Hanmi Pharmaceutical Progress on R&D, B2B Operations, and Exports

2017. 6. 15

Sector Pharmaceuticals (OVERWEIGHT) Update Earnings growth, R&D results in the spotlight in 2H

Team Analysts ● Global, Korean pharma markets to grow 6.3% and 4.4% pa , respectively. Multiple Brian Lee blockbusters to come off patent over 2016-2020, benefiting Korean biosimilar firms. Team Head (Pharm/Biotech) brian79.lee@samsung.com ● Sea change from 2012 as Korean healthcare integrates with global ecosystem. 822 2020 7177 Next five years, virtuous circle: stronger brands/track records →→→ financial gains. SunYoung Yoon ● Eye government policy, regulatory direction; visibility to improve in 2H. Be (Pharm/Biotech) [email protected] selective: buy firms with R&D successes, B2B track record, or improving earnings. 822 2020 7840 ● Covered stocks: combined sales, operating profit to grow 14.1%, 47.9% y-y in 2017. Kevin Kim Medical aesthetics to stand out in 2Q; large pharmaceutical, biotech stocks in 2H. (Medical Devices/Medical Aesthetics) [email protected] ● Top picks: Hanmi Pharm, Samsung Biologics, Hugel, Dentium, ST Pharm, Huons. 822 2020 7178

Research Associate WHAT’S THE STORY? Wonyong Park Solid growth ahead for global, Korean pharmaceutical markets: The global [email protected] pharmaceutical market is projected to grow at a 2016-2022 CAGR of 6.3% to reach USD1.12t, while 822 2020 7847 its Korean counterpart should expand at 2017-2021 CAGR of 4.4% to KRW18.6t. Meanwhile, a second patent cliff is ahead: blockbuster drugs (including several biologics) worth USD249b will lose patent protection over 2016-2020. In short, things are looking good for the Korean companies AT A GLANCE that lead the global biosimilar market.

Sea change for Korean healthcare: Over 2012-2017, Korean healthcare firms made massive Hanmi Pharmaceutical progress on R&D, B2B operations, and exports. Some signed large out-licensing deals with global (128940 KS, KRW364,000) pharmaceutical firms. Korea-made biosimilars dominate the global market, while Korea-made botulinum toxins and fillers are gaining global market share. We expect Korea to produce the

Target price: KRW450,000 (23.6%) world’s top biologics contract manufacturing organization and one of the world’s top-ten chemical- drug contract manufacturing services. Successes over the past five years owe much to the Samsung Biologics (207940 KS, KRW213,500) accumulation of technology, effective business strategies, investments by chaebol , and supportive government policies. Over the next five years, Korean healthcare firms should enter a virtuous cycle wherein stronger brand equities and track records lead to greater financial gains.

Target price: KRW260,000 (21.8%) Monitor policy, regulatory direction: Korea’s healthcare industry should benefit if the Hugel (145020 KS, KRW451,900) government keeps election pledges to nurture the pharmaceutical, biotechnology, and medical device industries; halts the introduction of for-profit medical corporations; and raises subsidies for implants, hearing aids, and Alzheimer’s treatments. But prescription-drug makers will suffer if a Target price: KRW570,000 (26.1%) total drug cost limit is enforced. Focus on firms specialized in OTC drugs, supplements, biotech, diagnostics, medical aesthetics, and medical devices. Dentium (145720 KS, KRW37,450) To make visible progress on R&D, B2B fronts: In 2H, Hanmi Pharmaceutical should begin global Phase III clinical trials for Efpeglenatide and resume global Phase I trials for Target price: KRW50,000 (33.5%) HM12525A/JNJ-64565111; Green Cross should win US approval for IVIG; Samsung Biologics should win US and European approval for three biosimilars; Medytox-Allegan should begin global ST Pharm (237690 KS, KRW48,400) Phase III trials for Innotox; Kolon Life Science should win domestic approval for Invossa; Genexine and Qurient should make progress on their B2B operations; and Seegene should begin supplying ODM products to Beckman Coulter. Target price: KRW56,000 (15.7%) Operating profit growth: We have operating profits at our covered large pharmaceutical firms, Huons (243070 KS, KRW58,800) medium-sized pharmaceutical firms, biotech, medical-diagnostics, medical-aesthetics, and medical- device firms growing 32.9%, 12.6%, 123.2%, 26.5%, 51.6%, and 15.6% y-y, respectively, in 2017. Medical aesthetics profits should stand out in 2Q on rising demand. In 2H, large pharmaceutical Target price: n/a firms should shine on base effect and SG&A cost-cutting; biotech firms should shine on export * Share price and financials based on growth. We foresee outstanding earnings growth over 2Q-4Q for Hanmi Pharm, Donga ST, May 26 Celltrion, Seegene, and Hugel.

Healthcare

2017. 6. 15

Contents 1H review: Poverty in the p2 midst of plenty Pharmaceutical market p7 outlook Visible progress to be made p32 on R&D and B2B fronts Government policy p52 warrants attention 1H review: Poverty in the midst of plenty Key issues in 2H p68 Healthcare indices largely in line with market in 1H; stock performances diverge Solid earnings momentum p87 in 2H Kospi Medical Supplies Index performing in line in 1H: The Kospi Medical Supplies Index Company p105 peaked at 11,297 on Jun 10, 2016, bottomed at 6,988 on Dec 2, 2016, and bounced back to stand at 8,888 on May 26, 2017. The index is up 17.1% ytd, in line with the Kospi’s ytd gains of 16.2%. The index excluding Samsung Biologics was valued as high as 40.1x P/E (Jul 22, 2016) and as low as 18.5x (Nov 18, 2016). It was valued at 26.2x on May 26, 2017. Kosdaq Pharmaceutical Index underperforming in 1H: The Kosdaq Pharmaceutical Index peaked at 7,552 on Feb 5, 2016, bottomed at 5,662 on Mar 24, 2017, and crept back up to stand at 6,209 on May 26, 2017. The index is down 1.3% ytd, underperforming the Kosdaq, which has gained 2.3%. The index’s P/E valuation peaked at 39.4x (Jan 29, 2015) and hit bottom at 24.6x (Mar 24, 2017). It was valued at 26.3x on May 26, 2017. Sector sentiment weakening: Investors have been in thrall to the IT sector in 1H on prospects of record earnings amid a semiconductor supply shortage and smartphone launches. Cyclical sectors have also appealed to those who anticipate US infrastructure investments and inflation under President Trump. In contrast, the belief that the US has begun a period of rate hikes has reduced the investment appeal of high-multiple sectors. Sentiment towards the healthcare sector weakened after Hanmi Pharmaceutical in 2016 announced that some out-licensing contracts it signed in 2015 have been revised or canceled. The sector has remained lackluster in 1H due to a lack of standout R&D successes and earnings momentum. Still, steep share-price corrections in late 2016 made valuations less demanding, leading shares to bottom out in 1Q. Oversold stocks and those with earnings momentum bounce back in 1H: The Kospi Medical Supplies Index performed in line with the Kospi, but stocks with earnings momentum posted the steepest share-price gains. Among our covered healthcare stocks, Samsung Biologics is up 41.4% ytd, Medytox 42.1%, Hugel 40.7%, Hanmi Pharmaceutical 27.4%, and Yuhan 24.6%. Also, stocks that had plunged more than 50% from their previous peaks have rebounded almost 20% from their lows as bargain hunters snapped them up. Healthcare stocks that have rebounded strongly include Huons Global (45.4%), Hanmi Pharmaceutical (36.8%), Hanmi Science (32.3%), and Jeil Pharmaceutical (30.3%).

Healthcare

2017. 6. 15

Korean healthcare indices: Relative performances

(Indexed: Jan 1, 2017 = 100) 120 115 110 105 100 95 90 85 80 Jan Feb Mar Apr May

Kospi Kospi Medical Supplies Kosdaq Kosdaq Pharmaceutical Kosdaq Medical and Precision Machines

Source: QuantiWise, Samsung Securities

Kospi sector indices: Year-to-date performances

(%)

40 30 20 10 0 (10) Gas Banking Telecom Financing Securities Insurance Machinery Chemicals Electronics Distribution Non-metallic Construction Iron and Metal Iron Paper and Wood and Paper Medical Precision Medical Drug and Medicine Drug and Trans. and Storage and Trans. Food and Beverage and Food Textile and Wearing Textile Transport Equipment Transport

Note: As of May 26 Source: QuantiWise, Samsung Securities

Kospi vs Kospi Medical Supplies Index vs Kosdaq Pharmaceutical Index

(Pts) Sep 30, 2016 (Pts) Mar 19, 2015 Nov 5, 2015 Boehringer Ingelheim Out-licensed 12,000 Out-licensed Quantum terminated HM61713 contract 2,400 HM71224 project to Sanofi 2,300 10,000 to Eli Lilly 2,200 8,000 2,100 6,000 2,000 1,900 4,000 Nov 9, 2016 1,800 2,000 Donald Trump wins 1,700 US election 0 1,600 2015 2016 2017

Kospi Medical Supplies (LHS) Kosdaq Pharmaceutical (LHS) Kospi (RHS)

Source: QuantiWise, Samsung Securities

Healthcare

2017. 6. 15

Korean healthcare indices and sub-sectors: Relative performances

(Indexed: Jan 1, 2015 = 100)

300 250 200 150 100 50 0 2015 2016 2017

Kospi Medical Supplies Kosdaq Pharmaceuticals Kosdaq Medical and Precision Machines Medical aesthetics Diagnostics

Note: Medical aesthetics (Medytox, Hugel, Humedix, Pharma Research Products, Caregen) Diagnostics (Seegene, i-Sense, Boditech Med, AccessBio) Source: QuantiWise, Samsung Secutieis

Korean healthcare indices and sub-sectors: Performances relative to parent index

(%pts)

200 150 100 50 0 (50) 2015 2016 2017

Kospi Medical Supplies Kosdaq Pharmaceuticals Kosdaq Medical and Precision Machines Medical aesthetics Diagnostics

Note: Kospi Medical Supplies index is compared to Kospi, the rests are to Kosdaq Source: QuantiWise, Samsung Securities

Korean healthcare indices: Forward P/E

(x)

0 2015 2016 2017

Kospi Medical Supplies Kospi Medical Supplies (excl. Samsung Biologics) Kosdaq Pharmaceuticals Kosdaq Medical and Precision Machines Medical aesthetics Diagnostics

Source: QuantiWise, Samsung Securities

Healthcare

2017. 6. 15

Korean healthcare firms: Top-20 share-price performers ytd

(%) 80 60 40 20 0 Hugel Yuhan Solborn Medytox Medipost Neopharm Daewoong DongKook Seoul Pharm Daewoong Hanmi Pharm Il SungIl Pharm Pharmswellbio Alvogen Korea Hanmi Science Pharmaceutical Pharmaceutical JW JW Life Science Kolon Life Science Samsung Biologics Green Green Cross Holdings Sam ChunSam Dang Pharm

Note: As of May 26 Source: QuantiWise, Samsung Securities

Covered healthcare firms: Ytd share-price performances and 1Q17 operating performances

(% y-y) (%)

300 90

70 200 50

100 30

10 0 Turned (10) pos (100) (30) Dio Hugel i-Sens Yuhan Celltrion Dentium Medytox Rayence Seegene Vieworks ST Pharm ST DongaST Green Cross Green IlyangPharm Boditech Med Boditech HanmiPharm SK Chemicals* SK Boryung Pharm Boryung Osstem Implant Osstem Chong Kun Dang Chong Samsung Biologics Samsung Daewon Pharmaceutical Daewon Value Added Technology Added Value Large pharmas SMEs Biotech Diagnostics Medical devices Medical aesthetics

1Q17 sales growth (LHS) 1Q17 operating profit growth (LHS) Ytd share performance (RHS)

Note: * Based on Life Science division Source: QuantiWise, Samsung Securities

Healthcare

2017. 6. 15

Korean healthcare stocks rebounded after plunging more than 50% from their peaks in 2016 Company name Ticker Current price 2016 peak 52-week low 52-week low vs Current price vs 2016 peak (%) 52-week low (%) Tego Science 191420 54,400 79,100 28,750 (63.7) 89.2 Green Cross Holdings 005250 35,600 49,700 20,250 (59.3) 75.8 Kolon Life Science 102940 162,700 223,862 104,300 (53.4) 56.0 Cellumed 049180 8,390 36,700 5,380 (85.3) 55.9 CMG Pharmaceutical 058820 3,420 7,907 2,300 (70.9) 48.7 Seoul Pharm 018680 11,500 18,100 7,870 (56.5) 46.1 Young Jin Pharm 003520 10,150 17,500 6,960 (60.2) 45.8 Huons Global 084110 34,250 64,338 23,550 (63.4) 45.4 MG MED 180400 37,700 53,600 26,500 (50.6) 42.3 Qurient 115180 29,700 58,300 21,050 (63.9) 41.1 LegoChem Biosciences 141080 33,000 49,000 23,500 (52.0) 40.4 GL Pharm Tech 204840 2,930 9,200 2,100 (77.2) 39.5 InBody 041830 28,550 58,400 20,750 (64.5) 37.6 Hanmi Pharm 128940 364,000 732,204 266,043 (63.7) 36.8 Medipost 078160 67,800 102,600 49,850 (51.4) 36.0 Hanmi Science 008930 69,200 159,342 52,302 (67.2) 32.3 DNA Link 127120 4,535 15,850 3,430 (78.4) 32.2 Je Il Pharm 002620 70,100 137,000 53,800 (60.7) 30.3 BIT Computer 032850 5,820 9,400 4,480 (52.3) 29.9 EstechPharma 041910 11,100 30,400 8,580 (71.8) 29.4 Mekics 058110 6,050 11,700 4,715 (59.7) 28.3 Anterogen 065660 22,500 41,000 17,600 (57.1) 27.8 Peptron 087010 41,800 73,000 32,800 (55.1) 27.4 Oscotec 039200 7,250 13,000 5,700 (56.2) 27.2 Chong Kun Dang Holdings 001630 72,300 136,000 56,900 (58.2) 27.1 Pharma Research Products 214450 40,650 82,700 32,000 (61.3) 27.0 YuYu Pharma 000220 10,550 17,350 8,330 (52.0) 26.7 JW Holdings 096760 9,370 17,500 7,400 (57.7) 26.6 Donga Socio Holdings 000640 150,500 239,500 119,000 (50.3) 26.5 Dio 039840 34,700 59,700 27,500 (53.9) 26.2 Shin Poong Pharm 019170 6,260 11,550 4,975 (56.9) 25.8 Next BT 065170 2,005 3,985 1,615 (59.5) 24.1 Kyung Nam Pharm 053950 5,680 10,000 4,600 (54.0) 23.5 C-Tri 047920 5,720 11,050 4,650 (57.9) 23.0 BioLeaders 142760 5,880 21,200 4,785 (77.4) 22.9 ilShin Biobase 068330 2,510 4,250 2,050 (51.8) 22.4 Choa Pharm. 034940 4,900 8,100 4,015 (50.4) 22.0 HS Vital 204990 6,210 34,650 5,090 (85.3) 22.0 Donga ST 170900 98,000 175,000 80,600 (53.9) 21.6 Green Cross Lab Cell 144510 25,200 62,500 20,950 (66.5) 20.3 Dae Hwa Pharm 067080 23,250 48,000 19,350 (59.7) 20.2 Cosmax BTI 044820 34,350 78,400 28,600 (63.5) 20.1 Hanall Biopharma 009420 13,150 26,700 10,950 (59.0) 20.1 Bota Bio 026260 1,165 9,120 976 (89.3) 19.4 EyeGene 185490 9,740 27,750 8,160 (70.6) 19.4 Humedix 200670 32,350 68,446 27,200 (60.3) 18.9 JW Pharmaceutical 001060 49,000 92,105 41,300 (55.2) 18.6 JW Shinyak 067290 7,890 13,750 6,680 (51.4) 18.1 FutureChem 220100 9,270 36,650 7,850 (78.6) 18.1 Source: QuantiWise, Samsung Securities

Healthcare

2017. 6. 15

Contents 1H review: Poverty in the p2 midst of plenty Pharmaceutical market p7 outlook Visible progress to be made p32 on R&D and B2B fronts Government policy p52 warrants attention Pharmaceutical market outlook Key issues in 2H p68 Breakthrough-therapy approvals brighten outlook for global market Solid earnings momentum p87 in 2H Worldwide pharmaceutical sales outlook: EvaluatePharma has the global pharmaceutical Company p105 industry growing at a 2016-2022 CAGR of 6.3% to reach USD1.12t, with a new wave of innovative therapies approved by regulators over the last three years serving as the core engine. The market research firm expects the orphan drug market to almost double over the same period, expanding at an 11.5% CAGR to peak at USD217b in 2022, while generic sales should grow at a 6.2% CAGR to USD115b. R&D programs should increasingly be oriented towards narrower patient populations characterized by larger unmet need, limited market competition, and favorable environment to gain approvals. Yet, tightening of insurance-benefit rules and drug-pricing policies by the US administration and large pharmacy benefit managers (PBMs) warrant attention. Worldwide biologics sales outlook: The world’s chemical and biologic drug markets should continue to grow at CAGRs of 5.1% and 9.1%, respectively, through 2022 to reach USD827b and KRW337b. Biotech product penetration increased from 16.9% in 2008 to 24.6% in 2016, and it should hit 29% in 2022, when 50% of the value of the top-100 products comes from biologics (vs 30% in 2008 and 47% in 2016). Oncology should remain the fastest-growing therapy area, expanding at a 2016-2022 CAGR of 12.5% to reach USD190b in annual sales and represent 16.3% of the global pharmaceuticals market (vs 10.7% in 2015). Top player Roche should see its oncology sales grow 3.3% pa to USD32.2b over the same period, though its market share is likely to slide to 17% (vs 30.9% in 2015) due to the release of biosimilars (of Avastin, Herceptin, and Rituxan) after key patents expire. Anti-diabetes is forecast to be the second biggest therapy area, with sales of USD66.1b in 2022 (6.8% CAGR), accounting for 5.7% of the pharmaceuticals market (vs 5.4% in 2015). Sales of number-one anti-diabetes drug Lantus should shrink at a 2016-2022 CAGR of 11.8% to USD3b in 2022 on the advent of biosimilars after patent expiration. Accordingly, Sanofi’s anti-diabetes sales should slide 1.1% pa to USD7.7b in 2022, while its market share should tumble from 20% to 11.7%. Meanwhile, anti-rheumatics should remain a low-growth market, expanding just 1.6% pa to USD54.5b in 2022 due to price erosion caused by the entry of biosimilars. We expect sales of the blockbusters Humira, Enbrel, and Remicade to decline 0.7%, 3.2%, and 10.9% pa , respectively, to USD13.6b, USD7.2b, and KRW3.6b in 2022.

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2017. 6. 15

Global prescription drug market

(USDb)

1,200 2016-2022E CAGR: 6.3% 1,000 800 789 752 712 673 600 639 610 584 584 567 565 579 566 400 545 547 557

200 217 200 143 161 181 96 102 113 127 64 70 79 84 90 61 109 115 0 53 53 59 65 66 69 74 73 80 86 92 97 103 2008 2010 2012 2014 2016E 2018E 2020E 2022E

Generic Orphan Other prescription

Note: Industry sales based on top-500 pharmaceutical and biotech companies; sales to 2015 are company-reported data; sales forecasts based on a consensus of leading equity analysts Source: EvaluatePharma, Samsung Securities

Global sales at risk from patent expiration

(USDb) (%) 80 7 8 6 6 70 7 60 5 5 5 6 4 4 4 50 4 4 4 5 52 52 40 48 50 4 2 30 38 40 2 2 3 33 35 34 32 20 26 29 29 2 23 21 24 23 10 1612 10 9 20 17 19 16 20 1816 12 12 1 0 0 2008 2010 2012 2014 2016E 2018E 2020E 2022E

Total sales at risk (LHS) Expected sales lost (LHS) Percentage of market at risk (RHS)

Source: EvaluatePharma, Samsung Securities

Global pharmaceutical market: Biologics vs conventional drugs

(Portion out of total drug market, %) 100 83 83 82 82 90 80 78 77 76 75 74 73 80 73 72 72 71 70 Biologic drugs within top 100 60 Rapid increase in share of top 100 2022E spilt 30 products: 50 53 47 Biologic: n=46 (avg. USD3.8b) 50 50 70 - 2008: 30% Chemical: n=55 (avg. USD3b) 40 - 2015: 47% 30 - 2022E: 50% 20 26 27 27 28 29 29 10 22 23 24 25 17 17 18 18 20 0 2008 2010 2012 2014 2016E 2018E 2020E 2022E

Biologic Chemical/unclassified

Source: EvaluatePharma, Samsung Securities

Healthcare

2017. 6. 15

Top-10 therapy areas in 2022E: Market share and sales growth

2022E market share (%)

20 Key growth drivers: Opdivo (BMY), Revlimid (CELG), Keytruda 18 (MRK), Ibrance (PFE), Perjeta (Roche), Tecentriq (Roche) Key patent expiries: Oncology 16 Gleevec (Novartis, 2016), Rituxan (Roche, 2016+) Alimta (LLY, 2015+), Herceptin (Roche, 2014+) 14 Key growth drivers: Descovy (GILD), Genvoya (GILD) Bictegravir/F/TAF (GILD), 12 Tirumeq (GSK) Key growth brakes: 10 Harvoni (GILD), Sovaldi (GILD) Key contributors to CAGR growth: Truvada (GILD), Atripla (GSK) Stelara (JNJ); dupilumab (SAN) - expected 2017 global 8 launch; Broncho-dilators Ozanimod (CELG) - expected 2018 launch Anti-rheumatics 6 Anti- Anti- hyperlipidaemics diabetes Anti- Sensory organs 4 virals Vaccine Dematologicals

2 Anti-hypertensives Anti- Immunosuppressants Anti- Anti- fibrinolytics MS therapies bacterials coagulants 0 (4.0) (2.0) 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0

(2015-2022E sales growth CAGR, %)

Source: EvaluatePharma, Samsung Securities

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2017. 6. 15

Top-5 global oncology products in 2022E Rank Product Generic name Company Pharmacological Global sales (USDm) Global market Status class share (%) 2015 2022E CAGR (%) 2015 2022E Bristol-Myers Squibb, Anti-programmed 1 Opdivo Nivolumab 1,119 14,634 44.0 1.3 7.7 Marketed Ono Pharmaceutical death-1 (PD-1) MAb 2 Revlimid Lenalidomide Celgene Immunomodulator 5,801 13,024 12.0 7.0 6.9 Marketed Abbvie, Johnson & 3 Imbruvica Ibrutinib BTK inhibitor 1,299 7,287 28.0 1.6 3.8 Marketed Johnson+Pharmacyclics Anti-programmed 4 Keytruda Pembrolizumab Merck 566 5,959 40.0 0.7 3.1 Marketed death-1 (PD-1) MAb 5 Ibrance Palbociclib Pfizer CDK 4&6 inhibitor 723 5,709 34.0 0.9 3.0 Marketed Source: EvaluatePharma, Samsung Securities

Top-5 global anti-diabetes products in 2022E Rank Product Generic name Company Pharmacological Global sales (USDm) Global market Status class share (%) 2015 2022E CAGR (%) 2015 2022E Merck, Januvia/ Sitagliptin Ono Pharmaceutical, Dipeptidyl peptidase 1 6,333 5,913 (1.0) 15.2 9.0 Marketed Janumet phosphate Daewoong, Sigma-Tau, IV inhibitor Almirall Glucagon-like peptide 2 Victoza Liraglutide Novo Nordisk 2,682 4,133 6.4 6.4 6.3 Marketed 1 agonist Sodium-glucose 3 Jardiance Empagliflozin Boehringer Ingelheim cotransporter (SGLT-2) 118 3,932 65.0 0.3 6.0 Marketed inhibitor Sodium-glucose 4 Invokana Canagliflozin Johnson & Johnson cotransporter (SGLT-2) 1,308 3,314 14.2 3.1 5.0 Marketed inhibitor 5 NovoRapid Insulin aspart Novo Nordisk Insulin analogue 3,082 2,976 (0.5) 7.4 4.5 Marketed Source: EvaluatePharma, Samsung Securities

Top-5 global anti-rheumatism products in 2022E Rank Product Generic name Company Pharmacological Global sales (USDm) Global market Status class share (%) 2015 2022E CAGR (%) 2015 2022E 1 Humira Adalimumab Abbvie & Eisai Anti-TNF alpha MAb 14,359 13,645 (1.0) 29.4 25.0 Marketed 2 Enbrel Etanercept Pfizer & Amgen &Takeda Anti-TNF alpha MAb 9,037 7,177 (3.0) 18.5 13.2 Marketed Johnson & Johnson, Anti-TNF alpha MAb 3 Remicade Infliximab Merck, Mitsubishi 8,151 3,635 (11.0) 16.7 6.7 Marketed Tanabe Pharma Johnson & Johnson, Anti-TNF alpha MAb 4 Simponi Golimumab 2,018 3,139 7.0 4.1 5.8 Marketed Merck Phosphodiesterase 5 Otezla Apremilast Celgene 472 3,128 31.0 1.0 5.7 Marketed IV (PDE4) inhibitor Source: EvaluatePharma, Samsung Securities

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2017. 6. 15

Novartis and Roche to vie for top spot: EvaluatePharma forecasts that Roche’s sales will grow at a 2015-2022 CAGR of 4.5% to USD52.6b, its performance depending on sustained growth of Perjeta and Gazyva, the launch of PD-1 inhibitor Tecentriq, and the success of multiple sclerosis drug Ocrevus. Over the same period, Norvatis’ sales should expand at a 3.1% CAGR to USD52.5b, backed by robust sales of Entresto, Cosentyx, and ribociclib (LEE001). The two heavyweights should compete for leadership at least through 2022, but Roche’s higher exposure to biosimilars is worth considering. Meanwhile, Allergan should rank ninth in 2022 with sales of USD30.7b (7.6% CAGR), as Botox should be positioned as the 19th best-selling drug globally (with sales growing at an 8% CAGR to USD4.8b by 2022). the research firm expects Shire and Celgene to achieve the highest 2016-2022 sales CAGRs (18.9% and 15.9% respectively)—the former largely thanks to the acquisition of Baxalta, and the latter on sustained strength from Revlimid, and novel therapies Otezla and Pomalyst.

Global prescription drug sales in 2022E: Top-10 companies

(USDb) (%) 52.6 52.5 2022E sales 60 (+2) (+0) 49.1 (Ranking change, 2015-2022E) 20 (-2) 45.4 18 (+1) 50 39.8 39.2 16 (+2) (-2) 32.5 31.0 30.7 30.2 14 40 (+1) (+2) (+3) (-1) 12 30 10 8 20 8 6 3 2 10 2 4 5 4 4 4 4 2 0 3 0 Roche Novartis Pfizer Sanofi Johnson & Merck Glaxo AbbVie Allergan Astra Johnson SmithKline Zeneca

Global prescription sales (LHS) Global market share (RHS)

Source: EvaluatePharma, Samsung Securities

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2017. 6. 15

R&D productivity and breakthrough-therapy approvals improving: The world’s pharmaceutical R&D spending should grow at a 2015-2022 CAGR of 2.8% to USD182b, equivalent to 16.2% of 2022 sales. Record-high approvals—ie , of 56 new molecular entities (NMEs)—by the US FDA in 2015 testifies to the increasing productivity of the pharmaceutical pipeline. R&D spending per innovative drug hit a 10-year low of USD2.7b in 2015. Furthermore, total US sales of all drugs in their fifth year in 2015 amounted to an all-time high of USD32.4b, evidence of a rise in the number of breakthrough therapies. Ocrevus to be a blockbuster: Roche’s multiple sclerosis drug Ocrevus (ocrelizumab) is at the head of EvaluatePharma’s list of the top-20 most valuable R&D projects, with a net present value (NPV) of USD17b and 2022 sales projected at close to USD4b. Next on the list is Dupilumab (Sanofi/Regeneron’s novel therapy for atopic dermatitis), with 2022 sales forecast at USD3.7b and an estimated NPV of USD12.9b. EvaluatePharma estimates that Amgen’s Humira biosimilar ABP501 will generate sales of USD810m in 2022. It estimates its NPV at USD6.3b.

Global pharmaceutical R&D spending

(USDb) (% y-y) 2015-2022E CAGR: 2.7% 200 16 180 2008-2015 CAGR: 1.7% 14 182.0 160 172.3 177.0 12 163.4 167.5 140 153.8 159.0 10 143.1 149.8 120 132.9 137.5 136.5 138.2 8 129.0 130.1 4.7 100 3.6 6 3.4 2.8 2.9 2.8 80 2.6 2.5 2.7 4 0.9 1.2 5.7 60 (0.7) 2 40 0 (3.0) 20 (2) 0 (4) 2008 2010 2012 2014 2016E 2018E 2020E 2022E

Pharma R&D spending (LHS) Growth (RHS)

Source: EvaluatePharma, Samsung Securities

US FDA approval count vs total US sales of drugs in their fifth year

(USDb) (Number of new drugs) 56 35 60 50 30 43 50 38 25 35 35 35 32 34 40 29 31 20 26 28 26 26 30 15 20 10 5 10 8.5 12.7 8.3 14.1 6.4 9.2 4.3 5.6 5.4 13.5 11.4 13.6 16.0 27.1 32.4 0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

US sales 5-years post launch (LHS) Number of drugs approved (RHS)

Source: EvaluatePharma, Samsung Securities

Healthcare

2017. 6. 15

Top-20 most valuable R&D projects (ranked by net present value ) Rank Product Company Phase Pharmacological class Global sales New Net present (current) in 2022E entry? value ** (USDm) (USDm) 1 Ocrevus Roche Filed Anti-CD20 MAb 3,962 New entry 16,965 2 Dupilumab Sanofi Phase III Anti-interleukin-4 (IL-4) & interleukin-13 (IL-13) MAb 3,725 12,884 Sphingosine-1-phosphate (S1P) 1 & 5 receptor 3 Ozanimod Celgene Phase III 2,112 9,458 modulator 4 Durvalumab AstraZeneca Phase III Anti-programmed death-1 ligand1 (PD-L1) MAb 1,673 8,276 5 Abemaciclib Eli Lilly Phase III Cyclin-dependent kinase (CDK) 4 & 6 inhibitor 1,619 New entry 7,919** 6 Veliparib AbbVie Phase III Poly (ADP-ribose) polymerase (PARP) inhibitor 1,714 New entry 7,502 7 Semaglutide Novo Nordisk Phase III Glucagon-like peptide 1 (GLP-1) agonist 2,356 New entry 6,889 8 Aducanumab Biogen Phase III Anti-beta-amyloid (Abeta) MAb 939 New entry 6,889 9 LEE011 Novartis Phase III Cyclin-dependent kinase (CDK) 4 & 6 inhibitor 1,410 New entry 6,370 10 Emicizumab Roche Phase III Anti-factor IXa/X bispecific MAb 1,765 New entry 6,336 11 ABP501 Amgen Filed Anti-tumor necrosis factor alpha (TNFa) MAb 810 New entry 6,273 12 Lanadelumab Shire Phase III Anti-plasma kallikrein MAb 1,064 New entry 5,915 13 Solanezumab Eli Lilly Phase III Anti-beta-amyloid (Abeta) MAb 1,556 5,577** 14 Fovista Ophthotech Phase III Anti-platelet derived growth factor (PDGF)-B aptamer 1,973 5514* Johnson & 15 Apalutamide Phase III Anti-androgen 1,160 New entry 5,366 Johnson Bictegravir/ Gilead Nucleoside reverse transcriptase inhibitor (NRTI) & 16 Phase III 3,489 New entry 5,276 F/TAF Sciences HIV integrase inhibitor 17 Verubecestat Merck Phase III Beta secretase cleaving enzyme (BACE) 1 inhibitor 1,480 New entry 5,219** Juno Anti-CD19 chimeric antigen receptor (CAR) T cell 18 JCAR017 Phase II 1,086 New entry 4,836 Therapeutics therapy 19 Mongersen Celgene Phase III Smad7 mRNA antisense 1,205 New entry 4,719 Johnson & 20 Sirukumab Phase III Anti-interleukin-6 (IL-6) MAb 1,134 New entry 4,708 Johnson Top 20 36,232 142,893 Other 133,225 394,980 Total 169,457 537,873 Net present value of R&D projects May 2015 492,827 Change (%) 9.1 Note: * Fovista figures assume best-case scenario and do not full reflect development risk ** As of Aug 19, 2016 Forecasts for Abemaciclib, Solanezumab, and Verubecestat may have been adjusted downward due to recent announcements that those drugs failed in clinical trials Source: EvaluatePharma, Samsung Securities

Healthcare

2017. 6. 15

Biosimilar market outlook bright—Multiple biologics to go off patent over 2016-2022 USD249b of sales at risk over 2016-2022: With USD249b of sales at risk over 2016-2022, EvaluatePharma says that the pharmaceutical industry is on the brink of a second patent cliff that will usher in an era of biosimilars challenging top biologics. Sales of the most popular biologics (eg , Humira, Enbrel, Remicade, Lantus, Rituxan, Avastin, and Herceptin) seem destined to slide. The London-based consulting firm contends that some analysts are too conservative in their forecasts of the impact that upcoming biosimilars will have. Implications of biosimilar competition: IMS Health has studied the effects of biosimilars— specifically, epoetin (EPO), granulocyte colony-stimulating factor (G-CSF), human growth hormone (hGH), and anti-tumor necrosis factor (anti-TNF)—on price, volume, and market share in Europe. The data show that in some countries, prices of some original drugs fell by almost 70% after the release of biosimilars. Even in cases where biosimilars were less competitive, their existence was an essential step to generating a more competitive environment, which drove down prices of original biologics. The correlation between a biosimilar’s market share and price was weak. Competition also influenced the behavior of originators, encouraging them to: 1) reduce prices sufficiently to protect market share; 2) manufacture their own biosimilars; or 3) develop competitive bio-betters. In countries where biologics usage/availability was once low, price cuts appear to have had a significant impact on access.

Price* change: 2015 vs one year before biosimilar entrance (%) 0 (5) (4) (10) (8) (8) (15) (13) (13) (20) (19) (25) (23) (30) (26) (35) (32) (32) (33) (34) (40) EPO G-CSF hGH Anti-TNF

Biosimilar and reference product Accessible market Total market

Note: * Per treatment day Accessible market = products within the same ATC4 code Total market = both the accessible and non-accessible markets Source: IMS Health, Samsung Securities

Healthcare

2017. 6. 15

Price* change, by country: 2015 vs one year before biosimilar entrance (%) Portugal Slovakia Poland Bulgaria Slovenia Finland Sweden Denmark EPO (61) (52) (49) G-CSF (59) (58) (50) hGH (31) (47) (47) Anti-TNF (19) (21) (15) Note: * Per treatment day Based on both the accessible and non-accessible markets Source: IMS Health, Samsung Securities

Price* change** vs biosimilar market share EPO hGH

Change in price per treatment day (%) Change in price per treatement day (%) 20 20

0 0 (20) (20) (40)

(40) (60)

(80) (60) 0 20 40 60 80 0 20 40 60 80 (2015 biosimilar market share, %) (2015 biosimilar market share, %)

G-CSF Anti-TNF

Change in price per treatment day (%) Change in price per treatment day (%)

0 20

(20) 0

(40)

(20) (60)

(80) (40) 0 20 40 60 80 0 20 40 60 80 (2015 biosimilar market share, %) (2015 biosimilar market share, %)

Note: * Per treatment day ** 2015 vs one year before biosimilar entrance Source: IMS Health, Samsung Securities

Healthcare

2017. 6. 15

Impact of lower prices on patient access in countries with low initial usage (%) Change* in Treatment days per Change* in Note price per capita (year before volume sales treatment day biosimilar entrance) per treatment day EPO Romania (36) 0.036 460 Low Bulgaria (46) 0.125 120 historical Poland (49) 0.027 186 usage Ireland (18) 0.523 (32) High Austria (36) 0.942 (28) historical Germany (45) 0.412 (25) usage hGH Romania (27) 0.024 177 Czech Republic (20) 0.060 54 Poland (47) 0.043 78 G-CSF Romania (48) 0.004 498 Bulgaria (58) 0.001 1,016 Slovakia (59) 0.004 371 Anti-TNF Bulgaria (19) 0.099 131 Czech Republic (12) 0.232 53 Slovakia (8) 0.492 78 Note: * 2015 vs one year before biosimilar entrance Source: IMS Health, Samsung Securities

Anti-TNF drug prescription outlook (volume-based)

Note: TD (treatment day) Source: IMS Health, Samsung Securities

Healthcare

2017. 6. 15

EMA-approved anti-TNF alpha drugs: Indications Indication Humira Remicade Remsima Inflectra Enbrel Benepali Simponi Cimzia Rheumatoid arthritis V V V V V V V V Juvenile idiopathic arthritis V V Psoriatic arthritis V V V V V V V V Ankylosing spondylitis (AS) V V V V V V V V Axial spondyloarthritis without radiographic evidence of AS V V V V V Crohn’s disease V V V V Pediatric Crohn’s disease V V V V Ulcerative colitis V V V V V Paediatric ulcerative colitis V V V Psoriasis V V V V V V Paediatric plaque psoriasis V V Hidradenitis suppurativa V Source: IMS Health, Samsung Securities

EMA-approved anti-TNF drugs: Administration information Generic name Product Classification Frequency Injection method Reference Biosimilar Non-reference Non-accessible Subcutaneous Intravenous Remicade V Every 8 weeks V Infliximab Remsima V Every 8 weeks V Inflectra V Every 8 weeks V Enbrel V Once or twice a week V Etanercept Benepali V Once a week V Adalimumab Humira V Twice a week V Certolizumab pegol Cimzia V Every 4 weeks Golimumab Simponi V Monthly V Source: IMS Health, Samsung Securities

Healthcare

2017. 6. 15

Infliximab: Volume and price change in Europe after biosimilar launch (%) Biosimilar market Change* in price per Change* in volume per Treatment First year share in 2015 treatment day treatment day day s biosimilar per recorded capita sales Vs Vs Vs Vs Vs Vs Vs Vs Vs reference accessible total reference accessible total reference accessible total product market market product market market product market market Austria 3 3 2 (1) (1) (3) 43 43 41 0.19 2015 Belgium 1 1 0 (14) (14) (7) 23 23 21 1.05 2015 Bulgaria 100 100 16 (50) (50) (19) 96,660 96,660 131 0.23 2014 Czech Republic 21 21 11 (16) (16) (12) 56 56 53 0.35 2014 Denmark** 68 68 32 (29) (29) (15) 23 23 12 1.02 2015 Finland 32 32 12 (10) (10) (9) 33 33 38 0.88 2013 France 4 4 2 (10) (10) (7) 20 20 24 0.70 2015 Germany 10 10 3 (4) (4) (2) 23 23 25 0.56 2015 Greece** 0.01 Hungary 25 25 7 (7) (7) 1 (5) (5) 14 0.36 2014 Ireland 4 4 1 (1) (1) (2) 46 46 30 1.31 2014 Italy 11 11 3 (1) (1) 1 6 6 13 0.37 2015 Netherlands** 13 13 5 (3) (3) 0 4 4 3 1.03 2015 Norway 68 68 29 (48) (48) (14) 51 51 28 1.52 2013 Poland 78 78 15 (38) (38) (3) (18) (18) 16 0.04 2014 Portugal** 15 15 6 (20) (20) (8) 33 33 27 0.37 2013 Romania 11 11 4 (12) (12) (10) (15) (15) 7 0.21 2014 Slovakia 9 9 5 (6) (6) (8) 95 95 78 0.88 2014 Slovenia 3 3 1 (18) (18) (9) 33 33 34 0.57 2015 Spain 13 13 5 (2) (2) 0 9 9 18 0.55 2015 Sweden 8 8 2 (10) (10) (21) 14 14 48 1.29 2015 United Kingdom 9 9 3 0 0 0 26 26 22 0.69 2015 Europe 13 13 5 (8) (8) (4) 20 20 23 0.56 Note: * 2015 vs one year before biosimilar entrance ** Netherlands (2009-2015); Denmark (2007-2015); Portugal (2010-2015); Greece, only retail panel available Source: IMS Health, Samsung Securities

Healthcare

2017. 6. 15

Korea’s pharmaceutical market outlook solid Korea’s pharmaceutical sales outlook: According to IMS Health, Korea’s pharmaceutical market should grow at a 2017-2021 CAGR of 4.4% to KRW18.58t—around twice stronger the country’s estimated annual GDP growth of 2.3% over the same period. Cancer therapy and immunomodulators should achieve the highest growth, averaging 8.5% pa , while anti-diabetes and digestive-system medicines should also outpace the market’s growth, averaging 5.2% pa . Meanwhile, sales of systemic anti-infective materials are projected fall sharply as sales of hepatitis C treatments weaken. Growth via population aging, chronic disease, wider coverage for four big diseases: The market expansion will be driven by population aging, according to IMS Health. In 2016, the elderly—ie , those aged 65 and above—accounted for only 13% of people covered by the National Health Insurance Service (NHIS), but their medical costs accounted for 39% (KRW25.2t) of the NHIS total. The life expectancy of Korean females born in 2030 should be 90 years, up from 85.2 years in 2015, while males born in 2030 should have a life expectancy of 84.1 years (vs 79 years in 2015). The country’s medical costs should surge over 2017-2021 as: 1) more people are developing chronic diseases due to societal aging; and 2) national health insurance coverage is expanding for four major diseases—ie , cancers, rare diseases, cardiovascular diseases, and cerebrovascular diseases. The government plans to improve the frameworks for drug prices and health insurance to support the bio industry. Generics to continue to lead market growth in Korea: IMS Health says that generics represented 32% of Korea’s pharmaceutical market in 2016, and that figure should barely budge through 2021, edging down just 0.1%pts. Meanwhile, the developed-market average should climb 1.1%pts to 16.8% over the same period. Why will market share stagnate in Korea? Because penetration is already high, and prices are almost on par with those of off-patent drugs, which serves to discourage substitution with generics. Meanwhile, original drugs accounted for 45.2% of 2016 sales in Korea, around half of which came from off-patent drugs; original drugs made up 73.8% of sales in developed markets, while off-patent drugs accounted for around just 20%. Biologics exports to keep growing strongly: According to Korea’s Ministry of Food and Drug Safety, the pharmaceutical market grew 3.4% y-y to KRW17t in 2015, with exports leaping 31.1% y-y to KRW3.3t and imports rising 1.9% y-y to KRW5.6t for a trade deficit of KRW2.3t. In the same year, biologics production rose 2.3% y-y to KRW1.72t. Biologics exports leapt 47.7% y-y to KRW915.7b while imports shrank 9.5% y-y to KRW835.3b, turning Korea to a trade surplus of KRW80.4b. Biologics exports have accelerated, led by solid biosimilar exports, and this trend should continue as multiple biosimilar are commercialized and exports by bio-CMO firms increase. Chaebols ’ pharmaceutical arms to thrive: Chaebols have also entered the pharmaceutical market—eg , CJ Healthcare was established in 1984; SK Chemicals (formerly SK Pharma) in 1998; Isu Abxis in 2001; LG Life Sciences in 2002; SK Biopharmaceuticals (spun off) and Samsung Biologics in 2011; Samsung Bioepis in 2012; and SK Biotek (spun off) in 2015. These chaebol arms are now emerging as growth drivers of Korea’s pharmaceutical market and, notably, enjoying rapid earnings improvements. The combined sales of LG Life Sciences, CJ Healthcare, SK Chemicals, Samsung Biologics, SK Biotek, and Isu Abxis leapt 27% y-y to KRW1.795t in 2016, and the group turned y-y to a combined operating profit of KRW110.7b. We expect those companies to enjoy sustained growth as their investments start to bear fruit.

Healthcare

2017. 6. 15

Korean pharmaceutical market outlook

(KRWt) (% y-y)

20 16

16 12 8 12 4 8 0

4 (4)

0 (8) 2007 2009 2011 2013 2015 2017E 2019E 2021E

Historical/baseline (LHS) Forecast (LHS) Growth (RHS)

Source: IMS Health, Samsung Securities

Generic drugs’ market share in major countries/regions Country Category Market share (%) 2016 2021E Major developed countries* Original 73.8 73.7 Generic 15.7 16.8 Others 10.5 9.5 US Original 76.7 77.2 Generic 16.0 16.1 Others 7.4 6.7 EU5** Original 66.8 65.3 Generic 17.8 19.9 Others 15.4 14.8 Korea Original 45.2 46.4 Generic 32.0 31.9 Others 22.9 21.7 Note: * UK, Germany, France, Italy, Spain, US, Japan ** UK, Germany, France, Italy, Spain Source: IMS Health, Samsung Securities

NHIS: Medical costs paid for the elderly Category 2010 2011 2012 2013 2014 2015 2016 Growth (% y-y) Number of days in or visiting hospital (million) 907 926 952 969 990 990 1,022 3.2 Aged below 65 667 674 683 682 686 678 694 2.4 Aged 65 and over 239 252 269 287 302 312 327 4.9 Portion (%) 26.4 27.2 28.3 29.6 30.6 31.5 32.0 Medical costs (KRWb) 44 46 48 51 54 58 65 11.4 Aged below 65 30 31 31 33 35 36 40 9.4 Aged 65 and over 14 15 16 18 20 22 25 14.8 Portion (%) 32.2 33.1 34.2 35.4 36.3 37.6 38.7 Medical costs per day in hospital (KRW) 48,125 49,928 50,262 52,596 55,004 58,545 63,213 8.0 Aged below 65 44,328 45,901 46,138 48,231 50,426 53,334 56,976 6.8 Aged 65 and over 58,710 60,713 60,719 62,980 65,306 69,859 76,446 9.4 Source: National Health Insurance Service, Samsung Securities

Healthcare

2017. 6. 15

Korean pharmaceutical industry: Exports and imports Korean biologics industry: Exports and imports

(KRWt) (KRWb)

20 2,000 1,500 15 1,000 10 500 5 0 0 (500)

(5) (1,000) 2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015

Pharmaceutical production Pharmaceutical exports Biologic production Biologic exports Pharmaceutical imports Pharmaceutical trade balance Biologic imports Biologic trade balance

Source: Ministry of Food and Drug Safety, Samsung Securities Source: Ministry of Food and Drug Safety, Samsung Securities

Major chaebol : Pharmaceutical/biotech sales Major chaebol : Pharmaceutical/biotech operating profit

(KRWb) (KRWb) 2,000 200

1,500 100 0 1,000 (100)

500 (200)

0 (300) 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016

LG Life Science CJ Healthcare* LG Life Science CJ Healthcare* SK Chemicals** Samsung Biologics SK Chemicals** Samsung Biologics SK Biotek Isu Abxis SK Biotek Isu Abxis

Note: * Based on CJ CheilJedang’s pharmaceutical division over 2011-2014 Note: * Based on CJ CheilJedang’s pharmaceutical division over 2011-2014 ** Based on Life Science division ** Based on Life Science division Source: Company data, Samsung Securities Source: Company data, Samsung Securities

Healthcare

2017. 6. 15

Sea change for Korea’s healthcare industry over 2012-2017

Korean players burst onto global scene via tie-ups with multinationals Korea a rising star: Korea has emerged as a key player in the global healthcare ecosystem, with many Korean pharmaceutical firms signing a slew of partnership contracts with multinationals over the past five years—a stark departure from the past, when the country’s presence on the global scene was low. Korean companies are: 1) providing multiple candidates for original drugs to global firms; 2) standing at the forefront of the world’s biosimilar market and Asia’s medical aesthetics market; and 3) positioning themselves as production bases for biologics and chemical drugs. Turning its gaze overseas, the Korean healthcare sector, which accounts for just 2% of the world’s healthcare market, should enjoy export-driven earnings momentum.

Korean healthcare firms in the global healthcare ecosystem

Source: Samsung Securities

Healthcare

2017. 6. 15

Korean players out-license new drug candidates: To date, the US FDA has approved the following Korean-made pharmaceuticals: 1) original chemical drugs by LG Life Sciences (Factive, 2003) and Donga ST (Sivextro, 2014); and 2) Afstyla biologics by SK Chemicals (2016). Most Korean players out-license new drug candidates they discover, because: 1) the have limited capital for R&D; 2) they lack experience in carrying out global clinical development; 3) they are unsure of the process of gaining approval and handling health insurance providers and related authorities in developed countries; or 4) they are weak on the marketing front. Donga ST in 2007 out-licensed Sivextro to Trius Therapeutics, which was later acquired by Merck, which went on to commercialize the drug. SK Chemicals’ Afstyla also hit the shelves after an out-licensing contract with CSL (Australia) in 2010. Out-licensing contracts signed over 2013-2016: Medytox in Sep 2013 out-licensed Innotox, the world’s first liquid botulinum toxin (BTX; a bio-better) to Allergan for USD362m. It granted Allergan exclusive development and sales rights worldwide (save Korea and Japan). Over 2015-2016, Hanmi Pharmaceutical agreed to export its technology for autoimmune therapy HM71224 to Eli Lilly (in a deal worth USD690m), the Quantum Project (diabetes drugs) to Sanofi, diabetes and obesity treatments HM12525A and JNJ-64565111 to Johnson & Johnson (USD9150m), and anti-cancer RAF kinase inhibitor HM95573 to Genentech (USD910m). Kolon Life Science out-licensed Invossa, the world’s first allogeneic cell therapy for degenerative arthritis, to Mitsubishi Tanabe for JPY45.7b in 2016. Donga ST in Dec 2016 said it had out-licensed DA-4501, a cancer immunotherapy candidate targeting Mer TK, to AbbVie Biotechnology in a deal worth up to USD525m.

Healthcare

2017. 6. 15

Korean pharmaceutical and biologics players’ alliances Date Exporter Importer Code/product Category Contract value Remarks Cancelled in 2002, LGLS May 1997 LG Life Sciences GSK Factive Antibiotics Total: USD40.5m launched the product by itself Pacific Total: USD107.25m Feb 2004 Schwarz PAC200030 Pain killer Stopped development Pharmaceuticals Upfront fees: USD3.25m Bukwang Clevudine Hepatitis Total: USD30m Clinical trials stopped; Jun 2005 Pharmasset Pharmaceutical (Levovir) B treatment Upfront fees: USD6m contract cancelled Ilyang Ilaprazole Total: USD44m Phase III clinical trials Sep 2005 TAP Antiulcer drugs Pharmaceutical (Noltec) Upfront fees: USD3.5m in US stopped Donga Total: USD17.2m Feb 2007 Trius Sivextro Antibiotics Launched globally Pharmaceutical Royalties: 5-7% Liver disease Total: USD200m Nov 2007 LG Life Sciences Gilead Science LB84451 Phase II clinical trials stopped treatment Upfront fees: USD20m Udenafil Erectile dysfunction Dec 2008 Mezzion Warner Chilcott Total: USD69m Cancelled (Zydena) treatment NBP601 Jun 2009 SK Chemicals CSL Hemophilia treatment n/a Launched globally (Afstyla) Cephalosporin Total: USD140m Dec 2012 Legochem Bio AstraZeneca n/a Cancelled antibiotics Upfront fees: USD2.45m Total: USD362m To start global Phase Sep 2013 Medytox Allergan Innotox Botulinum toxin Upfront fees: USD65m III clinical trials in 2H17 Gene therapy Developed anti-sense gene Oct 2014 Olipass BMS PNA platform n/a platform therapy (utilizing PNA platform) Total: USD690m Mar 2015 Hanmi Pharm Eli Lilly HM71224 BTK inhibitor On Phase ll global clinical trials Upfront fees: USD50m Boehringer Molecular-targeted Total: USD730m Jul 2015 Hanmi Pharm HM61713 Cancelled Ingelheim cancer therapy Upfront fees: USD50m ADC Molecular-targeted Signed exclusive out-licensing Aug 2015 Legochem Bio Fosun Total: KRW20.8b technology cancer therapy deal for China ADC Molecular-targeted Signed exclusive out-licensing Oct 2015 Alteogen 3S Bio n/a technology cancer therapy deal for China 3 types Total: KRW115 Signed exclusive out-licensing Oct 2015 Genexine Tasly Fc-fusion protein (incl. GX-H9) Upfront fees: KRW23b deal for China Quantum Long-acting diabetes Total: EUR3.9b To start Phase III global clinical Nov 2015 Hanmi Pharm Sanofi project treatment Upfront fees: EUR400m trials in 2H17 Johnson & Diabetes/obesity Total: USD920m To start Phase II global clinical Nov 2015 Hanmi Pharm HM12525A Johnson treatment Upfront fees: USD110m trials in 2H17 Molecular-targeted Total: USD92m Signed exclusive out-licensing Nov 2015 Hanmi Pharm ZAI Lab HM61713 cancer therapy Upfront fees: USD7m deal for China Signed exclusive out-licensing Jan 2016 Chong Kun Dang Fuji Pharma CKD-11101 Nesp biosimilar n/a deal for Japan Total: USD44.5m Signed exclusive out-licensing Feb 2016 Genexine Fosun GX-E2 Anemia treatment Upfront fees: USD2m deal for China Ishin ALLO-ASC Diabetic foot ulcer Total: USD75m Signed exclusive out-licensing Feb 2016 Anterogen Pharmaceutical -sheet treatment Upfront: USD1m deal for Japan and Taiwan Signed an out-licensing deal Tobira Apr 2016 Donga ST DA-1229 NASH treatment Total: USD61.50m exclusively for North America, Therapeutics Europe and Australia Aptose Acute myeloid Total: KRW352.4b, Signed exclusive out-licensing Jun 2016 Crystal Genomics CG026806 Biosciences leukemia treatment Upfront: KRW1.16b deal for Japan and Taiwan Molecular-targeted Signed exclusive out-licensing Total: USD120m Jul 2016 Yuhan Luoxin YH25448 cancer therapy deal for China, Hong Kong, Upfront: USD6m for NSCLC and Macao Signed exclusive out-licensing Ilyang Sep 2016 R-Pharm Noltec Antiulcer drugs Total: USd200m deal for Russia, Armenia, Pharmaceutical and Belarus Molecular-targeted Total: USD910m Sep 2016 Hanmi Pharm Genentech HM95573 Phase l in Korea (in progress) cancer therapy Upfront: USD80m Kolon Life Mitsubishi Tanabe Degenerative arthritis Total: KRW500b Signed exclusive out-licensing Nov 2016 Invossa Science Pharma treatment Upfront fees: KRW27.3b deal for Japan Abbvie Immuno-oncology Total: USD525m Still in drug candidate discovery Dec 2016 Donga ST DA-4501 Biotechnology therapy Upfront fees: USD40m phase Source: Local press, Company data, Samsung Securities

Healthcare

2017. 6. 15

Korean biosimilar developers leading the way Biologics turn to trade surplus for first time in 2015: Korea’s pharmaceutical market shrank a touch in 2015, creeping down 0.7% y-y to KRW19.1b, with production, exports, and imports up 3.4%, 31.1%, and 1.9% y-y, respectively, to KRW17t, KRW3.3t, and KRW5.6t. Meanwhile, Korea’s biologics market contracted a sharp 17.3% y-y to KRW1.64t, with production and exports rising 2.3% and 47.7% y-y, respectively, to KRW1.72t and KRW815.7b, and imports falling 9.5% y-y to KRW835.3b. The biologics market accounted for 8.5% of the nation’s pharmaceutical market (down 1.7%pts y-y), while biologics production, exports, and imports represented a respective 10.1%, 27.5% and 14.9% (down 0.1%pts, up 3.1%pts, and down 1.9%pts y-y). The nation’s biologics industry suffered a trade deficits before turning to its first-ever surplus in 2015. Backed by solid growth in biologics exports, the pharmaceutical trade deficit also declined rapidly. Korea’s biosimilar exports to top KRW1t in 2017: Korea’s combined biosimilar exports climbed 112.3% y-y to KRW905.2b in 2016, which figure includes consolidated sales from Celltrion Healthcare (up 88.3% y-y to KRW757.7b) and Samsung Bioepis (up 517% y-y to KRW147.5b). According to PR Newswire, Celltrion Healthcare’s Remsima (a Remicade biosimilar) and Samsung Bioepis’ Benepali (an Enbrel biosimilar) boast volume-based market shares of 40% and 25%, respectively, in Europe. Celltrion’s partner, Pfizer, announced that 1Q sales of Remsima leapt 116.7% y-y to USD78m. Remsima is called Inflectra in the US. Samsung Bioepis’s partner, Biogen, said 1Q sales of Benepali skyrocketed 3,200% y-y to USD66m. Celltrion Healthcare launched Inflectra in the US on Dec 5, 2016 and plan to release Rituxan biosimilar Truxima in Europe soon. Samsung Bioepis is planning a US launch for Remicade biosimilar Flixabi (Renflexis in Korea) and an European launch for Lantus biosimilar Lusduna. Accordingly, Korea’s biosimilar exports (including those of Celltrion Healthcare and Samsung Bioepis) should exceed KRW1t in 2017.

Healthcare

2017. 6. 15

Pfizer (Hospira): Remsima/Inflectra quarterly sales Biogen: Benepali quarterly sales

(USDm) (USDm)

90 70 65.3 78 80 60 52.7 70 61 50 60 55 50 40 40 30.7 40 36 30 30 30 20 15.4 20 10 10 1.8 0 0 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 1Q16 2Q16 3Q16 4Q16 1Q17

Note: Pfizer (Hospira) has exclusive marketing rights for Remsima/ Source: Company data, Samsung Securities Inflectra in the US and some parts of Europe Source: Company data, Samsung Securities

Remsima/Inflectra: Market share in Europe Benepali: Market share in Europe

Benepali: Remsima/ 25% Inflectra: 40%

Remicade: 60% Enbrel: 75%

Note: Volume-based Note: Volume-based Source: PR Newswire, Samsung Securities Source: PR Newswire, Samsung Securities

Celltrion Healthcare and Samsung Bioepis: Annual sales

(KRWb)

1,000 147 900 800 700 600 500 24 400 758 300 76 200 44 402 100 34 145 165 0 2012 2013 2014 2015 2016

Celltrion Healthcare Samsung Bioepis

Source: Company data, Samsung Securities

Healthcare

2017. 6. 15

Korean medical-aesthetic firms penetrate global BTX and filler markets Korean filler products dominant in China: The Chinese filler market was sized at an estimated USD330m (up 65% y-y) in 2016. In the rapidly-growing market, Korean filler products have taken firm root. LG Chem’s Yvoire sales in China hit USD37b (up 146.7% y-y) in 2016, which is in the same ballpark as sales at major Chinese firms Bloomage Biotech (KRW51.6b; up 21.1% y-y) and Shanghai Haohai (KRW32.8b; up 115% y-y). In sum, Yvoire sales in China grew more quickly than sales of competing Chinese products. Meanwhile, Hugel’s and Medytox’s combined filler sales (typically generated through parallel imports to China) leapt 102.9% to KRW107.6b in 2016, far outstripping sales growth of Yvoire. In 1Q17, when the THAAD issue came to a head, LG Chem, Medytox, and Hugel saw 1Q filler sales of KRW17b (up 77.1% y-y), KRW17.7b (up 31.5% y-y), and KRW15.5b (up 60% y-y), respectively. Such strong growth for 1Q eased concerns over slowdowns in top-line growth at those firms. We attribute the strength of Korean filler products in Asia to: 1) superior pricing power compared to US and European products; and 2) high brand equity based on the increasing global popularity of South Korean culture (commonly known as the Korean wave). EM-bound BTX export growth solid: Korea’s BTX exports have grown explosively, led by Hugel and Medytox, whose combined BTX sales rose 61.3% y-y to KRW126.1b in 2016 and 99.5% y-y to KRW44.7b in 1Q17 thanks to strength in Southeast Asia, China, Latin America, and East Europe. Korea’s customs-cleared BTX exports surged 116.2% y-y to USD7.99m in April, indicating that Korea’s BTX export growth will remain solid y-y in 2Q. Considering that Allegan and Ipsen’s BTX sales rose 12% and 35.8% y-y, respectively, in 1Q17, it is obvious that Korean firms’ market-share gains are accelerating-led by strong growth of the global market and solid pricing and brand power.

Korean BTX product sales* Korean dermal filler product sales*

(KRWb) (KRWb)

50 60 44.7 49.1 50.2 39.1 50 45.6 40 35.6 38.1 40 29.1 30 31.7 32.8 22.4 22.4 30 24.8 20.5 19.7 20.3 20 15.6 20 13.2 10 10

0 0 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17

Note: * Sum of Hugel’s and Medytox’s BTX product sales Note: * Sum of Hugel’s, Medytox’s, and LG Chemical’s (LG Life Sciences) Source: Company data, Samsung Securities dermal filler product sales Source: Company data, Samsung Securities

Healthcare

2017. 6. 15

Korean firms to lead global biologics CMO and chemical-drug CMS markets Global market for contracted manufacturing growing: The global market for chemical- drug contract manufacturing services (CMS) is projected to grow at a 2015-2020 CAGR of 6.3% to USD84b as pharmaceutical firms increasing outsource manufacturing as they strive to improve cost competitiveness and amid rising demand for selective manufacturing technology. The global market for biologics contract manufacturing organizations (CMOs) should grow at a 2015-2025 CAGR of 15.1% to USD30.3b given the needs for capacity management, cost savings, risk control, rapid production, and efficient use of resources. Korea potentially home to a global top-ten CMS and the top CMO: SK Biotek entered the CMS business in 1998 and was incorporated as an SK Group subsidiary in 2016 after being spun off from SK Biopharmaceuticals in 2015. SK Biotek has accumulated a wide range of experience and knowhow thanks to its group’s five decades of operating refineries and petrochemicals facilities. Of note is the firm’s ability to meet customer demand for high-tech manufacturing, backed by its world- class technology in continuous organic synthesis and systems that enable it to make over 50 types of chemical synthesis technology. The firm’s factory in Daeduk has an annual production capacity of 158m cubic meters, while its factory in Sejong will open this year with a capacity of 318m cubic meters, and this latter should rise to 798 m in 2020. Meanwhile, Samsung Biologics is Samsung Group’s biotech holding company established in 2011 as a subsidiary of Samsung C&T and Samsung Electronics. Samsung Biologics is expanding capacity efficiently by leveraging the group’s: 1) competitiveness in design, engineering, procurement, construction, and validation (DEPC-V); and 2) ability to construct plant and install equipment concurrently (based on its experience in the semiconductor industry). Swiss firm Lonza currently has the world’s largest bio-CMO capacity at 259,000 liters, followed by Boehringer Ingelheim’s 241,000 liters and Samsung Biologics’ 182,000 liters. By 2018, however, Samsung Biologics should top the list with 362,000 liters of capacity, followed by Boehringer Ingelheim’s 319,000 liters and Lonza’s 265,000 liters. SK Biotek and Samsung Biologics pursuing ambitious 2020 targets: SK Biotek in 2016 posted sales of KRW97.1b (up 52.5% y-y) and an operating profit of KRW28.1b (up 80.1% y-y) for a margin of 29% (up 4.4% pts y-y). The company’s 2020 vision is to become a global top-ten CMS player with KRW1.5t in sales, KRW300b in operating profit, and an operating margin of 20%. IT will pursue this by: 1) strengthening its competitiveness via domestic capacity expansions; and 2) seeking M&A opportunities to rapidly secure capabilities. Samsung Biologics last year posted another operating loss, this time to the tune of KRW30.4b on parent-based sales of KRW294.6b (up 337.3% y-y). The company aims to be the world’s top bio-CMO player by 2020, with sales of KRW1t, an operating profit of KRW400b, and an operating margin of 40%. The company currently has nine CMO contracts totaling USD3.2b with six multinational pharmaceutical and biotechnology firms. It is also negotiating with 15 such firms over around 30 biologics.

Healthcare

2017. 6. 15

SK Biotek: Company history Date Event Note Enters drug manufacturing business Business based on in-house chemical and catalyst technology Commences manufacturing 1998 (drug intermediate) (Plant #1 in 1999 and plants #2 and #3 in 2003) 2005 Enters API business Receives CMO order for BMS’s diabetes treatment 2013 Expands API business Wins regulatory approval in DMs (Japan in 2013, US in 2014, Europe in 2015) 2015 Spins off as SK Biotek CMS business spun off from SK Biopharmaceuticals Changes to holding structure; hikes capital SK Holdings acquires direct ownership Expands API plant capacity 2016 Secures 23 customers, makes 40 products Sales of KRW101.2b in 2016 with KRW30.2b operating profit Source: Company data, Samsung Securities

Major CMS players Company Country 2015 CMS sales 2015 EBITDA Product category Core product Area of business

(USDm) margin (%) 1 Catalent US 1848 20 API, finished drug, distribution HPAPI, DP, soft gel US, Europe, Asia 2 DPx US 1705 n/a API, finished drug DP US, Europe, Asia 3 Lonza Switzerland 1623 26 API, finished drug HPAPI, DP, bio-API US, Europe, Asia 4 Aenova Germany 832 12 Finished drug DP US, Europe 5 Famar Greece 514 16 Finished drug DP Europe 6 Better Germany 501 n/a Finished drug DP US, Europe 7 Evonik Germany 470 21 Finished drug HPAPI US, Europe, China 8 Siegfried Switzerland 468 17 API, finished drug HPAPI, DP US, Europe, China 9 Cambrex US 434 30 API HPAPI US, Europe 10 Recipharm Sweden 406 15 API, finished drug HPAPI, DP Europe Source: SK Biotek, Samsung Securities

SK Biotek: Sales and operating profit

(KRWb) (%)

120 35 101.2 100 30 78.9 25 80 68.2 60.7 20 60 51.9 15 40 30.2 20.9 10 20 4.3 4.8 7.5 5 0 0 2012 2013 2014 2015 2016

Sales (LHS) Operating profit (LHS) Operating margin (RHS)

Source: Company data, Samsung Securities

Healthcare

2017. 6. 15

Global biologic CMO market outlook

(USDb)

35 Mammalian: 2015 - 2025E CAGR of 18.0% 30.4 Microbial: 2015 - 2025E CAGR of 9.0% 30 25.9 6.4 25 22.1 18.9 5.7 20 15.4 16.2 5.2 13.3 4.7 15 11.3 9.7 4.3 4.2 8.5 4 24 10 7.3 20.2 3.5 16.9 3 3.2 14.2 2.7 11.1 12 5 7.8 9.3 4.6 5.5 6.5 0 2015 2017E 2019E 2021E 2023E 2025E

Mammalian Microbial

Source: Frost & Sullivan

Manufacturing capacity of global players Company 2016 2021E Capacity (L) 2016-2021E rank rank 2016 2021E CAGR (%) Roche 1 1 673,000 909,000 6.2 Lonza (CMO) 2 6 261,000 281,000 1.5 Boehringer Ingelheim (partial CMO) 3 3 241,000 338,000 7.0 Johnson & Johnson 4 9 230,000 230,000 0.0 Sanofi 5 7 223,000 243,000 1.7 Amgen 6 10 204,000 225,000 2.0 Biogen 7 4 196,000 316,000 10.0 Samsung (CMO) 8 2 182,000 362,000 14.7 Pfizer 9 149,000 149,000 0.0 Celltrion (partial CMO) 10 5 140,000 310,000 17.2 BMS 8 132,000 237,000 12.4 Novartis 125,000 205,000 10.4 Eli Lilly 137,000 137,000 0.0 Merck KGaA 120,000 120,000 0.0 Other* 1,291,000 2,106,000 10.3 Share of top-10 (%) 65.6 62.1 Total 3,754,000 5,557,000 8.2 Note: * Excludes top-10 capacity Source: BioProcess Technology, Samsung Securities

Healthcare

2017. 6. 15

Global biologic CMOs: Capacity comparison

('000 liters)

400 350 300 180 Plant #3* 250 200 150 259 241 100 152 Plant #2 (2015) 197 50 Plant #1 0 30 Samsung Biologics (2018E) Lonza (2015) Boehringer Ingelheim (2015) Others (2015)

Note: * Expected to start operations by 2019 Source: Company data, BioProcess Technology Consultants

Overview of Samsung Biologics’ manufacturing facilities Plant #1 (2011-2013) Plant #2 (2013-2016) Plant #3 (2015-2018E)

Total capacity (L) 30,000 (6 x 5,000 L) 152,000 (10 x 15,000 L / 2 x 1,000 L) 180,000 (12 x 15,000 L) Batches per year* 120 200 240 (estimate) Annual production (L) 480,000 2,400,000 3,225,000 Capex (USDm) 300 650 740 (estimate) Capex per unit production 625 (benchmark**) 271 (43% of benchmark) 226 (36% of benchmark) volume (USD/L) Construction 25 months to cGMP ready 29 months to cGMP ready 35 months to cGMP ready Annual operation (days) 300 340 360 Cost competitiveness Industry average Industry-leading Industry-leading Commenced ramp-up in Jul 2013 Commenced ramp-up in Mar 2016 Under construction Operation status Commenced commercial operation in 2015 Commenced commercial operation in 2017 (expected to complete by 2017) US FDA approval status First approval in Dec 2015 Inspection expected in 2H17 Undecided EMA approval status First approval in Sep 2016 Inspection expected in 2H17 Undecided Batch success rate of 99% in 2015 Reduced periodical down-time N-1 perfusion convertible technology Note 6 bioreactors to 1 filtration processing 10 bioreactor to 1 filtration processing 12 bioreactor to 1 filtration processing Note: * Based on maximum annual batch production. Batch is a unit equivalent to the amount produced from a single bioreactor ** Industry average Source: Company data

Healthcare

2017. 6. 15

Contents 1H review: Poverty in the p2 midst of plenty Pharmaceutical market p7 outlook Visible progress to be made p32 on R&D and B2B fronts Government policy p52 warrants attention Visible progress to be made on R&D and B2B fronts Key issues in 2H p68 Firms with R&D or B2B deals with multinationals warrant attention Solid earnings momentum p87 in 2H Uncertainties to ease in 2H: As stated, Hanmi Pharmaceutical, Medytox, and Seegene gained Company p105 global recognition over 2013-2016 for their out-licensing and ODM supply contracts with global pharmaceutical companies. Yet, slow R&D progress by the global firms and delays in ODM shipments have raised concerns over contract cancellations. In 2H, we expect Hanmi and Medytox to move to the next phase of development and Seegene to start ODM shipments. Indeed, expectations should supplant concerns and lead to the market to reevaluate Korean firms’ R&D capabilities. Multiple drugs up for US, European approval: Samsung Bioepis and Celltrion filed for FDA and EMA approval of multiple biosimilars in 2016 and expect to obtain them in 2H. Also in 2H: 1) Green Cross should reapply for US approval of its immunodeficiency drug IVIG, which was shelved in 2016 after an FDA review; and 2) SK Biopharmaceuticals plans to file for US approval of its epilepsy drug Cenobamate and sleep disorder drug SKL-N05/JZP-110. R&D to regain momentum, influence shares: Sentiment on the healthcare sector soured in late 2016 on the cancellation or revision of some of Hanmi’s out-licensing contracts, and investors lost interest in the sector in 1H17 for a lack of R&D momentum. In 2H17, however, the sector should show visible R&D progress, resume ODM shipments, and receive US and European approvals for multiple drugs, boosting sentiment and making R&D a key share-price determinant once again.

Healthcare

2017. 6. 15

Samsung healthcare coverage: B2B and R&D outlook (1) Category Company 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 Submit BLA for Receive Start global IVIG to US FDA; Launch IVIG Green Cross approval for Phase I of Start Korea Phase in US IVIG in US MG1113A III of Hepabig Yuhan Start global Release results Release results Submit BLA Hanmi Start global Phase Phase I of of HM71224 of Rolontis for Rolontis to Pharmaceutical III of Efpeglenatide Large JNJ-64565111 global Phase II US Phase III US FDA pharmas Chong Kun Dang

Pharmaceutical Finalize Europe Finalize Finalize Korea Finalize US Phase Donga ST Phase I of CKD- Australia Phase Phase I of I of CKD-504 506 II of CKD-519 CKD-581 Finalize Europe Finalize US Phase Finalize US Phase I SK Chemicals Phase I of I of DA-1241 of DA-1229 (NASH) DA-8010 Start exporting Start exporting Boryung Start exporting Kanarb to two Kanarb to three

Pharmaceutical Kanarb to Russia Southeast Asian Southeast Asian countries countries Start exporting Submit IND for Start China Noltec and Supect’s Phase III Phase III of Supect to in China Supect Middle East Ilyang Submit IND for Pharmaceutical anti-virus Add H. treatment Start exporting pylori as

SMEs (IY7640) Noltec to Ecuador indication overseas for Noltec Phase I Add fever as Daewon Renew certification indication for Pharmaceutical to export to China Pelubi Sign contract Sign contract to with Gilead supply API for Sciences to ST Pharm oligonucleotide supply API for drug; test operation hepatitis of new plant C drugs Receive Received FDA Receive approval Receive approval for approval for for Herceptin approval for Humira Remicade biosimilar in Humira Samsung biosimilar biosimilar Europe biosimilar in US Biologics in Europe Receive approval Biotech for Lantus biosimilar in US Receive Receive approval approval for Celltrion for Herceptin Herceptin biosimilar in Europe biosimilar in US Released Phase Submit NDA for III results of SKL- Receive approval SKL-N05/JZP- SK N05/JZP-110; for SKL-N05/JZP- Other 110 and Biopharmaceutical release results of 110 and pharmaceutical Cenobamate Cenobamate Cenobamate arms of in US Phase III conglomerates Receive approval Kolon Life Launch Invossa in for Invossa in Science Korea Korea Source: Samsung Securities estimates

Healthcare

2017. 6. 15

Samsung healthcare coverage: B2B and R&D outlook (2) Category Company 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 Signed a co- Receive approval Start ODM development Start ODM supply Seegene for ‘Project 100’ in supply to contract with to Beckman Coulter Europe Qiagen ThermoFisher Receive approval for manufacturing i-Sense Diagnostics site and products in China Signed a contract with McKesson to Boditech Med supply colon cancer diagnostic kits Osstem Implant Dio Receive approval Dentium for manufacturing site in China Medical Launch new Vieworks devices dynamic detector Receive approval Value Added for Green Smart Technology in China Launch veterinary Rayence imaging system Start global Phase Medytox III of Innotox Medical Receive approval Receive inflow of aesthetics for dermal filler Hugel funds from Bain products from Capital China Source: Samsung Securities estimates

Healthcare

2017. 6. 15

Hanmi Pharmaceutical: Sector leader to make R&D progress Boasts out-licensing contracts worth KRW6.5t: Hanmi Pharmaceutical has a number of exceptional out-licensing contracts, including ones worth: 1) USD690m (USD50m upfront; USD640m in milestones) with Eli Lilly for BTK inhibitor-based autoimmune treatment HM71224; 2) EUR2.92b (EUR0.2b; EUR2.72b) with Sanofi for long-acting GLP-1 diabetes treatment known as the Quantum Project; 3) USD915m (USD105m; USD810m) with Johnson & Johnson for long-acting GLP-1/Oxynotomduline diabetes/obesity treatment HM12525A/JNJ-64565111; 4) USD910m (USD80m; USD830m) with Genentech for RAF inhibitor-based cancer treatment HM95573; 5) undisclosed amounts with Spectrum (end-Jan 2012) for long-acting neutropenia treatment Rolonits TM (LAPS-GCSF, eflapegrastim) and pan-HER cancer treatment poziotinib (Mar 2015); and 6) an undisclosed amount with Zai Lab in for the marketing rights in China, Hong Kong, and Taiwan for EGFR inhibitor-based lung cancer treatment HM61713/ZL-2303 (olmutinib; Nov 2015).

Five clinical trials underway • Spectrum in Sep 2014 started US Phase III trials for Rolonits on 580 cancer patients that developed neutropenia due to chemotherapy, with completion targeted for Oct 2018. If proven effective, the once-every-three-week treatment has potential to take over the KRW6t global neutropenia treatment market from Neulasta’s blockbuster PEG-GCSF, which requires once-a- week dosing. • Safety concerns over HM61713 (olmutinib) emerged after Boehringer Ingelheim on Sep 30, 2016 cancelled its out-licensing deal for the drug. That said, Hanmi on Apr 13 of this year obtained investigational IND approval in Korea to conduct Phase III trials for the drug on EGFR-mutant lung cancer patients. On Feb 2, 2017, Zai Lab filed for IND approval to perform Phase I trials in China for ZL-2303 (olmutinib). • Eli Lilly on Sep 10, 2016 initiated Phase II multinational trials for HM71224 on 182 rheumatoid arthritis patients. The trials should complete in Jun 2018. • Spectrum on Mar 8, 2016 began Phase II US trials for poziotinib on 70 breast cancer patients showing resistance to existing therapies. • Hanmi on Mar 20, 2017 entered Phase I domestic trials for HM95773 on 100 patients with solid tumors harboring BRAF, KRAS, or NRAS mutations. Global clinical trials to resume for LAPScovery biologics: Johnson & Johnson at end-Nov 2016 posted on the US NIH site clinicaltrials.gov that it suspended recruitment of patients for the Phase I clinical trials for HM12525A/JNJ-64565111. Hanmi at end-Dec 2016 revealed revisions to its out-licensing contract with Sanofi for three new diabetes treatments known as the Quantum Project. Specifically, Sanofi will: 1) return the rights to LAPS-Insulin, a once-a-week insulin analog; 2) reduce milestone payments for efpeglenatide (a once- or twice-monthly GLP-1 analog) and have Hanmi share development costs (25% of Sanofi’s R&D costs with a cap of EUR150m); and 3) maintain its contract for LAPS-Insulin Combo—a combination of LAPS-Insulin and efpeglenatide—and retain rights to acquire the combination drug after development by Hanmi. Having taken back the rights to LAPS-Insulin and accepting responsibility for delays in clinical sample production, Hanmi agreed to return EUR196m of its upfront payment of EUR400m, while additional milestones will shrink from EUR3.5b to EUR2.7b. HM12525A/JNJ-64565111 is a combination of LAPS-GLP-1 and LAPS- Oxyntomodulin while efpeglenatide is LAPS-Exendin. Both are biologics based on LAPScovery long- acting platform technology.

Healthcare

2017. 6. 15

The suspension of Phase I trials for HM12525A/JNJ-64565111 and revisions to the out-licensing contract for the Quantum Project have raised doubts over the commercialization prospects of LAPScovery drugs. Yet, Sanofi during an Apr 28 earnings call said it will begin Phase III clinical trials for efpeglenatide in 4Q17, following through on remarks made during its 4Q16 earnings call that the trials would start this year. The company also says efpeglenatide is a top-10 drug (slated for Phase III trials) in its pipeline. RolontisTM, undergoing Phase III trials in the US, is also a LAPScovery-based biologic. Hanmi plans to invest KRW257.3b to complete a second bio plant in Pyeongtaek, with this one dedicated to making LAPScovery-based biologics for clinical trials, regulatory approval, and commercial production. Meanwhile, at the JP Morgan Healthcare Conference in January, the company unveiled an enzyme replacement therapy for rare diseases that employs LAPScovery long- action solution. The treatment is in preclinical phases, reconfirming LAPScovery’s commercial potential and scalability. In interviews with local press on Feb 13 and May 10, Hanmi’s CEO said sample shipments for efpeglenatide and HM12525A/JNJ-64565111 will begin soon, and added that that Hanmi was working with Sanofi and Johnson & Johnson to test and fine-tune the facilities to ensure they meet US FDA requirements, which was a reason behind sample production delays. We believe it is time to focus on prospects of efpeglenatide and HM12525A/JNJ-64565111 resuming global clinical trials and generating milestone income.

Healthcare

2017. 6. 15

Sanofi: Global Phase III clinical trials of efpeglenatide

Source: Company data

Sanofi: Efpeglenatide part of key pipeline projects in Phase III studies underway or expected to start this year

Source: Company data

Hanmi Group: Combined market cap and key events

Nov 9, 2015 Sep 30, 2016 (KRWb) Sep 29, 2016 Nov 5, 2015 Out-licensed HM12525A to Janssen Boehringer Ingelheim Out-licensed 20,000 Out-licensed terminated Quantum project HM95573 to HM61713 contract Jul 28, 2015 Genentech Out-licensed to Sanofi 16,000 HM61713 to Dec 29, 2016 Boehringer Changed out- Ingelheim licensing contract 12,000 with Sanofi on LAPS-Insulin Mar 19, 2015 Nov 23, 2015 Out-licensed Out-licensed HM61713 to ZAI Lab 8,000 HM71224 to Eli Lilly 4,000

0 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17

Combined market caps of Hanmi Pharm and Hanmi Science (LHS) Remaining contract amount (RHS)

Note: Deals converted to KRW based on forex rates on dates of announcement; upfront payments and milestone revenue deducted as received Source: QuantiWise, Bloomberg, company data

Healthcare

2017. 6. 15

Hanmi Pharmaceutical: R&D pipeline Category Project Indication Pre- Phase Phase Phase Remarks clinical l ll lll LAPS Exendin4 (efpeglenatide) Diabetes, obesity Quantum Project, out-licensed to Sanofi LAPS Insulin Combo (HM14220) Diabetes, obesity LAPS Insulin115 (HM12470) Diabetes LAPS GCSF (Rolontis, eflapegrastim) Neutropenia Out-licensed to Spectrum Pharmaceuticals LAPS hGH (efpegsomatropin) Growth hormone deficiency LAPS GLP/GCG (HM12525A) Diabetes, obesity Out-licensed to Janssen (Johnson & Johnson) LAPS Triple Agonist (HM15211) Obesity Developed by Bejing Hanmi Biologic LAPS GCG Analog (HM15136) Congenital hyperinsulinism Applied LAPScovery LAPS IDS (HM15410) Mucopoysaccharidosis Applied LAPScovery LAPS GLP-2 Analog (HM15410) Short bowel syndrome Applied LAPScovery HM21001 GMB stem cell therapy Co-developing with Ajou University BH2950 Breast/gastric cancer Developed by Bejing Hanmi BH2922 NSCLC/colorectal cancer Developed by Bejing Hanmi BH2941 Cancer Developed by Bejing Hanmi Out-licensed to Spectrum Pharmaceuticals Poziotinib (HM781-36B) Breast cancer and Luye Pharma in China Olmutinib (HM61713) NSCLC Out-licensed to ZaiLab in China Luminate Retinal diseases Licensed in from US bio venture Allegro Oraxol Gastric cancer Out-licensed to Athenex New chemical HM71224 Rheumatoid arthritis Out-licensed to Eli Lilly HM95573 Solid cancer Out-licensed to Genentech KX2-391 Solid cancer Licensed-in from Athenex Oratecan Solid cancer Out-licensed to Athenex HM43239 Acute myeloid leukemia HGP1207 Pulmonary hypertension Non-HDL decline of patients HCP1105 with combined dyslipidemia HCP1305 Hypertension/dyslipidemia Incrementally HCP1401 Hypertension modified or Prostatic hyperplasia, HCP1303 fixed-dose erectile dysfunction combination HCP1405 Osteoporosis HCP1202 COPD HIP1302 Anti-virus HIP1503 Overactive bladder Source: Company data, Samsung Securities

Healthcare

2017. 6. 15

Samsung Biologics: Biotech leader to win more CMO contracts, biosimilar approvals To become world’s largest bio CMO: Samsung Biologics currently operates two plants—with capacities of 30,000 and 152,000 liters—and is building a third one with a capacity of 180,000 liters. The #3 plant is 75% complete and should finish in 4Q17, with the validation process to wrap up v in 4Q18. On completion the company will be the world’s largest bio CMO in terms of capacity. The firm expects to break even on an operating basis in 2017 on y-y sales growth of 50% to KRW441.9b backed utilization rates of 100% and 40% at its #1 and #2 plants, respectively. In 2016 utilization rates at those facilities were a respective 100% and 20%. More CMO deals on the horizon: Samsung Biologics has a CMO order backlog of USD3.2b (including a KRW47.1b deal signed with a European firm on May 4) and is in talks with more than 15 foreign pharmaceutical players for over 30 CMO contracts. Considering construction of the third plant should complete this year, the firm is likely to pursue even more CMO contracts. Boasts four approved biosimilars in developed markets: Subsidiary Samsung Bioepis obtained approval from the EMA in: 1) Jan 2016 for Benepali, the world’s first Enbrel biosimilar; 2) May 2016 for Flixabi, the second-ever Remicade biosimilar; and 3) January for Lusduna, the second- ever Lantus biosimilar. After last week’s approval for Renflexis, the firm now boasts the largest biosimilar lineup with US FDA and/or EMA approval. The more biosimilars up for approval: Samsung Bioepis filed for US FDA approval of Lantus biosimilar Lusduna in Aug 2016, and for EMA approval of a Humira biosimilar in Jul 2016 and a Herceptin biosimilar in Oct 2016. The subsidiary should file for US approval of the latter two this year. The company’s lineup of approved biosimilars by end-year should include Benepali, Flixabi, Lusduna, Humira, and Herceptin in Europe and Renflexis and Lusduna in the US. Biogen during its 1Q earnings call said that combined European sales of Benepali and Flixabi rose 3,527.8% y-y and 23.9% q-q to USD65.3m. Benepali, available in 16 countries, has been taken by more than 40,000 patients while Flixabi is sold in seven countries. PR Newswire on May 4 reported that Benepali captured a 25% market share in Europe.

Healthcare

2017. 6. 15

Europe: Biosimilars of major drugs, by company Humira Remicade Enbrel Lantus Avastin Herceptin Neulasta Rituxan Filed Launched Launched Approved Phase III Filed

(May 2016) (Aug 2016) (Feb 2016) (Jan 2017) (Mar 2015) (Oct 2016)

Launched Filed Approved Pre-clinical Pre-clinical Pre-clinical (Feb 2015) (Nov 2016) (Feb 2017)

Phase III Phase III Filed (Top-line results (Data released (Nov 2016) released Jan 2017) Nov 2015) Phase III Approved Phase III Filed Phase III (Top-line results (Mar 2017) (Oct 2016) (Dec 2016) (May 2016) released Jul 2016) Filed Filed Filed Filed* (EMA CHMP Filed (EMA CHMP

(May 2017) (May 2017) recommendation (Mar 2016) recommendation Apr 2017) Apr 2017) Launched

(Sep 2015)

Phase III Filed Filed Filed Pre-clinical Phase I (May 2015) (Nov 2016) (Aug 2016) (Jul 2016) Phase III Phase III* Phase III Phase III Phase III (Top-line results (Top-line results Phase I (Feb 2015) (Feb 2014) (Sep 2014) released Jan 2017) released Sep 2016) Filed Launched** Phase III

(Jan 2017) (Sep 2015) (Jul 2015) Note: * Sandoz acquired EEA rights from Pfizer in 1Q16 ** Eli Lilly and Boehringer Ingelheim co-developed Lantus biosimilar Source: Samsung Securities

US: Biosimilars of major drugs, by company Humira Remicade Enbrel Lantus Avastin Herceptin Neulasta Rituxan Completed Approved Completed Filed Phase III Completed

clinical trials (Apr 2017) clinical trials (May 2016) (Mar 2015) clinical trials

Launched Completed Completed Pre-clinical Pre-clinical Pre-clinical (Dec 2016) clinical trials clinical trials

Phase III Phase III Filed (Top-line results (Data released (Aug 2016) released Jan 2017) Nov 2015) Phase III Approved Phase III Filed Phase III (Top-line results (Sep 2016) (Oct 2016) (Nov 2016) (May 2016) released Jul 2016) Phase III* Phase III Approved Filed** Completed (Top-line results (Dec 2013) (Aug 2016) (Nov 2015) clinical trials released Sep 2016) Launched

(Dec 2016)

Phase III Filed Filed Completed Pre-clinical Phase I (May 2015) (Nov 2016) (Nov 2016) clinical trials Phase III Phase III* Phase III Phase III Phase III (Top-line results (Top-line results Phase I (Feb 2015) (Feb 2014) (Sep 2014) released Jan 2017) released Sep 2016) Filed Launched*** Phase III

(Jan 2017) (Dec 2016) (Jul 2015) Note: * Sandoz acquired EEA rights from Pfizer in 1Q16 ** US FDA issued Sandoz with a complete response letter for its Neulasta biosimilar in Jul 2016 *** Eli Lilly and Boehringer Ingelheim co-developed Lantus biosimilar Source: Samsung Securities

Healthcare

2017. 6. 15

Biogen: Benepali and Flixabi sales

(USDm) 70 0.6

60 0.1 50 40 0.1 30 65.3 52.7 20 30.7 10 1.8 15.4 0 1Q16 2Q16 3Q16 4Q16 1Q17

Benepali Flixabi

Source: Company data, Samsung Securities

Healthcare

2017. 6. 15

Medytox: Medical aesthetics leader to start Phase III trials for Innotox Concerns have mounted over a lengthy delay to the start of Phase III trials for Medytox’s Innotox, which were scheduled to commence in 4Q15. One reason behind the delay was Allergan’s Jan 2016 acquisition of next-generation BTX developer Anterios for an upfront payment of USD90m. Allergan, during its 2Q16 earnings release, said it planned to submit an IND application to initiate Phase III clinical trials for Innotox by end-2016, but has shown little progress thus far. Medytox attributes the delay to an unexpectedly long validation process for its #2 plant in addition to clinical material production issues. Many market watchers, however, believe Allergan is trying to curb competition by acquiring and keeping next-generation BTX product candidates—such as Innotox and Anterios’s topical BTX ANT-1207—in the development stage, noting the US firm’s Botox controls 76% of the global BTX market. Recent developments at a rival, however, may force a change in strategy. Ipsen in 2013 conducted Phase II clinical trials for its liquid BTX—Dysport Next Generation (DNG)— on 176 glabellar lines patients and Phase III clinical trials on 333 cervical dystonia patients, with both trials producing positive results (released in Feb 2014) in terms of safety and efficacy. DNG was superior to a placebo in both studies, comparable to Dysport in the first one, and regarded as a success by the market in the latter. Yet, the firm delaying an application for DNG to treat cervical dystonia has investors kept investors skeptical over the product’s commercial value. Nonetheless, we believe Ipsen plans to commercialize DNG based on: 1) its purchase of Galderma’s patent for liquid BTX, which began US Phase II clinical trials in 2014; and 2) the results of Phase III trials for DNG in Europe where its efficacy and safety were respectively proven on trials on 184 and 600 patients that ended in Sep 2015 and Dec 2016. Ipsen on May 11 said it plans to apply for DNG’s approval in Europe in 2H, implying that the product’s Phase III trials were successful. The firm forecasts that DNG will be approved by the EMA as a treatment for glabellar lines in 2018 and cervical dystonia in 2019. All things considered, we expect Allergan to submit an IND application to initiate Phase III clinical trials for Innotox in 3Q17. On submission, Medytox should receive related milestones of USD25m and see its P/E fall from 36x to 27.9x. We estimate Innotox is worth KRW1.056t and will launch commercially in 2020.

Healthcare

2017. 6. 15

Ipsen: Major R&D pipeline

Note: As of May 2017; based on Ipsen IR material Source: Company data

Medytox: Innotox value (KRWb) 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2028E Development schedule Phase III Phase III Approval Launch

starts ends Global BTX market (USDb) 3.9 4.2 4.6 5.1 5.5 5.8 6.2 6.5 6.8 7.9 Market growth (%) 8.4 9.7 9.7 8.9 8.0 7.0 6.0 5.0 5.0 5.0 Market share* (%) 2 4 6 8 10 10 10 Innotox global sales (USDm) 101 219 351 496 651 684 791 Upfront fees and milestones (USDm) 25 35 42 184 Manufacturing profits** (USDm) 40 87 140 198 260 273 317 Royalties (USDm) 7 15 25 35 46 48 55 Total sales recognized by Medytox (USDm) 25 35 42 48 103 349 233 306 321 372 KRW-converted sales*** 30.0 42.0 49.8 57.1 123.3 418.8 279.8 367.2 385.6 446.3 EBIT*** 30.0 42.0 49.8 47.4 102.3 385.1 232.2 304.7 319.9 370.4 Free cash flow*** 24.0 33.6 39.8 37.9 81.9 308.0 185.7 243.8 255.9 296.3 Present value interest factor*** 0.9 0.8 0.8 0.7 0.7 0.6 0.6 0.5 0.5 0.4 Present value 22.1 28.5 31.1 27.3 54.2 187.9 104.3 126.1 121.9 110.2 Net present value 1,045.2 Terminal value*** 1,075.3 NPV+TV 2,120.6 Fair value**** 1,056.0 Outstanding shares (‘000) 5,657 Fair value per share 186,694 Note: * Assumes market share peaks at 10% five years after launch and stays flat thereafter ** Assumes Medytox supplies Allergan at 40% of retail price *** Assumes KRW1,200/USD, 80% EBIT margin, 20% tax rate, 8.6% WACC, -1.5% terminal growth **** Assumes Phase III success rate of 49.8% Source: UBS Pharmaceutical Handbook, Samsung Securities estimates

Healthcare

2017. 6. 15

Seegene: Diagnostics leader to start ODM shipments to Beckman Coulter Holds ODM contracts with global players: Seegene inked ODM contracts for molecular diagnostic kits with global: 1) number-three in-vitro diagnostic firm Beckman Coulter in Nov 2014: 2) number-three molecular diagnostic player Qiagen (with a market share of 11.6%) in Jul 2015; 3) number-four molecular diagnostics supplier Becton Dickinson (9.2%) in Sep 2015; and 4) number- two molecular diagnostic firm Hologic (14.4%) in Nov 2016. The company plans to develop and supply molecular diagnostic assays (based on MuDT technology capable of simultaneous detection of multiple targets) exclusively designed for its global partners’ automated gene diagnosis and analysis platforms, including Beckman Coulter VERIS MDx System, Qiagen QIAsymphony RGQ MDx, Becton Dickinson BD MAX System, and Hologic Panther Fusion. Shipments to start from 2017: Seegene should complete development and approval processes— which take around two or three years—with: 1) Beckman Coulter by 3Q17 and commence shipments from 4Q17; 2) Qiagen and Becton Dickinson by end-2017 and begin supplying from 2H18; and 3) Hologic in 2018 and ship from 2H19. Each contract is projected to generate sales of KRW5b in the first 12-months of supply, with full-year total projected to reach KRW30b-50b thereafter. The deals should help Seegene accelerate sales growth of molecular diagnostics assays, expand its global sales network, capitalize on global partners’ automated gene diagnosis and analysis platforms, and boost brand equity. Project 100 targets Europe CE certification by 2018: Seegene is running the gamut on an automated assay development system, taking care of development, clinical trials, regulatory filing, manufacturing, and quality control. The company can develop multiplex molecular detection assays within two months. The firm’s Project 100, a one-platform multiple molecular diagnostics solution, targets the development of 95 new assays—eg , 54 to detect infectious diseases, 21 for oncology, 12 for drug resistance, and 8 for genetic diseases. The firm plans to file for Europe CE certification for all 95 products and expects approval next year, after which it will approach key doctors in each nation to jointly develop and market the items. The project aims to open new markets and secure a fresh customer base.

Global in-vitro diagnostics market Global molecular diagnostics market Rank Company Market share (%) Rank Company Market share (%) 1 Roche Diagnostics 18.3 1 Roche Diagnostics 25.2 2 Siemens Healthcare 10.4 2 Hologic 14.4 3 Danaher (Beckman Coulter) 10.3 3 Qiagen 11.6 4 Abbott 9.5 4 Becton Dickinson 9.2 5 Thermo Fisher 6.2 5 Abbott 8.4 6 Becton Dickinson 5.4 6 Cepheid 5.5 7 Alere 4.5 7 Siemens Healthcare 5.2 8 Sysmex 3.7 Others 20.5 9 bioMerieux 3.6 Source: Evaluate MedTech (2015); Analysis of the Global In Vitro Diagnostics 10 Ortho Clinical Diagnostics 1.8 Market, Frost & Sullivan (2014) Others 26.3 Source: Evaluate MedTech (2015); Analysis of the Global In Vitro Diagnostics Market, Frost & Sullivan (2014)

Healthcare

2017. 6. 15

ST Pharm: To win more CMO contracts and expand capacity Gilead to keep suffering from falling hepatitis C drug sales: Sales of Gilead’s blockbuster hepatitis C drugs declined 40% y-y and 20% q-q to USD2.57b in 1Q17, with those from countries other than the US and Europe sliding 71.5% y-y and 30.7% q-q to USD401m. ST Pharm supplies the API for Gilead’s hepatitis C treatments in countries other than the US and Europe. Gilead set its 2017 hepatitis C drug sales guidance at USD7.5b-9b (down 35-49% y-y). Bloomberg consensus has such sales falling 43% y-y to USD8.44b in 2017 and 22.7% y-y to USD6.55b in 2018. Yet, we do not believe such drops in sales will hurt API orders much in the near term, as the APIs account for a minimal portion of the price. In addition, Gilead’s recently launched Epclusa should become available in more countries, and its new hepatitis C drugs (SOF/VEL/VOX) are likely to be approved in 2H17 by the US FDA—more reasons backing our view that ST Pharm’s API sales are unlikely to plunge this year. Even so, we conservatively estimate that the Korean firm’s related API sales will only increase 2.1% y- y in 2017—as some of the 135m shipments to Gilead scheduled for this year should be deferred to next year—and decline 15% y-y in 2018. Oligonucleotide plant to start pilot production in 2018, commercial in 2019: ST Pharm in Dec 2016 said it would invest KRW33b to build a new factory dedicated to oligonucleotides that will expand its capacity for the API by five times. The new facility should complete and start pilot production in 1H18, and then validate and start commercial production in 1H19. The company should see more orders and add clients as its capacity expands, demand for clinical trials for oligonucleotide-based treatments increases, and existing client enters Phase III clinical trials. We expect the firm’s oligonucleotide sales to grow to KRW31b in 2017 (15% of total sales) and KRW55b in 2018 (25.4%) from KRW10.4b in 2015 (7.5%) and KRW20.6b in 2016 (10.3%). The firm should see its sales dependence on the API for hepatitis C drugs fall and sales of high-margin oligonucleotide rise.

Gilead Sciences: Sales guidance of HCV treatment in 2017

Source: Company data

Healthcare

2017. 6. 15

SK Biopharmaceuticals: Chaebol arm finding R&D success Plans to build new drug candidate into a business: SK Biopharmaceuticals is dedicated to developing drugs to treat central nervous system (CNS) disorders. The company envisions: 1) discovering new drug candidates that address unmet medical needs; 2) carrying out global clinical development through its organization in the US; and 3) selling its products directly, unlike most of its domestic peers that opt for out-licensing contracts. The new drugs, if successful, should boost both the firm’s top and bottom lines. SK Bio aims to become the world leader in epilepsy treatments by 2020 and a global top-50 pharmaceutical player by 2025. To file for FDA approval of Cenobamate in 2017: Epilepsy is a result of excessive and abnormal nerve cell activity in the brain cortex. Datamonitor predicts that the seven major epilepsy treatment markets (US, France, Germany, Italy, Spain, UK, Japan) will see a 2.3% CAGR from USD4.5b in 2013 to USD5.5b in 2022. Among epilepsy patients, approximately 59% experience partial seizures, 27% generalized seizures, and 14% status epilepticus. Up to 30-40% of patients are unresponsive to treatment consisting of a combination of two or three drugs—eg , it is an unmet medical need. UCB/Daiichi Sankyo’s Vimpat (lacosamide) is currently leading the epilepsy treatment market, and its sales in the seven major markets are projected to grow from USD829m in 2016 to USD13.9m in 2021 before shrinking to USD493m in 2022 (on patent expiry in 2021). Clinical tests over 2007-2010 demonstrated that Vimpat reduces seizure frequency by 19%pts and improves the percentage of seizure-free patients by 2%pts, both figures vs those of a placebo. Cenobamate bettered the performance of a placebo by a respective 34%pts and 19%pts in Phase IIa clinical trials (6-week duration) and 31%pts and 10%pts in Phase IIb clinical trials (12-week duration). In other words, Cenobamate has potential to be a best-in-class drug. The drug in 1Q16 started Phase III trials in 19 countries (including in the US) as an adjunctive therapy for 1,100 epilepsy patients with partial seizures. The FDA only requires safety data from the Phase III study, saying Cenobamate proved its effectiveness in the Phase II study. As an open-label study (in which participants know which treatment is being administered) aimed at verifying the drug’s long-term safety, it has greater probability of success than do regular Phase III studies. SK Bio plans to hold a pre-NDA meeting with the FDA in 2Q and file for approval for use as an adjunctive therapy in 4Q. If commercialized, Cenobamate would have a dosage of 200mg once a day. In the longer term, the company plans to expand indications of the epilepsy drug to include sole therapy for partial seizures, generalized seizures, and rare seizures. Given its clinical superiority, Cenobamate is likely to be priced higher than Vimpat is. The firm intends to establish a dedicated marketing organization, recruit talent, and decide whether to sell directly or through partners boasting established distribution networks. Cenobamate worth an estimated KRW1.569t: Our estimate of Cenobamate’s value assumes a won/dollar rate of KRW1,200, an EBIT margin of 50%, a tax rate of 22.5%, a WACC of 10%, earnings persistence coefficient of 90%, probability of success of 87.9%, a 2018 approval, and 2019 launch. The company hopes the drug will generate annual sales of KRW1t and operating profit of more than KRW500b. Considering Cenobamate outperformed leading epilepsy drug Vimpat in clinical trials, we value the drug at KRW1.57t and expect its sales and operating profit to reach a respective KRW1.08t and KRW540b in 2026.

Healthcare

2017. 6. 15

SKL-N05/JZP-110 to seek FDA approval this year: SK Bio licensed out sleep disorder drug SKL-N05/JZP-110 to Jazz Pharmaceutical (US) for non-Asian markets in 2011. We expect the drug to become a best-in-class one as it is six times more effective than a placebo is while Xyrem (the world’s top drug for narcolepsy) is just twice as effective (vs a placebo). Jazz Pharmaceutical on Mar 20 said it completed Phase III TONES 3 and TONES 4 trials on 652 sleep apnea patients, and on Apr 26 announced it finished Phase III TONE 2 trials on 240 narcolepsy patients. Patients taking 300mg or 150mg doses of SKL-N05/JZP-110 three times a day showed a statistically significant advantage in the maintenance of wakefulness test and Epworth sleepiness scale over those taking a placebo (although 75mg dosing three times a day failed to show statistically significant advantage the latter). Side effects included headaches, nausea, a lack of appetite, nasopharyngitis, dry mouth, and anxiety. Two patients suffered severe reactions, but this proved to have little to do with the therapy. Jazz Pharmaceutical plans to announce the clinical results at the Jun 3-7 annual meeting of the Associated Professional Sleep Societies LLC, and apply for FDA approval of the drug as a sleep apnea and narcolepsy treatment in 4Q. SKL-N05/JZP-110’s value estimated at KRW224.6b: Our calculation of the value of SKL- N05/JZP-110 assumes a won/dollar rate of KRW1,200, an EBIT margin of 90%, a tax rate of 22.5%, a WACC of 10%, earnings persistence coefficient of 90%, probability of success of 87.9%, a 2018 approval, and 2019 release. Assuming maximum market share of 15% in 2023, we estimate SKL- N05/JZP-110’s value at KRW224.6b.

SK Biopharmaceuticals: Global networks Korea (Pangyo) US (New Jersey) China (Shanghai) Total No. of employees 113 39 4 156 Research and pre-clinical Global clinical trials Manage business and Note trials Partnerships and Commercialization of R&D staff: 111 partnering in China clinical trials in Asia drugs under SK brand Source: Company data, Samsung Securities

SK Biopharmaceuticals: Growth plan

2016 2020 2025

ò To commercialize its Cenobamate To lead ò Continue to launch new drugs for and make it best in class global nerve/menta l disorders Emerging Global ò Non-organic growth in epilepsy drug epilepsy ò Enter potential therapeutic areas such pharma top 50 business drug as cancer ò Establish epilepsy drug portfolio market ò Self-development and open innovation ò Continue to develop next-generation for new drugs drugs for epilepsy ò Enter Europe and Asia in addition to US

Source: Company data, Samsung Securities

Healthcare

2017. 6. 15

Characteristics of epilepsy market Feature Note US market accounts for 67% of global epilepsy market; relatively less regulation on drug prices in US US the biggest market (prices in US are 3x those in Europe and 5x those in Korea) Huge unmet needs Combination therapies are prevalent (2 to 3 drugs together), 30-40% of patients are incurable with existing drugs Opinion leaders lead market Prescribed by doctors who specialize in nerve disorders; competitiveness of drugs most critical factor Preference for new drugs Patients insensitive to costs due to risk of recurrence; preference is for new treatments Source: SK Biopharmaceuticals, Samsung Securities

Cenobamate: Decrease in seizure frequency (%) Dosage group (A) Placebo group (B) Difference (A-B) Phase IIb (n = 400) 55 24 31 Cenobamate Phase IIa (n = 200) 56 22 34 Vimpat 2007-2010 clinical trials 37 18 19 Difference Cenobamate’s Phase IIb vs Vimpat 18 6 12 Source: Company data, Samsung Securities

Cenobamate: Percentage of seizure-free patients (%) Dosage group (A) Placebo group (B) Difference (A-B) Phase IIb (n = 400) 11 1 10 Cenobamate Phase IIa (n = 200) 28 9 19 Vimpat 2007-2010 clinical trials 3 1 2 Difference Cenobamate’s Phase IIb vs Vimpat 8 0 8 Note: Six weeks for Phase IIa, 12 weeks for Phase IIb Source: Company data, Samsung Securities

Healthcare

2017. 6. 15

Cenobamate: Cenobamate: Decrease in seizure frequency vs placebo Percentage of seizure-free patients vs placebo

(%) (%)

40 20 19 34 35 31 18 30 16 14 25 19 12 10 20 10 15 8 10 6 4 2 5 2 0 0 Phase IIb (n=400) Phase IIa (n=200) 2007-2010 clinical Phase IIb (n=400) Phase IIa (n=200) 2007-2010 clinical trials trials Cenobamate Vimpat Cenobamate Vimpat

Source: Company data, Samsung Securities Source: Company data, Samsung Securities

SK Biopharmaceuticals: Major R&D pipeline Pipeline Indication Market size (USDb) Phase I Phase II Phase III Note Cenobamate Epilepsy 4.6 To seek US FDA approval in 4Q17 (YKP3089) (partial and general seizures) Carisbamate Orphan epilepsy 0.7 Phase II trials to start by end-2017 (SKL-N09) SKL-N05* Sleep disorders sleep apnea Released sleep apnea results in Mar 2017 1 (JZP-110) and narcolepsy Released narcolepsy results in Apr 2017

SKL13865 ADHD 7 Plans to start Phase II by end-2017

SKL20540 Schizophrenia 6 Submitted IND to US FDA in 4Q16

Clinical trials for irritable bowel syndrome YKP10811 GI disorders 3 To develop gastroparesis treatment with (Relenopride) a partner Note: * Out-licensed to leading narcolepsy player Jazz Pharmaceutical in 2011 Source: Company data, Samsung Securities

Healthcare

2017. 6. 15

SK Bio: Cenobamate value (KRWb) 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Epilepsy drug market in 7 major countries* 4.9 5.0 5.2 5.3 5.4 5.5 5.6 5.8 5.9 6.0 6.2 6.3 6.5 6.6 Chg (%) 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 Development schedule and patent expiry Phase III Approval Launch Patent expiry Sales (USDm) 64 176 303 429 546 625 753 900 1,026 1,182 1,348 1,520 Market share** (%) 2.8 7.7 13.2 18.7 23.7 27.2 32.7 39.1 44.6 51.4 58.6 66.1 KRW-based revenue (based on KRW1,200/USD) 77 211 364 515 655 750 904 1,080 1,231 1,418 1,618 1,824 EBIT (assumes EBIT margin of 50%) 38 106 182 257 328 375 452 540 616 709 809 912 Free cash flow (post-tax rate of 22.5%) 30 82 141 199 254 291 350 419 477 550 627 707 Discount factor (WACC of 10%) 0.8 0.7 0.6 0.6 0.5 0.5 0.4 0.4 0.4 0.3 0.3 0.3 Present value of FCF 22 56 87 113 130 136 148 161 167 175 182 186 Sum of present value 1,564 Continuing value 221 Continuing rate (%) 90.0 Net present value 1,785 Success rate (%) 87.9 Fair value 1,569 Note: * Outlook based on Datamonitor Healthcare (US, Japan, France, Germany, Italy, Spain, and the UK) Source: Samsung Securities estimates

Healthcare

2017. 6. 15

SK Bio: SKL-N05 (JZP-110) value (KRWb) 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Indication: Narcolepsy Market* (USDb) 1.4 1.6 1.8 2.0 2.2 2.4 2.7 2.9 3.1 3.3 3.4 3.6 3.7 3.7 Market growth (%) 11.9 11.9 11.9 11.9 11.0 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 Xyrem sales in US (USDb) 1.2 1.3 1.4 1.4 1.6 1.7 1.1 1.0 0.9 0.8 0.8 0.7 0.6 0.6 Sales growth (%) 11.4 8.7 3.6 4.0 8.5 8.1 (36.4) (8.3) (8.3) (8.3) (8.3) (8.3) (8.3) (8.3) Market share (%) 86.6 84.1 77.9 72.4 70.8 69.6 40.6 34.5 29.5 25.5 22.3 19.6 17.5 15.7 JZP-110 sales (USDb) 0.0 0.1 0.1 0.2 0.3 0.4 0.4 0.5 0.5 0.5 0.5 0.5 0.6 Sales growth (%) 571.4 123.8 66.5 46.7 36.3 8.0 7.0 6.0 5.0 4.0 3.0 2.0 Market share (%) 0.5 3.0 6.0 9.0 12.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 Indication: Obstructive sleep apnea JZP-110 sales** (USDb) 0.0 0.0 0.1 0.2 0.3 0.4 0.4 0.5 0.5 0.6 0.7 0.7 0.8 Sales growth (%) 500.0 150.0 65.0 50.0 40.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 Development schedule and patent expiry Phase III Approval Patent expiry Royalty sales (USDm) 1.1 7.0 16.6 27.5 40.8 56.4 61.4 66.7 72.1 77.6 83.2 88.9 94.7 KRW-based revenue (based on KRW1,200/USD) 1.3 8.4 19.9 33.0 49.0 67.6 73.7 80.0 86.5 93.1 99.8 106.7 113.6 EBIT (margin: 50%) 1.2 7.6 17.9 29.7 44.1 60.9 66.4 72.0 77.8 83.8 89.8 96.0 102.3 Free cash flow (tax rate: 22.5%) 0.9 5.9 13.9 23.0 34.2 47.2 51.4 55.8 60.3 64.9 69.6 74.4 79.3 Discount factor (WACC: 10%) 0.9 0.8 0.8 0.7 0.6 0.6 0.5 0.5 0.4 0.4 0.4 0.3 0.3 0.3 Present value of free cash flow 0.8 4.4 9.5 14.3 19.3 24.2 24.0 23.7 23.3 22.8 22.2 21.5 20.9 Sum of present value 230.8 Continuing value 24.7 Continuing rate (%) 90.0 Net present value 255.5 Success rate (%) 87.9 Fair value 224.6 Note: * Outlook based on Grand View Research (2014-2020E) ** Assumes JZP-110 will attain 70% of peak sales of Teva’s Provigil in 2011 if approved for same indication; market share expected to reach 30%, 15%, or5% if development occurs with large foreign pharmaceutical maker, medium-sized foreign pharmaceutical maker, or in-house, respectively Source: Samsung Securities estimates

Healthcare

2017. 6. 15

Contents 1H review: Poverty in the p2 midst of plenty Pharmaceutical market p7 outlook Visible progress to be made p32 Government policy warrants attention on R&D and B2B fronts Government policy p52 warrants attention Recommend selective approach on those positioned well to benefit Key issues in 2H p68 Government to promote pharma/biotech/medical device industries: Korea’s new Solid earnings momentum p87 government, striving to bring the nation out of low growth, presented a policy to nurture industries in 2H that create high added value. The policy centers on supporting innovative technology-driven Company p105 industries such as ones in areas such as biotech nano and life sciences. The administration said it will: 1) set up a biotech control tower manned by industry specialists under the Ministry of Health & Welfare; 2) produce reasonable guidelines (in line with international ones) to promote the pharma/biotech/medical-device industries; and 3) increase policy predictability via presenting a medium- to long-term plan. Moreover, the government also plans to: 1) improve the pricing system for insured drugs to help boost global penetration of drugs developed by Korean firms; 2) create a new drug development ecosystem by setting up a collaborative system among industry, academia, and R&D centers; and 3) promote oriental medicine and dentistry as strategic national industries. Government to end policy of allowing medical facilities to seek profits: The government is likely to exclude the healthcare sector from the Basic Act on Service Industry. Specifically, it plans to: 1) confine telemedicine to sharing information among practitioners; 2) ban hospitals from establishing profit-seeking subsidiaries; 3) allow hospitals to seek efficiency only within areas allowed under current laws; and 4) ban corporate pharmacies backed by large capital as they are highly likely to turn into profit-seeking chains. Implant, hearing aid, and dementia segments to benefit: On the campaign trail, the president pledged to: 1) raise the basic monthly pension (paid to 70% of lower-income seniors aged 65 and older) from KRW200,000 to KRW300,000; 2) lower a patient’s implant cost from KRW550,000-600,000/tooth to KRW300,000/tooth; and 3) make the government take full charge of dementia patients and strengthen related benefits of the nation’s long-term care insurance. Based on his pledges, it is likely insurance will increase the number of teeth that are covered for implants (from two currently), and that financial burdens related to hearing-aid use will decline. The government plans to set up a dementia support center, cap dementia patients’ medical cost burdens, set up public hospitals dedicated to dementia, and establish more public, long-term care facilities. Moreover, in taking full responsibility for dementia patients, it should make expand long-term care insurance to include patients showing minor symptoms.

Healthcare

2017. 6. 15

President Moon’s election pledge for healthcare industry Category Major point Detail Improve pricing system for insured drugs Diversify new drug pricing structure To establish a division for pharm/biotech/medical device industry in ‘4th industry Nurture Support pharmaceutical industry healthcare committee’ directly under president industry Build an ecosystem of new drug development To build industry-academy cooperation system Nurture oriental medicine and dental industries To designated as government’s strategic industry Reduce patients’ out of pocket expenses To limit a patient’s out of pocket expenses within KRW1m Subsidize treatment of demetia by paying amount exceeding certain level; establish Take charge of treating dementia patients centers and hospitals for patients Expand national health insurance coverage to cover expensive diagnostic tests and Expanding insurance coverage new drugs, and new medical technologies Expand national health insurance coverage of dental implants, hearing aids, and Expanding insurance coverage for elders dentures Subsidize hospitalized patients and outpatients with expensive medical costs up to Aid medical expenses in disasters KRW20m per person per year Government is in charge of children Subsidize hospital treatment for children under 15 years old under 15 years old Confine telemedicine to promoting treatment efficiency among practitioners; ban Ban hospitals from profit-seeking hospitals from establishing profit-seeking subsidiaries; ban corporate pharmacies backed by large capital Strengthen Expand national influenza vaccine program Provide influenza vaccines for students (elemental/middle/high) public services Establish public supply system for essential drugs Expand insurance coverage for oriental medicine Expand national health insurance coverage of oriental medicine Limit large hospitals from receiving outpatients; enhance forwarding system between Support local clinics and pharmacies hospitals and local clinics; reduce out-of-pocket costs for patients using local clinics and pharmacies; expand medical charge at night or on holidays Expand regional rehabilitation hospitals for children; nurture and support general Expand regional hospitals hospitals in 25 vulnerable regions. Induce cutting private insurance premium as much as the amount benefiting from Induce cutting private insurance premium national health insurance Expand government support in vulnerable region for pregnant women; expand number Support women’s health rights of beds for treating newborns Revise system to foster growth of medical staffs via scholarships and hire more public Support and expand medical staffs medical staff; enact a law to support medical staffs Enhance incentives and punishment Strengthen punishment on illegal hospitals; offer incentives related to treating chronic for medical institutions diseases and reducing medical costs Prevent and Establish central and regional hospitals that specialize in infectious diseases; establish manage Establish hospitals specialized in infectious an infectious disease response center under Korean Centers for Disease Control & natural and diseases and expand epidemiologic investigator Prevention; ensure Korean Centers for Disease Control & Prevention’s specialty and social disasters independency Source: Local press, Samsung Securities

Healthcare

2017. 6. 15

Implant market to benefit from health insurance expansion Korea’s Ministry of Health & Welfare on Jul 1 last year expanded health insurance coverage to include dental implants for patients aged 65 or older. Previously, the age threshold was 75 from Jul 2014 and 70 from Jul 2015. Under the expanded coverage, an insured patient now pays just 50% of the original cost for up to two implants (for any tooth) during their lifetime. Based on a government survey, an implant typically costs an insured patient KRW1,165,720—ie , KRW1,055,720 procedure and KRW110,000 material costs. Although the costs vary by clinic, some clinics charge an uninsured implant patient as little as KRW1.2m per implant. Korea’s implant market, backed by expanding coverage since 2014, has grown at a solid pace. According to the National Health Insurance Corporation, its cost of implants saw a CAGR of 22.8% from KRW1.7t in 2013 to KRW3.18t in 2016, with combined domestic sales of the nation’s top three implant firms ( ie , Osstem Implant, Dentium, and Dio) climbed 20.2% pa from KRW98.3b in 2013 to KRW169.9b in 2016. According to the Health Insurance Review & Assessment Service, insured implant sales volume saw at a CAGR of 142.9% y-y from 36,702 in 2014 to 491,083 in 2016, and the number of implant patients jumped 147.8% y-y pa from 21,805 to 300,543 over the same period. Market leader Osstem Implant’s earnings show that coverage expansion from 2014 has been the main driver of growth. The company’s insured implant sales jumped 84.6% y-y from KRW6.5b in 2015 to KRW12b in 2016, with the insured portion accounting for 62.5% of the y-y domestic implant sales gain of KRW19.2b. The nation’s top-five players—Osstem Implant, Dentium, Dio, Neo Biotech, and Megagen Implant—benefitted most from the coverage expansion as: 1) foreign brands were excluded; and 2) dentists likely prefer products with strong brand recognition, noting material costs are relatively fixed. Korea’s implant market is already saturated, with the nation boasting the world’s highest penetration rate. Straumann reports that 412 implants were sold for every 10,000 Koreans in 2015, more than twice the level of the next highest nation. This raised concerns that, absent further expansions in insurance coverage, growth will slow in Korea’ implant market. The new president’s apparent commitment to expand coverage for the elderly should ease such concerns. If the president follows through on his campaign pledges, we estimate that the domestic implant market will grow 15-20% pa over the next few years.

Healthcare

2017. 6. 15

Korean dental implant players: Domestic sales Dental implant sales covered by NHIS

(KRWb) (%) (KRWb) 14 200 30 169.9 12.0 12 160 25 +84.6% y-y 141.4 112.0 20 10 120 98.3 15 8 6.5 80 10 6 40 5 4 0 0 2 2013 2014 2015 2016 0 Sales (LHS) Growth (RHS) 2015 2016

Note: Sums sales of Osstem Implant, Dentium, and Dio Source: Osstem Implant Source: Company data

Number of dental implant patients covered by NHIS Dental implant sales volume covered by NHIS (Number of patients) 2014 2015 2016 (Unit) 2014 2015 2016 Aged 65-69 n/a n/a 96,490 Aged 65-69 n/a n/a 156,518 Aged 70-74 n/a 55,855 120,795 Aged 70-74 n/a 92,726 198,676 Aged 75-79 16,324 49,142 60,284 Aged 75-79 27,442 82,219 98,357 Aged over 80 5,481 16,294 22,974 Aged over 80 9,260 27,194 37,532 Total 21,805 121,291 300,543 Total 36,702 202,139 491,083 Growth (% y-y) n/a 456.3 147.8 Growth (% y-y) 450.8 142.9 Source: Health Insurance Review and Assessment Service Source: Health Insurance Review and Assessment Service

Healthcare

2017. 6. 15

Drug expenditure cap a possibility NHIS cumulative surplus hits KRW20t in 2016… The NHIS posted an annual surplus of KRW3.1t for 2016 (down 26.1% y-y) on revenue and expense growth of 6.3% and 9.1% y-y to KRW55.7t and KRW52.6t, respectively. The revenue consists of insurance premiums (KRW47.3t; up 7.4% y-y) and government aid (KRW7.4t; down 0.4% y-y), with the latter coming from government coffers (equivalent to 14% of expected insurance premium revenue in the year) and the National Health Promotion Fund (6%). The agency’s cumulative surplus rose 18.3% y-y to KRW20t. …but likely to fall to KRW17.2 t in 2020: Based on data submitted to the National Assembly, the NHIS over 2017-2020 expects its: 1) revenue to grow 6.9% pa on premium hikes and increased funding; and 2) expenses to expand 8.7% pa due to coverage expansions and greater use of medical services. If correct, the program will suffer an annual deficit of KRW1.2t in 2019, with the cumulative surplus peaking at KRW21.2t in 2018 and falling to KRW17.2t in 2020. With yields on managed assets in 2016 a meager 1.7%, the NHIS intends to cut exposure to Korean bonds and diversify into overseas stocks and alternative investments. Aid normalization, premium hikes key: The National Health Insurance Act set government aid at 20% of estimated annual insurance premium revenue. The government, however, has not fulfilled its mandate, with unpaid government aid over 2007-2015 reaching KRW14.7t. Meanwhile, after a 5.9% premium hike in 2011, growth in premiums collected has been slowing and should come in flat y-y this year, totaling 6.12% of income. Even though expenditures by the NHIS have seen a CAGR of 7.1% over 2011-2016, premium hikes have been moderate as pharmaceutical firms pared 14% on average from drug prices in 2012. NHIS’s finances should improve if premiums rise and the government makes good on its aid commitment. (Price cuts in 2012 reduced the drug portion of medical costs from 29.1% in 2011 to a record low of 25.7% in 2016.) Generous healthcare policy to burden finances: President Moon’s election pledges included reducing the cap on out-of-pocket expenses for lower income people to KRW1m, increasing state responsibility for hospitalized children under 15, and offering financial support for catastrophic medical expenses. If implemented: 1) insurance expansion would cover more services, making the out-of-pocket limit more meaningful; 2) out-of-pocket portion of costs would fall to 5% for those under 15 years; and 3) patients facing expensive medical bills would receive government support of up to KRW2m pa according to income levels. Also, national health insurance would expand to cover expensive diagnostic exams, novel drugs, and new high-tech medical procedures, as well as costs associated with employing care assistants, choosing more-experienced doctors, and staying in a premium hospital room. Out-of-pocket ratios would vary by income level. The new regime’s generous healthcare policy is likely to weigh on NHIS finances.

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2017. 6. 15

NHIS surpluses and deficits: Annual and cumulative

(KRWt) 25

20 Annual

15 Cumulative

(5) 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018E 2020E

Note: Based on cash flows; forecast are NHIS’s figures Source: National Health Insurance Service, Samsung Securities

NHIS: Annual revenue and expenditure

(KRWt)

80 70 Revenue

60 Expenditure 50 40 30 20 10 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018E 2020E

Note: Based on cash flows; forecast are NHIS’s figures Source: National Health Insurance Service, Samsung Securities

NHIS: Revenue breakdown (2016) NHIS: Expenditure breakdown (2016)

Government Other: subsidies: 2% Administration and 13% other costs: 3%

KRW55.7t KRW52.6t

Contribution Insurance benefit revenue: costs: 85% 97%

Note: Based on cash flows Note: Based on cash flows Source: National Health Insurance Service, Samsung Securities Source: National Health Insurance Service, Samsung Securities

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2017. 6. 15

Medical costs covered by NHIS: Breakdown of fees-for-services portion Medical supplies: 4.1% Pharmaceutical spending: 25.7%

Medical treatment: 43.1%

Base fee: 27.2%

Source: National Health Insurance Service, Samsung Securities

Medical costs covered by NHIS: Pharmaceutical portion

(KRWt) (%) 18 As portion of total costs covered by NHIS (RHS) 30 16 29 14 28 27 12 Pharmaceutical spending (LHS) 26 10 25 8 24 6 23 4 22 2 21 0 20 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Note: Pharmaceutical portion seems increased in 2014 due to change of calculation method change (excluding expenditure in case-payment system since 2014) Source: National Health Insurance Service, Samsung Securities

National Health Insurance: Premiums and growth

(%) (% y-y)

7 25 Growth (RHS) 6 Insurance premium (LHS) 20 5

4 15

3 10 2 5 1

0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: National Health Insurance Service, Samsung Securities

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2017. 6. 15

Korean government: Shortfalls in payments to NHIS

(KRWt) 2.5 2.4

1.9 2.0 2.0 2.0 1.8 1.6 1.5

1.0 1.0 0.8 0.7 0.6 0.5

0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Labor union of National Health Insurance Service, Samsung Securities

Healthcare

2017. 6. 15

Pharma to shoulder expenses exceeding NHIS budget? The NHIS, rather than controlling the price of each drug (as it currently does), may assign an expenditure cap for each therapeutic class (eg , hypertension, diabetes). Expenses exceeding the budget limit would be shouldered by pharmaceutical firms. The move could thus have the biggest impact on the pharmaceutical industry since 2012 when the government cut prices of 6,506 (out of 13,814) drugs on the formulary list, causing a 14% drop on average. In 2011, an NHIS committee for advancing healthcare insurance proposed: 1) capping growth in aggregate drug expenditures by therapeutic class; and 2) having pharmaceutical firms reimburse drug costs that exceed the cap. In 2013, the Korea Institute for Health and Social Affairs published A Study on Fixed Budget for Pharmaceutical Expenditures which, after comparing drug budgets across countries, asserted that a fixed drug budget is necessary to contain drug spending in the face of aging population and increasing number of people using medical services. Cap in Taiwan fails to address deficits: Taiwan introduced its National Health Insurance (NHI) in 1995 on a fee-for-service basis, exempting out-of-pocket payments for certain medical services such as child delivery. To contain rapidly rising costs, the nation implemented an expenditure cap for dental care in 1998, outpatient care in 2001, and inpatient care in 2002. The expenditure cap is adjusted every year as follows. • Expenditure cap for new year = per-capita costs of covered medical services in 2016 x [1+ growth in costs of covered medical services (non-negotiable factors + negotiable factors)] x number of policyholders The expenditure cap is based on both negotiable and non-negotiable factors. Negotiable factors refer to changes in the scope of covered services, costs of enhancing medical service quality and promoting health, magnitude of medical service usage; non-negotiable ones refer to natural growth in medical service users (due to population growth and changing demographics by age and gender), and medical service costs ( eg , labor, drug, medical supplies). Despite the expenditure caps, however, the NHI remained mired in deficits. In 2002 when it first introduced the expenditure cap to all services, it posted a surplus of TWD8.7b (KRW326.9b) but slipped back to a deficit of TWD12.6b (KRW473.5b) in 2007 which widened to TWD58.2b (KRW2.2t) in 2009. Annual growth in medical expenditures typically outstripped that of premiums due to population aging and heavy spending on major illnesses. To address the NHI’s financial woes, the nation in 2011 undertook a major health care reform—the Second-Generation NHI—which it implemented in 2013. The new plan levied: 1) additional premiums on employers and policyholders; and 2) supplemental premiums in six additional areas (including rent, interest, and dividends), establishing a new premium base. Study results on drug expenditure cap due in July: The Ministry of Health and Welfare’s Pharmaceutical Benefits Division in 2016 hinted at the need to introduce a drug expenditure cap. In March 2017, the NHIS commissioned a study to explore ways to introduce a drug expenditure cap (with the Seoul National University College of Nursing Professor Kim Jin-Hyun). The project, unlike previous ones that simply looked into overseas cases and studied drug prices, focuses solely on capping aggregate drug expenditures. The results should be announced by end-July.

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2017. 6. 15

( Taiwan National Health Insurance Administration

Annual revenue and expense Annual balance

(TWDb) (TWDb) 700 120 600 100 439.2 500 405.6 80 400 326.9 60 391.9 407.5 300 194.5 40 311.2 200 20

100 157.4 0 0 (20) 1995 1998 2001 2004 2007 2010 2013 (40) (60) Revenue Expense 1995 1998 2001 2004 2007 2010 2013

Note: Accrual basis Note: Accrual basis Source: Taiwan National Health Insurance Administration Source: Taiwan National Health Insurance Administration Samsung Securities Samsung Securities

Healthcare

2017. 6. 15

Regulations over rebates may tighten again Mandatory reporting to be implemented… The Ministry of Health and Welfare (MOHW) on Mar 27 revealed a proposal that makes it mandatory for pharmaceutical firms to collect/track data and submit reports regarding any financial incentives provided to pharmacists or physicians). Reports should include offerings of sample products, support of clinical trials, post-launch surveys, introductions of new drugs at big events (involving multiple institutions) or via a visit to a single institution, assistance to academic events, and discounts on costs (ie , favorable payment terms). For example, reports on academic events should include the event’s host, title, venue, and time, as well as the total amount of financial support. …with legally enforceable provisions: Pharmaceutical firms must submit the required documents to the MOHW within three months of the end of a financial year and keep related data. The MOHW reviews the reports and can ask law enforcement to become involved if required. Firms that break rules are subject to corrective orders and fines (less than KRW1m), and failure to follow corrective orders results in a fine of KRW2m. Furthermore, penalties for violating the prohibition of providing financial incentives can reach up to three years in prison or KRW30m in fines. Impacts to be limited: Major regulations related to rebates in Korea’s pharmaceutical industry include: 1) dual punishment (Nov 28, 2010), where both the giver and receiver are punished; 2) a two-strike rule (Jul 1, 2014) in which the offender can have its drug removed from NHIS list; and 3) the anti-corruption law (Sep 28, 2016). Government investigations into pharmaceutical firms in 2011 led to the prosecution of three doctors that received rebates, and administrative sanctions for 212 doctors, marking the first case of dual-punishment. Meanwhile, the MOHW on Apr 27, 2017 announced the suspension of nine of Novartis Korea’s drugs from national insurance coverage for six months and fined the company a combined KRW55.1b related to 33 other drugs, marking the first case of the two-strike rule. We believe the mandatory reports on financial incentive offerings simply complement existing anti-rebate regulations and will have limited impacts.

Healthcare

2017. 6. 15

Drug expenditure cap negative for firms dependent on prescription drugs The MOHW on Aug 12, 2011 announced a new drug pricing policy and measures to advance the pharmaceutical industry, which included: 1) a change in the calculation method for drug prices; 2) restricting prescriptions of unnecessary and high-price drugs; 3) selecting and supporting innovative pharmaceuticals; and 4) supporting R&D activities and strengthening capabilities to tap global markets. These measures targeted: 1) stabilizing the fiscal status of the NHIS via drug price cuts (which were capped at 33.1%) and controlling drug usage; and 2) restructuring the pharmaceutical industry to focus on globally competitive, innovative players with R&D capabilities. Under the new policy, prices of off-patent original drug prices were cut to 70% and those for generic ones to 59.55% of previous levels. All prices were cut to 53.55% of pre-off-patent levels in one year after patents expired. Indeed, 8,776 drugs (60.9% of the total) listed on the NHIS list whose prices were higher than 53.55% of pre-off-patent original drug prices had their prices cut in Mar 2012 by an average of 14%, with the maximum cut reaching 33.1%. In 2011, affected by such measures, the Kospi Medical Supplies Index fell 10.9%, the Kosdaq Pharmaceuticals Index rose 36.2%, and the Kosdaq Medical & Precision Machines Index increased 30.8%. Companies in the Kospi Medical Supplies Index saw their combined operating profit decline 38.7% for that year as price cuts led to corrections in retail inventories and returns. Combined operating profit at companies in the Kosdaq Pharmaceuticals Index and the Kosdaq Medical & Precision Machines Index rose a respective 23% and 54.6%, defying the drug pricing policy reforms. Among the top-20 companies in terms of 2011 share performance, most belonged to the Kosdaq Pharmaceuticals Index and the Kosdaq Medical & Precision Machines Index. Among the bottom-20, most were a part of the Kospi Medical Supplies Index. In short, if the drug expenditure cap system is put in place, investors would need to turn their attention from prescription drugs-focused players— who are mostly in the Kospi Medical Supplies index—to those specializing in OTC drugs, exports, health supplements, biotech, diagnostics, medical esthetics, and medical devices.

Korean healthcare indices Operating margins in 2011-2012 Operating profit and market cap change in 2011

(%) (% y-y) 54.6 18 60 15.4 16 14.7 36.2 30.8 40 23.0 14 12.7 12.2 12 20 10 8.2 8.6 0 8 6.7 5.3 (20) (10.9) 6 (14.9) (13.9) (40) 4 (38.7) 2 (60) 0 KRX Healthcare Kospi Medical Kosdaq Kosdaq Medical KRX Kospi Medical Kosdaq Kosdaq Medical Supplies Pharmaceutical and Precision Healthcare Supplies Pharmaceutical and Machines Precision Machines 2010-2011 operating profit change 2011 2012 2010-2011 market cap change

Source: QuantiWise, Samsung Securities Source: QuantiWise, Samsung Securities

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2017. 6. 15

Korean healthcare firms: Top-20 share performances in 2011 Rank Company Subsector Market cap at end-2011 (KRWb) Share price change in 2011 (%) 1 InBody Health Care Equipment & Supplies 167 339.6 2 Medipost Biotechnology 1,272 321.6 3 Dai Han Pharmaceutical Pharmaceuticals 62 241.7 4 Solco Biomedical Health Care Equipment & Supplies 103 187.8 5 Sewoon Medical Health Care Equipment & Supplies 234 162.3 6 Macrogen Life Sciences Tools & Services 201 157.6 7 Biotoxtech Life Sciences Tools & Services 71 155.4 8 Huvitz Health Care Equipment & Supplies 126 154.6 9 Infinitt Healthcare Health Care Technology 398 150.8 10 Seegene Life Sciences Tools & Services 978 135.2 11 Young Jin Pharm Pharmaceuticals 348 131.1 12 Green Cross Cell Biotechnology 136 118.8 13 CTC Bio Pharmaceuticals 136 106.6 14 Meta Biomed Health Care Equipment & Supplies 70 102.0 15 Estech Pharma Pharmaceuticals 79 101.0 16 Oscotec Biotechnology 62 100.5 17 JW Shinyak Pharmaceuticals 352 96.5 18 Seoul Pharm Pharmaceuticals 30 94.0 19 Dae Hwa Pharm Pharmaceuticals 91 93.4 20 Su-Heung Life Sciences Tools & Services 176 89.1

Korean healthcare firms: Bottom-20 share performance in 2011 Rank Company Subsector Market cap at end-2011 (KRWb) Share price change in 2011 (%) 1 Botabio Pharmaceuticals 10 (69.0) 2 ISU Abxis Pharmaceuticals 88 (46.5) 3 Panagene Life Sciences Tools & Services 102 (43.4) 4 ilShinbiobase Life Sciences Tools & Services 24 (43.3) 5 CKH Food & Health Pharmaceuticals 186 (41.6) 6 Samsung Pharm Pharmaceuticals 14 (41.3) 7 Hanmi Science Pharmaceuticals 198 (40.9) 8 Value Added Technology Health Care Equipment & Supplies 108 (38.8) 9 Wooridul Pharmaceutical Pharmaceuticals 28 (38.5) 10 Daewoong Pharmaceutical Pharmaceuticals 319 (37.9) 11 Aminologics Health Care Technology 194 (36.6) 12 Boryung Pharm Pharmaceuticals 111 (35.3) 13 LG Life Sciences Pharmaceuticals 569 (34.8) 14 Cellumed Health Care Equipment & Supplies 64 (33.5) 15 Genematrix Biotechnology 22 (31.0) 16 Samjin Pharm Pharmaceuticals 111 (30.3) 17 Pharmswellbio Pharmaceuticals 20 (30.1) 18 Daewon Pharmaceutical Pharmaceuticals 64 (29.8) 19 Donga Socio Holdings Pharmaceuticals 989 (27.8) 20 Yuhan Pharmaceuticals 1,422 (26.5) Note: Based on 128 firms listed in Kospi and Kosdaq in 2011 Source: QuantiWise, Samsung Securities

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2017. 6. 15

Korean healthcare firms: Exports portion in 2016 (1) Company Code Subsector Export (%) Company Code Subsector Export (%) Samsung Biologics 207940 Pharmaceuticals 100.0 Eubiologics 206650 Biotechnology 47.0 Alteogen 196170 Biotechnology 100.0 Dio 039840 Health Care Equipment & Supplies 46.5 Access Bio 950130 Life Sciences Tools & Services 99.6 Kyongbo Pharmaceutical 214390 Pharmaceuticals 45.7 Boditech Med 206640 Life Sciences Tools & Services 98.0 Oscotec 039200 Biotechnology 43.6 High Tech Pharm 106190 Pharmaceuticals 97.5 Panagene 046210 Life Sciences Tools & Services 41.8 Intromedic 150840 Health Care Equipment & Supplies 95.8 Su-Heung 008490 Life Sciences Tools & Services 39.5 KPX Lifescience 114450 Pharmaceuticals 93.4 Amicogen 092040 Biotechnology 37.7 Caregen 214370 Biotechnology 93.0 L&K Biomed 156100 Health Care Equipment & Supplies 37.4 Cell Biotech 049960 Biotechnology 90.0 Young Jin Pharm 003520 Pharmaceuticals 35.4 Celltrion 068270 Pharmaceuticals 84.8 Corentec 104540 Health Care Equipment & Supplies 32.6 Seegene 096530 Life Sciences Tools & Services 82.9 CU Medical Systems 115480 Health Care Equipment & Supplies 31.8 ST Pharm 237690 Pharmaceuticals 82.6 Green Cross Cell 031390 Biotechnology 30.5 i-Sens 099190 Health Care Equipment & Supplies 81.9 Komi Pharm International 041960 Pharmaceuticals 30.0 CKD Bio 063160 Pharmaceuticals 80.8 Woogene B&G 018620 Pharmaceuticals 28.4 NanoenTek 039860 Health Care Equipment & Supplies 80.6 Donga ST 170900 Pharmaceuticals 26.2 Kolon Life Science 102940 Pharmaceuticals 80.3 Bioneer 064550 Biotechnology 24.6 Mediana 041920 Health Care Equipment & Supplies 78.4 Prostemics 203690 Biotechnology 24.3 Value Added Technology 043150 Health Care Equipment & Supplies 77.2 Cosmax BTI 044820 Pharmaceuticals 23.7 Nibec 138610 Health Care Equipment & Supplies 75.8 Solco Biomedical 043100 Health Care Equipment & Supplies 20.7 Huvitz 065510 Health Care Equipment & Supplies 75.3 Won Ik 032940 Health Care Equipment & Supplies 20.2 Logos Biosystems 238120 Life Sciences Tools & Services 75.3 Anygen 196300 Biotechnology 19.9 PJ Electronics 006140 Health Care Equipment & Supplies 72.1 Daihan Scientific 131220 Life Sciences Tools & Services 19.7 ATGen 182400 Life Sciences Tools & Services 71.3 Yuhan 000100 Pharmaceuticals 18.7 Vieworks 100120 Health Care Equipment & Supplies 71.3 ilShinbiobase 068330 Life Sciences Tools & Services 18.6 Macrogen 038290 Life Sciences Tools & Services 69.7 Daesung Microbiological Labs 036480 Pharmaceuticals 17.7 Lutronic 085370 Health Care Equipment & Supplies 69.7 Sinsin Pharmaceutical 002800 Pharmaceuticals 17.6 Drtech 214680 Health Care Equipment & Supplies 65.0 Green Cross 006280 Pharmaceuticals 17.0 Medytox 086900 Biotechnology 62.8 DongKook Pharm 086450 Pharmaceuticals 16.9 Rayence 228850 Health Care Equipment & Supplies 62.6 Humedix 200670 Pharmaceuticals 16.1 Meta Biomed 059210 Health Care Equipment & Supplies 61.4 Choong Ang Vaccine 072020 Pharmaceuticals 15.8 Infinitt Healthcare 071200 Health Care Technology 59.3 Huons* 243070 Pharmaceuticals 15.6 Dentium 145720 Health Care Equipment & Supplies 59.3 Gene Bio Tech 086060 Pharmaceuticals 15.4 Estech Pharma 041910 Pharmaceuticals 59.1 Biotoxtech 086040 Life Sciences Tools & Services 15.0 Hironic 149980 Health Care Equipment & Supplies 58.6 Green Cross Medical Science 142280 Health Care Equipment & Supplies 14.5 Mezzion Pharma 140410 Pharmaceuticals 55.8 Sewoon Medical 100700 Health Care Equipment & Supplies 14.0 Hugel 145020 Biotechnology 54.4 Shin Poong Pharm 019170 Pharmaceuticals 14.0 Il-Yang Pharm 007570 Pharmaceuticals 54.1 Cheil Bio 052670 Pharmaceuticals 12.4 Hans Biomed 042520 Biotechnology 53.6 CTC Bio 060590 Pharmaceuticals 12.1 Astar 246720 Health Care Equipment & Supplies 53.4 Korea United Pharm 033270 Pharmaceuticals 11.8 Interojo 119610 Health Care Equipment & Supplies 52.6 Peptron 087010 Biotechnology 11.6 InBody 041830 Health Care Equipment & Supplies 52.3 Naturalendo Tech 168330 Pharmaceuticals 11.2 MEKICS 058110 Health Care Equipment & Supplies 51.1 Intron Biotechnology 048530 Life Sciences Tools & Services 10.9 Nutribiotech 222040 Pharmaceuticals 51.0 Daewoong Pharm 069620 Pharmaceuticals 10.8 PCL 241820 Life Sciences Tools & Services 49.8 U&I Corporation 056090 Health Care Equipment & Supplies 10.7 ISU Abxis 086890 Pharmaceuticals 48.6 Eagle Veterinary Technology 044960 Pharmaceuticals 10.5 GenoFocus 187420 Biotechnology 48.2 Je Il Pharm 002620 Pharmaceuticals 10.2 SK Chemicals 006120 Chemicals 47.6 Daehan New Pharm 054670 Pharmaceuticals 10.0 Osstem Implant 048260 Health Care Equipment & Supplies 47.5 Next BT 065170 Pharmaceuticals 9.6 JVM 054950 Health Care Equipment & Supplies 47.3 Samsung Pharm 001360 Pharmaceuticals 9.5 Note: * Before spin-off Source: Company data, Samsung Securities

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2017. 6. 15

Korean healthcare firms: Exports portion in 2016 (2) Company Code Subsector Export (%) Company Code Subsector Export (%) Hanmi Pharm 128940 Pharmaceuticals 9.3 Kwang Dong Pharm 009290 Pharmaceuticals 0.8 ChoA Pharm. 034940 Pharmaceuticals 9.0 Sam Il Pharm 000520 Pharmaceuticals 0.7 Bioleaders 142760 Biotechnology 8.8 DHP Korea 131030 Pharmaceuticals 0.7 Boryung Pharm 003850 Pharmaceuticals 8.4 Bukwang Pharmaceutical 003000 Pharmaceuticals 0.7 Neopharm 092730 Pharmaceuticals 8.3 Hanall Biopharma 009420 Pharmaceuticals 0.6 Shinhung 004080 Health Care Equipment & Supplies 7.9 Kyung Nam Pharm 053950 Pharmaceuticals 0.6 BIT Computer 032850 Health Care Technology 7.7 Reyon Pharmaceutical 102460 Pharmaceuticals 0.5 Kyung Dong Pharm 011040 Pharmaceuticals 6.6 HLscience 239610 Pharmaceuticals 0.3 Cellumed 049180 Health Care Equipment & Supplies 6.3 Wooridul Pharmaceutical 004720 Pharmaceuticals 0.2 Daewon Pharm 003220 Pharmaceuticals 5.8 Selvas Healthcare 208370 Health Care Equipment & Supplies 0.2 Theragen Etex 066700 Pharmaceuticals 5.5 Hyundai Pharmaceutical 004310 Pharmaceuticals 0.1 Futurechem 220100 Pharmaceuticals 5.4 Whan In Pharm 016580 Pharmaceuticals 0.1 Handok 002390 Pharmaceuticals 5.3 Qurient 115180 Biotechnology 0.0 SeouLinBioscience 038070 Biotechnology 5.2 Alvogen Korea 002250 Pharmaceuticals 0.0 Chong Kun Dang 185750 Pharmaceuticals 5.2 Sam-A Pharm 009300 Pharmaceuticals 0.0 DNA Link 127120 Life Sciences Tools & Services 5.1 UBCare 032620 Health Care Technology 0.0 Genematrix 109820 Biotechnology 5.1 Solborn 035610 Health Care Technology 0.0 BC World Pharm 200780 Pharmaceuticals 4.7 Pharmswellbio 043090 Pharmaceuticals 0.0 Aprogen pharmaceuticals 003060 Pharmaceuticals 4.6 C-Tri 047920 Pharmaceuticals 0.0 Dong Sung Pharm 002210 Pharmaceuticals 4.3 Nong Woo Bio 054050 Biotechnology 0.0 JW Pharmaceutical 001060 Pharmaceuticals 4.0 Hwail Pharm 061250 Pharmaceuticals 0.0 Eyegene 185490 Biotechnology 3.7 Anterogen 065660 Biotechnology 0.0 Young In Frontier 036180 Life Sciences Tools & Services 3.5 JW Shinyak 067290 Pharmaceuticals 0.0 Sam Chun Dang Pharm 000250 Pharmaceuticals 3.2 CrystalGenomics 083790 Life Sciences Tools & Services 0.0 Kukje Pharm 002720 Pharmaceuticals 3.1 LabGenomics 084650 Life Sciences Tools & Services 0.0 Dae Hwa Pharm 067080 Pharmaceuticals 3.0 ViroMed 084990 Biotechnology 0.0 Celltrion Pharm 068760 Pharmaceuticals 2.9 Chabiotech 085660 Biotechnology 0.0 Binex 053030 Pharmaceuticals 2.8 Genexine 095700 Biotechnology 0.0 Ahn-Gook Pharm 001540 Pharmaceuticals 2.7 Wooridul Huebrain 118000 Health Care Equipment & Supplies 0.0 JW Life Science 234080 Pharmaceuticals 2.6 Legochem Biosciences 141080 Life Sciences Tools & Services 0.0 MG MED 180400 Life Sciences Tools & Services 2.5 Corestem 166480 Biotechnology 0.0 Seoul Pharm 018680 Pharmaceuticals 2.3 Tego Science 191420 Biotechnology 0.0 Myungmoon Pharm 017180 Pharmaceuticals 2.1 HS Vital 204990 Pharmaceuticals 0.0 Aminologics 074430 Health Care Providers & Services 2.1 Pharma Research Products 214450 Pharmaceuticals 0.0 Shinil Pharm 012790 Pharmaceuticals 1.9 Sillajen 215600 Biotechnology 0.0 Jin Yang Pharmacetical 007370 Pharmaceuticals 1.8 Chemon 217600 Life Sciences Tools & Services 0.0 Korean Drug 014570 Pharmaceuticals 1.8 Kangstem Biotech 217730 Biotechnology 0.0 Medipost 078160 Biotechnology 1.8 Pangen Biotech 222110 Biotechnology 0.0 CMG Pharmaceutical 058820 Pharmaceuticals 1.7 Il Dong Pharm 249420 Pharmaceuticals 1.7 Yuyu Pharma 000220 Pharmaceuticals 1.6 Samjin Pharm 005500 Pharmaceuticals 1.3 Daebong LS 078140 Pharmaceuticals 1.3 Botabio 026260 Pharmaceuticals 1.1 Green Cross Lab Cell 144510 Health Care Providers & Services 0.9 Dai Han Pharmaceutical 023910 Pharmaceuticals 0.9 Il Sung Pharm 003120 Pharmaceuticals 0.9 Dong Wha Pharm 000020 Pharmaceuticals 0.9 GL Pharm Tech 204840 Pharmaceuticals 0.8 Source: Company data, Samsung Securities

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2017. 6. 15

Samsung healthcare coverage: Business portfolio in 2016

100% 80% 60% 40% 20% 0% Dio Hugel i-Sens Yuhan Celltrion Dentium Medytox Rayence Seegene Vieworks Donga ST Donga ST Pharm ST Green Cross Green Ilyang Pharm Ilyang Boditech Med Boditech Hanmi Pharm Hanmi SK Chemicals* SK Boryung Pharm Boryung Osstem Implant Osstem Chong Kun Dang Kun Chong Samsung Biologics Samsung Daewon Pharmaceutical Daewon Value Added Technology Added Value Large pharmas SMEs Biotech Diagnostics Medical devices Medical aesthetics

Exports Prescription drugs OTC drugs API Plasma derivatives/vaccines Medical devices Diagnostics Medical aesthetic Others

Note: * Based on Life Science division sales Source: Company data, Samsung Securities

Samsung healthcare coverage: Export portion in 2016

(%) 100 80 60 Domestic 40 sales 20 0 Exports Dio Hugel i-Sens Yuhan Celltrion Dentium Medytox Rayence Seegene Vieworks ST Pharm Donga ST* Donga Daewon Technology Green Cross Green Value Added Value Ilyang Pharm Ilyang Hanmi Pharm Hanmi Boditech Med Boditech Pharmaceutical Boryung Pharm Boryung Osstem Implant Osstem SK Chemicals** Chong Kun Dang Kun Chong Samsung Biologics Samsung

Note: * Based on parent-based sales ** Based on Life Science division sales Source: Company data, Samsung Securities

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2017. 6. 15

Contents 1H review: Poverty in the p2 midst of plenty Pharmaceutical market p7 outlook Visible progress to be made p32 on R&D and B2B fronts Government policy p52 warrants attention Key issues in 2H Key issues in 2H p68 Pharmaceutical, biotech, and diagnostics segments Solid earnings momentum p87 in 2H Company p105 Green Cross’s IVIG-SN up for FDA approval in 2H Green Cross on Nov 24, 2015 filed for US FDA approval for IVIG-SN. On Nov 22, 2016, the FDA asked for more data on the manufacturing process for the immunodeficiency-disease treatment. The company plans to prepare the requested data in 2Q and submit them in 3Q. We expect the product to be approved in 4Q. Establishing global value chain: Green Cross is building a global value chain that consists of running blood collection centers (to secure plasma), operating plants to produce plasma derivatives, obtaining approval to sell plasma derivatives, having plasma derivatives placed on the formulary lists, and marketing and selling the products. The company has eight blood collection centers in the US and seven in China, with plans to raise the respective numbers to 30 and 10 by 2020. The firm’s Ochang plant #1 and facility in China produce plasma derivatives and have respective capacities of 0.7m and 0.3m liters pa . Its Ochang plant #2, completed in Aug 2016, has an annual capacity of 0.7m liters. Its plant in Canada with annual capacity of 1m liters is set to open in 2019. Green Cross’s global blood derivatives business should take off once IVIG-SN obtains FDA approval. The company aims to boost its exports of plasma derivatives and lift its export portion of sales from 10% in 2011 and 20% in 2016 to 30% in 2020.

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2017. 6. 15

Green Cross: Plasma business strategic roadmap

Source: Company data

Green Cross: Plan to integrate local operations into global plasma business

Source: Company data

Healthcare

2017. 6. 15

Kolon Life Science to commercialize Invossa in Korea Invossa approval imminent: Kolon Life Science is developing Invossa, a cell-mediated gene therapy for degenerative osteoarthirists. The company plans to launch the drug domestically in September if it obtains approval in June. As a single-dose treatment injected near the knee, Invossa allows patients return to daily life after 30-60 minutes, a highly convenient option vs gene therapies requiring surgery. The drug should be ideal for patients that did not respond to other drugs, or early- phase patients unsuitable for surgery. The results of the Phase III Korean trial involving 163 patients showed that International Knee Documentation Committee (IKDC) scores—a measure of knee pain and activity—improved by 15.1 (from 40.3 to 55.4) for those taking Invossa over the 12-month period, exceeding the performance of a placebo by three times (from 39.6 to 44.6). Invossa also proved superior to placebo in improving visual analog scale (VAS) pain scores by 24.5 (vs 0.3 for placebo). Changes in Western Ontario and McMaster Universities Osteoarthritis Index (WOMAC) scores were significant after 12 months, with a mean change of -13.9 with Invossa and -6.2 with a placebo. Phase II US trials, performed over a 24- month period showed that a single-dose injection has an efficacy lasting two years. Looking to put Invossa on formulary list, expand capacity: Kolon Life Science priced Invossa at KRW4m-5m per dose in the domestic market. Of the nation’s 5m degenerative osteoarthritis patients, 2m of them are target customers in phase 2 or 3. The company aims to raise the number of patients taking the drug from an estimated 1,700 this year to 10,000 in 2018. The firm entered a marketing partnership with Mundipharma and Kolon Pharma, with the former partner responsible for general hospitals and the latter for general practitioners. Its capacity is currently at 10,000 doses but is scheduled to reach to 100,000 doses by 2020. In Nov of last year, Kolon Life Science out-licensed Invossa’s marketing rights in Japan to Mitsubishi Tanabe for KRW498.9b (including KRW27.3b upfront) plus royalties in the double digits. Under the 10-year deal, KLS retains the rights to manufacture and supply Invossa. Of note, 50% of the company’s upfront and milestone payments will be passed on to original developer TissueGene. Mitsubishi Tanabe plans to make IND applications for Phase II and Phase III trials this year, simultaneously proceed with Phase II and Phase III trials thereafter, and gain Japanese regulatory approval in 2023.

Invossa’s Phase III trials in Korea: IKDC scores Invossa’s Phase III trials in Korea: VAS scores (Pts) (Pts) 15.1 16 0 12.9 13.3 14 (5) 0.0 12 (10) (12.7) 10 8.6 7.5 (10.3) 6.9 (15) (12.8) 8 (13.3) 4.9 5.4 5.0 (14.1) (14.6) 6 (20) (17.2) 4 (25) (22.3) 2 (23.4) (24.5) 0.0 2.5 (30) 0 Baseline 1 month 3 months6 months9 months 12 Baseline 1 month 3 months 6 months 9 months 12 months months

Dosage group Placebo group Dosage group Placebo group

Source: Kolon Life Science, Samsung Securities Source: Kolon Life Science, Samsung Securities

Healthcare

2017. 6. 15

Genexine likely to release positive Phase II trial results Genexine, a biotech firm specializing in immune and metabolic disease treatment drugs, owns hybrid Fc fusion protein and DNA vaccine platform technology. The company has six candidates under Phase II trials and two under Phase I trials. The firm has inked technology alliances with large, Asian pharmaceutical firms such as Simcere, Tasly, Fosun, and Kalbe. Likely to release positive phase II trial result for GX-H9: Genexine is developing GX-H9 (hGH-hyFc), an innovative, long-acting recombinant hGH utilizing novel hyFc (hybrid Fc) technology and intended for once-weekly or twice-monthly administration. The global hGH market is likely to expand from USD3.5b in 2013 to USD4.7b in 2018, consisting of the pediatric growth hormone deficiency (86%) and adult growth hormone deficiency (14%) segments. Handok and Genexine in Jun 2012 signed a technology transfer and joint development contract for GX-H9 and agreed to split profits equally. The US FDA on Nov 16, 2016 granted GX-H9 an orphan drug designation for the treatment of growth hormone deficiency, which qualifies the firm for a seven-year monopoly in that nation. Genexine on Apr 1 at the annual Endocrine Society meeting 2017 released: 1) positive interim Phase II results regarding impacts on pediatric height; and 2) final Phase II results for adults. The former relates to data obtained from 24 patients, or 50% of total enrollment, for three months of the total six months of treatment. Key conclusions from the interim analysis include mean annualized height velocities of 12.7cm for the once-daily dose; 12.4cm for twice-monthly dose (receiving 2.4mg/kg), and 10.7 cm and 15.3 cm for the two weekly doses of a respective 0.8 mg/kg and 1.2mg/kg. Final Phase II results for the trial on children should be available in Sep 2017, and are likely to outperform results of rivals. The mean annualized height velocities at six months were 13.4cm for Pfizer/Opko Health’s MOD-4023, 8.5cm for Versartis’s VRS-317, and 12.9cm for Ascendis’ ACP-001, with all of those drugs currently under Phase III trials. GH-H9 vs rival products: Pfizer and Opko Health in Dec 2014 entered into an USD570m agreement to develop and commercialize the latter’s long-acting hGH MOD-4023 (hGH-CTP) based on carboxy-terminal peptide. Opko Health received USD295m upfront and should bring in a USD275m milestone when the drug is approved. The drug is now in Phase III trials. The drug’s low viscosity makes it easy to develop, but developing a long-acting formulation—beyond its current once-a-week product—has proven to be difficult. Versartis’s VRS-317 is a long-acting hGH based on XTEN technology. It is a fusion protein found in E. coli and derived by combining XTEN1 and XTEN2 with n- and c-terminals. That solubility rises in line with a hike in hydrophile is positive, but it has limitations such as reduced efficacy, side effects related to the immune system, and difficulties relating to developing treatments for children. Ascendis Pharma’s ACP-001 is a long-acting hormone based on TransCon PEG hGH. Because of the use of a polyethylene glycol (PEG), the drug has limitations related to formulation and toxicity. Novo Nordisk’s NNC-0195-0092 (Phase II) is a hGH conjugated with an albumin binding moiety. Novo Nordisk dominates the world’s once-daily dose hGH market, but limitations exist for the product due to the non-specific binding of albumin and hGH.

Healthcare

2017. 6. 15

Genexine to start Phase Ib/IIa trials for GX-188E DNA therapeutic vaccine: Genexine is developing GX-188E (HPV16/18 DNA vaccine), a first-in-class DNA therapeutic drug targeting the high-risk HPV types 16/18 associated with persistent infection responsible for cervical intraepithelial neoplasia, cervical cancer, and head and neck cancer. Rival Inovio’s Phase II trial results for VGX- 3100 showed that histological regression to CIN 1I or normal pathology was observed in 49.5% of the VGX-3100 and 30.6% of the placebo recipients. Complete regression was recorded in 40.2% of the VGX-3100 and 14.3% of the placebo recipients. Meanwhile, Merck on Nov 11, 2016 announced that it will test its cancer-fighting checkpoint inhibitor Keytruda in combo with Genexine’s cancer vaccine, GX-188E, in HPV-induced cancers. According to FiercePharma, Keytruda sales hit USD1.42b in 2016 and should hit USD6.56b in 2022. Genexine and Merck plan to initiate Phase Ib/IIa trials for the Keytruda and GX-188E combo involving 40 subjects in 1H17.

Genexine: R&D pipeline Platform Project Indication Discovery Pre- Phase Phase Phase Note technology clinical I Ib/2a II LA* growth Pediatric GHD** GX-H9 hormone Adult GHD** GX-E2 LA EPO Anemia Chemotherapy induced GX-G3 LA G-CSF neutropenia HPV persistent infection hyFc GX-I7 LA IL-7 Tumor GX-G6 LA GLP-1 Diabetes GX-G8 LA GLP-2 Short bowel syndrome Solid tumor Multi target LA hyFc Liver cancer hyFc IO Metabolic diseases CIN*** 2/3 DNA HPV GX-188E CIN 3 vaccine vaccine Cervical cancer Combination with Keytruda (1H17) Note: * LA (Long-acting) ** Growth hormone deficiency *** Cervical intraepithelial neoplasia Source: Genexine, Samsung Securities

Global daily growth hormone deficiency treatment market (2015)

Roche Novo Nordisk (Nutropin): (Norditropin): 213 1,173 Merck (Saizen): 292

Eli Lilly (Humatrope): 312 Sandoz (Omnitrope): Pfizer 772 (Genotropin): 617

Source: Company data, Piper Jaffray, Samsung Securities

Healthcare

2017. 6. 15

Genexine: Long-acting growth hormone competitors Item Category LG Life Sciences Genexine Versartis Ascendis OPKO (Pfizer) Novo Nordisk Listing status n/a Kosdaq Nasdaq Nasdaq Nasdaq CSE Ticker n/a 095700 KS VSAR US ASND US OPK US NOVOB DC Eutropin Plus/ Product GX-H9 VRS-317 ACP-001 MOD-4023 NN8640 Declage Technology Sustained release hyFc XTEN TransCon PEG CTP Albumin Completed Completed Completed Failed Adult Launched Phase III Development Phase II Phase II Phase II Phase III stage Pediatric Launched Phase II Phase III Phase III Phase III Phase II Orphan Designated by Designated by Designated by drug n/a US FDA and n/a US FDA and n/a US FDA designation EMA EMA All within 98.4% SDS All within 88.1% within Adult ± 2 SDS ≥ 2 SDS Completed ± 2 SDS ± 2 SDS (IGF-1) (GH 0.1-0.3mg/ (GH 0.05-0.8 mg/ Phase II (2.0-8.0mg/ (Individual dose) kg) kg) week) 0.8mg/kg: 10.7cm 8.5cm 13.4cm Efficacy (3 months) (6 months) (6 months) 1.2mg/kg: Pediatric 8.1cm 12.9cm 10-11.5cm 15.3cm No data yet (height) (1 year) (6 months) (1 year) (3 months) 7.8cm 7.6-8.7cm 2.4mg/kg: (2 year) (2 year) 12.4cm (3 months) Injection ✓ ✓ X ✓ ✓ volume<1ml Undisclosed Safety Immunogenicity Immunogenicity Immunogenicity (100s patients No data yet criteria (ADA*) (ADA) (ADA) on hyFc) Chemical Chemical CMC Genetic fusion Genetic fusion Genetic fusion conjugation conjugation Dosing Weekly or semi- Weekly Semi-monthly Weekly Weekly Weekly frequency monthly Note: * ADA: Anti-drug-antibody Source: Company data, Samsung Securities

Genexine: Overview of GX-H9 Phase II study design for pediatric patients Category Details Target Safety and tolerability, height velocity at 6 months Design Randomized, open label, single dose/multiple dose study in drug naive pediatric patients with growth hormone deficiency Arms Dosage group: 3 groups (N=48, 0.8 & 1.2mg/kg weekly, 2.4mg/kg twice monthly) Control group: Genotropin 0.03mg/kg daily Dosing period Periodic injection for 6 months + 6 months extension + 12 months extension Primary outcome Safety and tolerability, height velocity at 6 months Secondary outcome PK and PD profiles and immunogenicity Location 49 institutions in 15 countries (Europe and Asia) Source: Company data, Samsung Securities

Healthcare

2017. 6. 15

Genexine: GX-H9 Phase II study design for pediatric patients

Source: Company data, Samsung Securities

Genexine PK result in GX-H9 Phase II for pediatric patients PD result in GX-H9 Phase II for pediatric patients

Note: At single dose period Source: Company data, Samsung Securities Source: Company data, Samsung Securities

Healthcare

2017. 6. 15

Genexine: Interim GX-H9 Phase II height velocity from pediatric trials

Source: Company data, Samsung Securities

Healthcare

2017. 6. 15

Qurient to out-license eczema cure Q301 in 2H17 Qurient specializes in allergy and infection treatments, and anti-cancer drugs. The company entered alliances with Institut Pasteur Korea and Max Planck Institute/Lead Discovery Center to create a global innovative new drug development network. Qurient develops candidates for innovative drugs to satisfy unmet medical needs, engages in R&D activities, and out-licenses new drugs. Its R&D pipeline includes a one candidate in Phase II clinical trials, one in Phase I trials, and three in pre- clinical development. Eczema cure Q301 to be out-licensed in 2H17: Qurient is developing Q301, a cure for eczema (atopic dermatitis), the market for which should grow from USD4.57b in 2016 to USD5.63b in 2022. Side effects of existing steroid- and calcineurin inhibitor-based treatments include toxic ones, making long-term administration difficult—ie , there is an unmet medical need. The company’s Q301 is based on Zyflo (zileuton, 5-lipoxygenase inhibitor), Abbvie’s asthma treatment. The firm has completed Phase IIa clinical trials for patients with stage 3 or 4 eczema in Feb 2016. Pfizer acquired Anacor in a May 2016 deal worth USD5.2b to secure Eucrisa (crisaborole), a phosphodiesterase 4 (PDE-4) inhibitor. The company in Dec 2016 received FDA approval for the drug to treat mild to moderate eczema in patients aged 2 to 79 years old. Eucrisa is the first eczema treatment released in 15 years and is priced at USD580/60g (which translates to over USD2b in annual sales). Meanwhile, Sanofi and Regeneron at end-Mar 2017 acquired FDA approval for Dupixent (dupilumab), an interleukin-4 (IL-4) and IL-13 inhibitor. Dupixent, priced at USD37,000 per year, should generate more than USD4b in annual sales. Following a series of innovative eczema treatment releases by Pfizer and Sanofi, Qurient should be able to out-licensee Q301 to the US and Europe in 2H17. Q203 up for PRV from US FDA: Qurient is also developing Q203 (imidazopyridine amide), a treatment for drug-resistant tuberculosis. We estimate the market for such a treatment in Russia, China, and India at a combined USD780m. The drug (now in Phase Ib) at end-Dec 2015 received US FDA designation as a cure for rare diseases, granting it seven years of exclusivity in the US market. On completion of Phase II trials, the drug should obtain a greenlight for Phase III clinical trials and is eligible for a priority review voucher (PRV). The FDA introduced the PRV program to encourage development of cures for rare and/or neglected diseases. A PRV—which can be sold—allows firms to have any one of their drugs reviewed under FDA’s priority review system, which offers a reviewing period of six months. Over 2009-2017, 13 PRVs changed hands for a combined total of overUSD200m. The firm has one out-licensing deal for Q203 (Russia) and expects to ink more deals in Korea and Southeast Asia.

Healthcare

2017. 6. 15

Qurient: R&D pipelines Project Indication Discovery Candidate Pre-clinical Phase I Phase II Phase III Note Atopic Completed Q301 ≈2019 Developed by Qurient dermatitis US Phase IIa US Developed by Institut Pasteur Q203 Tuberculosis Phase ≈2019 Korea and out-licensed to Qurient Ib Orphan drug designation by FDA Drug resistant Developed by Max Planck Institute Q701 cancer/immuno- ≈2017 ≈2018 and out-licensed to Qurient oncology 5LO inhibitor Asthma ≈2018 ≈2019 Developed by Qurient Developed by Max Planck Institute CDK7 inhibitor Cancer ≈2018 ≈2019 and out-licensed to Qurient Source: Company data, Samsung Securities

Atopic dermatitis treatment market outlook (USDb) 6,000 5,631 5,234 4,874 5,000 4,575 4,210 3,869 4,000

3,000

2,000

1,000

0 2012 2014 2016E 2018E 2020E 2022E

Source: GlobalData ‘Atopic dermatitis - global drug forecast and market analysis to 2022’, Samsung Securities

Qurient: Q301’s Phase IIa results

(Patients with IGA score 0 or 1 at week8, %) 30 25 20 15 10 5 0 2 weeks 4 weeks 6 weeks 8 weeks (p=0.0249)

Dosage group Placebo group

Note: For 60 atopic dermatitis patients with IGA score 3 and 4 FDA recommended primary end point: IGA score 0 to 1 (clear to almost clear) Source: Company data, Samsung Securities

Healthcare

2017. 6. 15

PRV grant and use status Year Drug Indication Company Status 2009 Coartem (artemether/lumefantrine) Malaria Novartis Used by Novartis 2012 Sirturo (bedaquiline) Tuberculosis Janssen (Johnson & Johnson) Unused 2014 Vimizim (elosulfase alfa) Morquio A syndrome BioMarin Sold for USD67.5m 2014 Impavido (miltefosine) Leshmaniasis Knight Sold for USD125m 2015 Cholbam Rare bile acid synthesis inhibitor Asklepion Sold for USD245m 2015 Unituxin (dinutuximab) High-risk neuroblastoma United Therapeutics Sold for USD350m 2015 Xuriden Hereditary orotic aciduria Wellstat Sold for undisclosed value 2015 Strensiq (asfotase alfa) Hypophosphatasia Alexion Unused 2015 Kanuma (sebelipase alfa) Lysosomal acid lipase Alexion Unused 2016 Vaxchora Cholera PaxVax Unused 2016 Exondys 51 (eteplirsen) Duchenne muscular dystrophy Sarepta Sold for USD125m 2016 Spinraza (nusinersen) Spinal muscular atrophy Biogen Unused 2017 Emflaza (deflazcort) Duchenne muscular dystrophy Marathon Unused 2017 Brineura (cerliponase alfa) Batten disease BioMarin Unused Source: PriorityReviewVoucher.org, Samsung Securities

Healthcare

2017. 6. 15

Celltrion Healthcare, Tissuegene set for IPOs in 2H Celltrion Healthcare on Mar 14, 2017 received an approval of a preliminary screening for its IPO on the Kosdaq. According to press reports, the IPO price should be KRW33,300-41,000 per share (for a market cap of KRW3.73t-4.6t), with the issuance of new shares to raise KRW819.3b-1.01t. The projected price translates to 30.4x-37.4x 2016 P/E, and shares in the OTC market are currently at KRW43,700 (for a market cap of KRW4.898t). The Korean Institute of Certified Public Accountants (KICPA) on Mar 13, 2017 decided to conduct an in-depth audit of Celltrion Healthcare’s accounting practices, pushing back the IPO schedule. KICPA raised questions over the timing of recognition of interest income (of around KRW10.6b) related to the company’s contracts with overseas distribution partners. Celltrion Healthcare submitted adjusted financial reports for 2015 on Mar 20. The audit committee on Jun 1 released its findings which resulted in a light punishment. Celltrion Healthcare submitted its IPO prospectus and plans to complete the listing by end-July. Sales trends at the company’s global partners following its IPO in 2H17 should determine the earnings and share prices at Celltrion. Tissuegene is planning to apply a preliminary review for its IPO on the Kosdaq. The company is an overseas entity and thus not subject to special treatments of the Kosdaq—eg , it does not have to undergo a technology review. Still, the firm is known to have received an AA rating from Technology Credit Bureau (TCB) for its biologics development capabilities. It plans to commence Phase III trials of Invossa in the US after completing its IPO in 2H. The 24-month-long, double-blinded randomized and controlled trial will enroll approximately 1,020 patients with osteoarthritis of the knee. It will cost around KRW100b, with KRW30b funded by a loan and investment by the Korea Export-Import Bank and KRW70b in proceeds from the IPO. The company expects to receive FDA approval for the drug in 2023 as the first disease-modifying osteoarthritis drug marketed for treating osteoarthritis of the knee.

Healthcare

2017. 6. 15

Healthcare firms expected to list in Korea in 2017-2018 (KRW) Company Technology IPO Estimated Underwriter IPO price band Total number Estimated OTC OTC (or Konex ) Share Market evaluation eligibility IPO date (final IPO price ; of shares market cap (or Konex) market cap price) cap oversubscription rate) (post-IPO) (KRWb) price (KRWb ) (KRWb ) Eubiologics Qualified Qualified Jan 24 Korea I&S 000-6,800 6, (6,000; 10.5:1) 24,135,986 144.8-164.1 4,170 102 PCL Qualified Feb 23 Korea I&S 10,500-13,000 (8,000; 2.0:1) 8,876,164 93.2-115.4 6,230 56 Shinshin Pharm Qualified Feb 28 KB I&S 5,900-6,700 (4,500; 72.5:1) 15,073,000 88.9-101.0 8,730 132 Dentium Qualified Mar 15 NH I&S 45,000-50,000000; (32, 364:1) 11,068,830 498.1-553.4 37,450 415 Astar Qualified Qualified Mar 20 Kiwoom Securities 13,000-18,000 (8,000) 9,350,023 121.6-168.3 7,300 69 Chemon Qualified Apr 11 eBEST I&S 2,000 61,154,524 124.3 1,640 102 Abclone Qualified Filed 2017 NH I&S 17,500 106 2017 Humasis Filed 2017 HI I&S Celltrion Healthcare Qualified 2017 MiraeAssetDaewoo 33,300-41,000 3,732-4,595 43,700 4,898 TissueGene 2017 NH I&S Dongkoo Bio&Pharma 2017 NH I&S Olix 2017 NH I&S Gencurix 2017 Kiwoom Securities 14,900 69 iCure 2017 Kiwoom Securities 21,500 105 Celemics 2018 Kiwoom Securities General Bio 2018 Kiwoom Securities Cellid 2018 Samsung Securities Vivozon 2018 Samsung Securities Ybiologics 2018 Korea I&S ABL Bio 2018 Korea I&S SCM Life Science 2018 Korea I&S Kainos Medicine 2018 Korea I&S 4,995 58 2018 L&C Bio 2018 Korea I&S Kolon Pharmaceutical 2018 Korea I&S Eone-diagnomics 2018 Dongbu Securities Aribio 2018 NH I&S CJ Healthcare 2018 NH I&S SK Biopharmaceutical 2018 SK Biotek 2018 Medizen Humancare 2018 9,390 22 Note: As of May 26 close Source: KIND, 38 Communication, QuantiWise

Healthcare

2017. 6. 15

Major issues involving pharmaceutical SMEs and API makers

Viread and Tamiflu generics to launch in 2H after related patents expire Viread to go off patent in Nov 2017: Outpatient prescription sales of Gilead’s hepatitis B treatment Viread (tenofovir) grew 23% y-y to KRW154.1b in 2016, becoming the second biggest item in the domestic prescription drug market. Sales hit KRW39.9b in 1H17, taking top spot from Pfizer’s hyperlipidemia treatment Lipitor (atorvastatin). With Viread to go off patent on Nov 9, 2017 (in terms of drug substance) and in Nov 2018 (in composition), around 20 pharmaceutical companies plan to launch generics in Nov 2017 (provided they overcome the composition patent by winning related lawsuits). Of note, outpatient prescription sales of BMS’s hepatitis B treatment Baraclude (entecavir), which went off patent in 2015, plunged by around 50% from KRW193.1b in 2014 to KRW97.4b in 2016. We thus expect top-tier pharmaceutical SMEs, which are set to launch Viread generics, to see sales grow. Tamiflu to lose patent protection in Aug 2017: Sales of Roche’s Tamiflu (oseltamivir) hit KRW59.1b in 2016 (up 95% y-y), their highest figure since the drug launched in 2001. Tamiflu is an anti-viral used to treat and prevent influenza A and B. Hanmi Pharm’s Hanmiflu is a supergeneric, which launched in Korea on Feb 27, 2016 after having avoid the salt patent on original Tamiflu. Hanmiflu sales reached KRW14.8b in 2016, and the drug’s share of the prescription market hit 54.9% in the first week of Dec 2016 (topping Tamiflu’s shares) after Korea’s health authorities issued a flu warning early in the month. When the Tamiflu salt loses patent protection on Aug 23, 2017, some 30 pharmaceutical companies are expected to launch generic versions. The flu treatment market grew to KRW74b in 2016 thanks to the influenza pandemic last year. Influenza antiviral drug shortages during the pandemic has led to an increase in demand for steady inventories, which bodes well for further growth.

Export markets to expand; global clinical trials to start; to add overseas customers in 2H Boryung, Ilyang to export in-house-developed new drugs to more countries in 2H: Boryung Pharmaceutical should begin exporting its in-house-developed hypertension drug Kanarb (fimasartan) to Russia and Southeast Asia in 2017. Although such exports should have little impact on the firm’s overall sales, we are encouraged that the firm is adding exports destination markets (having only exported to Mexico last year). The company should land more export contracts for Kanarb-based combination drugs Dukarb (fimasartan + amlodipine) and Tuvero (fimasartan + rosuvastatin), both of which launched in 2016. Meanwhile, Ilyang Pharmaceutical should begin initial shipments of its in-house-developed gastroesophageal reflux disease treatment Noltec and leukemia treatment Supect to Latin America and the Middle East. Noltec is increasing its share of the domestic proton pump inhibitor (PPI) market, and its Supect sales have been increasing gradually since the drug was approved as a first-line chronic myeloid leukemia treatment at end-2015. Rising sales of high-margin, in-house-developed new drugs should contribute to longer-term profitability improvement. Huons to start global trials for BTX and new eye drop for dry-eye syndrome in 2H: Huons should begin Phase 3 clinical trials for its BTX Hutox in Korea and the US in 2H17. It plans to launch the product in Korea in early 2019 and the US possibly as soon as 2020. Having obtained an export license in Aug 2016 from Korea’s Ministry of Food and Drug Safety, Huons commenced exports of Hutox to Southeast Asia, the Middle East, and Latin America in Oct 2016. Hutox exports hit KRW2.3b in 4Q16 and should grow to KRW12b in 2017. Meanwhile, Huons plans to begin Phase 2 clinical trials for its in-house-developed eye drop for dry-eye syndrome in 2H17. Rising costs associated with trials should drive operating profit down this year, but shares should enjoy significant momentum from the firm’s entry into the fast-growing BTX market and late-phase clinical trials overseas.

Healthcare

2017. 6. 15

Key issues for medical aesthetics sector

Hugel to beef up global operation in 2H with newly raised capital Tapping into global network: Hugel on Apr 17 signed a term sheet with Bain Capital outlining a deal that would grant control to the global top-ten private equity fund. Considering Bain Capital’s extensive global network and management capability, Hugel’s overseas strategy stands to benefit. Hugel earned KRW454.7b in proceeds from the deal, which it should use to: 1) strengthen its distribution network in the US by securing a global pharma as a partner; 2) establish local subsidiaries and acquire local distributors in key markets, thus helping boost its ASP; and 3) increase its stake in filler-making subsidiary Across, thus boosting its net margin (attributable to controlling shareholders). Expected to sign BTX supply deal with US multinational pharma: Hugel plans to take back US sales rights for its Botulax (a glabellar line treatment) from Croma Pharmaceuticals, its business partner in North America, Europe, and Australia, and sign a new contract with a new multinational. The firm needs KRW100b to terminate the deal with Croma, which is currently conducting Phase III trials for Botulax in the US and Europe (involving 90 subjects). Considering Bain Capital’s global network and the BTX market’s solid growth, we expect many multinationals to show interest in acquiring the rights. We expect Hugel to sign a Botulax supply contract with a US pharmaceutical company in 2H. In Europe, considering the capability of Stada, Germany’s third largest generic firm (which Bain Capital took over in April), Hugel has likely already secured an extensive distribution network there. To make acquisitions to establish direct overseas network: Hugel distributes products via partners in each country—at a price that is just half what physicians pay to distribution firms. Thus, if the firm can secure a direct distribution network with physicians, its ASP could double. Hugel plans to acquire overseas distribution firms that have strong relationships with plastic surgery clinics or pharmaceutical companies—a move that should boost its profitability over the longer term. To increase stake in subsidiary Across: Across is Hugel’s filler-maker subsidiary (52.2% stake). In 2016, Across saw sales, operating profit, net profit, operating margin and net margin rise 34.7%, 36.9%, 40.8%, 1%pt, and 2.3%pts y-y, respectively, to KRW30.9b, KRW18.4b, KRW16.4b, 59.4%, and 53.2%. Hugel announced that it will use some of the proceeds from its deal with Bain Capital to increase its stake in Across. This should dissipate concerns that the stake in the subsidiary will be diluted if Across goes public in 2018. The stake expansion should also boost Hugel’s net margin attributable to controlling interests. Considering the potential synergies between BTX and filler products, Bain Capital is unlikely to take Across public. Hugel’s financial statement has the following footnote, ‘Hugel must collaborate with Across’ second-largest shareholder STIC Investment (19.3%) and take all reasonable measures to take Across public by Sep 2019. If Hugel violates this, STIC Investment has the right to request Hugel buy all or some of its stake in Across’. This indicates that Hugel may have to acquire some or all of STIC Investment’s stake in Across.

Medytox’s capacity shortage to be resolved in 2H Earnings momentum strong; plant #3 wins domestic approval: Medytox partially resolved its capacity shortage issue, as its #3 plant on Dec 19, 2016 won KGMP and export approval. Currently, the firm ships output from its #3 plant to nations that do not require separate approval, such as Japan and some countries in Southeast Asia and Latin America. As the plant’s output recently won domestic approval, the firm’s BTX capacity shortage should be fully resolved in 3Q.

Healthcare

2017. 6. 15

Major issues in medical-device industry

Measures to expand dental implant insurance coverage to become visible in 2H Concerns over slowing growth in domestic implant market to ease: On the campaign trail, Moon Jae-in—now president—pledged to: 1) lower per-tooth implant costs for patients from KRW600,000 to KRW300,000; and 2) gradually increase the number of teeth subject to implant coverage (from two currently). We expect follow-ups to these pledges to become visible in 2H. With implant coverage having expanded steadily (from those aged 75 and over in Jul 2014 to those aged 70 and over in Jul 2015 to those aged 65 and over in Jul 2016), the combined domestic implant sales of Osstem Implant, Dentium, and Dio hit KRW112b in 2014 (up 14% y-y), KRW141.4b in 2015 (up 26.2% y-y), and KRW169.9b in 2016 (up 20.2% y-y). We expect this figure to hit KRW191.6b in 2017 (up 12.8% y-y) and KRW211.6b in 2018 (up 10.4% y-y), which figures are subject to upwards revisions if the president follows through on his campaign pledges. We estimate that the domestic implant market will grow 15-20% pa over the next two to three years if insurance coverage expands.

Vieworks to land dynamic detector supply contracts in 2H Vieworks to be world’s third firm to commercialize TFT-based dynamic detectors: Dynamic detectors are indispensable for radiography fluoroscopy (used in gastrointestinalgraphy, angiography, and C-arm for noninvasive anesthesia or orthopedic surgeries) and computed tomography (CT). Like detectors that generate still images ( eg , flat panel-digital radiography detectors: FP-DRs), those that generate moving images (RF) can also be classified into CMOS and TFT. In the past, when TFT detectors could not produce high-resolution images with small doses of radiation, CMOS detectors were widely used for their fast retakes. However, recent advances in TFT detector technology have minimized image noise, allowing high-resolution images at low radiation doses. Also, TFT’s lower cost per area (vs CMOS) makes them more suitable for large-area imaging. We expect TFT-based dynamic detectors to become the gold standard in fluoroscopy and the CT market. Currently, Varex Imaging and Trixell are the only companies that have commercialized TFT- based dynamic detectors. We find the dynamic detector market more attractive than the FP-DR market given less downward pressure on ASPs. Vieworks in 2H should become the third company in the world to commercialize TFT-based dynamic detectors. The global dynamic detector market is estimated to be sized at KRW300b-KRW400b and should grow approximately 5% pa through 2020. Dynamic detectors to serve as another cash cow within three years: Vieworks completed development of dynamic detectors early this year and is known to be in talks to supply products to a number of radiography fluoroscopy (RF) system companies. The global RF system market is controlled by General Electronics, Siemens, and Philips. Admittedly, it is difficult for a detector manufacturer (other than Varex Imaging, Trixell, and Canon) to win supply contracts with major system firms. However, we believe Vieworks has a strong chance of landing B2B supply contracts in 2H given that: 1) it has a track record of more than five years in the FP-DR market; and 2) only two companies have so far managed to commercialize TFT-based dynamic detectors. Our earnings model currently has Vieworks’ dynamic detector sales (including CCD-RF) hitting KRW9.9b in 2017 (up 106.4% y-y) and KRW21.8b in 2018 (up 120% y-y)—figure we believe to be conservative given that the firm’s FP-DR sales hit KRW14.9b in their first year rose 97.1% to KRW29.5b the following year. Dynamic detectors should bolster profitability, as they have ASPs 1.5x those of still-image detectors but similar COGS. If the firm signs a large supply contract for dynamic detectors, it will dissipate concerns over slower growth in still-image detector sales.

Healthcare

2017. 6. 15

Global fluoroscopy market C-arm system (USDb) 3.0

2.40 2.5 CAGR 2015-2022E: +5.8% 2.0 1.81

1.5

1.0

0.5

0.0 2015 2020E Source: Global Industry Analysis Source: Industry data

Global CT market Computed tomography (CT)

(USDb) 8.0 6.89 7.0 CAGR 2015-2022E: +5.0% 6.0 4.89 5.0 4.0 3.0 2.0 1.0 0.0 2015 2022E Source: Global Industry Analysis Source: GE Healthcare

Global C-arm market breakdown Vieworks: RF detector sales

(KRWb) (% y-y) Ziehm: Philips: 4% 25 140 6% 120 20 100 Medtronic: 80 8% 15 60 10 40 Siemens: 20 11% 5 0 (20) 0 (40) 2014 2015 2016E 2017E 2018E GE Healthcare: RF detector sales (LHS) 71% Sales growth (RHS)

Source: Global Industry Analysis Source: Company data, Samsung Securities estimates

Healthcare

2017. 6. 15

Vatech to obtain China approval for Green Smart in 3Q China’s dental x-ray imaging systems market growing quickly: China’s dental x-ray imaging systems market—worth USD220m in 2015—is set to grow at a 2015-2020 CAGR of 15.6%. Leading global players have an oligopoly in China: Dentsply Sirona, Vatech, and Hefei Meiya Optoelectronic Technology each have 20% of the market (in terms of volume), while Planmeca, Carestream, and Danaher have 10-15% apiece. Sales contribution from China subsidiary surge in 2016: Vatech’s sales in China reached KRW15.4b in 2015 but rose only 16.8% y-y to KRW18b in 2016. Sales at its Chinese subsidiary surged 119.3% y-y to KRW16.4b in 2016, partly because the parent handed over its sales business to the subsidiary, but mainly thanks to surging sales of Green 3D, which received local sales approval in 2Q16. If Green Smart receives approval in 3Q17, Vatech’s China sales should further accelerate. The China subsidiary is eligible to manufacture Green 2D (approved in 2H14) but should soon win approval to manufacture Green 3D as well. Green Smart makes a splash: In Sep 2014, Vatech launched its Green Smart imaging system (formerly PaX-i3D Smart) domestically, and despite using just two x-ray detectors—for panoramic, CT, and cephalometric imaging—the device can produce 2D and 3D images on par with those generated by CBCT systems that require three detectors. This means the system’s detectors cost just two-thirds those of CBCT systems, so the system’s ASP is also lower. While Vatech’s regular 3D imaging systems is priced at USD50,000-60,000/unit (10-20% lower than rivals’ offerings), the Green Smart system sells for USD40,000/unit. In addition to price competitiveness, Green Smart requires only one round of filming to capture 2D and 3D images—whereas CBCT systems require two rounds of filming to accomplish this—which increases convenience for users and patients. Green Smart was central to Vatech’s domestic market share, which jumped from 50-60% in 1H14 to 78% by end-2015. Export growth for Green Smart strong: Green Smart made a significant contribution to Vatech’s domestic top-line growth. In 2H15, the firm began to export it to Europe (after having obtained CE approval in 3Q15), where it made KRW8.4b in sales in that half. Exports shot up 263.6% y-y to KRW30.6b in 2016, backed by US-bound shipments from 2Q16. The Green Smart portion of Vatech’s 3D imaging device exports leapt from 26% in 2H15 to 40% in 2016. Green Smart approval to take China sales to new heights: Competitively priced, Green Smart mainly targets buyers in China and other EMs who have relatively low purchasing power. Green Smart is dominant in Korea—which has the world’s highest CBCT system penetration—and the system should be a hit in China once its sale is approved in 3Q. We expect Vatech’s 3D imaging device exports to jump 26% this year to KRW96.4b.

Healthcare

2017. 6. 15

China: Dental imaging system sales volume China: Intraoral sensor sales volume

(Units) (Units) 4,000 3,740 14,000 3,340 3,500 3,070 2,950 12,000 11,100 3,000 1,340 9,900 2,450 1,340 10,000 8,800 1,900 2,500 1,320 8,000 1,600 1,300 8,000 1,300 2,000 1,100 1,050 4,600 4,000 6,000 3,500 1,500 3,200 2,400 1,000 2,000 4,000 1,650 1,750 1,400 4,600 500 2,000 3,700 4,000 4,300 0 0 2015 2016E 2017E 2018E 2019E 2015 2016E 2017E 2018E

3D 2D IOS IOX PSP

Source: Vatech Source: Vatech

Vatech: PaX-i3D Smart sales Vatech: Product approval status (KRWb) Product Korea US Europe China 2Q16 2H14 (sales) 60 US launch Green 2D 1Q12 1Q12 1Q12 2H14 (production) 50 2015.9 2Q16 (sales) Green 3D 3Q12 2Q13 3Q12 Europe launch 2018E (production) 40 4Q15 (approval) 2H17E (sales) 30.6 Green Smart 3Q14 3Q15 2Q16 (launch) 2018E (production) 30 8.4 2014.9 Korea launch IOS (bendable) 4Q14 3Q15 2Q15 2Q17E 20 24.9 Source: Vatech, Rayence 10 21.6 9.4 0 2014 2015 2016

Domestic Overseas

Source: Company data,

Healthcare

2017. 6. 15

Contents 1H review: Poverty in the p2 midst of plenty Pharmaceutical market p7 outlook Visible progress to be made p32 on R&D and B2B fronts Government policy p52 warrants attention Solid earnings momentum in 2H Key issues in 2H p68 2H sector outlook Solid earnings momentum p87 in 2H Company p105 Base effect, cost savings for big firms; bio exports, medical-aesthetics demand to rise Covered healthcare firms to see solid growth in sales, operating profit: We expect our covered healthcare firms this year to see their combined sales, operating profit, and net profit attributable to controlling shareholders grow 14.1%, 47.9%, and 76,9% y-y, respectively, to KRW10.8t, KRW1.6t, and KRW1.3t. The table below shows a breakdown of these metrics for each segment.

Covered healthcare firms: 2017 forecasts at a glance (KRWb) Large Pharma Biotech Medical Medical Diagnostics Coverage pharmas SMEs aesthetics devices Sales 6,392.3 1,241.8 1,332.7 373.3 1,130.2 305.8 10,776.1 Operating profit 434.3 171.1 496.1 209.8 210.8 62.3 1,584.5 Net profit attributable to controlling interests 346.4 186.8 326.7 155.9 213.7 48.4 1,277.9 Growth (% y-y) Sales 7.6 11.7 52.8 45.0 12.2 21.0 14.1 Operating profit 32.9 12.6 123.2 51.6 15.6 26.5 47.9 Net profit attributable to controlling interests 10.9 100.4 632.6 52.1 65.0 20.6 76.9 Source: Samsung Securities estimates

The biotech and medical-aesthetics segments should enjoy the strongest earnings momentum. Biotech profit growth should be bolstered by growing US sales of Remsima for Celltrion; improved utilization at Samsung Biologics’ second plant; and narrowing losses at Samsung Bioepis. Profit growth in the medical-aesthetics segment should be driven by Medytox starting shipments from its third plant; and Hugel increasing exports, taking advantage of a steadily growing global BTX/filler market. Medical aesthetics in 2Q, big-pharmaceuticals and biotech in 2H: The medical-aesthetics sector enjoyed a strong performance in 1Q, and this should be repeated in 2Q, with operating profit growing 49.6% y-y. In 2H, the large-pharmaceutical and biotech sectors should post pronounced operating profit growth of 39.3% and 124.8% y-y, respectively, on: 1) a low base—from Hanmi’s earnings shock after its out-licensing contract with Sanofi was revised down—and SG&A cost controls in 2017; and 2) aggressive exports of Korea-made biosimilars to developed markets.

Healthcare

2017. 6. 15

Healthcare coverage: Annual results and forecasts

(KRWb) (%) 14,000 18 12,000 16 14 10,000 12 8,000 10 6,000 8 6 4,000 4 2,000 2 0 0 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E

Sales (LHS) Operating profit (LHS) Operating margin (RHS)

Note: Using parent financials for Celltrion, SK Chemicals, Donga ST, and i-Sens Source: QuantiWise, Samsung Securities estimates

Healthcare coverage: Quarterly results and forecasts

(KRWb) (%)

3,500 20 3,000 16 2,500 2,000 12

1,500 8 1,000 4 500 0 0 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17E3Q17E4Q17E1Q18E2Q18E3Q18E4Q18E

Sales (LHS) Operating profit (LHS) Operating margin (RHS)

Note: Using parent financials for Celltrion, SK Chemicals, Donga ST, and i-Sens Source: QuantiWise, Samsung Securities estimates

Healthcare

2017. 6. 15

Large pharma coverage: Annual results and forecasts SME coverage: Annual results and forecasts

(KRWb) (%) (KRWb) (%) 8,000 12 1,600 16 7,000 10 1,400 14 6,000 1,200 12 8 5,000 1,000 10 4,000 6 800 8 3,000 4 600 6 2,000 400 4 1,000 2 200 2 0 0 2009 2011 2013 2015 2017E 0 0 2009 2011 2013 2015 2017E Sales (LHS) Sales (LHS) Operating profit (LHS) Operating profit (LHS) Operating margin (RHS) Operating margin (RHS)

Note: Yuhan, Green Cross, Hanmi Pharmaceutical, Chong Kun Dang Note: Boryung Pharmaceutical, Ilyang Pharmaceutical, Daewon Pharmaceutical, Donga ST (parent), and SK Chemicals (parent) Pharmaceutical, and ST Pharm

Biotech coverage: Annual results and forecasts Medical aesthetics coverage: Annual results & forecasts

(KRWb) (%) (KRWb) (%)

2,000 70 600 70 1,800 60 60 1,600 500 1,400 50 400 50 1,200 40 40 1,000 300 800 30 30 600 20 200 20 400 100 200 10 10 0 0 0 0 2009 2011 2013 2015 2017E 2009 2011 2013 2015 2017E

Sales (LHS) Sales (LHS) Operating profit (LHS) Operating profit (LHS) Operating margin (RHS) Operating margin (RHS)

Note: Celltrion (parent), and Samsung Biologics (from 2011) Note: Medytox and Hugel

Medical-device coverage: Annual results and forecasts Diagnostics coverage: Annual results and forecasts

(KRWb) (%) (KRWb) (%)

1,400 20 400 30 1,200 18 350 25 16 300 1,000 14 250 20 800 12 10 200 15 600 8 150 10 400 6 100 4 5 200 50 2 0 0 0 0 2009 2011 2013 2015 2017E 2009 2011 2013 2015 2017E

Sales (LHS) Sales (LHS) Operating profit (LHS) Operating profit (LHS) Operating margin (RHS) Operating margin (RHS)

Note: Osstem Implant, Dio, Vieworks, Vatech, and Rayence Note: Seegene, i-Sens (parent), and Boditech Med Source: QuantiWise, Samsung Securities estimates Source: QuantiWise, Samsung Securities estimates

Healthcare

2017. 6. 15

Large pharma coverage: Quarterly results and forecasts SME coverage: Quarterly results and forecasts

(KRWb) (%) (KRWb) (%) 2,000 10 450 20 1,800 9 400 18 1,600 8 350 16 1,400 7 300 14 1,200 6 250 12 1,000 5 10 800 4 200 8 600 3 150 6 400 2 100 4 200 1 50 2 0 0 0 0 1Q16 3Q16 1Q17 3Q17E 1Q18E 3Q18E 1Q16 3Q16 1Q17 3Q17E 1Q18E 3Q18E

Sales (LHS) Sales (LHS) Operating profit (LHS) Operating profit (LHS) Operating margin (RHS) Operating margin (RHS)

Note: Yuhan, Green Cross, Hanmi Pharmaceutical, Chong Kun Dang Note: Boryung pharmaceutical, Ilyang Pharmaceutical, Daewon Pharmaceutical, Donga ST (parent), and SK Chemicals (parent) Pharmaceutical, and ST Pharm,

Biotech coverage: Quarterly results and forecasts Medical-aesthetics coverage: Quarterly results & forecasts

(KRWb) (%) (KRWb) (%) 600 50 140 60 45 120 58 500 40 56 35 100 400 54 30 80 300 25 52 60 20 50 200 15 40 48 100 10 5 20 46 0 0 0 44 1Q16 3Q16 1Q17 3Q17E 1Q18E 3Q18E 1Q16 3Q16 1Q17 3Q17E 1Q18E 3Q18E

Sales (LHS) Sales (LHS) Operating profit (LHS) Operating profit (LHS) Operating margin (RHS) Operating margin (RHS)

Note: Celltrion (parent), and Samsung Biologics (from 2011) Note: Medytox and Hugel

Medical-device coverage: Quarterly results and forecasts Diagnostics coverage: Quarterly results and forecasts

(KRWb) (%) (KRWb) (%) 400 25 120 30 350 20 100 25 300 80 20 250 15 200 60 15 10 150 40 10 100 5 50 20 5 0 0 0 0 1Q16 3Q16 1Q17 3Q17E 1Q18E 3Q18E 1Q16 3Q16 1Q17 3Q17E 1Q18E 3Q18E

Sales (LHS) Sales (LHS) Operating profit (LHS) Operating profit (LHS) Operating margin (RHS) Operating margin (RHS)

Healthcare

2017. 6. 15

Healthcare coverage: 2017 sales growth forecasts

(% y-y) 54.5 60 49.5 52.7 50 37.8 40 26.6 22.8 22.3 23.7 30 19.4 18.8 17.7 14.0 13.8 13.5 13.0 14.1 20 6.7 8.8 10 3.7 4.4 3.3 3.4 0 (10) (20) (12.9) Dio Hugel i-Sens Yuhan Celltrion Dentium Medytox Rayence Seegene Vieworks Donga ST Donga ST Pharm ST Green Cross Green Ilyang Pharm Ilyang Hanmi Pharm Hanmi Boditech Med Boditech SK Chemicals SK Boryung Pharm Boryung Osstem Implant Osstem Chong Dang Kun Chong Samsung Biologics Samsung Daewon Pharmaceutical Daewon Value Added Technology Added Value Large pharmas Biotech Diagnostics SMEs Medical devices Medical aesthetics

Note: Using parent financials for Celltrion, SK Chemicals, Donga ST, and i-Sens Source: Samsung Securities estimates

Healthcare coverage: 2017 operating profit growth forecasts

(% y-y) 200 174.1 150 95.0 89.3 73.3 100 60.5 40.4 To turn 34.3 28.7 27.2 31.9 33.3 50 25.9 22.8 23.5 19.2 17.8 15.6 4.3 11.2 pos 10.2 0 (1.0) (50) (13.9) Dio Hugel i-Sens Yuhan Celltrion Dentium Medytox Rayence Seegene Vieworks Donga ST ST Pharm ST Green Cross Green Ilyang Pharm Ilyang Hanmi Pharm Hanmi Boditech Med Boditech SK Chemicals Boryung Pharm Boryung Osstem Osstem Implant Chong Kun Dang Kun Chong Samsung Biologics Samsung Daewon Pharmaceutical Daewon Value Added Technology Added Value Large pharmas Biotech Diagnostics SMEs Medical devices Medical aesthetics

Note: Using parent financials for Celltrion, SK Chemicals, Donga ST, and i-Sens Source: Samsung Securities estimates

Healthcare

2017. 6. 15

Healthcare coverage: Results and forecasts (1) (KRWb) Company 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17E 3Q17E 4Q17E 2016 2017E 2018E Sales 245.8 303.5 327.6 321.0 275.4 316.0 357.5 329.4 1,197.9 1,278.3 1,342.4 Growth (% y-y) 14.7 13.1 11.0 18.9 12.0 4.1 9.1 2.6 14.3 6.7 5.0 Green Operating profit 10.9 24.0 34.6 9.0 13.7 21.5 45.1 1.6 78.5 81.8 85.2 Cross Growth (% y-y) (14.4) (20.5) (28.2) 1,466.5 25.9 (10.7) 30.4 (82.2) (14.4) 4.3 4.1 Net profit* 5.3 16.1 22.4 19.2 4.6 15.5 34.0 2.2 63.0 56.4 60.8 Growth (% y-y) (57.6) (43.1) (60.9) nm (12.7) (3.5) 52.0 (88.4) (33.7) (10.5) 7.9 Sales 276.5 332.7 361.8 349.8 351.2 370.8 396.5 386.6 1,320.8 1,505.1 1,620.7 Growth (% y-y) 14.2 22.4 16.1 15.4 27.0 11.4 9.6 10.5 17.0 14.0 7.7 Operating profit 19.9 24.6 25.2 28.0 35.5 28.4 28.6 30.6 97.8 123.2 133.8 Yuhan Growth (% y-y) 33.4 (4.0) (20.4) 106.5 78.4 15.4 13.5 9.2 13.9 25.9 8.7 Net profit* 51.3 34.1 24.1 51.8 29.5 40.6 47.4 43.5 161.2 161.0 175.6 Growth (% y-y) 108.1 10.1 (46.4) 102.7 (42.5) 19.3 96.9 (16.1) 27.9 (0.1) 9.1 Sales 256.4 234.5 219.7 172.1 233.5 231.4 221.9 228.1 882.7 915.1 950.6 Growth (% y-y) 19.4 (4.1) (18.1) (70.8) (8.9) (1.3) 1.0 32.6 (33.0) 3.7 3.9 Hanmi Operating profit 22.6 6.4 13.8 (16.0) 31.4 14.4 15.1 15.4 26.8 76.2 88.0 Pharmaceutical Growth (% y-y) 968.7 161.3 (61.5) nm 39.0 124.7 9.4 nm (87.4) 184.5 15.5 Net profit* 38.1 20.1 4.8 (39.6) 18.9 9.3 9.8 10.3 23.3 48.4 58.5 Growth (% y-y) 200.7 78.4 nm nm (50.3) (53.6) 104.6 nm (84.9) 107.5 20.9 Sales 201.9 205.7 204.7 219.7 209.7 222.5 223.4 212.6 832.0 868.2 928.0 Growth (% y-y) 37.1 46.9 36.7 41.3 3.8 8.2 9.2 (3.2) 40.4 4.4 6.9 Chong Large Kun Operating profit 8.3 10.6 22.2 20.2 16.8 16.7 23.6 11.1 61.2 68.1 77.3 pharmas Dang Growth (% y-y) (32.6) 30.4 88.7 91.2 103.0 57.7 6.1 (45.0) 43.4 11.2 13.4 Pharmaceutical Net profit* 5.6 7.3 14.9 13.2 11.4 11.2 18.1 5.6 40.9 46.4 53.2 Growth (% y-y) (9.0) nm 77.9 155.7 105.5 53.7 21.7 (57.6) nm 13.3 14.6 Sales 146.9 152.7 136.3 124.3 133.1 148.3 145.6 151.5 560.3 578.6 616.6 Growth (% y-y) 5.3 9.6 (8.5) (11.2) (9.4) (2.9) 6.8 21.9 (1.3) 3.3 6.6 Operating profit 11.7 8.2 1.7 (6.4) 4.9 7.3 7.6 9.9 15.2 29.7 47.0 Donga ST Growth (% y-y) (8.5) (47.4) (89.3) nm (58.2) (10.7) 353.1 nm (72.1) 95.6 58.2 Net profit* 4.5 (3.8) 5.0 7.2 (11.3) 10.2 10.4 10.6 12.9 19.9 33.9 Growth (% y-y) (48.6) nm (53.8) (55.6) nm nm 108.7 45.8 (73.1) 54.2 70.4 Sales 245.5 291.8 307.4 301.9 269.6 318.8 328.5 330.1 1,146.6 1,247.0 1,356.4 Growth (% y-y) 0.5 23.2 0.4 19.6 9.8 9.3 6.9 9.3 10.3 8.8 8.8 SK Operating profit 8.2 10.8 25.6 2.7 11.2 12.3 26.3 9.0 47.3 58.8 66.1 Chemicals Growth (% y-y) nm nm 1.8 (12.3) 37.5 14.1 2.5 232.0 155.9 24.3 12.4 Net profit* 13.5 3.1 15.4 (20.4) 46.2 3.0 6.5 2.2 11.7 57.9 16.3 Growth (% y-y) 134.5 (95.7) 54.3 nm 240.8 (3.2) (57.7) nm (90.3) 395.7 (71.8) Sales 1,373.0 1,521.1 1,557.5 1,488.7 1,472.6 1,607.8 1,673.5 1,638.4 5,940.3 6,392.3 6,814.6 Growth (% y-y) 14.2 16.9 5.2 (13.0) 7.3 5.7 7.4 10.1 4.3 7.6 6.6 Operating profit 81.5 84.6 123.1 37.5 113.4 100.6 146.3 77.6 326.8 437.8 497.3 Total Growth (% y-y) 57.7 12.3 (26.8) (82.1) 39.2 18.8 18.8 106.8 (35.3) 34.0 13.6 Net profit* 118.2 76.9 86.5 31.5 99.3 90.0 126.3 74.4 313.1 390.0 398.4 Growth (% y-y) 68.1 (40.8) (17.3) (86.4) (16.0) 17.0 46.0 136.4 (41.7) 24.6 2.1 Note: Using parent financials for Donga ST and SK Chemicals * Attributable to controlling shareholders Source: QuantiWise, Samsung Securities estimates

Healthcare

2017. 6. 15

Healthcare coverage: Results and forecasts (2) (KRWb) Company 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17E 3Q17E 4Q17E 2016 2017E 2018E Sales 88.9 105.3 117.3 97.7 99.9 118.9 132.3 114.6 409.1 465.7 524.8 Growth (% y-y) 2.3 4.5 4.7 (3.9) 12.4 13.0 12.8 17.4 1.9 13.8 12.7 Boryung Operating profit 4.3 10.0 6.5 1.2 4.9 11.1 7.6 7.3 22.0 30.9 46.7 Pharmaceutical Growth (% y-y) (27.4) 42.9 11.4 (86.8) 12.7 11.2 16.3 534.8 (20.1) 40.4 51.2 Net profit* 3.2 8.7 3.2 (9.5) 2.7 9.6 67.5 6.4 5.6 86.2 37.6 Growth (% y-y) (40.4) 62.7 (40.9) nm (16.8) 10.9 1,978.1 nm (72.3) 1,435.0 (56.3) Sales 58.4 61.6 80.7 61.0 59.9 69.6 94.4 72.9 261.6 296.9 365.4 Growth (% y-y) 10.2 1.3 18.4 6.3 2.6 13.0 17.1 19.6 40.4 13.5 23.1 Ilyang Operating profit 7.3 4.2 5.2 6.4 5.9 4.8 8.9 8.9 23.2 28.6 42.7 Pharmaceutical Growth (% y-y) 96.8 (29.9) 105.8 (7.9) (19.5) 15.0 72.1 38.9 49.4 23.5 49.0 Net profit* 2.4 1.5 1.1 0.8 1.6 2.4 4.4 4.6 5.9 13.0 23.3 Growth (% y-y) 206.1 (37.1) nm (75.2) (32.1) 55.4 291.7 446.7 63.2 120.5 78.9 Sales 58.1 61.7 55.2 65.7 62.9 69.0 64.6 75.6 240.7 272.0 311.1 Growth (% y-y) 11.7 13.7 10.7 9.5 8.2 11.9 16.9 15.0 11.3 13.0 14.4 Daewon Operating profit 5.1 7.0 8.4 8.7 4.8 8.4 10.3 11.2 29.1 34.8 44.3 SMEs Pharmaceutical Growth (% y-y) (5.0) 12.5 87.9 23.1 (5.7) 20.6 23.5 28.6 26.3 19.2 27.5 Net profit* 3.9 4.3 7.2 4.8 3.3 6.8 8.3 9.0 20.2 27.3 35.0 Growth (% y-y) 2.5 (19.2) 126.6 (10.2) (16.5) 56.7 14.8 87.4 14.4 34.9 28.1 Sales 30.9 69.8 54.0 45.7 47.8 59.0 51.5 48.9 200.4 207.2 216.4 Growth (% y-y) 73.0 129.8 18.0 3.7 54.8 (15.4) (4.6) 7.0 45.1 3.4 4.4 Operating profit 8.7 31.2 20.9 16.8 17.8 23.3 18.9 16.7 77.6 76.8 78.0 ST Pharm Growth (% y-y) 613.6 548.5 22.1 48.4 105.6 (25.2) (9.5) (0.6) 125.1 (1.0) 1.6 Net profit* 13.4 23.7 16.3 11.7 13.4 18.5 15.0 13.3 65.2 60.3 62.3 Growth (% y-y) 1,769.6 622.0 34.3 25.9 (0.0) (22.2) (7.8) 13.6 158.9 (7.6) 3.3 Sales 236.2 298.3 307.2 270.1 270.5 316.5 342.8 312.1 1,111.8 1,241.8 1,417.7 Growth (% y-y) 12.6 21.2 11.4 2.6 14.5 6.1 11.6 15.5 18.0 11.7 14.2 Operating profit 25.4 52.4 41.0 33.1 33.4 47.8 45.8 44.2 151.9 171.1 211.8 Total Growth (% y-y) 56.4 118.1 36.9 (2.9) 31.4 (8.9) 11.7 33.4 51.0 12.6 23.8 Net profit* 23.0 38.3 27.9 7.9 21.0 37.2 95.1 33.4 97.0 186.8 158.2 Growth (% y-y) 114.9 133.4 49.9 (64.5) (8.5) (2.7) 241.5 324.0 45.2 92.6 (15.3) Sales 88.8 47.6 52.8 105.5 107.6 78.1 117.7 137.2 294.6 440.6 539.5 Growth (% y-y) n/a n/a n/a n/a 21.3 64.2 122.8 30.0 222.8 49.5 22.5 Samsung Operating profit (13.7) (3.3) (12.8) (0.7) 3.4 (11.4) 8.2 17.5 (30.4) 17.8 40.1 Biologics Growth (% y-y) n/a n/a n/a n/a nm nm nm nm nm nm 125.1 Net profit* (25.7) (50.0) (44.1) (57.0) (33.1) (13.8) (11.5) (4.6) (176.8) (63.0) 22.1 Growth (% y-y) n/a n/a n/a n/a nm nm nm nm nm nm nm Sales 90.9 159.9 146.5 180.2 175.8 208.6 205.7 302.0 577.6 892.1 1,185.7 Growth (% y-y) 11.2 7.4 (2.0) 21.3 93.4 30.4 40.4 67.5 9.2 54.5 32.9 Operating profit 25.5 75.2 72.2 79.8 90.8 101.9 111.7 173.9 252.7 478.3 669.5 Biotech Celltrion Growth (% y-y) (36.0) (5.7) 0.1 27.8 256.5 35.4 54.8 117.9 (0.6) 89.3 40.0 Net profit* 7.9 90.6 59.2 63.7 68.2 83.5 91.8 146.1 221.4 389.7 561.4 Growth (% y-y) (69.1) 71.7 29.6 (18.5) 768.7 (7.9) 55.1 129.3 9.6 76.0 44.1 Sales 179.7 207.5 199.3 285.7 283.5 286.7 323.3 439.2 872.2 1,332.7 1,725.2 Growth (% y-y) 119.8 39.3 33.3 92.3 57.8 38.2 62.2 53.7 40.7 52.8 29.5 Operating profit 11.8 72.0 59.4 79.1 94.2 90.5 119.9 191.4 222.3 496.1 709.6 Total Growth (% y-y) (70.4) (9.8) (17.6) 26.7 697.9 25.8 101.9 142.0 340.2 123.2 43.0 Net profit* (17.8) 40.6 15.1 6.7 35.2 69.7 80.3 141.5 44.6 326.7 583.6 Growth (% y-y) nm (23.1) (66.9) (91.4) nm 71.7 431.3 2,002.1 (97.9) 632.6 78.6 Note: Using parent financials for Celltrion; * Attributable to controlling shareholders Source: QuantiWise, Samsung Securities estimates

Healthcare

2017. 6. 15

Healthcare coverage: Results and forecasts (3) (KRWb) Company 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17E 3Q17 E 4Q17E 2016 2017E 2018E Sales 77.8 76.4 87.5 102.9 93.5 101.6 102.0 112.2 344.6 409.3 468.1 Growth (% y-y) 27.8 9.3 23.4 35.3 20.2 32.9 16.5 9.1 24.1 18.8 14.4 Osstem Operating profit 10.9 5.3 11.8 6.2 7.9 10.9 11.7 13.5 34.2 44.1 57.9 Implant Growth (% y-y) 34.3 (27.5) 42.3 (35.1) (27.8) 106.7 (0.8) 117.7 2.8 28.7 31.3 Net profit* 8.2 3.7 2.9 8.7 0.0 9.1 9.6 10.0 23.5 28.7 39.9 Growth (% y-y) 37.8 (50.3) (52.8) nm (99.7) 142.2 230.6 15.6 30.9 22.1 38.9 Sales 21.1 23.8 24.1 19.3 20.9 24.6 27.7 30.8 88.4 104.0 126.3 Growth (% y-y) 39.7 40.3 31.9 (16.4) (1.2) 3.3 14.7 59.8 20.3 17.7 21.4 Operating profit 7.0 8.3 8.2 2.2 6.5 7.2 8.1 8.7 25.9 30.5 34.8 Dio Growth (% y-y) 114.1 87.8 70.8 (75.9) (8.2) (13.2) (1.5) 284.8 18.2 17.8 14.1 Net profit* 3.2 6.9 4.8 4.9 2.2 5.6 6.6 6.3 19.8 20.7 26.0 Growth (% y-y) 226.1 313.5 21.6 10.7 (30.8) (18.8) 38.1 28.3 79.4 4.8 25.3 Sales 25.8 30.6 31.2 32.5 32.0 37.6 37.9 41.0 120.0 148.5 177.5 Growth (% y-y) 17.6 29.0 28.2 27.3 23.8 22.9 21.6 26.4 25.7 23.7 19.6 Operating profit 8.2 6.3 10.4 3.6 8.5 9.1 9.8 8.8 28.5 36.3 44.0 Dentium Growth (% y-y) 38.3 (5.5) 556.4 40.4 4.5 43.9 (5.7) 143.8 70.1 27.2 21.2 Net profit* 5.5 4.6 7.1 2.7 3.7 6.5 7.0 8.6 19.8 25.8 32.1 Growth (% y-y) 9.2 (14.7) 228.9 37.7 (31.6) 41.1 (0.8) 219.7 36.7 30.3 24.5 Sales 23.9 23.6 32.2 37.7 32.2 31.3 39.6 45.5 117.3 148.5 164.3 Growth (% y-y) 31.9 3.0 40.8 27.3 34.6 32.6 23.1 20.8 25.5 26.6 10.6 Medical Operating profit 4.8 5.5 7.8 12.3 7.6 6.9 11.6 14.0 30.5 40.2 44.3 Vieworks devices Growth (% y-y) 106.7 60.3 32.8 83.3 58.4 25.3 48.4 13.9 65.8 31.9 10.3 Net profit* 4.0 5.3 4.8 12.9 3.1 5.6 10.3 12.5 27.0 31.5 36.6 Growth (% y-y) 79.1 58.7 (25.4) 227.6 (21.4) 4.9 116.8 (3.2) 69.7 16.8 16.2 Sales 51.8 64.5 53.8 68.2 44.2 56.3 46.8 60.2 238.3 207.6 238.9 Growth (% y-y) 10.7 14.2 7.3 6.7 (14.7) (12.7) (13.0) (11.7) 9.7 (12.9) 15.1 Value Added Operating profit 8.4 15.5 10.0 11.5 8.3 12.6 6.5 11.6 45.3 39.0 43.0 Technology Growth (% y-y) 10.8 28.6 22.8 (13.6) (0.3) (18.9) (34.7) 1.3 10.6 (13.9) 10.2 Net profit* 4.2 8.9 3.0 8.6 59.4 11.4 7.9 10.6 24.8 89.2 34.3 Growth (% y-y) 158.3 2.7 (31.2) 31.0 1,308.9 27.9 158.1 22.8 16.3 260.1 (61.5) Sales 22.3 24.5 23.8 27.9 24.6 27.1 27.5 33.2 98.5 112.4 124.9 Growth (% y-y) 10.3 18.3 6.8 19.1 10.5 10.6 15.6 18.9 13.7 14.1 11.1 Operating profit 4.3 4.9 5.0 3.8 4.3 4.9 4.7 6.9 18.0 20.8 23.0 Rayence Growth (% y-y) 4.3 2.4 (14.0) (24.7) (0.2) (0.1) (5.4) 81.1 (9.0) 15.6 10.6 Net profit* 3.0 3.4 3.6 4.8 2.8 5.2 4.0 5.7 14.7 17.8 20.7 Growth (% y-y) 1.1 16.1 (20.3) 16.3 (4.9) 54.3 12.5 19.3 1.8 20.8 16.5 Sales 222.8 243.4 252.6 288.3 247.4 278.4 281.5 322.9 1,007.1 1,130.2 1,299.9 Growth (% y-y) 21.6 15.5 21.0 19.4 11.1 14.4 11.4 12.0 19.3 12.2 15.0 Operating profit 43.6 45.9 53.3 39.6 43.1 51.7 52.6 63.5 182.4 210.8 247.0 Total Growth (% y-y) 39.2 18.5 54.2 (14.8) (1.0) 12.6 (1.4) 60.2 20.7 15.6 17.1 Net profit* 28.1 32.8 26.2 42.6 71.3 43.3 45.4 53.7 129.6 213.7 189.6 Growth (% y-y) 49.7 11.2 (5.1) 120.0 154.3 32.0 73.8 26.1 36.2 65.0 (11.3) Note: * Attributable to controlling shareholders Source: QuantiWise, Samsung Securities estimates

Healthcare

2017. 6. 15

Healthcare coverage: Results and forecasts (4) (KRWb) Company 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17E 3Q17 E 4Q17E 2016 2017E 2018E Sales 28.8 31.5 33.0 40.0 40.5 44.5 45.7 53.0 133.3 183.7 231.6 Growth (% y-y) 53.0 44.1 43.3 61.1 40.7 41.3 38.5 32.5 50.6 37.8 26.1 Operating profit 16.4 18.8 17.8 22.1 21.2 24.1 25.0 29.9 75.2 100.2 127.3 Medytox Growth (% y-y) 47.9 34.1 42.6 57.6 28.9 27.8 40.2 35.6 45.5 33.3 27.1 Net profit* 13.6 15.9 14.6 15.1 17.0 18.7 19.5 24.4 59.2 79.7 101.0 Growth (% y-y) 59.4 35.4 39.3 31.1 24.5 17.6 33.8 62.0 40.0 34.5 26.7 Sales 22.7 30.9 32.8 37.8 44.3 48.6 46.3 50.4 124.2 189.7 247.9 Growth (% y-y) 197.2 84.1 80.7 68.0 95.3 57.3 41.3 33.4 90.9 52.7 30.7 Medical Operating profit 8.8 16.4 17.9 20.2 25.8 28.6 26.3 28.9 63.3 109.7 148.2 Hugel aesthetics Growth (% y-y) 8,517.8 252.7 317.1 131.5 194.0 74.7 47.0 43.1 256.2 73.3 35.1 Net profit* 5.5 11.6 12.6 13.6 18.3 19.9 18.3 19.7 43.3 76.2 104.1 Growth (% y-y) 2,299.5 nm (74.4) 98.5 232.4 71.2 45.4 45.3 27.5 76.2 36.6 Sales 51.4 62.4 65.8 77.8 84.7 93.2 92.1 103.4 257.4 373.3 479.4 Growth (% y-y) 94.6 61.5 59.8 64.4 64.8 49.2 39.9 32.9 67.6 45.0 28.4 Operating profit 25.2 35.2 35.8 42.3 47.0 52.6 51.3 58.8 138.4 209.8 275.5 Total Growth (% y-y) 124.9 88.4 112.8 86.0 86.4 49.6 43.6 39.2 99.4 51.6 31.3 Net profit* 19.1 27.6 27.2 28.6 35.3 38.6 37.8 44.1 102.5 155.9 205.1 Growth (% y-y) 118.1 nm (54.4) 56.2 84.5 40.2 39.2 54.1 34.5 52.1 31.5 Sales 17.2 18.5 17.8 20.2 21.0 22.5 21.5 25.5 73.7 90.5 106.5 Growth (% y-y) 4.7 12.6 16.7 18.7 21.9 21.5 20.9 26.5 13.1 22.8 17.6 Operating profit 1.9 2.8 2.9 2.5 3.3 4.2 3.9 4.7 10.1 16.2 23.5 Seegene Growth (% y-y) (35.5) 42.0 112.0 7.3 71.6 51.4 36.2 90.0 16.8 60.5 45.4 Net profit* 1.2 2.0 (0.5) 4.4 (0.3) 5.0 2.9 3.3 7.1 10.9 16.7 Growth (% y-y) (28.4) 3.9 nm 5,837.2 nm 146.0 nm (23.8) 5.1 53.5 52.5 Sales 26.2 31.0 32.2 34.5 32.1 37.5 37.5 41.0 124.1 148.1 167.4 Growth (% y-y) 19.2 16.3 31.4 24.3 22.2 20.8 16.3 18.7 22.8 19.4 13.0 Operating profit 5.7 7.4 7.0 6.6 6.6 7.6 7.5 7.7 26.8 29.5 36.2 i-Sens Growth (% y-y) 29.9 28.9 21.2 (7.2) 15.1 3.6 7.1 16.4 16.0 10.2 22.6 Net profit* 4.6 4.4 5.9 5.5 4.1 5.8 5.6 5.7 20.4 21.2 26.7 Growth (% y-y) 43.4 (9.8) 77.1 4.8 (12.4) 31.9 (4.2) 3.9 22.5 3.9 26.2 Diagnostics Sales 10.1 15.7 14.9 14.2 13.3 18.7 18.2 17.0 55.0 67.2 84.0 Growth (% y-y) 26.1 48.6 34.8 40.0 32.0 19.0 21.8 19.6 38.1 22.3 24.9 Boditech Operating profit 2.6 4.3 4.0 1.6 2.6 5.0 4.9 4.1 12.4 16.6 26.9 Med Growth (% y-y) 38.7 25.6 0.1 (50.0) 3.1 17.4 23.4 158.1 0.1 34.3 61.9 Net profit* 3.1 3.7 3.5 2.3 2.1 5.3 5.3 3.6 12.6 16.3 26.6 Growth (% y-y) 78.6 29.5 nm nm (33.3) 43.8 51.3 56.9 nm 29.1 63.1 Sales 53.6 65.3 65.0 68.9 66.4 78.7 77.2 83.5 252.7 305.8 357.8 Growth (% y-y) 15.2 21.5 27.7 25.5 24.0 20.5 18.8 21.2 22.7 21.0 17.0 Operating profit 10.2 14.4 13.9 10.7 12.6 16.8 16.4 16.5 49.3 62.3 86.6 Total Growth (% y-y) 10.4 30.2 24.7 (15.2) 22.8 16.9 17.8 54.4 11.7 26.5 39.0 Net profit* 9.0 10.1 8.9 12.1 5.8 16.1 13.8 12.6 40.1 48.4 69.9 Growth (% y-y) 34.3 4.6 231.4 408.2 (35.2) 59.3 55.9 3.9 87.2 20.6 44.6 Note: Using parent financials for i-Sens; * Attributable to controlling shareholders Source: QuantiWise, Samsung Securities estimates

Healthcare

2017. 6. 15

Big-pharmaceutical and biotech/diagnostics segments

Earnings solid in 1Q and to pick up momentum in 2H 1Q review: The large pharmaceutical firms under our coverage posted 1Q sales of KRW1.5t (up 7.2% y-y), operating profit of KRW113.5b (up 39.3% y-y), and net profit of KRW107.5b (down 12.1% y-y), beating consensus by 3.2%, 61.9%, and 38.6%, respectively. Top-line growth was driven by strength in: 1) Yuhan’s API exports; 2) Hanmi’s domestic supergenerics sales; 3) Green Cross’s blood derivatives exports; and 4) CKD’s domestic sales of licensed-in drugs. Profits beat forecasts handily as SG&A costs stabilized thanks to Korea’s new anti-corruption law. Meanwhile, our covered biotech/diagnostics firms posted 1Q sales of KRW353.8b (up 50.1% y-y) and operating profit of KRW105.5b (up 385.2% y-y), beating consensus by 7.3% and 35.8%, respectively. They swung y-y to a combined net profit of KRW38.9b, which missed consensus by 41.5%. Top-line growth was led by strong exports of: 1) Celltrion’s and Samsung Bioepis’ biosimilars; 2) Samsung Biologics’ bio-CMO products; 3) Seegene’s molecular diagnostic assays; and 4) i-Sens’s blood glucose test strips. Profitability beat forecasts easily thanks to operating leverage.

Large pharmaceuticals, biotech, and diagnostic coverage: 1Q17 results (KRWb) 1Q17 (actual) 1Q17 (consensus) Diff (%) Sales Operating Net Operating Sales Operating Net Operating Sales Operating Net Operating profit profit margin profit profit margin profit profit margin (%) (%) (%pts) Green Cross 275.4 13.7 7.0 5.0 264.2 9.7 5.2 3.7 4.2 40.5 34.0 1.3 Yuhan 351.2 35.5 29.5 10.1 312.3 24.3 35.6 7.8 12.5 45.9 (17.0) 2.3 Hanmi 233.5 31.4 24.6 13.4 233.7 11.4 8.8 4.9 (0.0) 175.1 178.8 8.6 Pharmaceutical Chong Kun Dang 209.7 16.8 11.4 8.0 213.6 11.4 7.9 5.3 (1.8) 47.1 44.9 2.7 Pharmaceutical Donga ST 133.1 4.9 (11.3) 3.7 136.6 4.1 (5.4) 3.0 (2.6) 21.7 nm 0.7 SK Chemicals 269.6 11.2 46.2 4.2 266.5 9.1 25.4 3.4 1.2 22.7 81.8 0.7 Large pharmas 1,472.5 113.5 107.5 7.7 1,426.9 70.1 77.6 4.9 3.2 61.9 38.6 2.8 Samsung Biologics 107.6 3.4 (33.1) 3.2 101.8 (9.6) n/a (9.4) 5.7 nm nm 12.6 Celltrion 175.8 90.8 68.2 51.6 158.5 74.4 58.7 46.9 10.9 22.0 16.2 4.7 Seegene 21.0 3.3 (0.3) 15.9 20.5 3.3 0.9 16.2 2.3 (0.0) nm (0.4) i-Sens 36.0 5.3 2.0 14.8 35.4 6.5 4.5 18.3 1.5 (17.8) (55.5) (3.5) Boditech Med 13.3 2.6 2.0 19.7 13.5 3.1 2.4 22.7 (0.9) (13.8) (13.7) (3.0) Biotech/Diagnostics 353.8 105.5 38.9 29.8 329.7 77.7 66.4 23.6 7.3 35.8 (41.5) 6.3 Note: Using parent financials for Donga ST, SK Chemicals, and Celltrion Source: WiseFn, Samsung Securities

Healthcare

2017. 6. 15

2017 consensus rises to reflect solid 1Q results: At the start of the year, consensus put the combined sales of the large pharmaceuticals firms we cover at KRW6.4t, operating profit at KRW399.9b, and net profit at KRW388.8b. But as of May 26, these figures had changed to KRW6.4t (up 0.2%), KRW435b (up 8.8%), and KRW388b (down 0.2%), respectively. Consensus at the start of the year had the combined sales of our covered biotech/diagnostics firms at KRW15t, operating profit at KRW486.1b, and net profit at KRW383.8b. As of May 26, they figures stood at KRW1.6t (up 5.6%), KRW530.3b (up 9.1%), and KRW372.2b (down 3%).

Large pharmaceuticals, biotech, and diagnostic coverage: 2017 consensus before and after release of 1Q17 results (KRWb) Company Sales Operating profit Net profit Feb 28 May 26 Chg (%) Feb 28 May 26 Chg (%) Feb 28 May 26 Chg (%) Hanmi Pharmaceutical 919.2 923.0 0.4 38.6 73.1 89.3 51.0 56.3 10.5 Yuhan 1,444.5 1,478.3 2.3 111.4 119.2 7.0 155.1 146.7 (5.4) Green Cross 1,268.9 1,286.5 1.4 83.5 81.9 (2.0) 63.9 62.7 (1.9) Large Chong Kun Dang 882.4 877.0 (0.6) 66.4 68.9 3.8 45.7 47.6 4.2 pharmas Pharmaceutical Donga ST 588.7 561.4 (4.6) 31.1 26.2 (15.9) 20.6 10.3 (50.3) SK Chemicals 1,262.4 1,252.7 (0.8) 68.8 65.7 (4.6) 52.4 64.4 22.9 Total 6,366.0 6,378.9 0.2 399.9 435.0 8.8 388.8 388.0 (0.2) Samsung Biologics 406.5 440.0 8.2 3.0 13.1 336.7 (30.1) (51.5) nm Celltrion 823.8 871.0 5.7 418.8 454.9 8.6 363.2 378.1 4.1 Biotech/ Seegene 85.0 89.0 4.7 14.7 16.0 8.6 10.9 9.7 (11.2) Diagnostics i-Sens 157.1 160.4 2.1 30.6 29.0 (5.4) 22.3 19.9 (10.4) Boditech Med 70.7 68.5 (3.1) 19.0 17.4 (8.5) 17.5 16.0 (9.0) Total 1,543.0 1,628.9 5.6 486.1 530.3 9.1 383.8 372.2 (3.0) Note: Using parent financials for Donga ST, SK Chemicals, and Celltrion Source: WiseFn, Samsung Securities

2Q-4Q earnings outlook bright for Yuhan and Hanmi… In 2Q, Hanmi’s and CKD’s earnings growth should benefit from a low base, while Donga ST’s will suffer from a high base. In 2H, Hanmi and Donga ST should experience favorable base effect, whereas CKD will face a high base. Yuhan should do well in each of the next three quarters regardless of base effect, though its 3Q results will benefit from a low base. Despite a low base, earnings at Green Cross should come in flat y-y in each of the next three quarters due to increased R&D investment.

………and Celltrion, Seegene, and i-Sens: Typically, 2Q is a seasonally weak quarter for Samsung Biologics, which conducts plant maintenance at the turn of the year and recognizes sales 90 days after production. From 3Q, however, sales should hit new heights and profits improve. Celltrion, Seegene, and i-SENS should perform consistently well in the year’s remaining quarters. Their quarterly profits are likely to hit all-time highs in 2H, leading to record full-year earnings this year. Operating profit at Boditech Med should stay flat y-y in each this year’s remaining quarters, due to increased R&D investment and costs associated with product approvals.

Healthcare

2017. 6. 15

Hanmi our top pick among large pharmas, Samsung Biologics among biotech firms Hanmi top pick among large pharmas; Yuhan second pick: Hanmi is our top pick among large pharmaceutical firms, and Yuhan is our next favorite. Hanmi will soon start producing samples of its Lapscovery-based biologics for clinical trials. We believe it is time to focus on the possibilities of Efpeglenatide and HM12525A/JNJ-64565111 resuming global clinical trials and generating milestone income. Also, we foresee strong quarterly results over 2Q-4Q on a low base. Yuhan should also post decent results over 2Q-4Q, backed by strong domestic sales of licensed-in prescription drugs and robust API exports. In particular, 3Q results should benefit from a low base due to a 3Q16 earnings shock. Subsidiary Yuhan Kimberly has struggled because: 1) its China-bound exports have been hit by fallout from the THAAD conflict; and 2) domestic sales of wipes contracted after authorities told it to stop selling wet types. But the firm should bounce back over 2Q-4Q. Samsung Biologics top biotech pick; Seegene second pick: Samsung Biologics is our top biotech pick and Seegene our next favorite. With construction of a Samsung Biologics’ third plant due to conclude in 2H, the firm is likely to pursue even more CMO contracts with multinationals. Subsidiary Samsung Bioepis expects to receive US FDA approval for its Lantus biosimilar Lusduna, and EMA approvals of its Humira and Herceptin biosimilars in 2H. As 2Q is a seasonally weak quarter for the firm due to plant maintenance at the turn of the year, Samsung Biologics should post record sales and growing profits from 3Q. Seegene’s quarterly growth has accelerated since it launched new Allplex products in 2016. Quarterly results are set to hit all-time highs in 2H, lifting annual earnings to record levels, too. In addition, the firm should commence ODM shipments to Beckman Coulter in 4Q, after completing related development and the approval process in 3Q. The contract will generate estimated sales of KRW5b during the first year of supply, and annual sales are projected to reach KRW30b-50b thereafter.

Healthcare

2017. 6. 15

SMEs

Earnings weak in 1Q due to rise in costs, but some firms to see momentum gather pace 1Q review: The combined 1Q sales, operating profit, and net profit of the nine pharmaceutical SMEs we cover came in at KRW630.1b, KRW72.5b, and KRW56.4b, respectively, missing consensus by 2.2%, 9.8%, and 12.8%. Excluding API manufacturer ST Pharm, combined figures for the other eight missed consensus by 2.4%, 14.6%, and 17.2%, respectively. The group’s overall profitability benefited from robust growth in ST Pharm’s high-margin oligonucleotide CMO sales and Ilyang Pharm’s in-house-developed new drugs and export growth. Meanwhile, the operating profit miss in 1Q is mainly attributable to higher COGS ratio at Boryung Pharm (due to an increasing number of drugs subject to co-promotion) and SG&A cost increases at Daewon Pharmaceutical (due to increases in OTC advertising and commissions paid). Among firms we do not cover, Ildong Pharm’s operating profit was hurt by inventory depletion at pharmacies following its opening of an online drugstore; Dongkuk Pharm saw higher sales commissions in its beauty/healthcare business; and Korea United Pharm incurred higher labor costs after increasing its headcount. Samjin Pharm and Huons reported in-line 1Q results.

SMEs: 1Q17 results (KRWb) 1Q17 (actual) 1Q17 (consensus) Diff (%) Sales Operating Net Operating Sales Operating Net Operating Sales Operating Net Operating profit profit margin profit profit margin profit profit margin (%) (%) (%pts) Boryung Pharm* 99.9 4.9 2.7 4.9 99.0 5.5 5.0 5.6 0.8 (11.7) (47.0) (0.7) Daewon Pharm* 62.9 4.8 3.2 7.6 65.0 6.8 5.3 10.4 (3.3) (29.3) (39.9) (2.8) Ilyang Pharm* 59.9 5.9 3.4 9.9 62.9 5.6 3.7 8.9 (4.8) 6.0 (7.4) 1.0 ST Pharm* 47.8 17.8 13.4 37.2 47.2 16.4 12.8 34.7 1.3 8.6 4.8 2.5 Ildong Pharm 106.7 3.1 2.4 2.9 115.8 7.2 6.4 6.2 (7.9) (57.2) (62.0) (3.3) Dongkuk Pharm 80.6 11.2 8.2 13.9 79.6 12.4 10.2 15.5 1.3 (9.6) (19.7) (1.7) Samjin Pharm 60.1 11.2 8.6 18.6 62.1 11.5 8.9 18.5 (3.2) (2.7) (3.6) 0.1 United Pharm 47.1 6.6 4.9 14.0 48.2 7.9 6.4 16.5 (2.2) (16.8) (23.0) (2.5) Huons 65.2 7.1 9.6 11.0 64.2 7.2 5.9 11.2 1.6 (1.0) 60.9 (0.3) Total 630 .1 72.5 56.4 11.5 644.0 80.4 64.7 12.5 (2.2) (9.8) (12.8) (1.0) Ex. ST Pharm 582.3 54.7 43.0 9.4 596.8 64.0 51.9 10.7 (2.4) (14.6) (17.2) (1.3) Note: * Under our coverage Source: WiseFn, Samsung Securities

Healthcare

2017. 6. 15

Consensus for 2017 operating tumbles: Early this year, consensus had our covered SMEs posting 2017 sales, operating profit, and net profit of KRW1.29t, KRW187.1b, and KRW171.7b, respectively. However, as of May 31, these forecasts were down 3.4%, 4.9%, and 0.4%, respectively, to KRW1.25t, KRW178b, and KRW171.1b.

SME coverage: 2017 consensus before and after release of 1Q17 results (KRWb) Company Sales Operating profit Net profit Feb 28 May 26 Chg (%) Feb 28 May 26 Chg (%) Feb 28 May 26 Chg (%) Boryung Pharm 476.3 465.9 (2.2) 36.4 32.9 (9.5) 58.0 66.2 14.2 Ilyang Pharm 303.3 286.8 (5.4) 30.1 26.3 (12.6) 21.0 13.7 (34.8) SMEs Daewon Pharm 278.4 273.5 (1.7) 35.8 35.6 (0.4) 27.3 26.6 (2.6) ST Pharm 232.7 220.8 (5.1) 84.9 83.1 (2.1) 65.5 64.6 (1.4) Total 1,290.7 1,247.1 (3.4) 187.1 178.0 (4.9) 171.7 171.1 (0.4) Source: WiseFn, Samsung Securities

Daewon and Boryung to enjoy earnings momentum over 2Q-4Q: A high base will weigh on 2Q growth at ST Pharm, Boryung, and Ilyang. Still, the latter two should benefit from a low base in 2H, while ST Pharm should continue to face a high base. Daewon should post robust earnings every quarter regardless of base effect.

Top picks ST Pharm our top pick; Huons second pick: In choosing picks from among our covered pharmaceutical SMEs, we focus more on those stocks with share-price momentum (and undemanding valuations), rather than on earnings. ST Pharm (an export-oriented API maker) is our top pick, and Huons our second choice—the latter because it is reinforcing its esthetic business. ST Pharm has the highest exposure to exports (83.1% of 2016 sales) among domestic pharmaceuticals firms, and thus is insulated from domestic regulatory risk. Although its 2017 earnings momentum seems limited, we believe shares have fully priced in concerns over falling orders for the API for hepatitis C treatments. In addition, oligonucleotide sales have been increasing quickly, and more CMO contracts with multinational pharmaceuticals firms are expected in 2H. We believe ST Pharm will enter an oligonucleotide-driven growth cycle in 2018. Meanwhile, Huons should see operating profit decline y-y in 2017 as costs related to clinical trials increase, but its fundamentals should be boosted by a stronger esthetic business. Moreover, it should begin global clinical trials and sign out- licensing contracts in 2H for its BTX and a new eye drop for dry-eye syndrome.

100

Healthcare

2017. 6. 15

2H earnings outlook for medical-aesthetics and -device firms

Medical aesthetics firms meet high 1Q expectations; momentum to stay solid into 2H 1Q results solid: The combined sales, operating profit, and net profit at the nation’s top-four medical-aesthetics firms’ rose 52.8%, 68.8%, and 55% y-y, respectively, to KRW107.7b, KRW54.6b, and KRW42b in 1Q, beating consensus by 13.1%, 15.5%, and 12.9%. BTX exports grew explosively, while filler exports also increased at a solid pace—despite concerns over China tightening regulations on Korean filler imports (in retaliation for Korea’s decision to install the THAAD anti-missile system on the peninsula). Hugel and Medytox’s 1Q sales rose q-q despite 4Q typically being the strongest season and 1Q the weakest. Hugel’s results bettered forecasts in 1Q, backed by simultaneous growth in BTX and filler sales, with overall sales, operating profit, and net profit attributable to controlling interest beating consensus by 28.4%, 45.6%, and 48.9%, respectively. Medytox’s 1Q sales beat consensus by 5.9%, but due to increased SG&A costs following the addition of staff and increased R&D spending, operating profit and net profit attributable to controlling interest was in-line.

Medical device firms post weak 1Q results; earnings momentum to pick up in 2H 1Q results weak: The combined 1Q sales, operating profit, and net profit of medical-device firms under our coverage rose 11.1%, dipped 1%, and jumped 149.1% y-y, respectively, the former two missing consensus by 2.3% and 6.9%, and the latter beating it by 161.8%. Rayence was excluded from Vatech’s consolidated accounting. Factoring the subsidiary back in, combined 1Q sales and operating profit would have risen 18.5%, and 7.8% y-y, respectively. The six firms’ top-line growth was solid in 1Q, backed by robust implant exports (at Osstem Implant, Dio, and Dentium), healthy industrial-use camera sales (at Vieworks; amid a capex expansion in the OLED industry), and growing 3D dental imaging device exports (at Vatech). However, combined operating profit was weak due to mass hiring of sales personnel and increased R&D costs at implant firms. Net profit missed consensus due to forex-related losses amid won appreciation.

Medical-aesthetic and -device coverage: 1Q17 results (KRWb) 1Q17 (actual) 1Q17 (consensus) Diff (%) Sales Net Operating Sales Operating Net Operating Sales Operating Net Operating Operating profit margin profit profit margin profit profit margin profit (%) (%) (%pts) Medytox* 40.5 21.2 17.0 52.3 38.2 21.5 16.5 56.1 5.9 (1.3) 3.0 (3.8) Hugel* 44.3 25.8 20.9 58.4 34.5 17.7 14.1 51.5 28.4 45.6 48.9 6.9 Caregen** 10.3 4.8 1.8 46.2 10.2 4.8 4.0 47.1 1.1 (0.7) (54.5) (0.8) Humedix 12.6 2.8 2.3 22.4 12.3 3.3 2.7 26.8 2.7 (14.2) (14.7) (4.4) Medical aesthetics 107.7 54.6 42.0 50.7 95.2 47.3 37.2 49.7 13.1 15.5 12.9 1.0 Osstem Implant* 93.5 7.9 (0.3) 8.4 88.3 11.1 3.1 12.6 5.9 (28.9) (109.4) (4.1) Dio* 20.9 6.5 3.2 31.0 21.7 5.5 4.0 25.4 (3.8) 17.1 (20.6) 5.5 Dentium* 32.0 8.5 3.8 26.7 31.5 8.0 5.0 25.4 1.6 6.6 (24.9) 1.3 Vieworks* 32.2 7.6 3.1 23.7 31.7 8.3 6.4 26.3 1.6 (8.3) (51.7) (2.6) Vatech* 44.2 8.3 60.6 18.8 55.1 8.7 6.0 15.8 (19.6) (4.2) 919.2 3.0 Rayence* 24.6 4.3 2.8 17.4 25.1 4.7 3.5 18.7 (2.1) (9.1) (19.7) (1.3) Medical devices 247.4 43.1 73.2 17.4 253.3 46.3 28.0 18.3 (2.3) (6.9) 161.8 (0.9) Note: * Under our coverage, ** Parent-based Source: WiseFn, Samsung Securities

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Medical aesthetics—2017 consensus operating profit rises 8.5% from start of year: At the start of the year, consensus had the combined sales, operating profit, and net profit of our two covered medical aesthetics firms—ie , Hugel and Medytox—hitting KRW326.5b, KRW179.9b, and KRE147.8b, respectively, in 2017. As of May 26, however, those forecasts had risen 8.4%, 8.5%, and 5%, respectively, to KRW354b, KRW195.2b, and KRW155.2b. Medical devices—2017 consensus operating profit falls 10.9% from starts of year: Early this year, consensus had the combined sales, operating profit, and net profit of our six covered medical device firms hitting KRW1.15t, KRW232.3b, and KRW174.5b, respectively, in 2017. As of May 26, however, forecasts for the first two figures had fallen 2.5% and 10.9%, respectively, to KRW1.12t and KRW207b. Consensus for the latter figure was up 15.3% to KRW201.2b. Excluding Vatech, which removed Rayence from consolidated accounting in 1Q, consensus sales would have risen 3%, while consensus operating profit and net profit would have fallen 6.2% and 9.8%, respectively.

Medical-aesthetic and -device coverage: 2017 consensus before and after release of 1Q17 results (KRWb) Company Sales Operating profit Net profit Feb 28 May 26 Chg (%) Feb 28 May 26 Chg (%) Feb 28 May 26 Chg (%) Medytox 166.5 178.2 7.0 95.6 98.2 2.7 76.6 77.5 1.1 Medical Hugel 160.0 175.8 9.9 84.3 97.1 15.1 71.1 77.7 9.2 aesthetics Total 326.5 354.0 8.4 179.9 195.2 8.5 147.8 155.2 5.0 Osstem Implant 377.6 399.9 5.9 53.5 42.2 (21.1) 35.0 23.7 (32.4) Dio 102.4 104.7 2.3 30.6 29.6 (3.2) 24.2 22.5 (6.8) Dentium* 145.6* 144.4 (0.8) 33.1 33.5 1.4 26.0 25.1 (3.1) Medical Vieworks 144.2 144.5 0.2 39.2 39.7 1.3 30.4 31.5 3.6 devices Vatech 266.5 211.4 (20.7) 53.7 39.6 (26.3) 40.3 80.1 98.9 Rayence 113.4 116.0 2.3 22.2 22.4 0.7 18.7 18.3 (2.3) Total 1,149.7 1,120.9 (2.5) 232.3 207.0 (10.9) 174.5 201.2 15.3 Note: * Mar 31 figure, as Dentium listed on Mar 15 Source: QuantiWise, Samsung Securities

Hugel, Medytox to enjoy solid earnings momentum over 2Q-4Q: We expect Hugel’s earnings momentum to remain solid over 2Q-4Q given growing global demand for BTX and filler products and the firm’s price competitiveness. Hugel’s exports should grow well in 2H as it starts shipping to large emerging markets. The firm began recognizing sales to Russia in 1Q and should start to recognize sales in Brazil and Mexico in 2Q and 3Q, respectively. Concerns over China tightening regulations on parallel imports from Korea turned out to be overblown in 1Q, which we believe suggests Hugel’s filler exports will remain solid going forward. Earnings momentum should strengthen in 2H as the firm capitalizes fully on largest shareholder Bain Capital’s extensive global network and uses the capital injection from Bain to strengthen its distribution network in key export markets ( eg , by establishing local subsidiaries or acquiring local firms). Meanwhile, Medytox should also see stronger earnings momentum in 2H as its BTX and filler exports grow well. That the firm recently won domestic approval for products produced at its #3 plant should completely resolve its BTX capacity shortage issue in 3Q17. Sales in key markets ( eg , Korea, Thailand, Japan, Brazil, and Iran) should grow evenly in 2H, but SG&A costs are likely to edge up due to the addition of production and R&D staff.

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Dentium to enjoy earnings momentum over 2Q-4Q… Despite solid top-line growth, operating margin at Dentium, Osstem Implant, and Dio is unlikely to improve visibly in 2H, as the increases in sales personnel and R&D investments will bump up SG&A costs. While Dentium and Osstem are likely to benefit from a low base in 2Q, Dio will face a high base in 2Q. All three firms will face a high base in 3Q, but a low base in 4Q. Dentium’s earnings momentum should stand out most, as its SG&A cost increases are likely to be the smallest. …Vieworks and Vatech, too: Exports at medical-imaging firms Vieworks, Vatech, and Rayence should remain solid in 2H. Though Vieworks’ is likely to report weak 2Q exports, it should beat market estimates in 2H—despite a high base. Vatech will face a high base y-y over 2Q-4Q as it no longer treats Rayence as a consolidated subsidiary, but its dental operation should keep posting solid results, base effect notwithstanding. Rayence should benefit from a low base in 4Q, which is also when its new operations should take off in earnest.

Hugel our preferred medical-aesthetics firm; Dentium our top medical-device firm Hugel our top pick among medical-aesthetics firms: Hugel is our top pick among medical- aesthetics firms. Backed by growth in sales of both BTX and fillers, operating profit should rise 73.4% to KRW109.7b in 2017. The firm should use a capital injection of KRW454.7b from Bain Capital to: 1) strengthen its distribution network in the US by securing a global pharma as a partner; 2) establish local subsidiaries and acquire local distributors in key markets, which should help boost ASPs; and 3) increase its stake in filler-making subsidiary Across, which should lead net margin (attributable to controlling shareholders) to rise. Moreover, the firm has a solid longer-term growth story, as it plans to enter the US, Europe, and China in 2019. Shares, trading at KRW451,000 (on May 26) were nearly on par with the per-share acquisition price that Bain Capital paid to purchase a 45.3% stake in the firm. Considering Bain’s expected return, we believe Hugel has a lot of upside. Dentium our top pick among medical-device firms: Dentium was trading at 16.1x 2017 P/E on May 26, discounted 37.4% to the 25.7x average of Korean rivals Osstem Implant (26x) and Dio (25.4x). Excluding treasury shares (22.1% of shares outstanding), Dentium would have been trading at just 12.5x P/E. We believe the steep discount is unwarranted considering its solid earnings growth momentum. We forecast that Dentium’s full-year sales will rise 23.7% this year, backed by implant market growth in Asia. As for the domestic implant market, contrary to concerns, it should keep growing, backed by a likely expansion of insurance coverage, thus sustaining Dentium’s top-line growth over the longer term. Unlike domestic rivals, the firm plans to keep tight control of SG&A costs, suggesting earnings will remain solid in the near term.

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Healthcare coverage: Valuation summary (KRW) Target price Current Upside Rating EV/EBITDA P/B P/E P/E

price (x) (x) (x) (consensus, x) (%) 2017E 2017E 2017E 2018E 2017E 2018E Green Cross 210,000 176,000 19.3 BUY 19.5 1.9 36.5 33.8 35.2 29.5 Yuhan 330,000 248,500 32.8 BUY 15.4 1.6 18.4 16.8 20.0 17.8 Hanmi Pharmaceutical 450,000 364,000 23.6 BUY 36.1 5.7 84.0 69.5 84.9 60.4 Chong Kun Dang 140,000 120,500 16.2 BUY 12.9 2.9 24.4 21.3 23.8 21.9 Pharmaceutical Donga ST 110,000 98,000 12.2 BUY 15.5 1.4 41.6 24.4 81.4 30.6 Samsung Biologics 260,000 213,500 21.8 BUY 155.3 3.5 n/a 638.2 n/a 259.8 Celltrion 135,000 93,800 43.9 BUY 21.2 4.5 28.1 20.5 37.5 26.8 Seegene 45,000 40,000 12.5 BUY 46.5 6.8 96.0 62.9 108.7 62.5 i-Sens 38,000 28,150 35.0 BUY 11.3 2.2 18.3 14.5 18.9 15.1 Boditech Med 23,000 19,050 20.7 BUY 22.3 4.9 27.2 16.7 27.7 18.5 SK Chemicals 78,000 71,200 9.6 BUY 15.5 1.0 15.8 14.6 15.6 13.3 Boryung Pharmaceutical 64,000 50,300 27.2 BUY 8.7 1.5 5.2 11.8 6.7 13.7 Ilyang Pharmaceutical 50,000 40,600 23.2 BUY 24.0 3.6 53.4 34.0 100.2 86.0 Daewon Pharmaceutical 26,000 20,350 27.8 BUY 7.9 2.0 13.6 10.6 13.7 11.2 ST Pharm 56,000 48,400 15.7 BUY 8.3 2.5 15.0 14.5 14.0 13.2 Osstem Implant 65,000 52,200 24.5 BUY 15.5 5.5 26.0 18.7 28.6 21.8 Dio 41,000 34,700 18.2 BUY 15.2 4.0 25.4 20.3 24.1 19.1 Dentium 50,000 37,450 33.5 BUY 10.9 1.8 16.1 12.9 17.0 13.3 Vieworks 87,000 56,000 55.4 BUY 11.4 4.0 17.8 15.3 17.7 14.6 Vatech 36,000 28,700 25.4 BUY 7.8 1.8 4.8 12.4 5.7 12.9 Rayence 22,000 18,600 18.3 HOLD 8.3 1.6 17.3 14.9 16.7 13.7 Medytox 600,000 506,800 18.4 BUY 27.4 12.4 36.0 28.4 37.0 30.7 Hugel 570,000 451,900 26.1 BUY 8.7 2.8 23.9 19.7 21.9 17.5 Note: Based on May 26 close Source: QuantiWise, Samsung Securities

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Company Hanmi Pharmaceutical (128940) Update Pipeline value to shed discount

● Global clinical trials for efpeglenatide and HM12525A/JNJ-64565111 are likely to resume in 2H. Successful clinical trials and related milestones, of course, are key to shares in firms with out-licensed drugs. We present Hanmi Pharmaceutical as our top pharmaceutical pick for its likely R&D progress and strong quarterly y-y growth over into 2018 backed by the base effect.

WHAT’S THE STORY? Brian Lee Efpeglenatide, HM12525A/JNJ-64565111 likely to resume clinical trials: Hanmi Analyst [email protected] Pharmaceutical is involved with numerous clinical trials: Rolontis (out-licensed to Spectrum) and 822 2020 7177 olmutinib (ZaiLab) in Phase III in the US and China, respectively; poziotinib (Spectrum) and HM71224 (Eli Lilly) in Phase II in the US and globally, respectively; and HM95573 (Genentech) in Wonyong Park Research Associate Phase I domestically. The company in 2H: 1) targets starting Phase III trials for efpeglenatide [email protected] (Sanofi) and Phase I trials for JNJ-64565111 (Johnson & Johnson); and 2) expects its 10 drug 822 2020 7847 candidates under pre-clinical trials to enter clinical ones, of which LAPS-GLP/GCG/GIP triple agonist-based obesity treatment HM15211 and FLT3-inbibitor for acute myeloid leukemia are particularly noteworthy. The firm is pursuing new out-licensing deals—including one for long-

AT A GLANCE acting growth hormone LAPS-hGH (efpegsomatropin—and should receive milestone income as out-licensed drugs progress through trials. Trial progress key to shares: We looked at cases of foreign firms that inked out-licensing

deals worth over USD1b in 2015. Galapagos, Lexicon Pharmaceuticals, Five Prime Therapeutics, Target price KRW450,000 (23.6%) and Innate Pharma have no operating value but out-licensed innovative drug candidates to Current price KRW364,000 multinational players. Both the size of the contract and progress through clinical trials—and Market cap KRW4.1t/USD3.7b subsequent milestone payments—influenced shares, so the market may remove the discount on Shares (float) 11,163,452 (58.2%) 52 -week high/low KRW670,486/KRW266,043 Hanmi’s pipeline as candidate drugs enter the late stages of trials and generate milestone revenue. Avg daily trading KRW30.6b/ value (60-day) USD27.3m Top pick for trial progress, strong growth figures: We advise focusing on prospects of efpeglenatide and HM12525A/JNJ-64565111 resuming global clinical trials and bringing in ONE-YEAR PERFORMANCE milestone income. Meanwhile, Hanmi should post strong quarterly y-y growth over 2Q-4Q thanks 1M 6M 12M to last year’s low base. We raise our target price to KRW450,000, and present the firm as our top Hanmi Pharmaceutical (%) 21.1 7.7 -36.6 pharmaceutical pick. Vs Kospi (%pts) 13.5 -9.7 -47.3 (Continued on the next page ) KEY CHANGES (KRW) New Old Diff Recommend. BUY BUY Target price 450,000 410,000 9.8% SUMMARY FINANCIAL DATA 2017E EPS 4,335 4,301 0.8% 2018E EPS 5,239 4,565 14.8% 2016 2017E 2018E 2019E Revenue (KRWb) 883 915 951 977 SAMSUNG vs THE STREET Net profit (adj) (KRWb) 30 63 76 73 No of estimates 14 EPS (adj) (KRW) 2,089 4,335 5,239 5,068 Target price 404,308 EPS (adj) growth (% y-y) (84.9) 107.5 20.9 (3.3) Recommendation 3.5 EBITDA margin (%) 7.4 12.6 13.5 12.5 ROE (%) 3.5 7.1 7.9 7.1 BUY ★★★ : 5 / BUY: 4 / HOLD: 3 / SELL: 2 / SELL ★★★ : 1 P/E (adj) (x) 174.2 84.0 69.5 71.8 P/B (x) 6.1 5.7 5.3 4.9 * Share price and financials based on EV/EBITDA (x) 63.1 36.1 31.7 32.7 May 26 Dividend yield (%) 0.0 0.0 0.0 0.0

Source: Company data, Samsung Securities estimates

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Foreign firms with big out-licensing deals in 2015: Galapagos (Belgium) and Gilead Sciences in Dec 2015 inked a deal to develop and commercialize JAK 1-selective inhibitor filgotinib for arthritis (under Phase II trials), with the latter paying the former USD2.075b (USD725m upfront, USD1.35b in milestones, royalties of at least 20%). Lexicon Pharmaceuticals (US) in Nov 2015 out- licensed diabetes candidate sotagliflozin (Phase III) to Sanofi for USD1.7b (USD300m upfront, USD1.4b in milestones, royalties of at least 10%). The drug works as a dual inhibitor of SGLT-1 and SGLT-2. In Oct 2015, Five Prime Therapeutics (US) out-licensed CSF1R inhibitor cabiralizumab (Phase I) to BMS for USD1.75b (USD350m upfront, USD1.4b in milestones, royalties of 15-25%). In Apr 2015, Innate Pharma (France) out-licensed NKG2A inhibitor monalizumab (Phase II) to AstraZeneca for USD1.275b (USD250m upfront, USD1.025b in milestones, royalties of 10%). Trial progress key to shares: Based on 30-day average share prices before and after the out- licensing deals, the combined market cap of the four firms leapt USD314m, equal to 77.3% of their USD460m in upfront payments. Performances have since diverged. For recent 30-day average share prices (relative to 30-day averages right after the deals), Galapagos is up 91.5%, Lexicon 16.7%, Five Prime 4.2%, while Innate has shed 25.2%. Progress through clinical trials was the difference maker. Galapagos in May 2016 said it would start global Phase III trials by end-year for indications of Crohn’s disease and ulcerative colitis. It dosed the first patient for Crohn’s disease in Nov 2016 and for ulcerative colitis in Dec 2016, triggering respective milestone payments of USD50m and USD10m. Lexicon in Mar 2016 announced plans to start global Phase III trials for type-2 diabetes within the year, and in Sep 2016 reported successful results for global Phase III trials for type-1 diabetes. In contrast, Five Prime in Oct 2016 initiated the Phase Ib portion of a clinical trial evaluating its drug candidate in combination with BMS’s Opdivo. Innate entered Phase I/II trials of its drug candidate in combination with Imbruvica (ibrutinib) in Oct 2015, Phase Ib/II trials in combination with Erbitux (cetuximab) in Dec 2015, and Phase I trials in combination with Imfinzi (durvalumab) in Feb 2016. Share price performances, of course, are impacted by both the size of out-licensing contracts and also the ability of out-licensed drug candidates to progress through trials and trigger milestone payments. Hanmi’s pipeline value to rise as drugs make progress, trigger milestones: Galapagos, Lexicon, Five Prime, and Innate have no operating value but successfully out-licensed innovative drug candidates to multinational players. Lacking operating value, their market caps can be seen as the equivalent of the value of their drug pipeline. Based on recent 30-day market caps, we estimate market caps of the four firms at USD4b, USD1.62b, USD897m, and USD615m, respectively. Hanmi Pharmaceutical has more pipeline drugs in late-stage trials than any of the four firms do, with several of them already under out-licensing deals. The value of the company’s pipeline, however, has been discounted following a series of negative news flows in 2016—eg , a September cancellation of an out- licensing deal with Boehringer Ingelheim for HM61713 (olmutinib), a November suspension of patient recruitment for Phase I trials of HM12525A/JNJ-64565111, and December revisions to an out-licensing contract with Sanofi for the Quantum Project. This year, Hanmi’s new CEO in interviews on Feb 13 and May 10 said sample production for efpeglenatide and HM12525A/JNJ- 64565111 will commence soon, allowing global clinical trials to resume. The company’s pipeline may be reevaluated as drug candidates progress to latter stages of trials and bring in milestone revenue.

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Top 10 out-licensing contract in global pharm/biotech industry in 2015, by upfront payment Rank Contract Upfront Licensor Licensee Project Development value payment stage (USDm) (USDm) T-cell therapies for cancer and autoimmune diseases with an initial 1,000 Juno 1 1,100 Celgene focus on chimeric antigen receptor technology (CAR-T) and T-cell Phase I (150 cash+850 equity) Therapeutics receptor (TCR) technologies 725 Gilead JAK1-selective inhibitor filgotinib for inflammatory disease 2 2,075 (300 cash+ 425 Galapagos Phase II Sciences indications equity) Regeneron PD-1 (programmed death-1) inhibitor and other immuno-oncology Phase I, 3 2,165 640 Sanofi Pharmaceuticals antibodies Pre-clinical MEDI4736, PD-L1 (programmed death ligand-1) inhibitor program 4 450 450 AstraZeneca Celgene Phase III for blood cancers 4,259 Efpeglenatide, a long-acting glucagon-like peptide-1 receptor 437 Hanmi Phase II, Phase I, 5 (EUR3, Sanofi agonist (GLP1-RA), weekly insulin and a fixed-dosed weekly GLP- (EUR400m) Pharmaceutical Pre-clinical 900m) 1-RA/insulin drug combination Five Prime Bristol-Myers Colony stimulating factor 1 receptor (CSF1R) antibody program for 6 1,737 350 Phase I Therapeutics Squibb immunology and oncology indications Sotagliflozin, an oral dual inhibitor of sodium-glucose Lexicon 7 1,700 300 Sanofi cotransporters 1 and 2 (SGLT-1 and SGLT-2), for the treatment of Phase III Pharmaceuticals diabetes Immunomic Astellas LAMP-vax products for the treatment or prevention of any and all 8 300 300 Discovery Therapeutics Pharma allergic diseases in humans 9 1,275 250 Innate Pharma AstraZeneca IPH2201, an immune checkpoint inhibitor targeting NKG2A Phase II Small molecule oral calcitonin gene-related peptide (CGRP) 10 250 250 Merck Allergan Phase II receptor antagonists for the treatment and prevention of migraine Source: IMS Health, Samsung Securities

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Innate Pharma: Market cap and major events Apr 24, 2015 Feb 6, 2017 Feb 5, 2014 (pts) (EURm) Out-licensed IPH2201 to Released disappointing 1,000 Licensed-in IPH2201 AstraZeneca phase II results 4,500 from Novo Nordisk for lirilumab for AML 900 4,000 800 Nov 20, 2013 Financed EUR20m from US 3,500 700 institutional investor specialized 3,000 600 in healthcare sector 2,500 500 2,000 400 300 Nov 8, 2016 1,500 Released fine phase I/II results for 200 Feb 4, 2014, lirilumab (combination with Opdivo) 1,000 Initiated coverage at for head and neck cancer 500 100 conviction buy by Goldman Sachs 0 0 2013 2014 2015 2016 2017 Market cap (LHS) Nasdaq Biotechnology Index (RHS)

Source: Bloomberg, Samsung Securities

Innate Pharma: R&D related events Date Events Aug 27, 2014 EMA designates IPH4102 as orphan drug Oct 6, 2015 Monalizumab starts Phase I/II (combination with ibrutinib) Dec 17, 2015 Monalizumab starts Phase Ib/II (combination with cetuximab) Feb 8, 2016 Monalizumab starts Phase I (combination with durvalumab) Nov 8, 2016 Lirilumab releases fine Phase I/II results (combination with Opdivo) for head and neck cancer patients Nov 30, 2016 Monalizumab releases positive safety data in Phase I/II for advanced gynecologic malignancies patients Feb 6, 2017 Lirilumab releases disappointing Phase II results for AML patients

Innate Pharma: Major contracts Date Project Mode of Development Partner Contract value Upfront Milestone Royalties Notes action stage (USDm) payment payments (USDm ) (USDm) EUR22m EUR2m Monalizumab Feb 5, 2014 Anti-NKG2A Phase II Novo Nordisk +600,000 +600,000 EUR20m Licensed-in (IPH2201) shares shares Monalizumab Apr 24, 2015 Anti-NKG2A Phase II AstraZeneca 1,275 250 1,025 Double digit Out-licensing (IPH2201) Jan 11, 2016 Bispecific antibodies n/a n/a Sanofi EUR400m n/a EUR400m Undisclosed Co-development Source: Bloomberg, Samsung Securities

Innate Pharma: R&D pipeline Project Mode of action Indication Research Pre-clinical Phase I Phase II Phase III Partner Notes Squamous cell carcinoma Bristol-Myers Lirilumab KIR2DL-1/2/3 Phase I/II of the head and neck Squibb Phase I/II Solid and hematological (Multiple tumors combination) Phase I/II Solid and hematological Monalizumab Anti-NKG2A AstraZeneca (Mono and tumors combination) IPH4102 KIR3DL2 Cutaneous T-cell lymphomas IPH4301 MICA/B Cancer IPH52 CD39 Cancer IPH53 CD73 Cancer IPH33 TLR3 Inflammation NK bispecific Up to two Undisclosed Cancer Sanofi engagers drugs

Source: Innate Pharma, Samsung Securities

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Five Prime Therapeutics: Market cap and major events

(USDm) Oct 15, 2015 (pts) Mar 17, 2014 Out-licensed FPA008 2,000 Signed a co-development contract to Bristol-Myers Squibb 6,000 1,800 with Bristol-Myers Squibb to develop Nov 24, 2014 immuno-oncology drugs Signed a contract with Bristol-Myers 5,000 1,600 Squibb to do phase I clinical trials of FPA008, combination with Opdivo 1,400 4,000 1,200 Sep 17, 2013 1,000 Listed on Nasdaq 3,000 800 Jul 16, 2015 2,000 600 Licensed in Inhibrix's multi-target antibody drugs 400 May 27, 2015 1,000 200 Signed a co-development contract with Bluebird Bio to develop CAR T cell treatments 0 0 2013 2014 2015 2016 2017

Market cap (LHS) Nasdaq Biotechnology Index (RHS)

Source: Bloomberg, Samsung Securities

Five Prime Therapeutics: R&D related events Date Events Jan 22, 2016 FPA144 releases Phase I results for gastric cancer (partial response) Jul 1, 2016 US FDA designates FPA144 as an orphan drug GSK exercises option to take an exclusive license to IP related to a target under the respiratory diseases research collaboration Jul 15, 2016 between the companies, triggering a $1.5 million license payment to Five Prime Therapeutics. Five Prime is eligible to receive up to $92.75 million in contingent milestone payments for each product that incorporates or targets the licensed protein. Oct 4, 2016 FPA008 starts Phase Ib (combination with Opdivo) Jan 5, 2017 Extends immune-oncology drug co-development contract with Bristol-Myers Squibb by one year Source: Bloomberg, Samsung Securities

Five Prime Therapeutics: Major contracts Date Project Mode of Development Partner Contract value Upfront Milestone Royalties Notes action stage payment payments (USDm) (USDm) (USDm) USD20m+ Immuno- Bristol- USD320m+ New USD21 m Mid-single to Out- Mar 17, 2014 oncology n/a Myers USD21 m share 300 target share low-double digit licensing therapies Squibb purchase purchase CAR T cell New Bluebird Up to USD130m USD1.5m Up to USD128.5m Out- May 27, 2015 n/a Undisclosed therapies target Bio per product per product per product licensing Up to USD342.5m Up to USD342.5m per product per product (USD442.5m GITR and Multi-specific (USD442.5m for for License- Jul 16, 2015 other n/a Inhibrix n/a n/a antibodies drugs with US drugs with US in targets FDA orphan drug FDA orphan designation) drug designation) Bristol- Cabiralizumab Out- Oct 15, 2015 CSF1R Phase I Myers 1,737 350 1,387 Double digit (FPA008) licensing Squibb Source: Bloomberg, Samsung Securities

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Five Prime Therapeutics: R&D pipeline Project Mode of action Indication Research Pre-clinical Phase I Phase II Phase III Partner Note Cabiralizumab Bristol-Myers Combination CSF1R antibody Multiple tumors (FPA008) Squibb with Opdivo Pigmented villonodular

synovitis FPA144 FGFR2b antibody Gastric and bladder cancers FP-1039 FGF ligand trap Mesothelioma FPT155 CD80-Fc Multiple tumors Tetravalent GITR FPA154 Multiple tumors agonist antibody FPA150 B7-H4 antibody Multiple tumors BCMA/CD3 bi- FPA151 Multiple myeloma specific antibody Immuno- Bristol-Myers Undisclosed Multiple tumors oncology Squibb Immuno- Bristol-Myers Undisclosed Multiple tumors oncology Squibb Source: Five Prime Therapeutics, Samsung Securities

Lexicon Pharmaceuticals: Market cap and major events

(USDm) (pts) Sep 9, 2016 Nov 6, 2015 2,500 Oct 1, 2013 Released successful phase II results for 6,000 Out-licensed Released phase II data proving sotagliflozin in type I diabetes 5,500 LX4211 (sotagliflozin) sotagliflozin to Sanofi 2,000 reduces blood glucose level 5,000 Aug 3, 2015 Released successful phase III 4,500 results for telotristat etiprate 1,500 4,000 3,500 1,000 3,000 2,500

500 Dec 3, 2013 2,000 LX1033, released disappointing 1,500 phase II results 0 1,000 2013 2014 2015 2016 2017 Market cap (LHS) Nasdaq Biotechnology Index (RHS)

Source: Bloomberg, Samsung Securities

Lexicon Pharmaceuticals: R&D related events Date Events Oct 9, 2013 Telotristat etiprate fails to deliver meaningful results in a pilot study for ulcerative colitis Apr 14, 2014 Sotagliflozin releass Phase II results in type I diabetes Sep 11, 2014 Sotagliflozin releases Phase IIb results in type II diabetes Mar 2, 2016 Sanofi states it will start Phase III for Sotagliflozin in type II diabetes by end-2016 Mar 16, 2016 Applies for approval of Xermelo with US FDA May 31, 2016 Receives US FDA Priority Review Jul 19, 2016 EMA receives application of approval for Xermelo Sep 9, 2016 Sotagliflozin releases successful Phase III results in type I diabetes Mar 1, 2017 US FDA approves Xermelo Source: Bloomberg, Samsung Securities

110

Hanmi Pharmaceutical

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Lexicon Pharmaceuticals: Major contracts Date Project Mode of Development Partner Contract value Upfront Milestone Royalties Notes action stage payment payments (USDm ) (USDm) (USDm) Xermelo Oct 22, 2014 TPH inhibitor Phase III Ipsen 145 23 122 Undisclosed Out-licensing (Telotristat etiprate) Sotagliflozin SGLT1/SGLT2 Escalating Nov 6, 2015 Phase III Sanofi 1,700 300 1,400 Out-licensing (LX4211) inhibitor double digit Source: Bloomberg, Samsung Securities

Lexicon Pharmaceuticals: R&D pipelines Project Mode of action Indication Research Pre-clinical Phase I Phase II Phase III Approval Partner LX1606 TPH inhibitor Carcinoid syndrome diarrhea US Ipsen Sotagliflozin SGLT1/SGLT2 Type 1 diabetes Sanofi (LX4211) inhibitor Type 2 diabetes LX2761 SGLT1 inhibitor Diabetes LX9211 AAK1 Neuropathic pain Source: Five Prime Therapeutics, Samsung Securities

Galapagos: Market cap and major events Dec 17, 2015 (EURm) Out-licensed filgotinib (pts) 4,500 to Gilead Sciences 7,000 Apr 14, 2015 Received milestone payments on progression of 4,000 Released positive phase II results for clinical trials and released positive results 6,000 filgotinib in rheumatoid arthritis Sep 25, 2015 3,500 Cancelled a co-develoopment contract with 5,000 3,000 Abbvie for Crohn's diesesae treatments 2,500 Sep 24, 2013 4,000 Signed a co-development contract with 2,000 Abbvie for cystic fibrosis treatments 3,000 1,500 2,000 1,000 May 19, 2015 Sep 2016 1,000 500 ADR listed on Nasdaq Rumoured Gilead Sciences' acquisition 0 0 2013 2014 2015 2016 2017 Market cap (LHS) Nasdaq Biotechnology Index (RHS)

Source: Bloomberg, Samsung Securities

111

Hanmi Pharmaceutical

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Galapagos: R&D related events Date Events Jan 8, 2015 GLPG1205 starts Phase II for ulcerative colitis Apr 14, 2015 Filgotinib releases positive Phase IIb results in rheumatoid arthritis (DARWIN1) Apr 27, 2015 Filgotinib releases positive Phase II results in rheumatoid arthritis (DARWIN2) Sep 25, 2015 Cancels co-development contract with Abbvie for Crohn’s disease treatment; maintains contract for cystic fibrosis Oct 15, 2015 GLPG2665 releases pre-clinical trial plan as a next generation cystic fibrosis treatment Dec 7, 2015 Filgotinib releases successful Phase II results for severe Crohn’s disease Jan 19, 2016 GLPG2222 receives milestone of USD10m on onset of Phase I for Cystic fibrosis Jan 26, 2016 GLPG1205 fails in Phase IIa clinical trials for ulcerative colitis Feb 17, 2016 GLPG1837 announces will release Phase II data for cystic fibrosis in 4Q16 Apr 29, 2016 Expands co-development contract with Abbvie for cystic fibrosis treatment; total milestone payments change from USD 350m to USD600m May 25, 2016 Filgotinib announces start of global Phase III clinical trials Nov 23, 2016 Filgotinib receives milestone of USD50m on first administration in Phase III clinical trials Nov 29, 2016 GLPG2737 receives milestone of USD10m on onset of Phase I for cystic fibrosis Dec 9, 2016 Filgotinib receives milestone of USD10m on first administration in Phase IIb/III clinical trials for ulcerative colitis Dec 21, 2016 GLPG1837 releases competitive Phase II results for cystic fibrosis Mar 10, 2017 Filgotinib releases Phase II plans for small bowel Crohn’s disease and fistulizing Crohn’s disease Mar 22, 2017 GLPG3607 starts Phase I for cystic fibrosis Source: Bloomberg, Samsung Securities

Galapagos: Major contracts Date Project Mode of Development Partner Contract value Upfront payment Milestone Royalties Notes action stage payments (USDm) (USDm) (USDm) Cystic fibrosis Sep 24, 2013 n/a n/a Abbvie 405 45 360 Double digit Out-licensing treatment JAK1-selective Gilead 725 (300 cash + Dec 17, 2015 Filgotinib Phase II 2,075 1,350 Over 20% Out-licensing inhibitor Sciences 425 equity) Cystic fibrosis Expanding Apr 29, 2016 n/a n/a Abbvie 240 0 240 Double digit treatment contract Source: Bloomberg, Samsung Securities

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Galapagos: R&D pipelines Project Mode of action Indication Research Pre-clinical Phase I Phase II Phase III Approval Partner JAK1-selective Filgotinib Rheumatoid arthritis Gilead inhibitor Crohn’s disease Gilead Ulcerative colitis Gilead Short bowel Crohn’s disease Gilead Fistulizing Crohn’s disease Gilead Sjogren’s disease Gilead Ankylosing spondylitis Gilead Psoriatic arthritis Gilead Cutaneous Lupus Gilead Erythematosus GLPG1837 Potentiators Cystic fibrosis (CF) Abbvie GLPG2451 Potentiators Cystic fibrosis (CF) Abbvie GLPG2222 C1 corrector Cystic fibrosis (CF) Abbvie GLPG2737 C2 corrector Cystic fibrosis (CF) Abbvie GLPG3607 Potentiators Cystic fibrosis (CF) Abbvie Selective Idiopathic pulmonary GLPG1690 autotaxin inhibitor disease ADAMTS-5 GLPG1972 Osteoarthritis Servier inhibitor MOR106 IL-17C Atopic dermatitis MorphoSys Idiopathic pulmonary GLPG2938 Undisclosed disease GLPG2534 Undisclosed Atopic dermatitis Source: Galapagos, Samsung Securities

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Hanmi Pharmaceutical: R&D pipeline Category Project Indication Pre- Phase Phase Phase Remarks clinical l ll lll LAPS Exendin4 (efpeglenatide) Diabetes, obesity Quantum Project, out-licensed to Sanofi LAPS Insulin Combo (HM14220) Diabetes, obesity LAPS Insulin115 (HM12470) Diabetes LAPS GCSF Neutropenia Out-licensed to Spectrum Pharmaceuticals (Rolontis, eflapegrastim) LAPS hGH (efpegsomatropin) Growth hormone deficiency Out-licensed to Janssen LAPS GLP/GCG (HM12525A) Diabetes, obesity (Johnson & Johnson) LAPS Triple Agonist Obesity Developed by Bejing Hanmi Biologic (HM15211) LAPS GCG Analog Congenital hyperinsulinism Applied LAPScovery (HM15136) LAPS IDS Mucopoysaccharidosis Applied LAPScovery (HM15410) LAPS GLP-2 Analog Short bowel syndrome Applied LAPScovery (HM15410) HM21001 GMB stem cell therapy Co-developing with Ajou University BH2950 Breast/gastric cancer Developed by Bejing Hanmi BH2922 NSCLC/colorectal cancer Developed by Bejing Hanmi BH2941 Cancer Developed by Bejing Hanmi Poziotinib Out-licensed to Spectrum Pharmaceuticals Breast cancer (HM781-36B) and Luye Pharma in China Olmutinib (HM61713) NSCLC Out-licensed to ZaiLab in China Luminate Retinal diseases Licensed in from US bio venture Allegro Oraxol Gastric cancer Out-licensed to Athenex New chemical HM71224 Rheumatoid arthritis Out-licensed to Eli Lilly HM95573 Solid cancer Out-licensed to Genentech KX2-391 Solid cancer Licensed-in from Athenex Oratecan Solid cancer Out-licensed to Athenex HM43239 Acute myeloid leukemia HGP1207 Pulmonary hypertension Non-HDL decline of patients HCP1105 with combined dyslipidemia HCP1305 Hypertension/dyslipidemia Incrementally modified HCP1401 Hypertension Prostatic hyperplasia, or HCP1303 fixed-dose erectile dysfunction combination HCP1405 Osteoporosis HCP1202 COPD HIP1302 Anti-virus HIP1503 Overactive bladder Source: Company data, Samsung Securities

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R&D milestones Category Project Description Progress Late Phase ll clinical trials underway in nine countries (including US, EU members, and Korea) Weekly T2DM* Phase ll completed LAPS Exendin4 GLP-1, targets diabetes Monthly T2DM Phase ll interim analysis completed Quantum (efpeglenatide) and obesity Weekly/biweekly obesity Phase ll interim analysis completed Project Presented at ADA in Jun 2015 (diabetes drug) Signed out-licensing contract with Sanofi (Nov 2015) Pre-clinical trials currently underway LAPS Insulin Insulin combo; Presented at ADA in Jun 2015 Combo administered weekly Signed out-licensing contract with Sanofi (Nov 2015) US clinical trials began LAPS Insulin115 Long-acting insulin; Presented at ADA in Jun 2015 (HM12470A) administered weekly New Signed out-licensing contract with Sanofi (Nov 2015) biologic LAPS GLP/GCG Long-acting diabetes & Phase l clinical trials underway globally (HM12525A obesity treatment, JNJ-6456111) administered weekly Signed out-licensing contract with Janssen Made presentation on Phase l clinical trials at ASCO (Jun 2015) Olmutinib Anti-cancer drug targeting Signed out-licensing contract with Boehringer Ingelheim (Jul 2015) (HM61713) non-small cell lung cancer Signed out-licensing contract with ZaiLab in China (Nov 2015) Phase ll clinical trials underway on lung cancer and terminal breast cancer patients Poziotinib Anti-cancer drug targeting Signed out-licensing contract with Spectrum Pharmaceuticals in US (Mar 2015) New (HM781-36B) non-small cell lung cancer chemical Signed out-licensing contract with Luye Pharma in China (Aug 2015)

Rheumatoid arthritis/ Phase lI clinical trials in Europe currently underway HM71224 auto-immune disease Made presentation on Phase l clinical trials at EULAR (Jun 2015) treatment Signed out-licensing contract with Eli Lilly (Mar 2015) HM95573 Urinary system treatment In Phase l trials for solid tumor cancer; signed out-licensing deal with Genentech (Sep 2016) Note: * Type II diabetes mellitus Source: Company data, Samsung Securities

Global partnerships Year Partner Drug (or technology) Remarks 2009 MSD Amosartan World’s first amlodipine + losartan combination drug Oral Platform Tech 2011 Kinex Co-development and exclusive marketing rights (Oral Paclitaxel/Irintotecan) 2012 Spectrum Pharmaceuticals Eflapegrastim Co-development and exclusive global marketing rights, excluding Korea, China, and Japan 2013 Sanofi Rovelito Co-development and exclusive marketing rights (commercialized) 2014 Luye Pharma Poziotinib (Pan-HER inhibitor) Co-development and exclusive marketing rights in China Spectrum Pharmaceuticals Poziotinib (Pan-HER inhibitor) Co-development and exclusive global marketing rights, excluding Korea and China Eli Lilly HM71224 (BTK Inhibitor) Co-development and exclusive global marketing rights, excluding Korea and China HM61713 Co-development and exclusive global marketing rights excluding Korea, China, Boehringer Ingelheim (3rd-generation EGFR TKI) and Hong Kong → deal canceled in Sep 2016 Co-development and exclusive global marketing rights 2015 Sanofi Quantum Project → deal on LAPS-Insulin canceled in Dec 2016 HM12525A Janssen (Johnson & Johnson) Co-development and exclusive global marketing rights, excluding Korea and China (GLP/GCG dual agonist) HM61713 ZaiLab Co-development and exclusive marketing rights in China (3rd-generation EGFR TKI) 2016 Genentech (Roche) HM95573 (RAF inhibitor) Co-development and exclusive global marketing rights, excluding Korea Source: Company data, Samsung Securities

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2017 clinical trial plans Category Phase l Phase ll Phase lll Sanofi (efpeglenatide) Hanmi (LAPS Insulin Combo) Biologic Hanmi (HM12470) Spectrum (eflapegrastim) Janssen (HM12525A/JNJ-6456111) Hanmi (HM10560A) Spectrum (Poziotinib) New chemical Genentech (HM95573) Eli Lilly (HM71224) ZAI Lab (HM61713) Source: Company data, Samsung Securities

R&D pipeline highlights Pipeline Description Clinical stage Remarks Presented results of domestic Phase l Long-acting rhGH with comparable efficacy to Completed Phase ll clinical trials on HM10560A clinical trials and interim results of global daily rhGH adult growth hormone deficiency Phase ll clinical trials at US ENDO Value-added To develop fixed-dose combinations on back of Plans to launch five new products in 2017 , programs technological prowess for IMD development developing six more Source: Company data, Samsung Securities

Raising target to KRW450,000; top pharmaceutical pick: We estimate Hanmi’s operating value at KRW1.58t based on the sum of its: 1) parent operating value of KRW1.11t; 2) equity holdings in Beijing Hanmi of KRW412.4b; and 3) equity holdings in Hanmi Fine Chemical of KRW50.8b. Our estimate seems reasonable considering Hanmi’s market cap averaged KRW1.29t in the 30 days prior to its first out-licensing contract in 2015. We value the company’s pipeline drugs at KRW3.35t, putting the value of efpeglenatide (Phase III) at KRW1.85t, HM71224 (Phase II) at KRW372.3b, HM12525A (Phase I) at KRW321.9b, LASP insulin combo (Phase I) at KRW226.7b, HM95573 (Phase I) at KRW76.8b, and others (Rolontis, poziotinib, olmutinib, and efpegsomatropin) at a combined KRW500b. Our estimates are not aggressive, but simply assume that efpeglenatide and HM12525A/JNJ-64565111 enter global Phase III and I trials, respectively. Galapagos, which signed a USD2.075b out-licensing deal, saw the value of its pipeline rise to USD4b after starting global Phase III trials. We raise our target price to KRW450,000, and present the stock as our top pharmaceutical pick.

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Sum-of-the-parts valuation (KRWb) Remarks Operating value (A=BxC) 1,114.2 2017E sales (B) 742.8 P/S multiple (x) (C) 1.5 Kospi Medical Supplies Index P/S*: 1.5x Non-operating value (D=E+L) 3,813.8 Subsidiaries (E=F+I) 463.2 Beijing Hanmi (F=GxHx74%) 412.4 74% stake 2017E net profit (G) 22.3 P/E multiple (x) (H) 25.0 Hanmi Fine Chemical (I=JxKx63%) 50.8 63% stake 2017E net profit (J) 8.1 P/E multiple (x) (K) 10.0 New drugs (L=M+N+O+P+Q+R) 3,350.6 Efpeglenatide (M) 1,853.0 HM71224 (N) 372.3 HM12525A (O) 321.9 LAPS Insulin Combo (P) 226.7 HM95573 (Q) 76.8 Others (Rolontis, Poziotinib, Olmutinib, Efpegsomatropin) (R) 500.0 Net cash (S) (2.5) Fair equity value (T=A+D+S) 4,930.6 Number of common shares (‘000) (U) 11,163 Target price (KRW) (T/U) 441,691 Note: * Excludes Samsung Biologics Source: Samsung Securities

Revisions to full-year forecasts (KRWb) 2017E 2018E Old New Diff (%) Old New Diff (%) Sales 915.1 915.1 (0.0) 950.6 950.6 0.0 Operating profit 73.4 73.4 (0.0) 77.2 88.0 14.0 Pre-tax profit 69.3 69.8 0.8 73.6 84.4 14.7 Net profit 62.4 62.9 0.8 66.2 76.0 14.7 Source: Samsung Securities estimates

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Forward P/E band Forward P/B band

(KRW) (KRW) 1,000,000 1,000,000

13.0x 800,000 800,000

600,000 130x 600,000 9.0x

90x 400,000 400,000 5.0x 50x 200,000 200,000

10x 1.0x 0 0 2012 2013 2014 2015 2016 2017 2012 2013 2014 2015 2016 2017

Source: QuantiWise, Samsung Securities estimates Source: QuantiWise, Samsung Securities estimates

Ownership structure

Other: 45.0%

National Pension Service: 6.1%

Dong Kuk Shin: 7.6% Hanmi Science: 41.4%

Source: Company data, Samsung Securities

118

Hanmi Pharmaceutical

2017. 6. 15

Hanmi Pharm: Results and forecasts (consolidated) (KRWb) 1Q16 2Q16 3Q16 4Q16 2016 1Q17 2Q17E 3Q17E 4Q17E 2017E Sales 256.4 234.5 219.7 172.1 882.7 233.6 231.4 221.9 228.1 915.2 Chg (% y-y) 19.4 (4.1) (18.1) (70.8) (33.0) (8.9) (1.3) 1.0 32.5 3.7 Hanmi Pharm 195.4 191.4 177.1 123.7 687.7 178.1 191.6 181.2 191.9 742.8 Chg (% y-y) 23.9 (4.0) (16.7) (77.2) (38.2) (8.9) 0.1 2.3 55.1 8.0 Domestic 142.9 145.6 135.1 155.1 578.7 141.9 155.7 152.4 163.1 613.1 Chg (% y-y) 5.3 20.3 (0.8) 15.8 9.8 (0.7) 6.9 12.8 5.2 5.9 Exports 19.5 24.5 17.2 20.1 81.3 18.9 27.0 19.8 19.8 85.5 Chg (% y-y) 4.8 4.0 2.7 34.0 10.0 (3.1) 10.0 15.1 (1.5) 5.1 Upfront and milestone revenue 33.0 21.3 24.8 (51.5) 27.7 17.3 9.0 9.0 9.0 44.3 Chg (% y-y) 871.9 (61.1) (58.5) (113.1) (94.6) (47.6) (57.8) (63.8) (117.5) 59.9 Beijing Hanmi 60.0 42.3 42.6 47.9 192.8 55.6 39.8 40.7 36.2 172.4 Chg (% y-y) 9.4 (7.2) (22.2) (3.2) (5.8) (7.3) (5.8) (4.4) (24.3) (10.6) Mamiai 22.0 17.6 19.8 10.7 70.1 20.2 17.6 18.1 10.6 66.6 Chg (% y-y) (2.2) 5.1 (18.3) (38.7) (13.4) (8.2) 0.2 (8.5) (0.7) (5.0) Mechanan 4.0 3.5 3.4 1.8 12.7 2.8 3.4 3.4 1.7 11.2 Chg (% y-y) (21.7) (36.4) (49.8) (61.7) (42.6) (28.5) (5.3) (1.5) (7.4) (11.8) Itanzing 21.8 11.9 9.2 19.2 62.2 19.1 10.1 8.4 19.7 57.3 Chg (% y-y) 15.2 (14.8) (29.4) 1.0 (4.4) (12.3) (15.4) (8.9) 2.4 (7.8) Other 9.8 9.3 10.1 16.1 45.3 11.1 8.8 10.8 4.2 34.9 Chg (% y-y) 17.8 (0.5) (4.7) 96.3 24.2 12.7 (5.1) 6.7 (73.9) (23.1) Gross profit 143.8 126.3 123.0 67.7 460.9 134.4 124.6 116.9 113.2 489.1 Chg (% y-y) 23.4 (14.0) (28.4) (86.0) (49.9) (6.5) (1.3) (5.0) 67.2 6.1 Gross margin (%) 56.1 53.8 56.0 39.4 52.2 57.5 53.8 52.7 49.6 53.4 R&D expenses 37.0 36.0 36.8 33.0 142.9 36.5 39.3 39.3 39.3 157.2 Chg (% y-y) (12.3) (17.1) (4.9) (24.3) (14.9) (1.2) 9.1 6.7 18.9 10.0 R&D expenses-to-sales (%) 14.4 15.4 16.8 19.2 16.2 15.6 17.0 17.7 17.2 17.2 Operating profit 22.6 6.4 13.8 (16.0) 26.8 31.4 14.4 15.1 12.6 73.4 Chg (% y-y) 968.7 161.3 (61.5) Turned neg (87.4) 39.0 124.7 9.4 To turn pos 174.1 Operating margin (%) 8.8 2.7 6.3 (9.3) 3.0 13.4 6.2 6.8 5.5 8.0 Pre-tax profit 34.9 21.4 0.7 (49.0) 8.0 29.2 13.5 14.1 13.1 69.8 Chg (% y-y) 139.5 1,016.3 (97.9) Turned neg (96.2) (16.3) (37.1) 1,933.2 To turn pos 773.3 Pre-tax margin (%) 13.6 9.1 0.3 (28.4) 0.9 12.5 5.8 6.4 5.7 7.6 Net profit 41.0 21.4 6.3 (38.3) 30.3 24.6 12.1 12.7 13.4 62.9 Chg (% y-y) 152.8 69.7 Turned pos Turned neg (81.3) (39.9) (43.3) 101.9 To turn pos 107.5 Net margin (%) 16.0 9.1 2.9 (22.3) 3.4 10.6 5.2 5.7 5.9 6.9 Net profit attributable to 38.1 20.1 4.8 (39.6) 23.3 18.9 9.3 9.8 10.3 48.4 controlling shareholders Chg (% y-y) 200.7 78.4 Turned pos Turned neg (84.9) (50.3) (53.6) 104.6 To turn pos 107.5 Net margin attributable to 14.9 8.6 2.2 (23.0) 2.6 8.1 4.0 4.4 4.5 5.3 controlling shareholders (%) Source: Samsung Securities estimates

Revenue from out-licensing deals Reflected Project Partner Type Value (KRWb) Recognition 2Q15 HM71224 Eli Lilly Upfront fee 54.8 Lump-sum 3Q15 HM61713 Boehringer Ingelheim Upfront fee 59.8 Lump-sum 4Q15 HM61713 Boehringer Ingelheim Milestone fee 17.1 Lump-sum 4Q15 HM12525A Janssen (Johnson& Johnson) Upfront fee 121.6 Lump-sum 4Q15 Quantum Project Sanofi Upfront fee 255.6 Distributed 4Q16 HM95573 Genentech Upfront fee 93.6 Distributed 4Q16 Quantum Project Sanofi Upfront fee 63.9 Returned Note: Sales recognition based on GAAP and general practices of global pharmaceutical sector; values exclude 30% of total payment going to Hanmi Science Source: Company data, Samsung Securities

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Hanmi Pharm: Results and forecasts (parent basis) (KRWb) 1Q16 2Q16 3Q16 4Q16 2016 1Q17 2Q17E 3Q17E 4Q17E 2017E Sales 195.4 191.4 177.1 123.7 687.7 178.1 191.6 181.2 191.9 742.8 Chg (% y-y) 23.9 (4.0) (16.7) (77.2) (38.2) (8.9) 0.1 2.3 55.1 8.0 Domestic 142.9 145.6 135.1 155.1 578.7 141.9 155.7 152.4 163.1 613.1 Chg (% y-y) 5.3 20.3 (0.8) 15.8 9.8 (0.7) 6.9 12.8 5.2 5.9 Exports 19.5 24.5 17.2 20.1 81.3 18.9 27.0 19.8 19.8 85.5 Chg (% y-y) 4.8 4.0 2.7 34.0 10.0 (3.1) 10.0 15.1 (1.5) 5.1 Operating profit 9.3 (0.0) 5.9 (20.0) (4.4) 15.7 9.7 8.4 9.3 42.5 Chg (% y-y) Turned pos Remained neg (79.3) Turned neg Turned neg 69.1 To turn pos 43.3 To turn pos 흑전 Operating margin (%) 4.7 (0.0) 3.3 (16.1) (0.6) 8.8 5.1 4.6 4.8 5.7 Net profit 29.8 16.6 (0.1) (42.9) 3.7 11.2 8.7 7.3 11.2 32.5 Chg (% y-y) 745.7 109.8 Remained neg Turned neg (97.2) (62.2) (47.2) To turn pos To turn pos 778.2 Net margin (%) 15.2 8.6 (0.1) (34.7) 0.5 6.3 4.6 4.0 5.8 4.4 Source: Samsung Securities estimates

Beijing Hanmi: Results and forecasts (KRWb) 1Q16 2Q16 3Q16 4Q16 2016 1Q17 2Q17E 3Q17E 4Q17E 2017E Sales 60.0 42.3 42.6 47.9 192.8 55.6 39.8 40.7 36.2 172.4 Chg (% y-y) 9.4 (7.2) (22.2) (3.2) (5.8) (7.3) (5.8) (4.4) (24.3) (10.6) Mamiai 22.0 17.6 19.8 10.7 70.1 20.2 17.6 18.1 10.6 66.6 Chg (% y-y) (2.2) 5.1 (18.3) (38.7) (13.4) (8.2) 0.2 (8.5) (0.7) (5.0) Mechanan 4.0 3.5 3.4 1.8 12.7 2.8 3.4 3.4 1.7 11.2 Chg (% y-y) (21.7) (36.4) (49.8) (61.7) (42.6) (28.5) (5.3) (1.5) (7.4) (11.8) Itanzing 21.8 11.9 9.2 19.2 62.2 19.1 10.1 8.4 19.7 57.3 Chg (% y-y) 15.2 (14.8) (29.4) 1.0 (4.4) (12.3) (15.4) (8.9) 2.4 (7.8) Other 9.8 9.3 10.1 16.1 45.3 11.1 8.8 10.8 4.2 34.9 Chg (% y-y) 17.8 (0.5) (4.7) 96.3 24.2 12.7 (5.1) 6.7 (73.9) (23.1) Operating profit 14.4 4.5 7.1 2.7 28.2 14.7 4.0 6.1 2.7 27.8 Chg (% y-y) 8.6 11.1 (7.3) (50.0) (7.0) 2.1 (11.5) (14.0) 0.7 (1.5) Operating margin (%) 24.0 10.6 16.7 5.6 14.6 26.4 10.0 15.0 7.5 16.1 Net profit 12.5 4.1 6.2 3.3 25.7 12.1 3.0 5.1 1.8 22.3 Chg (% y-y) 8.7 14.4 (8.1) (37.7) (5.3) (3.2) (27.1) (17.9) (45.1) (13.3) Net margin (%) 20.8 9.7 14.6 6.9 13.3 21.8 7.5 12.5 5.0 12.9 Source: Samsung Securities estimates

Hanmi Fine Chem: Results and forecasts (KRWb) 1Q16 2Q16 3Q16 4Q16 2016 1Q17 2Q17E 3Q17E 4Q17E 2017E Sales 21.9 25.6 21.8 23.7 93.0 21.9 25.6 21.8 23.7 93.0 Chg (% y-y) (2.8) (7.7) 9.3 25.4 4.4 0.0 0.0 0.0 0.0 0.0 Operating profit (1.1) 1.9 0.8 1.3 2.9 1.3 0.6 0.5 0.6 3.1 Chg (% y-y) Turned neg 19.1 Turned pos Turned pos 212.2 Turned pos (66.3) (31.9) (54.4) 6.1 Operating margin (%) (5.0) 7.4 3.7 5.5 3.1 5.9 2.5 2.5 2.5 3.3 Net profit (1.3) 0.7 0.2 1.3 0.9 7.0 0.4 0.3 0.4 8.1 Chg (% y-y) Turned neg (39.3) Turned pos Turned pos (17.4) Turned pos (45.1) 63.5 (72.7) 796.3 Net margin (%) (5.9) 2.7 0.9 5.5 1.0 32.0 1.5 1.5 1.5 8.7 Source: Samsung Securities estimates

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Hanmi Pharmaceutical

2017. 6. 15

Valuation comparison: Major out-licensing firms in 2015 (USDm) Hanmi Pharmaceutical Innate Pharma Five Prime Therapeutics Lexicon Pharmaceuticals Galapagos Country Korea France US US Belgium Share price (USD) 326.8 13.4 29.8 14.4 84.9 Market cap 3,648 726 858 1,512 4,314 Sales 2016 761 62 31 83 168 2017E 842 90 47 95 155 2018E 919 83 67 160 227 Operating profit 2016 23 8 (99) (137) (13) 2017E 60 26 (121) (148) (107) 2018E 94 2 (116) (137) (80) EBITDA 2016 57 12 (93) (135) (8) 2017E 112 63 n/a (161) (68) 2018E 139 38 n/a (20) (27) Net profit 2016 20 14 (66) (141) 60 2017E 45 34 (109) (148) (75) 2018E 64 16 (120) (118) (47) EPS (USD) 2016 1.8 0.3 (2.4) (1.4) 1.3 2017E 4.1 0.8 (4.3) (1.4) (1.6) 2018E 5.3 0.5 (4.0) (1.0) (1.0) P/E (x) 2016 136.3 63.5 n/a n/a 51.6 2017E 79.4 16.6 n/a n/a n/a 2018E 62.3 25.7 n/a n/a n/a P/B (x) 2016 4.8 9.1 3.5 9.2 3.7 2017E 5.8 4.3 n/a 17.8 3.7 2018E 5.3 3.5 n/a 18.0 3.5 EV/EBITDA (x) 2016 52.3 55.0 n/a n/a n/a 2017E 34.8 8.4 n/a n/a n/a 2018E 28.0 14.0 n/a n/a n/a ROE (%) 2016 3.5 16.0 (15.9) (63.8) 9.6 2017E 8.2 51.7 n/a (146.9) (6.1) 2018E 10.1 22.7 n/a (149.1) 2.8 Absolute return (%) 1-week (0.3) 4.7 (1.3) (0.6) (1.8) 1-month 20.1 8.9 (17.0) (7.7) (7.2) 3-months 15.4 21.1 (36.9) (10.2) 12.0 6-months 7.6 (13.0) (49.7) (5.4) 33.2 1-year (36.2) (4.3) (35.5) 5.3 44.7 Year-to-date 29.8 (15.5) (42.2) 4.2 22.5 Relative return (%) 1-week 3.8 2.2 (2.8) (1.0) (0.2) 1-month 13.0 7.6 (18.0) (8.9) (8.4) 3-months 3.0 10.3 (38.3) (12.1) 5.2 6-months (8.9) (25.3) (54.1) (13.7) 15.4 1-year (46.4) (18.7) (44.0) (8.5) 23.9 Year-to-date 12.2 (22.9) (46.5) (3.4) 12.2 Note: As of May 29 close and forex Source: Bloomberg, Samsung Securities

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Income statement Balance sheet Year-end Dec 31(KRWb) 2015 2016 2017E 2018E 2019E Year-end Dec 31(KRWb) 2015 2016 2017E 2018E 2019E Sales 1,318 883 915 951 977 Current assets 1,145 841 800 906 1,023 Cost of goods sold 398 422 426 446 465 Cash & equivalents 138 130 221 296 382 Gross profit 919 461 489 505 512 Accounts receivable 778 250 337 350 360 Gross margin (%) 69.8 52.2 53.5 53.1 52.4 Inventories 158 190 151 157 161 SG&A expenses 707 434 416 417 428 Other current assets 71 269 91 103 120 Operating profit 212 27 73 88 84 Fixed assets 577 756 788 779 752 Operating margin (%) 16.1 3.0 8.0 9.3 8.6 Investment assets 54 43 45 47 48 Non-operating gains (losses) (2) (19) (4) (4) (2) Tangible assets 416 599 632 624 599 Financial profit 1 8 5 3 4 Intangible assets 67 40 37 34 32 Financial costs 12 10 8 7 7 Other long-term assets 41 74 74 74 74 Equity-method gains (losses) 0 0 0 0 0 Total assets 1,723 1,597 1,588 1,686 1,775 Other 9 (17) 0 0 0 Current liabilities 674 544 467 482 493 Pre-tax profit 210 8 70 84 82 Accounts payable 56 51 55 57 59 Taxes 48 (22) 7 8 8 Short-term debt 37 77 77 77 77 Effective tax rate (%) 22.7 (278.9) 10.0 10.0 10.0 Other current liabilities 580 416 334 347 357 Profit from continuing operations 162 30 63 76 73 Long-term liabilities 304 318 324 330 335 Profit from discontinued operations 0 0 0 0 0 Bonds & long-term debt 263 159 159 159 159 Net profit 162 30 63 76 73 Other long-term liabilities 42 159 165 171 176 Net margin (%) 12.3 3.4 6.9 8.0 7.5 Total liabilities 978 862 791 812 828 Net profit (controlling interests) 154 23 48 58 57 Owners of parent equity 675 659 708 766 823 Net profit (non-controlling interests) 8 7 14 17 17 Capital stock 26 26 26 26 26 EBITDA 262 66 115 129 122 Capital surplus 418 417 417 417 417 EBITDA margin (%) 19.9 7.4 12.6 13.5 12.5 Retained earnings 228 229 277 336 392 EPS (parent-based) (KRW) 13,835 2,089 4,335 5,239 5,068 Other 3 (13) (13) (13) (13) EPS (consolidated) (KRW) 14,517 2,714 5,631 6,805 6,583 Non-controlling interests’ equity 70 75 90 107 124 Adjusted EPS (KRW)* 13,835 2,089 4,335 5,239 5,068 Total equity 745 735 797 873 947 Net debt 185 2 (3) (88) (189)

Cash flow statement Financial ratios Year-end Dec 31(KRWb) 2015 2016 2017E 2018E 2019E Year-end Dec 31 2015 2016 2017E 2018E 2019E Cash flow from operations 102 413 78 117 112 Growth (%) Net profit 162 30 63 76 73 Sales 73.1 (33.0) 3.7 3.9 2.8 Non-cash profit and expenses 121 72 53 53 49 Operating profit 514.8 (87.4) 174.1 19.9 (4.4) Depreciation 27 36 39 38 36 Net profit 274.3 (81.3) 107.5 20.9 (3.3) Amortization 23 3 3 3 2 Adjusted EPS** 330.1 (84.9) 107.5 20.9 (3.3) Other 70 33 12 12 11 Per-share data (KRW) Changes in A/L from operating activities (118) 332 (26) 1 0 EPS (parent-based) 13,835 2,089 4,335 5,239 5,068 Cash flow from investments (114) (355) 106 (42) (26) EPS (consolidated) 14,517 2,714 5,631 6,805 6,583 Change in tangible assets (119) (200) (72) (30) (10) Adjusted EPS** 13,835 2,089 4,335 5,239 5,068 Change in financial assets 6 (145) 178 (12) (16) BVPS 60,573 59,234 63,580 68,833 73,915 Other (1) (11) 0 0 0 DPS (common) 2,000 0 0 0 0 Cash flow from financing 95 (63) (94) 0 0 Valuations (x) Change in debt 95 (35) (94) 0 0 P/E*** 26.3 174.2 84.0 69.5 71.8 Change in equity (0) 0 0 0 0 P/B*** 6.0 6.1 5.7 5.3 4.9 Dividends 0 (20) 0 0 0 EV/EBITDA 16.5 63.1 36.1 31.7 32.7 Other (1) (7) 0 0 0 Ratios (%) Change in cash 86 (8) 91 75 86 ROE 25.7 3.5 7.1 7.9 7.1 Cash at beginning of year 52 138 130 221 296 ROA 11.8 1.8 3.9 4.6 4.2 Cash at end of year 138 130 221 296 382 ROIC 20.6 12.2 8.1 9.4 9.2 Gross cash flow 283 102 116 128 122 Payout ratio 13.2 0.0 0.0 0.0 0.0 Free cash flow (19) 213 6 87 102 Dividend yield (common) 0.5 0.0 0.0 0.0 0.0 Note: * Excluding one off items, ** Fully diluted, excluding one-off items Net debt to equity 24.9 0.3 (0.3) (10.1) (19.9) *** From companies subject to equity-method valuation Interest coverage (x) 17.3 2.7 8.9 12.8 12.3 Source: Company data, Samsung Securities estimates

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Company Samsung Biologics (207940) Update Well on the way to long -term growth

● With progress at its third plant well underway, Samsung Biologics should be able to receive more orders and bolster its USD3.2b backlog. The firm is aiming to change into a contract development and manufacturing organization and cut costs.

● The company holds the world’s largest lineup of biosimilars approved in US or Europe, and expects to receive three more approvals in 2H. ● Samsung Biologics is our top biotech pick for its high growth potential.

WHAT’S THE STORY? Brian Lee Analyst More orders ahead: Samsung Biologics should complete its third plant in 4Q17 and the [email protected] 822 2020 7177 related validation process in 4Q18. The new facility will boost the company’s capacity to 360,000 liters or 32.7% of the estimated total for global bio CMOs in 2020. The firm has a CMO order Wonyong Park backlog of USD3.2b, is in talks with more than 15 global pharmaceutical players for over 30 CMO Research Associate contracts, and should pursue even more orders when construction of its plant completes this year. [email protected] 822 2020 7847 Aiming to become a CDMO, cut costs: At the request of CMO clients, Samsung Biologics is aiming to transform from a CMO to a contract development and manufacturing organization (CDMO), and is likely to provide R&D, quality control, and quality assurance services. The AT A GLANCE company is also striving to cut costs enterprise wide in areas such as supply chain management, including increasing logistic efficiency. More approvals ahead: Subsidiaries Samsung Bioepis and Archigen Biotech develop

Target price KRW260,000 (21.8%) biosimilars and boast the world’s largest lineup of approved products in the US and Europe. Samsung Bioepis’ EMA approved products include Enbrel biosimilar Benepali, Remicade Current price KRW213,500 biosimilar Flixabi, and Lantus biosimilar Lusduna, noting Flixabi is also approved by the US FDA. Market cap KRW14.1t/USD12.6b Shares (float) 66,165,000 (21.7%) According to Biogen, European sales of Benepali and Flixabi rose a respective 3,200% y-y and 52 -week high/low KRW213,500/KRW142,000 24.5% q-q to a combined USD66m in 1Q17; and a May 4 article on PR Newswire estimated Avg daily trading KRW35.2b/ Benepali’s European market share at 25%. Samsung Bioepis expects to receive more approvals in value (60-day) USD31.4m 2H, having filed in 2016 for US FDA approval of Lantus biosimilar Lusduna in August, and for ONE-YEAR PERFORMANCE EMA approvals of Humira and Herceptin biosimilars in July and October, respectively. 1M 6M 12M Biotech top pick: Samsung Biologics expects to hit an operating BEP this year on y-y sales Samsung Biologics (%) 18.0 31.8 0.0 growth of 50% to KRW441.9b, backed by utilization of 100% at its #1 plant and 40% at its #2 Vs Kospi (%pts) 10.6 10.5 0.0 facility. We expect quarterly results to improve markedly from 2H through 2018, noting the KEY CHANGES company conducted its biennial plant maintenance from late-2016 into early-2017. Believing the (KRW) New Old Diff firm’s flagship business is on track, we normalize our target P/E and raise our target price to Recommend. BUY BUY KRW260,000. Samsung Biologics our top biotech pick. Target price 260,000 230,000 13 .0%

2017E EPS -953 -1,006 n/a SUMMARY FINANCIAL DATA 2018E EPS 335 327 2.4% 2016 2017E 2018E 2019E SAMSUNG vs THE STREET Revenue (KRWb) 295 441 540 932 No of estimates 3 Net profit (adj) (KRWb) (177) (63) 22 274 Target price 220,667 EPS (adj) (KRW) (3,113) (953) 335 4,145 Recommendation 4.0 EPS (adj) growth (% y-y) nm nm nm 1,138.9

BUY ★★★ : 5 / BUY: 4 / HOLD: 3 / SELL: 2 / SELL ★★★ : 1 EBITDA margin (%) 10.1 24.4 25.9 43.0 ROE (%) (5.2) (1.6) 0.5 6.6

P/E (adj) (x) n/a n/a 638.2 51.5 * Share price and financials based on P/B (x) 3.5 3.5 3.5 3.3 May 26 EV/EBITDA (x) 525.7 155.3 124.8 44.7 Dividend yield (%) 0.0 0.0 0.0 0.0 Source: Company data, Samsung Securities estimates

Samsung Biologics

2017. 6. 15

Revisions to full-year forecasts (KRWb) 2017E 2018E Old New Diff (%) Old New Diff (%) Sales 440.6 440.6 0.0 540.3 539.5 (0.1) Operating profit 10.9 17.8 63.8 32.7 40.1 22.6 Pre-tax profit (87.0) (82.3) To remain neg 28.3 28.9 2.2 Net profit (66.6) (63.0) To remain neg 21.6 22.1 2.2 Source: Samsung Securities estimates

Target-price calculation (KRWb) 2020E 2021E 2022E Note Fair equity value (A=B+F×50%) 10,888 17,547 22,088 Parent business (B=C×E) 5,346 10,032 12,729 Present value of net profit (C=D/(1+0.1)^n) 214 401 509 Applies 10% discount rate Net profit (D) 285 534 678 Excludes equity method gains Target P/E (E) 25 25 25 Lonza’s P/E Samsung Bioepis (F=G×I) 11,084 15,031 18,718 Assumes 50% stake + 1 share Present value of net profit (G= H/(1+0.1)^n) 317 429 535 Applies 10% discount rate Net profit (H) 422 572 712 Target P/E (I) 35 35 35 Celltrion’s P/E Shares outstanding (J, ‘000) 66,165 66,165 66,165 Fair price (K=A/J, KRW) 164,558 265,206 333,830 Target-price (KRW) 254,532 Averages 2020-2022E fair prices Source: Samsung Securities estimates

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Samsung Biologics: Full-year forecasts (KRWb) (%) 2,500 60 50 2,000 1,934 1,588 40 1,242 1,500 932 1,034 30 820 819 1,000 646 20 441 540 481 495 500 304 274 10 18 40 22 0 0 (10) (63) (500) (20) 2017E 2018E 2019E 2020E 2021E 2022E

Sales (LHS) Operating profit (LHS) Net profit (LHS) Operating margin (RHS) Net margin (RHS)

Source: Samsung Securities estimates

Results and forecasts (KRWb) 1Q16 2Q16 3Q16 4Q16 2016 1Q17 2Q17E 3Q17E 4Q17E 2017E Sales 88.8 47.6 52.8 105.5 294.6 107.6 78.1 117.7 137.2 440.6 Chg (% y-y) 222.8 21.3 64.2 122.8 30.0 49.5 Gross profit n/a n/a 2.0 16.7 26.5 17.7 3.2 27.7 47.3 95.8 Chg (% y-y) Turned pos n/a n/a 1,285.4 183.0 261.2 Gross margin (%) 3.8 15.8 9.0 16.4 4.0 23.6 34.4 21.8 Operating profit (13.7) (3.3) (12.8) (0.7) (30.4) 3.4 (11.4) 8.2 17.5 17.8 Chg (% y-y) Remained neg Turned pos To remain neg To turn pos To turn pos To turn pos Operating margin (%) (15.4) (6.9) (24.2) (0.7) (10.3) 3.2 (14.5) 7.0 12.8 4.0 Pre-tax profit (30.2) (68.6) (57.3) (74.8) (230.9) (39.8) (17.6) (15.4) (9.5) (82.3) Chg (% y-y) Turned neg Remained neg To remain neg To remain neg To remain neg To remain neg Pre-tax margin (%) (34.1) (144.1) (108.5) (70.9) (78.4) (37.0) (22.6) (13.1) (6.9) (18.7) Net profit (25.7) (50.0) (44.1) (57.0) (176.8) (33.1) (13.8) (11.5) (4.6) (63.0) Chg (% y-y) 0.0 0.0 0.0 0.0 Turned neg Remained neg To remain neg To remain neg To remain neg To remain neg Net margin (%) (29.0) (105.2) (83.5) (54.0) (60.0) (30.7) (17.6) (9.8) (3.4) (14.3) Note: Parent basis Source: Samsung Securities estimates

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CMO sales results and forecasts (KRWb) 2016 2017E 2018E 2019E 2020E 2021E 2022E Total Sales 264.3 440.6 539.5 932.3 1,242.2 1,588.0 1,933.7 Sales 217.4 186.7 115.0 187.3 216.6 223.6 230.3 Plant #1 Price DS 1.81 1.85 2.07 2.13 2.19 2.26 2.33 DP 0.23 0.23 0.26 0.27 0.28 0.29 0.29 Batches DS 125 100 55 85 95 95 95 DP 7 8 16 23 29 31 31 Sales 34.5 253.9 416.5 578.8 727.1 749.5 772.0 Price DS 3.62 3.71 4.14 4.26 4.39 4.52 4.66 DP 0.21 0.21 0.23 0.24 0.25 0.26 0.26 Plant #2 CMP 0.66 0.68 0.76 0.78 0.80 0.83 0.85 Batches DS 10 67 102 132 161 161 161 DP 0 2 4 9 11 13 13 CMP 0 3 8 18 22 22 22 Sales 0.0 0.0 8.0 166.2 298.5 614.9 931.4 Price DS 3.62 3.71 4.14 4.26 4.39 4.52 4.66 Plant #3 DP 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Batches DS 0 0 2 39 68 136 200 DP 0 0 0 0 0 0 0 KRW/USD (end-year) 1,208 1,200 1,300 1,300 1,300 1,300 1,300 KRW/USD (average) 1,155 1,161 1,248 1,248 1,248 1,248 1,248 Note: Based on our forex estimates; assumes per-batch prices rise 3% pa Source: Samsung Securities estimates

CMO business: Sales

(KRWb)

2,500

2,000

1,500 931.4 614.9 1,000 298.5 Plant #3: 166.2 8.0 Plant #2: 727.1 749.5 772.0 500 578.8 34.5 253.9 416.5 230.3 0 217.4 186.7 115.0 187.3 216.6 223.6 2016 2017E 2018E 2019E 2020E 2021E 2022E

Plant #1 Plant #2 Plant #3

Source: Samsung Securities estimates

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Results and forecasts (KRWb) 2016 2017E 2018E 2019E 2020E 2021E 2022E Sales 294.6 440.6 539.5 932.3 1,242.2 1,588.0 1,933.7 Chg (% y-y) 49.5 22.5 72.8 33.2 27.8 21.8 Plant #1 217.4 186.7 115.0 187.3 216.6 223.6 230.3 Chg (% y-y) (14.1) (38.4) 62.8 15.6 3.3 3.0 Plant #2 34.5 253.9 416.5 578.8 727.1 749.5 772.0 Chg (% y-y) 635.3 64.0 39.0 25.6 3.1 3.0 Plant #3 8.0 166.2 298.5 614.9 931.4 Chg (% y-y) 1,972.3 79.6 106.0 51.5 Gross profit 26.5 95.8 122.1 389.5 569.3 761.5 938.2 Chg (% y-y) 261.2 27.4 219.0 46.2 33.8 23.2 Gross margin (%) 9.0 21.8 22.6 41.8 45.8 48.0 48.5 Operating profit (30.4) 17.8 40.1 304.2 480.6 645.9 818.6 Chg (% y-y) (158.5) 125.1 659.6 58.0 34.4 26.7 Operating margin (%) (10.3) 4.0 7.4 32.6 38.7 40.7 42.3 Pre-tax profit (230.9) (82.3) 28.9 358.1 646.9 931.7 1,174.5 Chg (% y-y) (64.3) (135.1) 1,138.8 80.6 44.0 26.1 Pre-tax margin (%) (78.4) (18.7) 5.4 38.4 52.1 58.7 60.7 Net profit (176.8) (63.0) 22.1 274.2 495.4 819.9 1,033.6 Chg (% y-y) (64.3) (135.1) 1,138.9 80.6 65.5 26.1 Net margin (%) (60.0) (14.3) 4.1 29.4 39.9 51.6 53.5 Source: Samsung Securities estimates

Samsung Biologics: Plant utilization rate forecasts (%)

120

100

0 2017E 2018E 2019E 2020E 2021E 2022E

Plant #1 Plant #2 Plant #3

Source: Samsung Securities estimates

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Samsung Bioepis: Full-year forecasts (KRWb) 2017E 2018E 2019E 2020E 2021E 2022E Sales 149.0 555.1 881.5 1,387.7 1,738.1 2,074.8 Chg (% y-y) 1.0 272.6 58.8 57.4 25.3 19.4 Europe 139.3 372.3 522.9 603.1 748.8 770.6 Chg (% y-y) 63.5 167.2 40.5 15.3 24.2 2.9 Benepali (Enbrel biosimilar) 114.9 276.6 270.9 257.4 257.4 257.4 Chg (% y-y) 34.8 140.8 (2.1) (5.0) 0.0 0.0 Flixabi (Remicade biosimilar) 24.5 52.8 103.4 103.4 103.4 103.4 Chg (% y-y) 115.9 95.9 0.0 0.0 0.0 Lusuduna (Lantus biosimilar) 18.6 36.5 52.0 69.3 86.6 Chg (% y-y) 96.1 42.5 33.3 25.0 SB3 (Herceptin biosimilar) 24.2 47.5 67.7 85.8 101.9 Chg (% y-y) 96.1 42.5 26.7 18.8 SB5 (Humira biosimilar) 64.5 122.6 232.9 221.2 Chg (% y-y) 90.0 90.0 (5.0) US 182.9 358.6 784.6 989.3 1,304.2 Chg (% y-y) 96.1 118.8 26.1 31.8 Benepali (Enbrel biosimilar) Chg (% y-y) Flixabi (Remicade biosimilar) 108.2 212.4 403.6 383.4 364.2 Chg (% y-y) 96.4 90.0 (5.0) (5.0) Lusuduna (Lantus biosimilar) 74.7 146.2 208.3 277.7 347.2 Chg (% y-y) 95.7 42.5 33.3 25.0 SB3(Herceptin biosimilar) 34.1 64.7 92.3 Chg (% y-y) 90.0 42.5 SB5 (Humira biosimilar) 138.7 263.5 500.6 Chg (% y-y) 90.0 90.0 Operating profit (163.6) 54.8 222.8 495.9 672.5 837.4 Chg (% y-y) To remain neg To turn pos 306.6 122.6 35.6 24.5 Operating margin (%) (109.8) 9.9 25.3 35.7 38.7 40.4 Net margin (163.6) 46.6 189.4 421.5 571.6 711.8 Chg (% y-y) To remain neg To turn pos 306.6 122.6 35.6 24.5 Net margin (%) (109.8) 8.4 21.5 30.4 32.9 34.3 Source: Samsung Securities estimates

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Samsung Bioepis: Biosimilar sales forecasts

(KRWb) 2,500

2,000 721.8 1,500 496.3 SB3: 47.5 261.2 150.5 194.1 1,000 SB5: 64.5 101.8 260.3 347.0 433.8 SB3: 24.2 182.7 500 93.3 315.8 507.0 486.8 467.7 Flixabi: 24.5 161.0 276.6 270.9 257.4 257.4 257.4 0 114.9 2017E 2018E 2019E 2020E 2021E 2022E

Benepali (Enbrel) Flixabi (Remicade) Lusuduna (Lantus) SB3 (Herceptin) SB5 (Humira)

Source: Samsung Securities estimates

Samsung Bioepis: Biosimilar sales forecasts (KRWb) 800 700 600 500 400 300 200 100 0 2017E 2018E 2019E 2020E 2021E 2022E

Benepali (Enbrel) Flixabi (Remicade) Lusuduna (Lantus) SB3 (Herceptin) SB5 (Humira)

Source: Samsung Securities estimates

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Samsung Bioepis: Biosimilar pipeline Biosimilar in Original drug Patent 2015 Market size Development Note development (therapeutic area) expiries sales rank (USDb) Phase I Phase III Filed Approval SB5 Humira US: 2016 Europe: Filed 1 14.4 (adalimumab) (immunologic) EU: 2018 US: Preparing to file Europe, Korea: Launched SB4 Enbrel US: 2029 3 9.0 Australia: Approved (etanercept) (immunologic) EU: 2015 Canada: Filed SB2 Remicade US: 2018 Europe, Korea: Launched 4 8.2 (infliximab) (immunologic) EU: 2015 US, Australia: Approved SB9 Lantus US: 2015 Europe: Approved 6 7.2 (insulin glargine) (metabolic) EU: 2015 US: Filed SB8 Avastin US: 2019 7 7.0 Phase III (bevacizumab) (oncology) EU: 2019 SB3 Herceptin US: 2019 Europe, Korea: filed 8 6.8 (trastuzumab) (oncology) EU: 2014 US: Preparing to file SAIT101 Rituxan US: 2019 5 7.4 Phase I/III (rituximab) (oncology) EU: 2013 Note: SB3: Filed for regulatory approval with EMA in Aug 2016 SB5: Filed for regulatory approval with EMA in May 2016 SB4: Received approval from MFDS in Sep 2015 and from EMA in Jan 2016; filed for regulatory approval with Health Canada in May 2015 SB2: Approved by MFDS in Dec 2015, by EMA in May 2016, by Australian TGA in Nov 2016, and by US FDA in Apr 2017 SB9: Filed for regulatory approval with US FDA in May 2016 SAIT101: Co-developing with Archigen Biotech (JV with AstraZeneca) Source: EvaluatePharma, company data, Samsung Securities

Marketing partners of Samsung Bioepis

Note: * Includes Plegridy sales Source: Company data

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Europe: Biosimilars of major drugs, by company Humira Remicade Enbrel Lantus Avastin Herceptin Neulasta Rituxan Filed Launched Launched Approved Phase III Filed

(May 2016) (Aug 2016) (Feb 2016) (Jan 2017) (Mar 2015) (Oct 2016) Launched Filed Approved Pre-clinical Pre-clinical Pre-clinical (Feb 2015) (Nov 2016) (Feb 2017)

(Sep 2015)

Phase III Filed Filed Filed Pre-clinical Phase I (May 2015) (Nov 2016) (Aug 2016) (Jul 2016)

Phase III Phase III* Phase III Phase III Phase III (Top-line results (Top-line results Phase I (Feb 2015) (Feb 2014) (Sep 2014) released Jan 2017) released Sep 2016) Filed Launched** Phase III

(Jan 2017) (Sep 2015) (Jul 2015) Note: * Sandoz acquired EEA rights from Pfizer in 1Q16 ** Eli Lilly and Boehringer Ingelheim co-developed Lantus biosimilar Source: Samsung Securities

US: Biosimilars of major drugs, by company Humira Remicade Enbrel Lantus Avastin Herceptin Neulasta Rituxan Completed Completed Approved Filed Phase III Completed clinical clinical (Apr 2017) (May 2016) (Mar 2015) clinical trials trials trials Launched Completed Completed Pre-clinical Pre-clinical Pre-clinical (Dec 2016) clinical trials clinical trials

(Dec 2016)

Completed Phase III Filed Filed Pre-clinical Phase I clinical (May 2015) (Nov 2016) (Nov 2016) trials Phase III Phase III* Phase III Phase III Phase III (Top-line results (Top-line results Phase I (Feb 2015) (Feb 2014) (Sep 2014) released Jan 2017) released Sep 2016) Filed Launched*** Phase III

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Valuations of global peers (USDm) Samsung Biologics Lonza Celltrion Country Korea Switzerland Korea Share price (USD) 187.9 208.2 85.1 Market cap 12,431 15,504 10,434 Sales 2015 81 3,953 533 2016 254 4,196 578 2017E 393 5,002 746 2018E 541 5,887 1,030 Operating profit 2015 (180) 445 229 2016 (26) 493 215 2017E 24 844 404 2018E 111 1,032 599 EBITDA 2015 (143) 757 302 2016E 26 805 292 2017E 93 1,239 480 2018E 184 1,503 676 Net profit 2015 1,698 288 136 2016 (152) 306 153 2017E (28) 612 336 2018E 117 798 490 EPS (USD) 2015 68.7 5.1 1.2 2016 (2.7) 5.4 1.3 2017E (0.4) 9.3 2.8 2018E 1.8 11.0 4.0 P/E (x) 2015 n/a 30.8 60.0 2016 n/a 30.8 70.0 2017E n/a 22.6 30.0 2018E 105.4 19.1 21.1 P/B (x) 2015 n/a 4.0 5.5 2016 2.4 4.0 6.1 2017E 3.5 2.8 4.6 2018E 3.3 2.9 3.9 EV/EBITDA (x) 2015 n/a 14.0 29.7 2016E 324.1 13.7 38.6 2017E 130.6 13.9 22.0 2018E 65.9 11.5 15.6 ROE (%) 2015 112.9 13.0 10.5 2016 (5.2) 13.4 9.5 2017E (0.8) 13.0 16.2 2018E 3.1 13.0 19.7 Note: As of May 29; Samsung Biologics and Celltrion both on parent-basis Source: Bloomberg, Samsung Securities

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Samsung Biologics

2017. 6. 15

Income statement Balance sheet Year-end Dec 31(KRWb) 2015 2016 2017E 2018E 2019E Year-end Dec 31(KRWb) 2015 2016 2017E 2018E 2019E Sales 91 295 441 540 932 Current assets 193 1,461 917 1,059 876 Cost of goods sold 115 268 345 417 543 Cash & equivalents 35 230 122 445 247 Gross profit (24) 27 96 122 389 Accounts receivable 35 66 76 93 160 Gross margin (%) (25.8) 9.0 21.8 22.6 41.8 Inventories 119 164 212 259 448 SG&A expenses 180 57 78 82 85 Other current assets 4 1,000 507 262 21 Operating profit (204) (30) 18 40 304 Fixed assets 5,768 6,072 7,036 7,740 8,292 Operating margin (%) (223.1) (10.3) 4.0 7.4 32.6 Investment assets 4,838 4,966 5,460 6,004 6,602 Non-operating gains (losses) 2,692 (200) (100) (11) 54 Tangible assets 890 1,091 1,564 1,727 1,683 Financial profit 7 14 27 12 9 Intangible assets 14 14 11 8 6 Financial costs 1,841 87 26 27 30 Other long-term assets 26 1 1 1 1 Equity-method gains (losses) 4,524 (129) (102) 3 75 Total assets 5,960 7,533 7,953 8,799 9,169 Other 2 1 0 0 0 Current liabilities 1,912 2,477 2,994 3,618 3,713 Pre-tax profit 2,488 (231) (82) 29 358 Accounts payable 0 2 1 2 3 Taxes 583 (54) (19) 7 84 Short-term debt 10 0 0 0 0 Effective tax rate (%) 23.4 23.4 23.4 23.4 23.4 Other current liabilities 1,901 2,475 2,992 3,616 3,710 Profit from continuing operations 1,905 (177) (63) 22 274 Long-term liabilities 1,274 974 940 1,140 1,140 Profit from discontinued operations 0 0 0 0 0 Bonds & long-term debt 682 439 405 605 605 Net profit 1,905 (177) (63) 22 274 Other long-term liabilities 592 535 535 535 535 Net margin (%) 2,087.0 (60.0) (14.3) 4.1 29.4 Total liabilities 3,186 3,451 3,934 4,758 4,853 Net profit (controlling interests) 1,905 (177) (63) 22 274 Owners of parent equity 2,775 4,082 4,019 4,041 4,316 Net profit (non-controlling interests) 0 0 0 0 0 Capital stock 138 165 165 165 165 EBITDA (162) 30 108 140 400 Capital surplus 1,031 2,487 2,487 2,487 2,487 EBITDA margin (%) (177.5) 10.1 24.4 25.9 43.0 Retained earnings 1,602 1,425 1,362 1,384 1,658 EPS (parent-based) (KRW) 38,489 (3,113) (953) 335 4,145 Other 5 5 5 5 5 EPS (consolidated) (KRW) 38,489 (3,113) (953) 335 4,145 Non-controlling interests’ equity 0 0 0 0 0 Adjusted EPS (KRW)* 38,489 (3,113) (953) 335 4,145 Total equity 2,775 4,082 4,019 4,041 4,316 Net debt 2,478 1,501 2,594 3,318 3,762

Cash flow statement Financial ratios Year-end Dec 31(KRWb) 2015 2016 2017E 2018E 2019E Year-end Dec 31 2015 2016 2017E 2018E 2019E Cash flow from operations (266) (63) 57 77 129 Growth (%) Net profit 1,905 (177) (63) 22 274 Sales 214.6 222.8 49.5 22.5 72.8 Non-cash profit and expenses (2,068) 211 171 118 126 Operating profit nm nm nm 125.1 659.6 Depreciation 33 56 87 97 94 Net profit nm nm nm nm 1,138.9 Amortization 9 4 3 3 2 Adjusted EPS** nm nm nm nm 1,138.9 Other (2,110) 151 81 18 30 Per-share data (KRW) Changes in A/L from operating activities (96) (74) (65) (42) (167) EPS (parent-based) 38,489 (3,113) (953) 335 4,145 Cash flow from investments (429) (1,373) (60) (13) 197 EPS (consolidated) 38,489 (3,113) (953) 335 4,145 Change in tangible assets (240) (163) (560) (260) (50) Adjusted EPS** 38,489 (3,113) (953) 335 4,145 Change in financial assets 0 (1,008) 493 247 247 BVPS 50,326 61,700 60,747 61,082 65,226 Other (189) (202) 6 0 0 DPS (common) 0 0 0 0 0 Cash flow from financing 633 1,631 492 800 0 Valuations (x) Change in debt 2,057 205 492 800 0 P/E*** 5.5 n/a n/a 638.2 51.5 Change in equity 258 1,484 0 0 0 P/B*** 4.2 3.5 3.5 3.5 3.3 Dividends 0 0 0 0 0 EV/EBITDA n/a 525.7 155.3 124.8 44.7 Other (1,682) (58) 0 0 0 Ratios (%) Change in cash (62) 196 (108) 323 (198) ROE 107.4 (5.2) (1.6) 0.5 6.6 Cash at beginning of year 96 35 230 122 445 ROA 52.0 (2.6) (0.8) 0.3 3.1 Cash at end of year 35 230 122 445 247 ROIC (18.8) (2.2) 1.0 1.7 11.9 Gross cash flow (163) 35 108 140 400 Payout ratio 0.0 0.0 0.0 0.0 0.0 Free cash flow (506) (226) (503) (183) 79 Dividend yield (common) 0.0 0.0 0.0 0.0 0.0 Note: * Excluding one off items, ** Fully diluted, excluding one-off items Net debt to equity 89.3 36.8 64.5 82.1 87.2 *** From companies subject to equity-method valuation Interest coverage (x) (76.8) (1.6) 0.8 1.5 10.3 Source: Company data, Samsung Securities estimates

133

2017. 6. 15

Company Hugel (145020) Update Earnings to gain visible momentum in 2H

● We expect earnings momentum at Hugel to stay strong into 2018 backed by growing sales of BTX and filler products.

● The company should emerge as a global medical aesthetics player, given Bain Capital’s extensive network in the US and Europe. The firm should use Bain’s injection of KRW454.7b to beef up its US distribution network by securing a new pharmaceutical maker as a partner and acquiring distributors in key markets. Its overseas business expansion in 2H deserves attention. ● The stock is now at par with Bain Capital’s per-share purchase price. Considering the PEF’s expected return, we believe there is ample upside. Kevin Kim Analyst [email protected] 822 2020 7178 WHAT’S THE STORY?

Operating profit to rise 73.3% y-y in 2017: We expect Hugel’s consolidated sales, operating profit, and net profit attributable to controlling shareholders in 2017 to rise 52.7%, 73.3%, and 76.2% y-y to KRW189.7b, KRW109.7b, and KRW76.2b, respectively. AT A GLANCE Operating leverage should help full-year operating margin rise 6.9%pts to 57.8%.

Combined exports of BTX and filler products this year are likely to account for 65.1% of total sales (up 10%pts y-y). The firm’s earnings momentum should stay strong into 2018.

Target price KRW570,000 (26.1%) BTX—exports to keep surging: Hugel’s BTX sales should climb 70.7% y-y to Current price KRW451,900 KRW109.3b in 2017. In 1Q, Hugel, Medytox, Ipsen, and Allergan’s BTX sales rose a respective 157.6%, 54.2%, 35.8%, and 12% y-y, evidencing still strong global demand. Market cap KRW1.5t/USD1.3b Shares (float) 3,284,058 (73.4%) Hugel started recognizing sales to Russia in 1Q and should start doing so for Brazil in 2Q, 52 -week high/low KRW486,000/KRW259,000 which is when it should gain approval in Mexico. Penetration into more large emerging Avg daily trading KRW20.7b/ markets should sustain solid export growth. As the firm is likely to enter the US, Europe, value (60-day) USD18.5m and China in 2019, its medium- to long-term growth prospects appear strong. ONE-YEAR PERFORMANCE Filler-solid top-line growth to continue: We expect Hugel’s filler sales to expand 1M 6M 12M 40.2% y-y to KRW66.3b in 2017. As proven by 1Q results, concerns over a domestic Hugel (%) 7.0 61.1 37.4 slowdown of the filler market and tightening Chinese regulations (related to THAAD) on Vs Kosdaq (%pts) 5.2 49.1 46.3 Korean filler products were overblown. We expect the company to win approval for its fillers in 10 more countries in Europe and Asia in 2017, and then in China in 2H18. KEY CHANGES Bain Capital to take firm global: Hugel on Apr 17 agreed to grant managerial (KRW) New Old Diff Recommend. BUY BUY control to a Bain Capital, a move that we believe eliminates all discounts (such as a Target price 570,000 570,000 0.0% managerial dispute, and controversy over a BTX strain). We expect the company to use 2017E EPS 18,931 18,927 0.0% Bain’s upcoming injection of KRW454.7b to: 1) strengthen its US distribution network by 2018E EPS 22,917 22,645 1.2% securing a new pharmaceutical maker as a partner, facilitated by Bain’s strong US presence; 2) form subsidiaries and acquire distributors in key markets to help boost ASP; SAMSUNG vs THE STREET and 3) hike its stake in filler-making subsidiary Across to bolster net margin attributable No of estimates 6 to controlling shareholders. Shares are trading at an attractive 26.9x fully diluted 2017 Target price 566,667 EPS. We recommend the stock as our top pick in the medical aesthetics sector. Recommendation 4.0

BUY ★★★ : 5 / BUY: 4 / HOLD: 3 / SELL: 2 / SELL ★★★ : 1 SUMMARY FINANCIAL DATA

2016 2017E 2018E 2019E Revenue (KRWb) 124 190 248 305 * Share price and financials based on Net profit (adj) (KRWb) 51 87 119 146 May 26 EPS (adj) (KRW) 13,177 18,931 22,917 28,234 EPS (adj) growth (% y -y) 4.4 43.7 21.1 23.2

EBITDA margin (%) 54.8 60.4 61.8 61.8 ROE (%) 18.8 16.3 14.1 15.1 P/E (adj) (x) 34.3 23.9 19.7 16.0 P/B (x) 5.8 2.8 2.4 2.1 EV/EBITDA (x) 20.6 8.7 6.0 4.3 Dividend yield (%) 0.0 0.0 0.0 0.0 Source: Company data, Samsung Securities estimates Hugel

2017. 6. 15

Results and forecasts (consolidated) (KRWb) 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17E 3Q17E 4Q17E 2015 2016 2017E 2018E Sales 22.7 30.9 32.8 37.8 44.3 48.6 46.3 50.4 65.1 124.2 189.7 247.9 Botulinum toxins 9.8 14.3 19.9 20.0 25.3 27.9 26.9 29.2 30.1 64.0 109.3 145.4 Fillers 9.7 13.1 9.8 14.7 15.5 17.2 15.9 17.7 23.4 47.3 66.3 88.1 Neurological devices 3.1 3.1 3.1 2.9 3.2 3.1 3.1 3.0 9.5 12.2 12.5 12.5 Other (0.0) 0.4 0.0 0.2 0.3 0.4 0.4 0.5 2.1 0.6 1.6 1.9 Gross profit 16.4 23.6 25.3 29.1 34.7 38.2 36.4 39.7 38.5 94.4 149.0 195.9 Operating profit 8.8 16.4 17.9 20.2 25.8 28.6 26.3 28.9 17.8 63.3 109.7 148.2 Pre-tax profit 8.7 17.2 17.7 20.7 25.4 28.3 26.2 28.6 39.3 64.3 108.8 148.5 Net profit attributable to 5.5 11.6 12.6 13.6 18.3 19.9 18.3 19.7 33.9 43.3 76.2 104.1 controlling shareholders Chg (% y-y) Sales 197.2 84.1 80.7 68.0 95.3 57.3 41.3 33.4 61.3 90.9 52.7 30.7 Botulinum toxins 103.8 78.5 154.0 112.4 157.6 94.9 35.3 45.9 (1.5) 112.8 70.7 33.0 Fillers 321.1 161.6 58.4 48.2 60.0 31.6 62.4 20.1 202.7 101.9 40.2 32.9 Neurological devices n/a 5.1 (3.2) (13.5) 1.6 0.8 0.8 5.1 n/a 28.9 2.0 0.0 Other Turned to neg (48.1) (99.7) Turned to pos Turned to pos (5.4) 12,748.7 164.7 (0.7) (69.6) 150.0 20.0 Gross profit 283.1 147.7 161.7 93.7 111.4 62.2 44.0 36.2 35.6 145.2 57.8 31.5 Operating profit 8,518.2 252.7 317.1 131.5 194.0 74.7 47.0 43.1 14.7 256.2 73.3 35.1 Pre-tax profit 2,664.3 Turned to pos (67.5) 110.8 190.6 64.3 47.8 38.6 151.7 63.7 69.1 36.6 Net profit attributable to 2,299.6 Turned to pos (74.4) 98.5 231.9 71.2 45.4 45.3 158.0 27.5 76.2 36.6 controlling shareholders Margins (%) Gross profit 72.4 76.2 77.1 77.1 78.3 78.6 78.6 78.7 59.2 76.0 78.6 79.0 Operating profit 38.8 52.9 54.7 53.4 58.4 58.8 56.9 57.3 27.3 50.9 57.8 59.8 Pre-tax profit 38.6 55.7 54.0 54.6 57.4 58.2 56.5 56.8 60.4 51.8 57.4 59.9 Net profit attributable to 24.4 37.6 38.3 35.9 41.4 40.9 39.4 39.1 52.1 34.8 40.2 controlling shareholders Source: Samsung Securities estimates

Forward P/E Forward P/B

(KRW) (KRW) 600,000 30x 600,000 3.5x

500,000 25x 500,000 3.0x 2.5x 400,000 20x 400,000 2.0x 300,000 15x 300,000

200,000 200,000

100,000 100,000

0 0 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17

Source: Quantiwise, Samsung Securities estimates Source: Quantiwise, Samsung Securities estimates

135

Hugel

2017. 6. 15

Results and forecasts Full-year margins

(KRWb) (%y-y) (%) 300 300 100 250 76.0 78.6 79.0 70.4 200 200 80 59.2 57.8 59.8 150 60 50.9 100 100 38.4 52.1 50 40 40.2 42.0 0 0 20 32.6 27.3 34.8 2015 2016 2017E 2018E 0 Sales (LHS) 2014 2015 2016 2017E 2018E Operating profit (LHS) Net profit (LHS) Gross margin Operating margin Sales growth (RHS) Operating profit growth (RHS) Net margin (excl. MI)

Source: Samsung Securities estimates Note: * Based on net profit attributable to controlling interests Source: Samsung Securities estimates

Sales, by product group Sales portion, by product group (KRWb) 100% 300 80% 250

200 60% 150 40% 100 50 20%

0 0% 2014 2015 2016 2017E 2018E 2014 2015 2016 2017E 2018E

BTX Filler Neurological device Other BTX Filler Neurological device Other

Source: Samsung Securities estimates Source: Samsung Securities estimates

Sales breakdown Domestic and export portions of sales (KRWb) 100% 300 90% 80% 250 70% 200 Exports 60% Exports 50% 150 40% 100 30% Domestic Domestic 20% 50 sales sales 10% 0 0% 2014 2015 2016 2017E 2018E 2014 2015 2016 2017E 2018E

Source: Samsung Securities estimates Source: Samsung Securities estimates

136

Hugel

2017. 6. 15

Shareholder breakdown (before deal with Bain Capital) Shareholder breakdown (after deal with Bain Capital)

Bain Capital Dongyang 45.3% HC 24.4%

Other 42.5% B.K. Kim B.K. Kim 8.4% 6.0% Morgan Morgan Stanley Stanley Investment Investment Other 5.2% Foreign Mgmt 7.2% 42.9% ESOP 0.6% ESOP 0.8% investors 16.8% Source: DART Source: DART

Hugel: Ownership structure

Bain Capital

45.3%

Hugel

100% 100% 60.0% 52.2% 29.0% 8.4% 15.2% Hugel Hugel Small AB Bio Across Enjiness Olix Pharma Meditech Lab

100% 100% Wei Hai Hugel Hugel Pharma Pharma (Vietnam)

Source: Company data

137

Hugel

2017. 6. 15

Global medical aesthetic players: Peer valuations (KRWb, USDm) Hugel Medytox Daewoong Huons Caregen Pharma Humedix Bloomage Shanhai Allergan Ipsen Revance

Pharm Research BioTech Haohai Nation Korea Korea Korea Korea Korea Korea Korea China China US France US Main products BTX, HA BTX, HA BTX, HA BTX HA PDRN HA HA HA BTX, HA BTX BTX Share price (KRW, USD) 451,900 506,800 93,100 55,200 71,300 40,650 32,350 1.67 5.63 223.12 123.51 21.95 Market cap 1,484 2,867 1,079 342 764 385 288 608 901 74,939 10,323 665 Sales 2016 124.2 133.3 883.9 169.0 46.8 46.0 47.1 127.2 128.2 14,571 1,850 0 2017E 189.7 183.7 916.2 270.8 57.2 57.0 50.0 149.5 197.4 15,813 2,133 0 2018E 247.9 231.6 1,003.8 297.7 67.5 n/a 54.6 183.9 237.7 16,941 2,458 0 Operating profit 2016 63.3 75.2 25.9 21.5 25.7 14.1 12.8 44.5 45.9 579 412 (77) 2017E 109.7 100.2 40.9 31.6 32.7 21.0 12.8 55.8 53.0 7,638 524 (111) 2018E 148.2 127.3 47.7 35.5 40.3 n/a 14.8 65.7 64.5 8,318 656 (111) EBITDA 2016 68.1 79.9 57.5 24.6 28.3 16.0 13.8 53.5 38.0 4,806 381 (87) 2017E 114.5 105.7 78.2 39.2 35.1 22.0 18.4 63.6 70.2 7,844 586 n/a 2018E 153.2 133.0 90.0 42.5 43.0 n/a 20.3 73.0 85.2 8,451 721 n/a Net profit attributable 2016 43.3 59.2 27.0 15.3 23.0 13.9 10.3 34.3 45.9 5,502 291 (83) to controlling shareholders 2017E 76.2 79.7 40.7 25.8 24.7 18.9 9.8 42.2 54.5 5,727 369 (112) 2018E 104.1 101.0 49.0 29.0 31.2 n/a 12.1 51.1 65.1 6,370 452 (111) EPS (KRW, USD) 2016 13,177 10,471 2,328 2,498 214 1,469 1,152 0.09 0.29 13.51 3.52 (2.97) 2017E 18,931 14,083 3,508 4,168 231 1,997 1,099 0.11 0.34 16.11 4.50 (3.79) 2018E 22,917 17,848 4,229 4,677 291 n/a 1,357 0.13 0.41 17.98 5.70 (3.58) Sales 2017E 52.7 37.8 3.7 60.3 22.1 24.0 6.1 17.6 54.0 8.5 15.3 n/a chg (% y-y) 2018E 30.7 26.1 9.6 9.9 18.0 n/a 9.2 23.0 20.4 7.1 15.3 n/a Operating profit 2017E 73.4 33.3 58.1 46.8 27.3 48.9 (0.3) 25.6 15.4 1,219.2 27.4 n/a chg (% y-y) 2018E 35.1 27.1 16.5 12.2 23.2 n/a 15.6 17.7 21.9 8.9 25.2 n/a Net profit attributable 2017E 76.2 34.5 50.7 68.3 7.6 35.9 (4.6) 22.8 18.7 4.1 26.7 n/a to controlling shareholders 2018E 36.6 26.7 20.5 12.2 26.3 n/a 23.5 21.2 19.4 11.2 22.6 n/a Operating margin (%) 2017E 57.8 54.5 4.5 11.7 57.2 36.8 25.6 37.3 26.8 48.3 24.6 n/a 2018E 59.8 55.0 4.7 11.9 59.7 n/a 27.1 35.7 27.1 49.1 26.7 n/a Net margin attributable to 2017E 40.2 43.4 4.4 9.5 43.2 33.2 19.6 28.2 27.6 36.2 17.3 n/a controlling shareholders (%) 2018E 42.0 43.6 4.9 9.7 46.2 n/a 22.2 27.8 27.4 37.6 18.4 n/a P/E (x) 2016 24.4 34.1 29.5 25.6 38.3 27.5 29.1 18.2 20.2 3,719.5 40.3 n/a 2017E 23.9 36.0 26.5 13.2 30.9 20.4 29.4 15.3 16.5 13.9 27.6 n/a 2018E 19.7 28.4 22.0 11.8 24.5 n/a 23.8 12.6 13.8 12.4 21.8 n/a P/B (x) 2016 4.2 12.8 1.4 4.2 3.6 2.2 2.7 2.7 2.1 1.1 6.7 3.7 2017E 2.8 12.4 1.8 2.8 2.9 2.0 2.3 2.4 2.2 1.1 5.9 n/a 2018E 2.4 8.7 1.7 2.3 2.7 n/a 2.2 2.0 2.0 1.2 5.0 n/a EV/EBITDA (x) 2016 14.0 26.0 18.0 16.9 24.8 17.0 18.1 11.0 n/a 25.6 16.2 n/a 2017E 8.7 27.4 17.4 8.3 17.9 11.5 13.9 8.3 10.0 13.2 17.8 n/a

2018E 6.0 21.1 15.1 7.0 14.4 n/a 12.4 6.4 7.7 12.0 14.2 n/a ROE (%) 2016 18.8 45.4 4.4 n/a n/a n/a n/a 16.6 11.0 7.7 19.3 (46.5) 2017E 16.3 43.7 6.6 23.9 10.2 10.5 8.4 17.4 13.1 2.9 20.9 n/a 2018E 14.1 38.5 7.8 21.5 12.0 n/a 9.8 17.4 15.0 5.0 22.2 n/a Return (%) 1-month 7.0 1.8 3.1 2.2 0.4 12.8 0.0 (1.5) 2.2 (8.5) 3.4 0.9 3-months 29.9 21.3 9.9 15.0 1.9 10.5 4.9 15.2 18.4 (8.9) 31.8 4.5 6-months 61.1 51.2 35.1 1.3 7.7 1.6 4.9 7.6 17.9 17.4 75.4 24.7 12-months 37.4 13.6 (5.0) 0.0 (38.9) (26.4) (32.9) (9.3) 13.9 (5.4) 92.4 10.7 Ytd 40.7 42.1 35.5 (13.5) (13.2) 0.6 (3.6) 11.3 15.7 6.2 60.8 6.0 Note: Based on May 26 closing prices and forex rates; Hugel/Medytox based on our forecasts, other Korean firms on QuantiWise, overseas firms on Bloomberg Source: QuantiWise, Bloomberg, Samsung Securities

138

Hugel

2017. 6. 15

Income statement Balance sheet Year-end Dec 31(KRWb) 2015 2016 2017E 2018E 2019E Year-end Dec 31(KRWb) 2015 2016 2017E 2018E 2019E Sales 65 124 190 248 305 Current assets 107 151 685 801 943 Cost of goods sold 27 30 41 52 63 Cash & equivalents 70 65 581 676 796 Gross profit 39 94 149 196 242 Accounts receivable 21 31 42 55 68 Gross margin (%) 59.2 76.0 78.6 79.0 79.5 Inventories 8 14 18 24 29 SG&A expenses 21 31 39 48 59 Other current assets 8 42 44 47 50 Operating profit 18 63 110 148 183 Fixed assets 126 143 154 164 176 Operating margin (%) 27.3 50.9 57.8 59.8 60.0 Investment assets 12 17 25 33 41 Non-operating gains (losses) 22 1 (1) 0 (0) Tangible assets 49 59 62 65 70 Financial profit 1 2 1 1 1 Intangible assets 64 64 63 62 62 Financial costs 0 1 1 0 0 Other long-term assets 1 4 4 4 4 Equity-method gains (losses) 2 (1) (1) (1) (1) Total assets 234 294 839 965 1,119 Other 19 1 (0) (0) (0) Current liabilities 18 20 23 30 37 Pre-tax profit 39 64 109 149 183 Accounts payable 4 3 4 5 6 Taxes 3 13 22 30 37 Short-term debt 1 0 0 0 0 Effective tax rate (%) 8.8 20.9 20.0 20.0 20.0 Other current liabilities 13 16 19 25 30 Profit from continuing operations 36 51 87 119 146 Long-term liabilities 1 0 101 101 101 Profit from discontinued operations 0 0 0 0 0 Bonds & long-term debt 0 0 100 100 100 Net profit 36 51 87 119 146 Other long-term liabilities 1 0 1 1 1 Net margin (%) 55.1 41.0 45.9 47.9 48.0 Total liabilities 18 20 124 131 138 Net profit (controlling interests) 34 43 76 104 128 Owners of parent equity 208 253 684 788 916 Net profit (non-controlling interests) 2 8 11 15 18 Capital stock 2 2 2 2 2 EBITDA 19 68 115 153 189 Capital surplus 141 145 499 499 499 EBITDA margin (%) 29.7 54.8 60.4 61.8 61.8 Retained earnings 63 106 183 287 415 EPS (parent-based) (KRW) 12,620 13,177 18,931 22,917 28,234 Other 2 (0) (0) (0) (0) EPS (consolidated) (KRW) 13,337 15,499 21,609 26,160 32,229 Non-controlling interests’ equity 7 21 32 47 65 Adjusted EPS (KRW)* 12,620 13,177 18,931 22,917 28,234 Total equity 215 274 716 834 981 Net debt (76) (104) (521) (618) (739)

Cash flow statement Financial ratios Year-end Dec 31(KRWb) 2015 2016 2017E 2018E 2019E Year-end Dec 31 2015 2016 2017E 2018E 2019E Cash flow from operations 20 45 79 112 140 Growth (%) Net profit 36 51 87 119 146 Sales 61.3 90.9 52.7 30.7 23.1 Non-cash profit and expenses (15) 20 27 34 42 Operating profit 14.7 256.2 73.4 35.1 23.6 Depreciation 1 4 4 4 5 Net profit 172.7 42.0 71.0 36.6 23.2 Amortization 1 1 1 1 1 Adjusted EPS** 138.4 4.4 43.7 21.1 23.2 Other (17) 16 22 29 37 Per-share data (KRW) Changes in A/L from operating activities 2 (24) (14) (12) (12) EPS (parent-based) 12,620 13,177 18,931 22,917 28,234 Cash flow from investments (17) (54) (14) (14) (17) EPS (consolidated) 13,337 15,499 21,609 26,160 32,229 Change in tangible assets (12) (15) (7) (7) (10) Adjusted EPS** 12,620 13,177 18,931 22,917 28,234 Change in financial assets 4 (38) (7) (7) (7) BVPS 63,290 77,438 160,883 185,379 215,558 Other (9) (0) (0) 0 0 DPS (common) 0 0 0 0 0 Cash flow from financing 50 3 455 0 0 Valuations (x) Change in debt (45) (1) 100 0 0 P/E*** 35.8 34.3 23.9 19.7 16.0 Change in equity 131 4 355 0 0 P/B*** 7.1 5.8 2.8 2.4 2.1 Dividends 0 0 0 0 0 EV/EBITDA 73.3 20.6 8.7 6.0 4.3 Other (35) 0 0 0 0 Ratios (%) Change in cash 53 (6) 516 95 120 ROE 27.1 18.8 16.3 14.1 15.1 Cash at beginning of year 17 70 65 581 676 ROA 21.7 19.3 15.4 13.2 14.1 Cash at end of year 70 65 581 676 796 ROIC 18.5 35.9 55.1 67.8 76.7 Gross cash flow 20 71 114 153 189 Payout ratio 0.0 0.0 0.0 0.0 0.0 Free cash flow 7 30 72 105 130 Dividend yield (common) 0.0 0.0 0.0 0.0 0.0 Note: * Excluding one off items Net debt to equity (35.5) (37.9) (72.8) (74.0) (75.4) ** Fully diluted, excluding one-off items Interest coverage (x) 520.8 n/a n/a n/a n/a *** From companies subject to equity-method valuation Source: Company data, Samsung Securities estimates

139

2017. 6. 15

Company Dentium (145720) Initiation Discount unwarranted

● Our forecasts show Dentium’s full-year sales and operating profit up a respective 23.7% and 27.2%, with it retaining significant growth potential. ● Shares in the firm trade at 16.1x 2017 P/E, which is a 37.4% discount to the 25.7x average of Korean rivals Osstem Implant (26x) and Dio (25.4x), while its solid cash flow increases the likelihood of treasury share cancelation. Given such positives, we initiate coverage on the stock at BUY with a 12-month target price of KRW50,000 and make it our medical device sector top pick.

Kevin Kim Analyst WHAT’S THE STORY? [email protected] 822 2020 7178 No. 2 domestic dental implant player: Dentium is Korea’s number-two dental

implant player with a market share of 15% in 2015, while competitive pricing have helped it to gain presence elsewhere in Asia. The firm’s export portion of total sales rose by 3.9%pts to 59.3% in 2016, with most bound for China (27.9%), the UAE (10.6%), and AT A GLANCE Russia (6.8%). Attractive product mix: Dentium’s profitability edge over rivals owes to in-house developed products accounting for over 90% of total sales, while its 1Q gross margin of Target price KRW50,000 (26.3%) 73.8% outpaced Dio (72.8%) and Osstem Implant (60.3%). The firm plans to internalize Current price KRW39,600 digital dentistry device production (as it does for implants and bone graft materials), and Market cap KRW438.33b/USD390.67m recently won domestic approval for cone beam computed tomography devices (CBCTs), Shares (float) 11,068,830 (54.7%) 52 -week high/low KRW41,700/KRW32,800 with an advanced 3D intraoral scanner set to debut next year. Avg daily trading KRW6.7b/ value (60-day) USD6.0m China operation: Dentium entered China in 2009, last year becoming that nation’s number-three player with sales growth of 37.3% to KRW33.5b. The firm established a ONE-YEAR PERFORMANCE local dental subsidiary in 2015, which should commence annual production of 300,000 1M 6M 12M units from 2H18 and thus help mitigate risk related to protectionist measures undertaken DENTIUM (%) 3.0 n/a n/a by that government against foreign firms. Expectations of such localization efforts paying Vs Kospi (%pts) -3.1 n/a n/a off still seem valid, with Dentium set to be the only foreign player with local production. KEY CHANGES The firm’s China-bound exports were sluggish in 1Q , but they are likely normalizing this (KRW) New Old Diff quarter. (Continued on the next page) Recommend. BUY Not Rated Target price 50,000 n/a n/a *This report originally published on Jun 2 2017E EPS 2,329 n/a n/a 2018E EPS 2,899 n/a n/a

SAMSUNG vs THE STREET SUMMARY FINANCIAL DATA No of estimates 3 2016 2017E 2018E 2019E Target price 45,667 Revenue (KRWb) 120 148 178 206 Recommendation 3.7 Net profit (adj) (KRWb) 20 26 32 40 BUY ★★★ : 5 / BUY: 4 / HOLD: 3 / SELL: 2 / SELL ★★★ : 1 EPS (adj) (KRW) 1,788 2,329 2,899 3,561 EPS (adj) growth (% y-y) 36.7 30.3 24.5 22.9 EBITDA margin (%) 27.1 27.1 27.0 27.9 ROE (%) 33.7 21.1 16.8 17.4 P/E (adj) (x) 20.9 16.1 12.9 10.5 P/B (x) 6.0 1.8 1.6 1.3 EV/EBITDA (x) 14.8 10.9 9.7 7.5 Dividend yield (%) 0.3 0.3 0.3 0.3 Source: Company data, Samsung Securities estimates

Dentium

2017. 6. 15

Full-year sales set to rise 23.7%: Our forecasts have the full-year sales of Dentium up 23.7%, backed by implant market growth in Asia, and despite SG&A cost hikes (eg , labor and R&D), we foresee its operating profit and margin rising a respective 27.2% and 0.6%pts to 27.2% and 24.4%. Unlike rivals, the firm has no plans to hire significant numbers of new staff, so near-term earnings improvements warrant attention. Undervalued: Shares in Dentium trade at 16.1x 2017 P/E, which is a 37.4% discount to the 25.7x average of Korean rivals Osstem Implant (26x) and Dio (25.4x), and if treasury shares (22.1% of those outstanding) were excluded, its P/E multiple would be just 12.5x P/E. The company’s solid cash flow increases the likelihood of it cancelling treasury shares, and while its foreign ownership is just 2% (vs 48% for Osstem and 21% for Dio), this should rise once its earnings visibility improves. Initiating coverage at BUY with KRW50,000 target: We initiate coverage of Dentium at BUY with a 12-month target price of KRW50,000, which: 1) offers 33.5% upside from current levels and 2) is derived by applying 21.4x P/E—a 20% discount to the average of medical device players Osstem Implant, Dio, Straumann, Danaher, Dentsply Sirona, Zimmer Biomet, Henry Schein, and Align Technology—to its projected 2017 net profit attributable to controlling interests of KRW25.8b. We apply the discount since the firm: 1) lacks earnings visibility by being newly-listed; 2) has a high China portion of sales at 27.9% while THAAD uncertainties still linger; and 3) has insignificant export sales to developed markets such as the US and Europe. Our target P/E seems fairly conservative given that the company’s domestic rivals trade an average P/E of 25.7x.

Valuation (KRWb) 2017E net profit P/E (x) Note Operating value 552.7 25.8 21.4 20% discount to global dental device players* (26.8x 2017 P/E) Fair equity value 552.7 Number of common shares (‘000) 11,069 Target price (KRW) 49,930 Note: * Osstem Implant, Dio, Straumann, Danaher, Dentsply Sirona, Zimmer Biomet, Henry Schein, and Align Technology Source: Samsung Securities estimates

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Reasons why we recommend Dentium More attractively valued than rivals: Leading global dental implant player Straumann trades at 36.5x P/E, while our estimates show Dentium trades at 16.1x 2017 P/E (and just 12.5x if excluding treasury shares), which is a significant undervaluation, even though its business model is comparable to those of rivals. In addition, the company accounted for 15% of Korea’s dental implant market in 2015, trailing only Osstem Implant, with it is also being China’s third-largest player, where it enjoys significant brand power. The firm’s PEG multiple of 0.59x—based on projected growth in average net profit attributable to controlling interests over 2016-2018—lags the respective figures of 0.86x and 1.74x for Osstem Implant and Dio, but given its solid earnings outlook, we expect the valuation figure to soon catch up.

Global dental device players: P/E vs EPS growth 2017E P/E (x) 50 Align Tech 45 Straumann 40 35 30 Henry Schein Dio Osstem Implant 25 20 Coltene Danaher Dentsply Sirona 15 Lifco Patterson 10 Dentium 5 0 0 5 10 15 20 25 30 35

2016-2018E avg EPS growth (%)

Source: Bloomberg, Samsung Securities estimates

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Treasury share cancellation likely: Dentium’s 2,444,939 treasury shares represent 22.1% of those outstanding, which it might utilize to boost the holdings of majority stakeholders (currently at 19.1%) or to bolster the share price, but given its solid cash flow, we see little chance of them being sold. The company needs KRW106.5b (KRW56b this year and KRW50.5b in 2018) to construct a new HQ, which it plans to finance with KRW26.4b of IPO proceeds and cash of KRW23.4b this year and KRW34.3b in 2018, with the remainder to made up with borrowings. The firm’s solid financials—as evidenced by a current ratio of 133%, debt ratio of 76.7%, and net cash position of KRW3.5b—means cancellation of the treasury shares is probable.

Ownership breakdown Lock-up periods Shareholder Shares Stake (%) Lock-up Major shareholder Major stakeholders, et al . 2,116,490 19.1 6 months et al : 19.1% Treasury 2,444,939 22.1 6 months E&GENNAKER Fund No.1 407,000 3.7 6 months E&GENNA KER Fund: ESOP 509,166 4.6 12 months 3.7% Total number of Total 5,477,595 49.5 shares : ESOP: Note: 142,000 of 2,545,831 shares offered to institutional investors were 11,068,830 4.6% Other: under lockup from its Mar 15 listing, with 25,000 having been so for 15 50.5% days while another 117,000 are still under a three-month lockup Source: Company data Treasury stock:

22.1%

Source: Company data

Expected use of IPO proceeds (announced in March) (KRWb) Proceeds Pay taxes related to gains from disposing of treasury shares 14.9 Inject cash into overseas subsidiaries 9.5 Repay part of KRW54.5b debt 27.7 Finance part of KRW106.5b to construct new HQ 26.4 Source: Company data

Foreign ownership set to rise: Foreign shareholders control just 2.1% of Dentium (vs 48.3% for Osstem and 20.6% for Dio), which we attribute to its poor earnings visibility as a newly-listed firm and a pre-IPO accounting fraud issue. The company’s modified sales and operating profit met 1Q consensus estimates, with its earnings likely remaining solid this quarter, and once related visibility improves, foreign investors in tune with Korea’s competitive implant industry should flock to the stock.

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Gross margin to stay over 70% on premium-heavy product mix: Dentium enjoys an edge in profitability over rivals as its in-house developed products account for over 90% of total sales. Indeed, the company’s gross margin hit 73.8% in 1Q (vs 72.8% at Dio and 60.3% at Osstem Implant), with it also striving to internalize digital dentistry device production, which would follow up on implants and bone graft materials. Notably, the firm commercialized CAD/CAM devices in 2015, launched cone beam computed tomography devices (CBCTs) in 2Q17, and plans to roll out an advanced 3D intraoral scanner (which is critical to digital implants) in 2018. Dentium is Korea’s most advanced digital dentistry hardware player, while 59%-owned bone graft materials subsidiary Genoss commands 40% of the domestic market, which should grow in tandem with the implant industry.

Dental implant players: Development and securing of product portfolios Product Dentium Osstem Implant Dio Straumann Implants In-house In-house In-house In-house Implant Surgery kit In-house In-house In-house In-house

Digital CAD/CAM In-house Under development Merchandise Secured by M&A dentistr IOS Under development Under development Merchandise Secured by M&A y CBCT In-house Under development Merchandise Secured by M&A

Category Category Crown In-house Merchandise Merchandise Secured by M&A Other Bone materials In-house* Merchandise Merchandise Secured by M&A Chairs n/a In-house n/a Secured by M&A Note: * Bone materials produced by Genoss Source: Company data

Top-line growth to be led by Asian implant demand, insurance coverage at home: We expect Dentium’s sales to rise a respective 23.7% and 19.6% this year and in 2018, backed by implant market growth in Asia, with the domestic figures projected to rise 22.5% and 13.5%, respectively, to KRW59.9b and KRW67.9b. Our forecasts for the latter could soon be revised up since Korea’s new president supported expanded health insurance coverage while campaigning. China operation: China’s dental implant market is expected to grow at a CAGR of 19.9% over 2015-2023, with Dentium first entering that nation in 2009 before becoming its number-three player in 2016 with full-year sales growth of 37.3% to KRW33.5b. The firm established a local subsidiary in 2015, with annual capacity of 300,000 units expected to commence from 2H18—nb, China takes two-three years before approving manufacturing once medical device production facilities are constructed—which should: 1) mitigate risk related to regulations aimed at overseas firms; and 2) make it the only foreign medical device player with local production. Dentium’s China-bound exports were sluggish in 1Q, but they are likely normalizing this quarter, although our forecasts have its sales there rising just 12.8% to KRW37.8b this year. Cost controls to drive earnings growth: We expect Dentium’s full-year operating profit and margin to rise a respective 27.2% and 0.6%pts to 27.2% and 24.4%, despite SG&A cost hikes, which should owe to solid top-line growth. Unlike domestic rivals, the company will not add much staff this year, with a plan to hire just 50 personnel for a total of 660, which should boost earnings growth.

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Results and forecasts (consolidated) (KRWb) 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17E 3Q17E 4Q17E 2015 2016 2017E 2018E Sales 25.8 30.6 31.2 32.5 32.0 37.6 37.9 41.0 95.5 120.0 148.5 177.5 Domestic 11.3 12.7 12.9 11.9 14.3 15.4 14.5 15.7 42.5 48.8 59.9 67.9 Overseas 14.5 17.9 18.3 20.5 17.7 22.2 23.4 25.3 52.9 71.2 88.6 109.6 China 7.1 8.2 8.2 10.0 7.5 9.4 9.9 11.0 24.4 33.5 37.8 45.4 Russia 1.8 2.4 2.0 1.9 0.5 2.2 2.2 2.2 6.1 8.1 7.1 9.2 UAE 2.0 3.2 3.6 3.9 3.4 4.1 4.7 5.1 4.9 12.8 17.4 20.9 Other 3.7 4.1 4.4 4.7 6.2 6.5 6.6 7.0 17.6 16.8 26.3 34.2 Gross profit 19.9 21.7 22.8 18.9 23.6 27.1 27.3 27.6 68.7 83.3 105.7 126.4 Operating profit 8.2 6.3 10.4 3.6 8.5 9.1 9.8 8.8 16.8 28.5 36.3 44.0 Pre-tax profit 7.5 6.0 8.1 4.8 5.3 8.7 9.3 11.1 17.4 26.4 34.4 42.8 Net profit* 5.5 4.6 7.1 2.7 3.7 6.5 7.0 8.6 14.5 19.8 25.8 32.1 Growth (% y-y) Sales 17.6 29.0 28.2 27.3 23.8 22.9 21.6 26.4 11.3 25.7 23.7 19.6 Domestic 3.6 16.4 27.5 12.6 26.9 20.7 12.2 31.5 16.4 14.8 22.5 13.5 Overseas 31.3 39.8 28.6 37.8 21.4 24.5 28.2 23.4 7.6 34.5 24.5 23.7 China 102.7 56.3 11.9 20.4 6.1 15.0 20.0 10.0 90.0 37.3 12.8 20.0 Russia (26.2) 17.5 65.3 426.0 (70.5) (10.0) 10.0 15.0 (35.3) 34.1 (12.6) 28.8 UAE 148.8 210.9 110.4 203.1 70.9 30.0 30.0 30.0 (37.5) 162.6 36.5 20.0 Other (15.7) (8.8) 12.6 (5.0) 68.8 60.0 50.0 50.0 (8.3) (4.7) 56.5 30.0 Gross profit 9.7 26.9 31.7 16.8 18.9 24.9 19.6 46.4 13.8 21.2 26.9 19.6 Operating profit 38.3 (5.5) 556.4 40.4 4.5 43.9 (5.7) 143.8 (0.7) 70.1 27.2 21.2 Pre-tax profit 33.8 (10.6) 158.5 145.2 (29.1) 43.4 15.9 130.4 (4.4) 51.4 30.3 24.5 Net profit* 9.2 (14.7) 228.9 37.7 (31.6) 41.1 (0.8) 219.7 (3.4) 36.7 30.3 24.5 Margin (%) Gross profit 76.9 71.0 73.2 58.1 73.8 72.2 72.0 67.4 72.0 69.4 71.2 71.2 Operating profit 31.6 20.8 33.4 11.1 26.7 24.3 25.9 21.5 17.6 23.8 24.4 24.8 Pre-tax profit 29.0 19.7 25.8 14.8 16.6 23.0 24.6 27.0 18.2 22.0 23.1 24.1 Net profit* 21.1 15.0 22.7 8.2 11.7 17.3 18.5 20.9 15.2 16.5 17.4 18.1 Note: * Net profit attributable to controlling interests Source: Samsung Securities estimates

Overseas subsidiary earnings overview (2016) (KRWb) Sales Operating profit Net Change (% y-y) profit Sales Operating profit Net profit China (five subsidiaries) 33.6 (0.6) (1.2) 25.7 Remained neg Remained neg Russia 0.0 (0.0) (0.0) n/a Remained neg Remained neg UAE 12.8 1.1 1.0 142.4 613.0 617.9 US (two subsidiaries) 1.4 0.4 0.1 -72.1 Turned pos Turned pos Europe 2.2 0.2 0.2 85.9 Turned pos Turned pos Thailand 1.5 (0.4) (0.4) 124.0 Remained neg Remained neg Singapore 1.1 (0.3) (0.4) -5.6 Remained neg Remained neg Hong Kong 0.9 (0.1) (0.1) -0.5 Remained neg Remained neg Malaysia 0.5 (0.2) (0.2) 462.2 Remained neg Remained neg India 0.4 (0.5) (0.5) n/a Remained neg Remained neg Indonesia 0.0 (0.0) (0.0) n/a n/a n/a Total 54.3 (0.4) (1.5) 33.0 Remained neg Remained neg Source: Company data, Samsung Securities

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Results and forecasts Sales portions, by product

(KRWb) (% y-y) 177.5 100% 180 80 8 148.5 3 15 150 120.0 60 80% 120 95.5 40 20 90 20 60% 60 36.3 44.0 28.5 32.1 16.8 25.8 0 30 14.5 19.8 89 0 (20) 40% 65 2015 2016 2017E 2018E 20% Sales (LHS) Operating profit (LHS) 0% Net profit (LHS) 2016 2020E Sales growth (RHS) Operating profit growth (RHS) Implants Digital dentistry devices Other

Source: Company data, Samsung Securities estimates Source: Company data

Total sales China sales

(KRWb) (KRWb) 200 50 177.5 45.4 180 45 160 148.5 40 37.8 33.5 140 120.0 35 120 30 95.5 24.4 100 85.8 25 73.9 80 20 60 15 12.8 8.9 40 10 20 5 0 0 2013 2014 2015 2016 2017E 2018E 2013 2014 2015 2016 2017E 2018E

Source: Company data, Samsung Securities estimates Source: Company data

Sales, by country Sales portions, by country (KRWb) 180 100% 18 14 18 19 160 22 80% 11 5 12 140 9 6 7 12 120 5 5 60% 11 100 26 28 15 25 26 80 40% 60 40 20% 43 45 41 40 38 20 0 0% 2014 2015 2016 2017E 2018E 2014 2015 2016 2017E 2018E

Korea China Russia UAE Other Korea China Russia UAE Other

Source: Company data Source: Company data

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Global: Dental implant market size and growth Dental implant market breakdown, by region

(USDb) (% y-y) 2016~2023E CAGR 8.2% 100% 8 7.0 12 7 7 6.4 90% 7 20 5.4 5.8 10 80% 23 6 4.6 4.9 8 70% 5 4.2 3.7 4.0 60% 4 6 36 27 50% 3 4 40% 2 30% 1 2 20% 36 42 0 0 10% 2015 2017E 2019E 2021E 2023E 0% 2015 2023E Global dental implant market (LHS) Market growth (RHS) North America Europe Asia Latin America

Source: MRG, Osstem Implant Source: MRG, Osstem Implant

Dental implant market growth, by region Dental implant market overview, by sales volume < 0.25m units 0.25 - 1m units > 1m units (%) Switzerland Japan US 25 Austria Spain Brazil 19.5 Sweden China Korea 20 Netherlands France Germany Canada Russia Italy 15 Australia Israel 10.2 10.2 India Turkey 10 8.6 Colombia Argentina Mexico UK 4.4 5 Source: Straumann

0 China Asia North Latin Europe (ex China) America America

Note: 2015-2023E CAGR Source: MRG, Osstem Implant

Global: Dental implant market share Korea: Dental implant market share

Other: Straumann: Other: Osstem 31% 22% 21% Implant: 33%

Megagen Implant: 7% Henry Danaher: Schein: 19% Dio: 5% 9%

Zimmer Dentium: Biomet:11% Neo 15% Dentsply Biotech: Sirona: 12% 15%

Source: Straumann Source: MRG, DART, Samsung Securities estimates

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North America: Dental implant market size Europe: Dental implant market

(USDm) (% y-y) (USDm) (% y-y)

3,500 12 2,500 7 2,959 1,931 6 3,000 10 2,000 2,500 5 8 1,500 1,364 2,000 4 1,365 6 1,500 1,000 3 4 1,000 2 500 500 2 1 0 0 0 0 2015 2017E 2019E 2021E 2023E 2015 2017E 2019E 2021E 2023E

Dental implant market (LHS) Dental implant market (LHS) Market growth (RHS) Market growth (RHS)

Source: MRG, Company data Source: MRG, Company data

Asia: Dental implant market Latin America: Dental implant market

(USDm) (% y-y) (USDm) (% y-y)

1,800 1,624 16 600 10 514 1,600 14 9 500 8 1,400 12 1,200 400 7 10 6 1,000 746 8 300 268 5 800 6 4 600 200 3 400 4 100 2 200 2 1 0 0 0 0 2015 2017E 2019E 2021E 2023E 2015 2017E 2019E 2021E 2023E

Dental implant market (LHS) Dental implant market (LHS) Market growth (RHS) Market growth (RHS)

Source: MRG, Company data Source: MRG, Company data

Estimated number of implants per 10,000 inhabitants, by nation (2015)

Source: Straumann

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China: Dental implant market China: Dental implant market share

(USDm) (%) 3,500 12 2,959 Other: 16% 3,000 10 2,500 Osstem 8 Implant: 2,000 36% 1,365 6 1,500 Dentium: 4 1,000 18% 500 2 0 0 2015 2017E 2019E 2021E 2023E

Straumann: Dental implant market (LHS) 30% Market growth (RHS)

Source: MRG, Company data Source: Company data, Samsung Securities

Growth in number of dentists, by country China: Growth in number of implant-qualified dentists

(%) 11% 10 9 8 7 6 5 4 3 2 1 0 1% UK US Israel China Korea Japan Czech France Poland Austria Mexico Norway Belgium Hungary Slovenia Australia Germany 2008 2015 Switzerland Luxembourg

Note: 2011-2014 CAGR Source: KOTRA Source: OECD

Dentist population characteristics, by country Implant-qualified portion of dentists, by region

(%)

100

80 80

20 11

0 Korea North America China

Source: Straumann Source: Osstem Implant

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Dental device makers: Peer valuations (KRWb, USDm) Dentium Osstem Dio Straumann Danaher Dentsply Zimmer Henry Align Coltene Lifco Patterson Implant Sirona Biomet Schein Tech Headquarters Korea Korea Korea Switzerland US US US US US Switzerland Sweden US Total Total Ortho- Consum- Focus Implants Implants Implants Implants Implants Distributor Distributor Distributor solutions solutions dontics ables Share price (KRW, USD) 37,450 52,200 34,700 552.55 84.40 62.72 119.23 182.68 142.10 99.74 28.40 43.94 Market cap 415 746 526 8,774 58,584 14,377 24,042 14,492 11,415 421 2,580 4,268 Sales 2016 120.0 344.6 88.4 932 16,882 3,745 7,684 11,572 1,080 163 1,051 5,593 2017E 148.5 409.3 104.0 1,082 17,949 4,010 7,865 12,230 1,354 163 1,124 5,731 2018E 177.5 468.1 126.3 1,190 18,742 4,203 8,114 12,895 1,613 169 1,175 5,951 Operating profit 2016 28.5 34.2 25.9 231 2,751 455 826 772 249 24 146 288 2017E 36.3 44.1 30.5 276 3,249 850 2,463 864 309 24 162 370 2018E 44.0 57.9 34.8 311 3,570 945 2,673 940 392 26 173 394 EBITDA 2016 32.5 41.1 28.7 263 3,879 726 1,865 941 273 29 173 372 2017E 40.3 50.7 33.7 321 4,196 974 3,117 1,044 340 29 190 428 2018E 47.9 64.4 38.0 360 4,547 1,067 3,299 1,134 427 31 201 451 Net profit (excl. MI) 2016 19.8 23.5 19.8 233 2,554 430 306 507 190 18 106 171 2017E 25.8 28.7 20.7 236 2,774 659 1,739 578 265 18 128 217 2018E 32.1 39.9 26.0 270 2,909 733 1,890 631 313 19 136 231 EPS 2016 1,788 1,645 1,304 14.91 3.69 1.97 1.53 6.27 2.38 4.16 1.17 1.80 (KRW, USD) 2017E 2,329 2,009 1,366 15.16 3.93 2.84 8.54 7.27 3.24 4.37 1.33 2.32 2018E 2,899 2,791 1,711 17.33 4.29 3.20 9.30 8.04 3.85 4.61 1.40 2.53 Chg (% y-y) Sales 2017E 23.7 18.8 17.7 16.1 6.3 7.1 2.4 5.7 25.4 (0.2) 6.9 2.5 2018E 19.6 14.4 21.4 9.9 4.4 4.8 3.2 5.4 19.1 3.6 4.5 3.8 Operating profit 2017E 27.2 28.7 17.8 19.5 18.1 87.0 198.2 11.9 24.3 1.3 10.5 28.4 2018E 21.2 31.3 14.1 12.7 9.9 11.1 8.5 8.9 26.6 6.6 6.7 6.6 Net profit (excl. MI) 2017E 30.3 22.1 4.8 1.0 8.6 53.3 468.5 14.0 39.5 1.7 20.2 27.0 2018E 24.5 38.9 25.3 14.5 4.9 11.3 8.7 9.2 18.5 8.3 6.2 6.4 Margins (%) Operating margin 2017E 24.4 10.8 29.3 25.5 18.1 21.2 31.3 7.1 22.9 14.7 14.4 6.5 2018E 24.8 12.4 27.5 26.1 19.0 22.5 32.9 7.3 24.3 15.1 14.7 6.6 Net margin (excl. MI) 2017E 17.4 7.0 19.9 21.8 15.5 16.4 22.1 4.7 19.5 10.9 11.4 3.8 2018E 18.1 8.5 20.6 22.7 15.5 17.4 23.3 4.9 19.4 11.4 11.5 3.9 P/E (x) 2016 n/a 36.9 29.3 36.7 23.9 30.5 24.4 26.4 52.8 23.7 24.7 21.0 2017E 16.1 26.0 25.4 36.5 21.5 22.1 14.0 25.1 43.8 21.9 21.0 18.9 2018E 12.9 18.7 20.3 31.9 19.7 19.6 12.8 22.7 36.9 20.8 20.0 17.3 P/B (x) 2016 n/a 8.1 5.5 13.0 2.5 1.8 2.4 5.2 10.9 3.7 4.8 3.1 2017E 1.8 5.5 4.0 10.4 2.3 1.8 2.3 4.5 9.2 3.4 4.2 2.7 2018E 1.6 4.2 3.3 8.4 2.1 1.7 2.1 4.0 7.9 3.3 3.7 2.5 EV/EBITDA (x) 2016 n/a 21.2 20.8 23.6 16.8 20.2 17.6 16.2 30.1 10.5 16.4 14.3 2017E 10.9 15.5 15.2 27.0 16.1 15.7 10.7 15.4 31.7 13.7 15.1 12.2 2018E 9.7 11.7 12.8 23.6 14.2 14.0 9.8 14.0 n/a 12.9 13.9 11.6 ROE (%) 2016 33.7 22.1 20.7 37.1 9.5 4.4 5.1 18.7 22.6 16.2 21.0 12.1 2017E 21.1 24.2 17.3 32.3 10.8 7.3 15.6 19.3 23.2 16.4 20.1 14.7 2018E 16.8 26.1 18.1 29.4 10.7 7.7 16.0 18.9 23.2 15.8 18.8 14.4 Return (%) 1m (10.2) (3.7) (4.3) 2.6 1.3 (0.8) (0.4) 5.1 5.6 14.5 (8.5) (1.2) 3m n/a (11.5) 15.9 26.6 (1.3) (1.3) 1.8 6.5 38.3 13.1 3.1 (3.3) 6m n/a (5.4) (17.0) 48.0 6.8 3.8 16.9 20.7 49.0 39.9 7.7 13.2 12m n/a (28.2) (21.5) 42.1 12.6 0.4 (3.1) 5.1 79.5 62.0 (0.2) (10.2) Ytd n/a (14.0) (12.3) 35.5 8.4 8.6 15.5 20.4 47.8 31.3 5.8 7.1 Note: Valuations based on May 26 closing price and forex rates Source: Samsung Securities estimates, Bloomberg

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Dentium

2017. 6. 15

Income statement Balance sheet Year-end Dec 31(KRWb) 2015 2016 2017E 2018E 2019E Year-end Dec 31(KRWb) 2015 2016 2017E 2018E 2019E Sales 95 120 148 178 206 Current assets 72 92 132 134 181 Cost of goods sold 27 37 43 51 59 Cash & equivalents 5 9 33 20 52 Gross profit 69 83 106 126 148 Accounts receivable 39 46 53 59 65 Gross margin (%) 72.0 69.4 71.2 71.2 71.5 Inventories 24 26 31 37 43 SG&A expenses 52 55 69 82 94 Other current assets 3 11 15 18 21 Operating profit 17 29 36 44 54 Fixed assets 79 95 153 206 208 Operating margin (%) 17.6 23.8 24.4 24.8 26.0 Investment assets 0 0 0 0 0 Non-operating gains (losses) 1 (2) (2) (1) (1) Tangible assets 66 84 143 196 198 Financial profit 3 3 3 3 3 Intangible assets 3 2 1 1 1 Financial costs 3 4 4 4 4 Other long-term assets 10 9 9 9 9 Equity-method gains (losses) 0 0 0 0 0 Total assets 151 187 285 340 389 Other 0 (1) (1) 0 0 Current liabilities 79 96 97 99 119 Pre-tax profit 17 26 34 43 53 Accounts payable 4 5 6 7 8 Taxes 3 6 8 10 13 Short-term debt 45 56 40 40 40 Effective tax rate (%) 16.8 24.2 24.2 24.2 24.2 Other current liabilities 31 35 51 52 71 Profit from continuing operations 14 20 26 32 40 Long-term liabilities 22 22 12 33 23 Profit from discontinued operations 0 0 0 0 0 Bonds & long-term debt 22 20 10 30 20 Net profit 14 20 26 32 40 Other long-term liabilities 0 2 2 3 3 Net margin (%) 15.2 16.7 17.5 18.3 19.3 Total liabilities 102 118 109 132 142 Net profit (controlling interests) 14 20 26 32 39 Owners of parent equity 49 69 175 207 245 Net profit (non-controlling interests) 0 0 0 0 0 Capital stock 6 6 6 6 6 EBITDA 20 32 40 48 58 Capital surplus 5 5 66 66 66 EBITDA margin (%) 21.3 27.1 27.1 27.0 27.9 Retained earnings 77 98 123 154 193 EPS (parent-based) (KRW) 1,308 1,788 2,329 2,899 3,561 Other (39) (40) (20) (20) (20) EPS (consolidated) (KRW) 1,310 1,807 2,354 2,929 3,599 Non-controlling interests’ equity 0 0 1 1 1 Adjusted EPS (KRW)* 1,308 1,788 2,329 2,899 3,561 Total equity 49 69 176 208 247 Net debt 63 67 25 48 16

Cash flow statement Financial ratios Year-end Dec 31(KRWb) 2015 2016 2017E 2018E 2019E Year-end Dec 31 2015 2016 2017E 2018E 2019E Cash flow from operations 15 18 23 34 40 Growth (%) Net profit 14 20 26 32 40 Sales 11.3 25.7 23.7 19.6 16.3 Non-cash profit and expenses 13 15 13 15 17 Operating profit (0.7) 70.1 27.2 21.2 21.9 Depreciation 3 3 3 3 4 Net profit (3.8) 38.0 30.3 24.5 22.9 Amortization 1 1 1 0 0 Adjusted EPS** (3.7) 36.7 30.3 24.5 22.9 Other 9 11 9 11 13 Per-share data (KRW) Changes in A/L from operating activities (7) (10) (7) (2) (4) EPS (parent-based) 1,308 1,788 2,329 2,899 3,561 Cash flow from investments (28) (19) (62) (57) (6) EPS (consolidated) 1,310 1,807 2,354 2,929 3,599 Change in tangible assets (27) (18) (62) (57) (6) Adjusted EPS** 1,308 1,788 2,329 2,899 3,561 Change in financial assets (1) (1) (0) (0) (0) BVPS 4,384 6,234 20,342 23,963 28,434 Other (1) (1) (0) 0 0 DPS (common) 100 100 100 100 100 Cash flow from financing 15 5 63 9 (1) Valuations (x) Change in debt 16 8 (18) 10 0 P/E*** 28.6 20.9 16.1 12.9 10.5 Change in equity 0 0 61 0 0 P/B*** 8.5 6.0 1.8 1.6 1.3 Dividends (0) (1) (1) (1) (1) EV/EBITDA 23.5 14.8 10.9 9.7 7.5 Other (0) (2) 20 0 0 Ratios (%) Change in cash 2 4 24 (14) 33 ROE 32.4 33.7 21.1 16.8 17.4 Cash at beginning of year 4 5 9 33 20 ROA 11.0 11.8 11.0 10.4 10.9 Cash at end of year 5 9 33 20 52 ROIC 13.6 16.9 15.7 14.0 15.0 Gross cash flow 27 35 39 47 57 Payout ratio 4.2 3.1 3.3 2.7 2.2 Free cash flow (13) (1) (39) (22) 34 Dividend yield (common) 0.3 0.3 0.3 0.3 0.3 Note: * Excluding one off items Net debt to equity 129.8 97.0 14.4 23.3 6.3 ** Fully diluted, excluding one-off items Interest coverage (x) 15.9 29.7 40.3 51.8 58.6 *** From companies subject to equity-method valuation Source: Company data, Samsung Securities estimates

151

2017. 6. 15

Company ST Pharm (237690) Update Three things to monitor in 2H

● In 2H, we recommend investors monitor ST Pharm’s API orders for hepatitis C treatments, the pace of its oligonucleotide sales growth, and whether or not the firm adds new global clients.

● The stock already seems to have priced in concerns surrounding order declines for sofosbuvir, but with anticipation building for oligonucleotides-led growth starting next year, we make it our top 2H pick among pharmaceutical SMEs.

WHAT’S THE STORY? SunYoung Yoon Analyst Top pick for 2H: ST Pharm has highest exposure to exports (83.1% in 2016) among [email protected] Korean pharmaceutical SMEs, including API makers, with it largely insulated from 822 2020 7840 domestic pharmaceutical regulations thanks to long-term CMO contracts with multinational pharmaceutical players in the US and Europe. The company’s high-margin oligonucleotide sales have been growing unexpectedly fast, thus reducing its API AT A GLANCE dependence for hepatitis C treatments. In 2H, we recommend monitoring: 1) the size of

API orders for hepatitis C treatments—expected over September-October; 2) oligonucleotide sales growth; and 3) whether or not it adds new multi-national clients.

Target price KRW56,000 (15.7%) Earnings outlook: We expect the sales of ST Pharm to rise 3.4% to KRW207.2b this Current price KRW48,400 year as its operating profit slips 1% to KRW76.8b and margin falls 1.7%pts to 37.1%, with Market cap KRW894.64b/USD798.29m the latter to owe to increased: 1) R&D expenses for its in-house pipeline; and 2) hiring of Shares (float) 18,484,400 (43.2%) oligonucleotide QA and QC staff. The company in Sep 2016 received USD135m in 52 -week high/low KRW58,000/KRW36,250 sofosbuvir orders for this year (up 19% y-y), but Gilead’s guidance has us expecting its Avg daily trading KRW4.8b/ value (60-day) USD4.3m sales from the drug declining 15.1% to KRW112.5b in 2018, with our forecasts also having its total sales and operating profit up a respective 4.4% and 1.6% to KRW216.4b and ONE-YEAR PERFORMANCE KRW78b with a margin drop of 1%pt to 36.1%. We foresee its oligonucleotide sales 1M 6M 12M jumping 77.2% next year to KRW55b, which should account for 25.4% of the total figure, ST Pharm (%) 5.9 28.6 n/a Vs Kosdaq (%pts) 4.1 19.0 n/a vs a projected 15% this year and 10.3% in 2016.

KEY CHANGES Still a BUY: We base our 12-month target price of KRW56,000 on the abovementioned (KRW) New Old Diff forecasts, with the shares already reflecting concerns of falling sofosbuvir orders. Recommend. BUY BUY Anticipation of oligonucleotides-led growth from next year appears valid, with ST Pharm Target price 56,000 56,000 0.0% set to use its cash (KRW138b as of 1Q) to build a dedicated factory along with investments 2017E EPS 3,230 3,463 -6.7% for in-house R&D and open innovation systems overseas. 2018E EPS 3,337 3,352 -0.4% * This report was originally published on Jun 9 SAMSUNG vs THE STREET SUMMARY FINANCIAL DATA No of estimates 7 Target price 64,143 2016 2017E 2018E 2019E Recommendation 4.0 Revenue (KRWb) 200 207 216 236 Net profit (adj) (KRWb) 61 60 62 71 BUY ★★★ : 5 / BUY: 4 / HOLD: 3 / SELL: 2 / SELL ★★★ : 1 EPS (adj) (KRW) 3,761 3,230 3,337 3,820 EPS (adj) growth (% y-y) n/a (14.1) 3.3 14.5 EBITDA margin (%) 44.1 43.4 42.7 43.9 ROE (%) 19.6 17.8 15.9 15.9 P/E (adj) (x) 12.9 15.0 14.5 12.7 P/B (x) 2.9 2.5 2.2 1.9 EV/EBITDA (x) 8.8 8.3 7.7 6.3 Dividend yield (%) 1.0 1.0 1.2 1.2 Source: Company data, Samsung Securities estimates

ST Pharm

2017. 6. 15

Target-price calculation (KRWb) 2017E 2018E 2019E EBITDA 90.0 92.4 103.7 Peer average EV/EBITDA (x) 10.0 9.3 8.6 Target EV 900 859 897 Net borrowings (146) (187) (244) Fair value (KRW) 56,569 56,570 61,720 Target price (KRW) 57,000 56,000 62,000 Current price (KRW) 48,400 48,400 48,400 Upside (%) 17.8 15.7 28.1 Source: Samsung Securities estimates

Results and forecasts (KRWb) 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17E 3Q17E 4Q17E 2016 2017E 2018E 2019E Sales 30 .9 69.8 54.0 45.7 47.8 59.0 51.5 48.9 200.4 207.2 216.4 236.1 Chg (% y-y) 73.0 129.8 18.0 3.7 54.8 (15.4) (4.6) 6.9 45.1 3.4 4.4 9.1 Original-drug API 41.9 36.1 39.5 49.5 40.2 36.9 152.8 166.1 170.9 186.3 Generic drug API 9.3 9.4 7.7 8.0 9.5 10.0 39.9 35.2 37.5 40.5 Other 2.8 0.2 0.6 1.5 1.8 2.0 7.7 5.9 8.1 9.3 Gross profit 12.4 35.0 24.6 21.0 22.5 27.9 24.4 22.3 93.0 97.0 101.5 117.9 Chg (% y-y) 125.3 263.7 17.2 38.6 81.6 (20.4) (1.1) 6.2 81.4 4.3 4.6 16.2 Gross margin (%) 40.1 50.2 45.6 45.9 47.0 47.3 47.3 45.5 46.4 46.8 46.9 50.0 Operating profit 8.7 31.2 20.9 16.8 17.8 23.3 18.9 16.7 77.6 76.8 78.0 89.1 Chg (% y-y) 613.6 548.2 22.1 48.4 105.6 (25.2) (9.5) (0.6) 125.1 (1.0) 1.6 14.2 Operating margin (%) 28.0 44.7 38.7 36.8 37.2 39.6 36.7 34.2 38.7 37.1 36.1 37.7 Note: Based on consolidated K-IFRS Source: Company data, Samsung Securities

Forward EV/EBITDA band Forward P/E band (KRW) (KRW) 70,000 70,000

60,000 60,000 10.5x 15.5x 50,000 9.0x 50,000 14.0x 7.5x 12.5x 40,000 40,000 11.0x 6.0x 30,000 30,000

20,000 20,000 Jul 16 Sep 16 Nov 16 Jan 17 Mar 17 May 17 Jul 16 Sep 16 Nov 16 Jan 17 Mar 17 May 17

Source: WiseFn, Samsung Securities estimates Source: WiseFn, Samsung Securities estimates

153

ST Pharm

2017. 6. 15

Sales, by segment Sales, by customer (2016)

(KRWb) Other US 'R' 7.5% 250 9.3 Donga 2.0% Pharm 5.9 8.1 200 7.7 40.5 3.2% 35.2 37.5 39.9 Global 'J' 150 20.6 31.0 55.0 75.5 5.3% 24.1 17.9 100 10.4 132.2 135.1 115.9 110.8 50 89.9 Donga ST 16.8% Gilead 0 Sciences 2015 2016 2017E 2018E 2019E 65.2%

Small molecule APIs Oligonucleotide Generic APIs Other

Source: Company data, Samsung Securities estimates Source: Company data, Samsung Securities

Order backlog overview (as of March 2017) (USDm) Placed Due Total size Shipped Backlog Original small 2015 Dec 2016 119.6 122.2 0.0 molecule APIs 2016 Nov 2017 135.0 18.0 117.0 2015 Dec 2016 11.6 13.6 0.0 Oligonucleotides 2016 Apr 2017 11.0 0.0 11.0 Total 277.3 153.8 128.0 Source: Company data, Samsung Securities

Shareholder breakdown

Others Dong-A Socio 37% Holdings 33%

Employees 5% CEO JS Kang, et BRV Lotus al. 6% 19%

Source: Company data, Samsung Securities

154

ST Pharm

2017. 6. 15

Gilead’s Hepatitis C treatment products Product Compound List price* Applicable genotypes Status Launched Dec 2013 (US), Jan 2014 (EU), Sovaldi Sofosbuvir 400mg USD84,000 Genotypes 1 to 4 Jan 2015 (India), May 2015 (Japan) Launched Oct 2014 (US), Sofosbuvir 400mg Genotypes 1, 4, 5, 6 Harvoni USD94,500 Nov 2014 (EU), + Ledipasvir 90mg (mainly for genotype 1) Sep 2015 (Japan)

Sofosbuvir 400mg First pan-genotype (1-6) Approved Jun 2016 (US), Epclusa USD74,760 + Velpatasvir 100mg Particularly effective for genotype 3 Jul 2016 (EU, Canada)

Pan-genotype (1-6) Filed NDA Dec 2016 and under Sofosbuvir 400mg For patients who failed prior treatment with DAA** accelerated review (US), TBA + velpatasvir 100mg TBA regimen (including NS5A inhibitors); Also for patients Under accelerated review + voxilaprevir 100mg with cirrhosis; DAA -naïve patients can take 8-week Jan 2017 (EU) treatment instead of 12-weeks Note: * 12-week treatment cost in the US; ** Direct-acting antiviral Source: Gilead Sciences, media reports, Samsung Securities

FDA-approved Hepatitis C drugs Approval data Product Compound Company List price* Target genotype Note ó Under accelerated review for approval sofosbuvir ó 12 weeks; 1 pill daily (8 weeks for 2H17E TBA + velpatasvir Gilead Sciences TBA Genotypes 1-6 treatment-naïve patients) +voxilaprevir ó Effective for patients with cirrhosis ó Under accelerated review for approval glencaprevir 2H17E TBA AbbVie TBA Genotypes 1-6 ó 8 weeks; 3 pills daily + pibrentasvir ó Effective for non-cirrhosis patients Genotypes 1-6 sofosbuvir Jun 2016 Epclusa Gilead Sciences USD74,760 (world’s first pan- ó 12 weeks; 1 pill daily + velpatasvir genotype) elbasvir ó 12 or 16 weeks; once daily; with or Jan 2016 Zepatier Merck USD54,600 Genotypes 1, 4 + grazoprevir without ribavirin ó 12 weeks; once daily; 600mg of Jul 2015 Daklinza daclatasvir BMS USD63,000 Genotypes 1, 3 dakilinza with sofosbuvir ombitasvir ó Viekira Pak: Twice daily (3 pills in the Dec 2014 (Pak) Viekira Pak/ + paritaprevir AbbVie USD83,319 Genotype 1 morning, 1 pill in the evening) Jul 2016 (XR) Viekira XR + ritonavir ó Viekira XR: once daily; 3 pills + dasabuvir ledipasvir ó 24 weeks interferon-free or 12 weeks Oct 2014 Harvoni Gilead Sciences USD95,000 Genotypes 1, 4, 5, 6 + sofosbuvir with ribavirin for genotype 1 ó With peginterferon for genotypes 1 and 2013 Sovaldi sofosbuvir Gilead Sciences USD84,000 Genotypes 1-4 4; without interferon for genotypes 2 and 3 (world’s first) ó With peginterferon alpha and ribavirin; or 2013 Olysio simeprevir Janssen/Medivir USD66,360 Genotype 1 12 weeks with sofosbuvir once-daily (approved Nov 2014) Note: * US 12-week treatment cost in the US Source: Company data, media reports, Samsung Securities

155

ST Pharm

2017. 6. 15

Gilead’s hepatitis C drugs: Revenue, by product Gilead’s hepatitis C drugs: Revenue, by region

(USDb) (USDb) 6 6 5 5

4 4

3 3

2 2

1 1

0 0 4Q13 2Q14 4Q14 2Q15 4Q15 2Q16 4Q16 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17

Harvoni Sovaldi Epclusa US Europe Japan ROW

Source: Gilead Sciences, Samsung Securities Note: ROW included in Japan in 1Q17 Source: Gilead Sciences, Samsung Securities

Gilead’s hepatitis C drugs: Patient initiations Revenue of major players’ hepatitis C drugs

('000 patients) (USDb) 180 5 Gilead still has 80% 160 market share 140 4 120 3 100 80 2 60 1 40 20 0 0 1Q16 2Q16 3Q16 4Q16 1Q17 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Harvoni (GS) Sovaldi (GS) Epclusa (GS) US Europe Japan ROW Zepatier (Merck) Viekira (Abbvie)

Note: ROW not reported in 1Q17 Source: Company data, Samsung Securities Source: Gilead Sciences, Samsung Securities

156

ST Pharm

2017. 6. 15

Gilead: 2017 sales guidance for Hepatitis C treatment products

Source: Gilead Sciences

2017 clinical trial plans for Imetelstat

Source: Geron

157

ST Pharm

2017. 6. 15

Income statement Balance sheet Year-end Dec 31(KRWb) 2015 2016 2017E 2018E 2019E Year-end Dec 31(KRWb) 2015 2016 2017E 2018E 2019E Sales 138 200 207 216 236 Current assets 96 225 263 318 382 Cost of goods sold 87 107 110 115 118 Cash & equivalents 12 55 82 115 169 Gross profit 51 93 97 101 118 Accounts receivable 13 13 14 16 17 Gross margin (%) 37.1 46.4 46.8 46.9 50.0 Inventories 59 91 98 110 114 SG&A expenses 17 15 20 23 29 Other current assets 12 65 69 78 81 Operating profit 34 78 77 78 89 Fixed assets 137 143 158 163 164 Operating margin (%) 25.0 38.7 37.1 36.1 37.7 Investment assets 0 1 1 1 1 Non-operating gains (losses) 1 3 1 2 2 Tangible assets 134 138 153 158 159 Financial profit 2 8 1 2 2 Intangible assets 1 1 1 1 1 Financial costs 7 3 0 0 0 Other long-term assets 1 2 2 2 2 Equity-method gains (losses) 0 0 (1) 0 0 Total assets 232 368 421 481 546 Other 7 (2) 0 (0) (0) Current liabilities 108 51 54 60 63 Pre-tax profit 36 80 78 80 91 Accounts payable 11 14 15 16 17 Taxes 10 19 17 18 20 Short-term debt 33 0 0 0 0 Effective tax rate (%) 29.2 23.7 22.3 22.0 22.0 Other current liabilities 65 38 39 44 46 Profit from continuing operations 25 61 60 62 71 Long-term liabilities 13 3 3 4 4 Profit from discontinued operations 0 0 0 0 0 Bonds & long-term debt 10 0 0 0 0 Net profit 25 61 60 62 71 Other long-term liabilities 3 3 3 4 4 Net margin (%) 18.2 30.7 29.1 28.8 30.2 Total liabilities 121 55 57 64 67 Net profit (controlling interests) 25 61 60 62 71 Owners of parent equity 111 313 364 417 479 Net profit (non-controlling interests) 0 0 0 0 0 Capital stock 6 9 9 9 9 EBITDA 41 88 90 92 104 Capital surplus 26 170 170 170 170 EBITDA margin (%) 29.4 44.1 43.4 42.7 43.9 Retained earnings 76 134 185 238 300 EPS (parent-based) (KRW) 1,800 3,728 3,230 3,337 3,820 Other 3 (0) (0) (0) (0) EPS (consolidated) (KRW) 1,800 3,728 3,230 3,337 3,820 Non-controlling interests’ equity 0 0 0 0 0 Adjusted EPS (KRW)* 1,800 3,761 3,230 3,337 3,820 Total equity 111 313 364 417 479 Net debt 48 (114) (146) (187) (244)

Cash flow statement Financial ratios Year-end Dec 31(KRWb) 2015 2016 2017E 2018E 2019E Year-end Dec 31 2015 2016 2017E 2018E 2019E Cash flow from operations 36 51 68 67 81 Growth (%) Net profit 25 61 60 62 71 Sales 43.0 45.1 3.4 4.4 9.1 Non-cash profit and expenses 22 26 29 30 32 Operating profit 254.3 124.9 (1.0) 1.6 14.2 Depreciation 6 11 13 14 15 Net profit 360.8 143.8 (1.9) 3.3 14.5 Amortization 0 0 0 0 0 Adjusted EPS** 360.8 108.9 (14.1) 3.3 14.5 Other 16 15 16 16 18 Per-share data (KRW) Changes in A/L from operating activities (11) (21) (4) (7) (3) EPS (parent-based) 1,800 3,728 3,230 3,337 3,820 Cash flow from investments (33) (93) (31) (25) (17) EPS (consolidated) 1,800 3,728 3,230 3,337 3,820 Change in tangible assets (22) (16) (28) (19) (16) Adjusted EPS** 1,800 3,761 3,230 3,337 3,820 Change in financial assets 10 (61) (4) (8) (3) BVPS 7,924 16,791 19,525 22,367 25,691 Other (21) (16) 1 2 2 DPS (common) 250 500 500 600 600 Cash flow from financing 7 85 (11) (9) (9) Valuations (x) Change in debt (12) 2 (1) 0 0 P/E*** 26.9 12.7 14.8 14.3 12.5 Change in equity 25 179 0 0 0 P/B*** 6.1 2.8 2.4 2.1 1.9 Dividends (1) (3) (9) (9) (9) EV/EBITDA 23.2 8.7 8.2 7.5 6.2 Other (5) (93) (0) (0) (0) Ratios (%) Change in cash 9 43 27 33 55 ROE 30.0 19.6 17.8 15.9 15.9 Cash at beginning of year 2 12 55 82 115 ROA 13.4 16.7 15.3 13.8 13.9 Cash at end of year 12 55 82 115 169 ROIC 18.0 29.6 28.5 27.0 29.7 Gross cash flow 47 87 89 92 104 Payout ratio 11.7 15.0 15.3 17.8 15.6 Free cash flow 14 35 40 48 65 Dividend yield (common) 0.5 1.0 1.0 1.3 1.3 Note: * Excluding one off items, ** Fully diluted, excluding one-off items Net debt to equity 43.5 (36.3) (40.0) (44.7) (51.0) *** From companies subject to equity-method valuation Interest coverage (x) 7.8 62.3 2,480.5 5,275.2 6,021.9 Source: Company data, Samsung Securities estimates

158

Healthcare

2017. 6. 15

Compliance notice - As of Jun 14, 2017, Samsung Securities shared group affiliation with Samsung Biologics. - As of Jun 14, 2017, the covering analyst(s) did not own any shares, or debt instruments convertible into shares, of any company covered in this report. - As of Jun 14, 2017, Samsung Securities' holdings of shares and debt instruments convertible into shares of each company covered in this report would not, if such debt instruments were converted, exceed 1% of each company's outstanding shares. - This report has been prepared without any undue external influence or interference, and accurately reflects the views of the analyst(s) covering the company or companies herein. - All material presented in this report, unless specifically indicated otherwise, is under copyright to Samsung Securities. - Neither the material nor its content (including copies) may be altered in any form, or by any means transmitted, copied, or d istributed to another party, without prior express written permission from Samsung Securities. - This memorandum is based upon information available to the public. While we have taken all reasonable care to ensure its reliability, we do not gua rantee its accuracy or completeness. This memorandum is not intended to be an offer, or a solicitation of any offer, to buy or sell the securities mentioned herein. Samsung Securities shall not be liable whatsoever for any loss, direct or consequential, arising from the use of this memorandum or its contents. Statements made regarding affiliates of Samsung Securities are also based up on publicly available information and do not necessarily represent the views of management at such affiliates. - This material has not been distributed to institutional investors or other third parties prior to its publication.

Target price changes in past two years

Hanmi Pharmaceutical Samsung Biologics (KRW) (KRW) 900,000 300,000 800,000 250,000 700,000 600,000 200,000 500,000 150,000 400,000 300,000 100,000 200,000 50,000 100,000 0 0 Jun 15 Dec 15 Jun 16 Dec 16 Jun 17 Jun 15 Dec 15 Jun 16 Dec 16 Jun 17

Hugel Dentium (KRW) (KRW) 600,000 60,000 500,000 50,000

400,000 40,000 300,000 30,000 200,000 20,000 100,000 10,000 0 0 Jun 15 Dec 15 Jun 16 Dec 16 Jun 17 Jun 15 Dec 15 Jun 16 Dec 16 Jun 17

ST Pharm Huons (KRW) (KRW) 70,000 120,000 60,000 100,000 50,000 80,000 40,000 60,000 30,000 40,000 20,000 10,000 20,000 0 0 Jun 15 Dec 15 Jun 16 Dec 16 Jun 17 Jun 15 Dec 15 Jun 16 Dec 16 Jun 17

159

Healthcare

2017. 6. 15

Rating changes in past two years Hanmi Pharmaceutical Date 2015/9/7 10/27 11/5 11/9 11/23 2016/1/6 2/4 10/27 12/18 2017/1/1 2/8 2/27 Recommendation HOLD HOLD HOLD HOLD HOLD HOLD BUY BUY BUY BUY BUY BUY Target price (KRW) 321,298 339,658 532,437 642,596 651,776 757,452 804,209 561,076 467,563 392,753 345,997 370,000 Date 4/27 5/30 Recommendation BUY BUY Target price (KRW) 410,000 450,000 Samsung Biologics Date 2017/3/7 5/30 Recommendation BUY BUY Target price (KRW) 230,000 260,000 Hugel Date 2017/4/3 4/18 4/27 Recommendation BUY BUY BUY Target price (KRW) 475,000 510,000 570,000 Dentium Date 2017/5/30 Recommendation BUY Target price (KRW) 50,000 ST Pharm Date 2016/12/13 2017/4/10 4/24 Recommendation BUY BUY BUY Target price (KRW) 58,000 53,000 56,000 Huons Date 2017/6/15 Recommendation Not Rated Target price (KRW) n/a Samsung Securities uses the following investment ratings. Company Industry BUY Expected to increase in value by 10% or more within 12 months and OVERWEIGHT Expected to outperform market by 5% or more within 12 months is highly attractive within sector NEUTRAL Expected to outperform/underperform market by less than 5% HOLD Expected to increase/decrease in value by less than 10% within 12 months within 12 months SELL Expected to decrease in value by 10% or more within 12 months UNDERWEIGHT Expected to underperform market by 5% or more within 12 months

Percentage of ratings in 12 months prior to Mar 31, 2017 BUY (82%) | HOLD (18%) | SELL (0%)

160

Healthcare

2017. 6. 15

Global Disclosures & Disclaimers

General This research report is for information purposes only. It is not and should not be construed as an offer or solicitation of an offer to purchase or sell any securities or other financial instruments or to participate in any trading strategy. This report does not provide individually tailored investment advice. This report does not take into account individual client circumstances, objectives, or needs and is not intended as recommendations of particular securities, financial instruments or strategies to any particular client. The securities and other financial instruments discussed in this report may not be suitable for all investors. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein and investors should seek the advice of a financial adviser. This report may not be altered, reproduced, distributed, transmitted or published in whole or in part for any purpose. References to "Samsung Securities" are references to any company in the Samsung Securities, Co., Ltd. group of companies. Samsung Securities and/or other affiliated companies, its and their directors, officers, representatives, or employees may have long or short positions in any of the securities or other financial instruments mentioned in this report or of issuers described herein and may purchase and/or sell, or offer to purchase and/or sell, at any time, such securities or other financial instruments in the open market or otherwise, as either a principal or agent. Any pricing of securities or other financial instrument contained herein is as of the close of market for such day, unless otherwise stated. Opinions and estimates contained herein constitute our judgment as of the date of this report and are subject to change without notice. The information provided in this report is provided "AS IS". Although the information contained herein has been obtained from sources believed to be reliable, no representation or warranty, either expressed or implied, is provided by Samsung Securities in relation to the accuracy, completeness or reliability of such information or that such information was provided for any particular purpose and Samsung Securities expressly disclaims any warranties of merchantability or fitness for a particular purpose. Furthermore, this report is not intended to be a complete statement or summary of the securities, markets or developments referred to herein. Samsung Securities does not undertake that investors will obtain any profits, nor will it share with investors any investment profits. Samsung Securities, its affiliates, or any of its and their affiliates, directors, officers, employees or agents disclaim any and all responsibility or liability whatsoever for any loss (direct or consequential) or damage arising out of the use of all or any part of this report or its contents or otherwise arising in connection therewith. Information and opinions contained herein are subject to change without notice. Past performance is not indicative of future results. Foreign currency rates of exchange may adversely affect the value, price or income of any security or financial instrument mentioned in this report. For investment advice, trade execution or other enquiries, clients should contact their local sales representative. Any opinions expressed in this report are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or groups of Samsung Securities. Any analysis contained herein is based on numerous assumptions. Different assumptions may result in materially different results. Samsung Securities is under no obligation to update or keep current the information contained herein. Samsung Securities relies on information barriers to control the flow of information contained in one or more areas or groups within Samsung Securities into other areas or groups of Samsung Securities. Any prices stated in this report are for information purposes only and do not represent valuations for individual securities or other financial instruments. Samsung Securities makes no representation that any transaction can or could have been effected at those prices and any prices contained herein may not reflect Samsung Securities’ internal books and records or theoretical model- based valuations and may be based on certain assumptions. Different assumptions by Samsung Securities or any other source may yield substantially different results. Additional information is available upon request.

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