2023 Results Exceed Our Expectations
The company announced 2023 results: revenue of US$840 million, +34.2% YoY, of which non-cell therapy business revenue was US$555 million, +8.9% YoY, cell therapy business revenue was US$285 million, +144.2% YoY; Group loss narrowed to US$355 million (loss of US$428 million in 2022), and net loss to mother narrowed to 19.6 million yuan (loss of 227 million yuan in 2022), adjusted net loss narrowed to 298 million yuan (loss of 359 million yuan in 2022) USD); better than our expectations, mainly due to increased life sciences profitability and strong growth in CARVYKTI sales.
Development trends
Life science profitability has been restored, and demand in Europe and the US is steady. In 2023, Life Sciences achieved revenue of US$506 million, +14.5% year on year, and maintained steady growth in external revenue at a constant exchange rate; adjusted gross profit margin of 54.4%, -1.4ppt; adjusted operating profit margin 19.4%, +1.1ppt year over year. We believe that the increase in profitability is mainly due to increased capacity utilization and improved operational efficiency, and we expect the trend of increasing profit margins to continue in 2024. By region, the US and Europe contributed +20% and +25% of life sciences revenue in 2023, respectively.
CDMO is focusing on demand recovery and breaking through large-scale production orders. In 2023, the CDMO division achieved revenue of US$43 million, or -12.4%, of which the viral vector and mRNA business continued to grow. We believe the revenue growth pressure was mainly due to the negative impact of reduced downstream demand and increased industry competition; the adjusted gross margin was 18.1%, -16.1ppt year over year, and the weakening profitability was determined mainly due to pressure on order prices, low utilization rate of new production capacity, and impairment of raw materials and accounts receivable. According to the company announcement, the company has received the first 2,000L order, and large-scale production capacity has begun to be verified. We believe it will have a positive impact on orders and customer expansion.
CARVYKTI's capacity expansion is progressing steadily, and we look forward to the positive results of the OADC meeting. CARVYKTI begins clinical supply production at its Obelisc facility in Belgium. The company expects the production capacity of cooperation with Novartis to produce clinical trial drugs in 2024H1, and will achieve an annual production capacity of 10,000 doses by the end of 2025. Follow the progress of pipeline propellant approval: 1) On March 15, 2024, the FDA will hold an Oncology Drug Expert Committee (ODAC) meeting to review clinical data from the Carvykti CARTITUDE-4 trial; 2) The target date for CARVYKTI to obtain FDA approval for multiple myeloma patients treated with the 1-3L system is April 5, 2024. The company expects the EMA approval time to be 2024Q1.
Profit forecasting and valuation
Taking into account CDMO's short-term demand growth and pressure on profitability, we lowered our 2024 profit forecast to a net loss of US$197 million (previously a loss of US$167 million) and introduced a net loss of US$90 million in the 2025 profit forecast. Maintaining an outperforming industry rating, due to recent systemic adjustments in the pharmaceutical sector of Hong Kong stocks, we lowered our target price by 25.1% to HK$23.00 (based on the SOTP valuation method), which has 48.2% upside compared to the current stock price.
risks
R&D risk, risk of demand falling short of expectations, risk of capacity utilization falling short of expectations, risk of policy fluctuations.