Aggressive Pricing In China Will Compress Margins Despite Clinical Promise

Key Takeaways

• Deep price cuts and increased government cost controls are set to compress Akeso's revenue, margins, and profitability for the foreseeable future.
  
• Heavy pipeline concentration and escalating competition expose Akeso to significant growth risk and potential shareholder dilution.
  
• Diversified pipeline, strategic partnerships, and strong clinical data position Akeso for sustained revenue growth, competitive market share gains, and improved long-term earnings visibility.

Catalysts

A biopharmaceutical company, engages in the research, development, manufacture, and commercialization of antibody drugs worldwide.

• The deep price cuts of 53 to 54 percent for Akeso's two cornerstone drugs, cadonilimab and ivonescimab, in order to secure inclusion in the Chinese National Reimbursement Drug List are likely to trigger a significant and lasting decline in average selling prices, which could lead to sharp compression of revenue and gross margins, especially as future government negotiations or international reimbursement processes could impose further downward pricing pressure.
  
• While current adoption rates for Akeso's therapies are being boosted by broadening reimbursement and expansion into more hospitals, growing government focus on healthcare cost containment and price controls in China and globally is expected to persist. This will severely limit Akeso's ability to capture premium pricing or offset margin erosion, leading to long-term headwinds for net income and overall profitability.
  
• Akeso's heavy pipeline concentration in a few late-stage assets exposes the company to heightened risk: any clinical failure, regulatory setback, or delay-in fields such as immunotherapy or bispecific ADCs-could abruptly impair anticipated growth trajectories, jeopardizing both future revenue streams and near-to-medium term earnings stability.
  
• Intensifying competition from both Chinese and multinational biotech and pharmaceutical companies, many of whom are advancing their own immuno-oncology, ADC, and bispecific antibody therapies, is likely to erode Akeso's market share and lead to further price wars. This heightened rivalry could result in persistent sales and earnings pressure throughout the next decade.
  
• The rapid pace of innovation in biologics, cell therapy, and gene editing threatens to obsolesce parts of Akeso's current platform. As payers increasingly demand clinical differentiation and value, Akeso's heavy R&D and commercial investments may not yield expected returns, increasing the risk of future capital raises that would dilute shareholders and further constrain earnings per share growth.

Akeso Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Akeso compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Akeso's revenue will grow by 47.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -24.2% today to 15.9% in 3 years time.
• The bearish analysts expect earnings to reach CN¥1.1 billion (and earnings per share of CN¥1.28) by about July 2028, up from CN¥-514.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 93.1x on those 2028 earnings, up from -201.0x today. This future PE is greater than the current PE for the HK Biotechs industry at 33.3x.
• Analysts expect the number of shares outstanding to grow by 3.66% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.81%, as per the Simply Wall St company report.

Akeso Future Earnings Per Share Growth

Risks

• The rapid expansion and depth of Akeso's clinical pipeline, including multiple Phase III trials across a broad range of oncology and autoimmune indications, significantly enhances its likelihood of successful product launches and could diversify future revenue streams, improving topline revenue over time.
  
• Inclusion of both cornerstone bispecific antibodies, cadonilimab and ivonescimab, in China's National Reimbursement Drug List and aggressive expansion in hospital coverage are likely to drive large-scale patient adoption, which could sustain robust revenue growth even amid recent price cuts.
  
• Strategic global partnerships and licensing deals, especially with SUMMIT Therapeutics and combinations with Pfizer's ADCs, are expected to provide milestone payments and potential royalties, thereby adding to earnings visibility and expanding operating margins in the medium to long term.
  
• Demonstrated best-in-class clinical data for flagship therapies, such as superior survival benefits in broad patient populations (including those with low or no PD-L1 expression), positions Akeso to gain meaningful market share against existing competitors, supporting long-term growth in market share and revenues.
  
• Ongoing and accelerating regulatory and policy support for domestic biotechnology innovation in China, as well as the continued rise in global biotech M&A and collaborations, create a favorable industry environment that may expedite approvals, enhance reimbursement opportunities, and strengthen Akeso's financial performance in the years ahead.

Valuation

• The assumed bearish price target for Akeso is HK$89.52, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Akeso's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$150.72, and the most bearish reporting a price target of just HK$89.52.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CN¥6.7 billion, earnings will come to CN¥1.1 billion, and it would be trading on a PE ratio of 93.1x, assuming you use a discount rate of 6.8%.
• Given the current share price of HK$126.0, the bearish analyst price target of HK$89.52 is 40.7% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.