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BeiGene shares rise after drugmaker disputes short seller's claims

BeiGene Ltd. CEO John Oyler disputed a short seller's claims that the Chinese drugmaker had misreported its sales, leading to a partial recovery in the stock following a two-day decline.

The Sept. 5 report by investment research firm J Capital Research accused BeiGene of faking 60% of its sales. BeiGene's stock dropped about 14% in both listing venues to close at $120.61 in New York and HK$77.5 in Hong Kong on Sept. 6.

Oyler said in the Sept. 8 conference call that the report is a "collection of misleading statements with malicious assumptions."

J Capital Research was founded in China in 2010 with offices in Hong Kong, Beijing, Shanghai, New York and Sydney, according to the firm's website.

BeiGene has not yet won regulatory approval to sell its own drugs but is selling three cancer drugs that it licensed from Celgene Corp. in 2017 —multiple myeloma treatment Revlimid, or lenalidomide; breast cancer drug Abraxane, or protein-bound paclitaxel; and chemotherapy drug Vidaza, or azacitidine. The Chinese drugmaker also bought Celgene's commercial operations in China in 2017. BeiGene reported product sales of US$115.6 million in the first half.

In the 43-page report, J Capital Research accused BeiGene of inflating its sales by buying back Celgene's drugs from distributors, transferring costs to a shell company in Guangzhou known as BeiGene Pharmaceuticals Guangzhou and other strategies. The short seller cited interviews with distributors, hospitals and former BeiGene salespeople as the basis for the claims. It also alleged that the 175 million Chinese yuan of "other non-current assets" on the Guangzhou shell company's book are Celgene products.

"It is extraordinary to see someone claim that they can estimate our sales by purportedly interviewing 10 oncologists and use that as the basis to accuse the company of falsifying 60% of its sales," BeiGene CFO and chief strategy officer Howard Liang said on the call.

BeiGene shares rose 3.3% to close at $125.45 in New York on Sept. 9. The company's shares in Hong Kong closed at HK$74.80 on Sept. 9 but climbed 3.88% to HK$77.70 at the close of day in Hong Kong on Sept. 10.

BeiGene's president and general manager of China, Wu Xiaobin, said on the call that the company booked sales of Celgene products after they had been sold to its distributor China Resources, although it did not include returns for product defects in the sales figures. The value of the returned products is less than US$200,000, according to Wu.

The CFO added that the Guangzhou subsidiary is responsible for funding the development of its PD-1 oncology drug tislelizumab and distributing the drug once approved. The non-current asset balance cited in J Capital's report was paid to manufacturing partner Boehringer Ingelheim GmbH for capacity expansion of tislelizumab, Liang said.

Shan He, a Hong Kong-based analyst with research firm Sanford Bernstein, said in a Sept. 6 report that the sales data for the three Celgene drugs disclosed by BeiGene are accurate and are in line with its in-house analysis, which is based on prescription data compiled by the Chinese Pharmaceutical Association. The association tracks drugs sales at about 1,000 public hospitals in China. Bernstein maintained its "outperform" rating on BeiGene.

J Capital also said BeiGene's gross margin is decreasing too slowly, which could be seen as evidence of inflated sales. BeiGene's gross margin fell to 73% in the first quarter of 2019 from 81% in the fourth quarter of 2017. Given that prices of the three Celgene drugs dropped between 37% and 63% amid the negotiations for national reimbursement in China, such a small decline in margin is "very unlikely," the report said. J Capital estimated that BeiGene's margin should have decreased by 21 percentage points.

The report said the Chinese drugmaker inflated its sales partly by repurchasing Celgene products from distributors, adding that J Capital has "a high degree of confidence" that the inventory held by BeiGene's Suzhou subsidiary is composed of Celgene drugs.

BeiGene's Wu said its distributor usually keeps one month of inventory for Celgene products, and Liang explained that impact from the Revlimid price cut is the steepest of the three and was already known when it acquired Celgene's China business in 2017 and reflected in the margin disclosed in the fourth quarter of 2017. Liang also said the inventory in Suzhou is in fact its BTK inhibitor zanubrutinib and PARP inhibitor pamiparib, which are both under development.

Jefferies healthcare analyst Cyrus Ng said in a Sept. 9 note to clients that the details provided by BeiGene executives "should ease concerns." Ng assigned a "buy" rating to the company.

As of Sept. 9, US$1 was equivalent to 7.12 Chinese yuan.