Company’s four drug approvals in a year will contribute major revenue, but will also challenge CStone’s ability to commercialize its products

Key takeaways:

  • Its rollout of four new drugs will be a major test of CStone’s commercialization ability, prompting it to set up an in-house commercialization team and enlist outside help
  • The company needed just six months to finish the application process and get the regulatory nod for Ivosidenib, its latest approved drug

By Molly Wen

Developing new drugs and guiding them successfully through the approval process are major tasks, often taking years with no guarantee of success. But having mastered that skill with four drugs, CStone Pharmaceuticals (2616.HK) is getting a rapid lesson on the next major challenge for drug startups, namely, learning to successfully commercialize their products.

CStone announced last Wednesday that China’s National Medical Products Administration recently granted marketing approval for its new drug Ivosidenib, under the brand name Tibsovo, for the treatment of leukemia. The drug is the first isocitrate dehydrogenase-1 (IDH1) inhibitor approved in China for treating adult patients with IDHI-mutation-induced relapsed or refractory acute myeloid leukemia.

Leukemia is a type of malignant hematological tumor that is deadly when left untreated. Available treatment for adult patients with relapsed or refractory acute myeloid leukemia (R/R AML) is generally ineffective, with a five-year survival rate of only 27%. CStone is hoping it can turn the tables on the drug with its new approval for Ivosidenib.

The whole process from filing for approval for the new drug to being granted the approval took the company only six months. That makes Ivosidenib Cstone’s fourth drug to receive marketing approval in the course of just 12 months, following its two first-in-class drugs, Pralsetinib and Avapritinib, and Cejemly, an immuno-drug for cancer treatment.

The good news provided a temporary lift to CStone’s stock, which rose by around 5.3% last Thursday after the new announcement. But that was followed by a fall of 5.5% on Friday as investors got over the initial excitement. The stock closed at HK$6 at the end of the trading day. It has not fully emerged from a storm that began in the middle of last year, which saw the price drop by around 70% over the last eight months, suggesting the market has doubts about the company’s ability to commercialize its products.

CStone was established in 2015. Its four approved drugs can be used to treat non-small cell lung cancer, gastroenteric cancer and acute myeloid leukemia. It has another three drugs in late stage trials for treatment of lung cancer, esophageal cancer and recurrent or refractory cell lymphoma.

Rising marketing costs

As CStone finds its stride in translating laboratory innovations into commercial products, it may finally be entering a harvest season with real chances of turning a profit. Its latest interim report showed it generated 79.40 million yuan ($12.5 million) in revenue in the first six months of last year, up from nil a year earlier, as Pralsetinib and Avapritinib contributed 45.8 million yuan and 33.6 million yuan, respectively. But at the same time, its losses grew from 671 million yuan in the first half of 2020 to 774 million yuan during the same period last year, mostly due to growing sales and marketing expenses during its commercialization efforts.

CStone first announced its intent to bring Ivosidenib, a drug initially developed by the American company Agios (AGIO.US), to the Chinese market in 2018 after acquiring the license to clinically develop and commercialize the drug in China and Singapore. Under the agreement, CStone has already made a prepayment of $12 million to Agios and is required to make milestone payments of up to $412 million as well as handing over 15% to 19% of its net revenue from the drug in the Greater China region to Agios going forward.

The drug has been approved in China for treating adults with recurrent or refractory acute myeloid leukemia (R/R AML), the type of leukemia with the highest incidence rate that most often affects the elderly. The disease’s recurrent nature often results in very limited survival periods. The disease is becoming increasingly common in China as the country’s population ages, with the country reporting around 75,300 new leukemia cases every year. Around 59% of those cases are AML, and about 6% to 10% of those carry IDH1 mutations.

But courses of treatment remain limited for patients carrying such mutations, and patients’ quality of life tends to be poor. Ivosidenib, as an oral IDH1-targeted inhibitor, can act to inhibit the activities of mutated IDH1 enzymes, facilitating AML cell differentiation to fight the tumor.

The huge number of leukemia patients in China and the need to take the drug over a long period point to strong market prospects for Ivosidenib in China. Launched in the U.S. in 2019, a monthly regimen of the drug costs as much as $26,115. A course of treatment lasts a minimum of six months, making it one of the most expensive drugs in the world. Agios’ financial statements put the drug’s 2020 revenue at a whopping $121 million.

Profits on the horizon

The need to suddenly market four drugs in just a year is putting major demands on CStone’s commercialization capacity. It has set up an in-house team for the endeavor, and has also outsourced some of the work to third-party contractors. In the first half of 2021, CStone set up a team of 300 and a network comprised of more than 400 hospitals in more than 130 cities. Meanwhile, its marketing costs soared by 4.5 times year-on-year to 130 million yuan by the mid of 2021.

CStone has also reached large licensing deals with major domestic drug makers to help it market its drugs. Last November it partnered with Jiangsu Hengrui Medicine (600276.SH) to help it take CS1002 (a type of CTLA-4 mAb) to market. The deal entitled CStone to 52 million yuan in prepayments, up to around 1.3 billion yuan in milestone payments and a cut of 10% to 16% from annual sales of the drug from the partner. Prior to that, CStone entered other licensing deals with big multinationals Pfizer (PFE.US) and EQRx (EQRX.US), raking in $280 million and $1.3 billion, respectively.

In terms of valuation, CStone’s price-to-sales (P/S) ratio is lower than that for several other biomedical companies with similar business portfolios. By Feb. 11, its price-to-book (P/B) ratio was also just 2.49 times, compared to a range of 3.14 times to 3.5 times for the likes of Zai Lab (9688.HK), CanSinoBIO (6185.HK) and Innovent Biologics (1801.HK). BeiGene (6160.HK;BGNE.US;688235.SH) was even higher with a hefty P/B of 6.1 times.

Morgan Stanley gave the company a “buy” rating last December, with a target price of HK$20.50 – more than triple its current level. It also pointed out in a research report that as it commercializes its drugs, CStone’s sales and marketing expenses are expected to rise in tandem. It expects the company to record anothe loss in 2022 before becoming profitable next year.

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