We maintained the “hold” rating for Rongchang Biotech HK shares and lowered the target price to HK$26; covered Rongchang Biotech A shares for the first time, and gave a target price of RMB 35.
RC18's overseas progress has been slower than expected, increasing investors' concerns about the cash flow situation, causing recent stock prices to drop significantly: on July 8 and 9, Rongchang Biotech's A shares and H shares fell 27% and 35% respectively, mainly due to the current weak market sentiment. The progress of RC18 going overseas fell short of expectations, increasing investors' concerns about the company's cash flow situation. In previous reports, we have been conservative about the company's RC18 overseas expectations. The stock price trend over the past 3 months is in line with the “holding” rating we published in the annual performance report.
Management said that RC18 is still challenging to go overseas, and will be open to considering various ways to go overseas in the future:
Management said that based on past exchanges with potential overseas partners, RC18 faced the following challenges: (1) The indications involved are quite diverse (including SLE, RA, MG, iGaN, etc.), and it is challenging to find a potential partner willing to promote overseas development with so many indications. In particular, multiple indications will involve years of large-scale clinical trials; (2) Currently, the fastest progressing main indication, SLE disease, is complex, and large-scale international phase III clinical trials have certain risks; (3) Overseas companies are at risk after the COVID-19 pandemic Take a cautious approach to cash investment as a whole; (4) BD transactions usually involve the cooperation of multiple departments of overseas companies, especially multinational enterprises. If multiple departments fail to agree, it will also cause BD transaction negotiations to stall. Management believes that the progress of RC18 BD has been blocked mainly due to the company's high expectations for BD transactions in the past, hoping that overseas partners will undertake a package of indication development plans; in the future, the company will adjust the BD strategy and openly consider various forms of overseas travel plans, including cooperation with multinational companies and funds, and include more senior company executives and senior potential partners to participate in discussions and exchanges during the BD negotiations, improve flexibility in the adaptation negotiations, and strive to complete RC18 overseas landing within the year as soon as possible. Considering that the first phase of the company's overseas phase 3 will require 52 weeks of data, the deconstruction period is expected to be 1Q25. With no overseas data being read out during the year, we think it may still be difficult to complete RC18 overseas during the year.
Regardless of the fixed increase, the current capital plan is sufficient to support the company's cash requirements for this year and next two years:
Currently, the company's cash on hand is close to RMB 1 billion, and bank credit loans are 30+ billion yuan (a slight decrease from the 4 billion yuan credit conference call for the quarterly report at the end of April). The company expects to increase bank credit by about 1-2 billion yuan in the second half of the year. The company believes that the above funding plan will be sufficient to support cash requirements for this year and next two years. In addition, the proposed increase of 2.55 billion yuan for A-shares, which was previously announced, is still being approved by the Securities Regulatory Commission, and after regulatory approval, the company will decide whether to issue it depending on the market share price situation, so the fixed increase timeline is not yet clear. In addition to increasing financing and seeking BD implementation as soon as possible, the company believes that commercialization progress in the next two years is expected to bring a significant increase in revenue, including the accelerated volume of existing sales of RC18 and RC48, and the acceleration of commercialization due to the expansion of RC18 indications (including RA to be approved for marketing in the near future, MG Indication to be declared for BLA in the second half of the year, and PSS and iGaN are expected to declare BLA next year). The company said that commercialization growth in the first half of the year exceeded the annual guideline (50% YoY), so management is confident that RC18 and RC48's annual revenue will exceed the previous annual guidance.
The main catalyst in 2024 is RC18's potential overseas launch, which, if completed, would help to significantly increase the share price. Other catalysts include: 1) RC18: approval of RA indication in China, listing declaration of MG indication in China, 2) RC88 (MSLN ADC): potential overseas authorization transaction.