjuvant, MIBC and NMIBC settings. With positive signal observed in Ph2 trial of MIBC, RemeGen is in communication with CDE regarding a confirmatory trial of RC48+PD-1 for neoadjuvant MIBC. For GC and BC indications, the Company is actively exploring the potential of RC48 in earlier line treatment with a variety of Ph2 trials ongoing.

Maintain BUY. We expect RemeGen to continue its product sales growth in 4Q23 and beyond, and expect RC18 and RC48 to renew NRDL via 'Simple Renewals' with moderate price cuts. We revise up our DCF-based TP from HK$55.54 to HK$57.65 (WACC: 11.09%, terminal growth rate: 3.0%).