19 January 2015 Asia Pacific/China Equity Research Major Pharmaceuticals (Healthcare CN (Asia))
China Chemical Drug Sector Research Analysts INITIATION
Zen Zhou 852 2101 7640 [email protected] Big sheep run faster Iris Wang 852 2101 7646 Figure 1: Using three criteria to screen chemical drug companies [email protected] Strong Attractive Capable R&D commercialization Overall ranking valuation capability Hengrui Sihuan CSPC Huahai Salubris Dawnrays x Sino Biopharm Luye
Humanwell
CMS
Fosun Pharma
- Highest, - Lowest. Overall ranking is valued by weighted average of three criteria (Capable R&D:35%, Strong commercialization capability: 35%, Attractive valuation: 30%) Note: The four companies labelled with blue colour are initiated by us this time. Source: Credit Suisse ■ Stay on the sweet spot (Oncology and CNS). We forecast China’s chemical drug sector to deliver 15% CAGR in 2014–16, reaching about Rmb900 bn market size; however, the growth rate will vary among different therapeutic areas due to the higher morbidity rate for chronic diseases related to ageing population, urbanisation and lifestyle changes. We expect oncology drugs (17.5% CAGR in 2014–16) and CNS drugs (18.1% CAGR in 2014–16) to gain market share, while anti-infective drugs (9.5% CAGR in 2014–16) to lose market share. ■ Only the leader will win. China’s chemical drug market is fragmented compared to the global level (CR10: 15% vs 42%), but we see the domestic leading companies are gaining market share. We believe the trend of consolidation will stay stable, driven by: (1) higher barrier for R&D, (2) higher barrier for manufacturers, (3) favourable tender policy and (4) more M&A. ■ Our stock picking criteria is: (1) capable R&D capacity, (2) strong commercialisation capability and (3) attractive valuation. ■ Initiate on four stocks: Hengrui (TP Rmb49, 26% upside, OUTPERFORM) > Huahai (TP Rmb19, 32% upside, OUTPERFORM) > Salubris (TP Rmb45, 19% upside, OUTPERFORM) > Humanwell (TP Rmb29, 5% upside, NEUTRAL); among all A -and H-share chemical drug stocks, our top picks are Hengrui, Sihuan, Huahai and CSPC Pharma.
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19 January 2015 Focus charts Figure 2: We expect the chemical drug sector to deliver Figure 3: We believe oncology and CNS segments will +15% growth in 2014–2016 grow faster Rmb, bn China chemical drug market size (ex-factory price) 200 20% 1000 180 18% 900 15% 160 16% 800 140 14% 700 120 12% 100 10% 600 22% 80 8%
500 60 6% 16E market size CAGR market size 16E CAGR 400 40 4% - 20 2% 300 2014 2016E 2016E (Rmb, market bn) TA size 0 0% 200 100 0 2016E market size (Rmb, bn) 2014-16E market size CAGR (RHS) 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E Source: Wind, Credit Suisse estimates Note: CNS represents central nervous system, while CCV represents cardiovascular and cerebrovascular. Source: SFDA, Credit Suisse estimates
Figure 4: The big pharmas grow faster in revenues Figure 5: Sector concentration rate is increasing 30% Revenue YoY 51% 25% 49%
20% 47% 45% 15% 43% 10%
41% Revenue YoY RevenueYoY growth 5% drug manufacturers drug 39%
0% 37%
2009 2010 2011 2012 2013 3Q14 Concentration rate of top 100 domestic 100 top of rate Concentration Large group Small group 35% 2005 2007 2009 2011 2013 2020E
Note: Revenue YoY is calculated by adding up all company’s revenue Note: Concentration rate is calculated by dividing revenue of top-100 within each group. Source: Wind, Credit Suisse estimates companies by overall market size of drug manufacture segment. Source: Menet, Credit Suisse estimates
Figure 6: Three stock picking criteria Figure 7: Ranking of chemical drug companies we cover Strong Attractive Capable R&D commercialization Overall ranking R&D expense valuation Capable R&D No. and sales of capability capacity No. of R&D staff blockbuster drugs Hengrui No. of FTM/patent Sihuan drugs on pipeline No. and efficiency of sales CSPC staff Huahai Strong Domestic sales Sales of drugs in Salubris commercialization reimbursement list Dawnrays x capability Overseas potential Overseas sales as % of total Sino Biopharm Luye
Number of ANDA/DMF Humanwell P/E ratio Attractive CMS valuation PEG ratio Fosun Pharma
- Highest, - Lowest. Overall ranking is valued by weighted average of three criteria (Capable R&D:35%, Strong commercialization capability: 35%, Attractive valuation: 30%)
Source: The four companies with blue labelling are our coverage this Note: The four companies labelled with blue colour are initiated by us time. Source: Wind, Company data, Credit Suisse estimates this time. Source: Credit Suisse research
China Chemical Drug Sector 2 19 January 2015 Big sheep run faster Stay on the sweet spot (oncology and CNS) We forecast China’s chemical drug sector to deliver 15% CAGR in 2014–16 reaching We expect oncology and about Rmb900 bn market size. However, the growth rate will vary among different CNS to gain market share therapeutic areas as the higher morbidity rate for chronic diseases is related to ageing while anti-infective to lose population, urbanisation and lifestyle change. We expect oncology drugs (17.5% CAGR in market share 2014–16) and CNS drugs (18.1% CAGR in 2014–16) to gain market share while anti- infective drugs (9.5% CAGR in 2014–16) to lose market share. Only the leader will win Our research shows that larger companies recorded better operating results over small Larger companies recorded companies from 2009 to 2014 with higher revenue growth (20% vs 9%), gross margin better op. results over small (46% vs 42%) and ROE (19% vs 13%). We believe the trend will remain unchanged driven companies from 2009–14 by: (1) higher barrier for R&D, (2) higher barrier for manufacturer, (3) favourable tender with higher revenue growth, policy and (4) more M&A. gross margin and ROE Higher barrier for R&D. (1) The number of SFDA chemical drug approvals dramatically decreased from 889 in 2010 to 374 in 2013, despite rising numbers of new applications. (2) On an average, cost of each new drug application increased to Rmb4.5 mn in 2013 from Rmb2.4 mn in 2010. Higher barrier for manufacturer. New GMP (good manufacture practice) guidelines were New GMP (good announced by CFDA. (1) All pharmas are required to meet new guidelines by end-2013/end- manufacture practice) 2015, (2) about 13% of pharmas in China are loss making and cannot afford a GMP upgrade guidelines set higher barrier (about Rmb20 mn for each production line) and (3) by the end of 2013, 99% of top 100 for manufacturer pharmas got the new GMP certificates, while the total compliance rate was only 60.3%. Favourable tender policy. We believe that tender policies favour big pharma companies Tender policies favour big in two ways: (1) when setting up the tender scoring system, most provinces give credits on pharma companies the companies’ scale and (2) the big pharmas, which usually have rich pipelines can take the chance to monetise new drugs. More M&A. In China, the concentration rate of the top ten pharmaceutical companies was In China, the concentration ~15%, far below 52% in the US and the global level of 42%. According to the data from rate of pharmaceutical Bloomberg, the consolidation in the China healthcare sector shows an accelerating trend. companies is growing faster In 2013, the total deal value of M&A within the China healthcare sector was recorded at US$5.1 bn, with a YoY growth rate of 43% Three stock-picking criteria
■ Capable R&D capacity: Capable R&D is the key advantage to protect margin and We use strong R&D capacity, growth sustainability. Hengrui leads in the criteria. commercialisation capability ■ Strong commercialisation capability: For domestic market, strong sales capability is and attractive valuation as important given most players sell homogeneous generics. For overseas market, the US stock-picking criteria generic market is facing an opportunity driven by deficit budget and the upcoming patent cliff. Hengrui leads in the domestic market while Huahai wins market shares in the US.
■ Attractive valuation: The A-share chemical drug sector is trading at 27x 2015E P/E. We prefer stocks with discount or reasonable premium. Initiate on four chemical drug stocks Our pecking order is Hengrui (TP Rmb49, 26% upside, OUTPERFORM) > Huahai (TP Rmb19, 32% upside, OUTPERFORM) >Salubris (TP Rmb45, 19% upside, OUTPERFORM) >Humanwell (TP Rmb29, 5% upside, NEUTRAL); among all A- and H-share chemical drug stocks, our top picks are Hengrui, Sihuan, Huahai and CSPC Pharma. Key risks include setback in drug tendering, price cut and development of new drugs.
China Chemical Drug Sector 3 19 January 2015 Valuation comparison
Figure 8: Valuation metrics EPS Company Name Ticker Rating Mkt cap Price TP Up/Dow n P/E EV/EBITDA P/B ROE CAGR % PEG Reuters (US$, mn) (Local) CS (%) 2014 2015 2016 2013 2014 2013 2014 2013 2014 2014-16 2015 A-Chemical drugs Hengrui 600276.SS OUTPERFORM 9,432 38.9 49.0 26% 39.5 31.1 25.5 35.3 28.8 9.2 7.5 19.5% 18.9% 24.5% 1.3 Haisco 002653.SZ Not rated 3,440 19.8 34.1 26.9 23.0 43.3 27.2 11.1 5.5 29.8% 26.3% 21.8% 1.2 Salubris Pharm 002294.SZ OUTPERFORM 3,999 38.0 45.0 19% 23.7 19.5 16.0 23.3 18.8 7.9 6.6 26.5% 27.9% 21.5% 0.9 Kelun Pharm 002422.SZ Not rated 3,705 31.9 17.8 14.5 15.7 15.4 8.9 2.4 1.4 11.6% 9.7% 6.4% 2.3 Hongcheng Mach 600566.SS Not rated 2,595 20.6 32.3 25.8 20.9 n.a. 22.9 n.a. 9.9 31.6% 24.4% 1.1 Gloria Pharma 002437.SZ Not rated 2,802 23.8 39.4 28.6 22.6 n.a. 33.5 7.0 3.8 9.7% 14.7% 32.1% 0.9 Chase Sun 300026.SZ Not rated 2,359 25.5 32.3 24.1 19.1 33.7 25.8 8.5 6.5 22.2% 22.2% 30.2% 0.8 Livzon Group 000513.SZ Not rated 1,457 49.2 24.6 20.0 16.6 11.6 9.9 4.4 3.8 15.3% 14.9% 22.0% 0.9 Humanw ell 600079.SS NEUTRAL 2,346 27.5 29.0 5% 31.5 25.9 21.4 15.3 14.2 3.4 3.1 9.6% 9.8% 21.4% 1.2 CR Double-Cran 600062.SS Not rated 1,992 21.6 16.6 13.8 12.8 9.4 14.6 2.3 2.1 17.6% 12.3% 14.1% 1.0 Nhw a 002262.SZ Not rated 1,646 26.0 44.7 34.9 27.0 42.2 31.9 12.2 10.1 21.0% 22.3% 28.6% 1.2 Huahai Pharm 600521.SS OUTPERFORM 1,822 14.4 19.0 32% 36.4 26.4 19.9 21.0 20.8 3.8 3.5 11.9% 9.7% 35.3% 0.7 Hainan Haiyao 000566.SZ Not rated 1,247 15.6 43.4 29.5 20.4 47.3 n.a. 5.2 4.9 6.6% 11.2% 45.8% 0.6 Average 32.0 26.8 20.1 27.1 21.4 6.4 5.3 16.8% 17.8% 25.2% 1.1 A-TCM Yunnan Baiyao 000538.SZ OUTPERFORM 11,081 66.0 79.0 20% 28.9 23.5 19.6 32.0 23.4 7.6 6.0 25.7% 20.8% 21.5% 1.1 Tasly 600535.SS OUTPERFORM 7,210 43.3 54.0 25% 31.9 24.8 19.5 26.8 20.9 11.7 9.2 28.7% 28.8% 28.0% 0.9 Guangzhou BYS 600332.SS OUTPERFORM 6,198 31.1 32.0 3% 30.1 24.0 19.5 33.4 26.0 5.9 5.1 14.3% 16.9% 24.4% 1.0 Kangmei 600518.SS OUTPERFORM 6,081 17.2 21.0 22% 16.0 12.5 9.8 12.9 11.2 3.1 2.8 15.6% 17.2% 27.8% 0.4 Beijing Tongrentang 600085.SS NEUTRAL 5,163 24.4 19.0 -22% 41.6 35.5 29.8 19.8 15.7 6.4 5.8 13.1% 13.9% 18.2% 2.0 Dong-E E-Jiao 000423.SZ Not rated 4,212 40.0 18.4 15.3 13.4 17.5 14.7 5.2 4.3 25.8% 24.6% 17.2% 0.9 CR Sanjiu Pharma 000999.SZ OUTPERFORM 3,828 24.3 30.0 24% 17.9 15.4 13.3 14.1 12.2 3.9 3.3 19.2% 18.4% 15.8% 1.0 GZBL 002424.SZ Not rated 3,243 42.8 65.8 53.5 45.0 54.0 n.a. 9.6 n.a. 13.4% 13.8% 20.9% 2.6 Yiling Pharm 002603.SZ Not rated 2,716 29.9 44.4 33.3 25.7 47.3 32.6 4.0 3.7 6.0% 8.8% 31.3% 1.1 Zhongheng 600252.SS Not rated 3,217 17.2 20.0 16.1 13.1 24.8 17.1 5.1 4.4 18.0% 22.2% 23.7% 0.7 Yibai 600594.SS Not rated 2,245 35.2 25.4 19.5 15.4 25.2 17.9 6.6 4.5 24.8% 19.3% 28.4% 0.7 Pientzehuang 600436.SS UNDERPERFORM 2,301 88.8 74.0 -17% 32.4 27.4 23.0 25.5 25.2 5.7 5.2 17.1% 15.9% 18.5% 1.5 Kanion 600557.SS NEUTRAL 1,942 24.2 28.0 16% 32.2 24.8 19.5 27.2 24.0 5.3 5.5 15.8% 17.0% 28.6% 0.9 CONBA 600572.SS Not rated 2,043 15.7 25.8 21.3 16.6 21.6 13.8 4.8 4.6 18.6% 18.7% 24.6% 0.9 XPH 300147.SZ Not rated 1,580 19.2 38.3 28.7 21.9 44.2 n.a. 6.1 5.6 10.2% 14.6% 32.3% 0.9 Guilin Sanjin 002275.SZ Not rated 1,769 18.6 24.1 20.8 18.6 n.a. n.a. n.a. n.a. 13.8% 1.5 Kaibao 300039.SZ Not rated 1,393 13.5 20.3 16.1 12.7 22.3 16.9 5.3 4.2 21.4% 21.1% 26.3% 0.6 Taiantang 002433.SZ Not rated 1,442 12.4 43.2 30.4 24.1 n.a. 32.5 3.5 2.8 6.9% 9.1% 33.8% 0.9 CheezhengTTM 002287.SZ Not rated 1,504 23.0 36.7 29.2 23.8 38.4 29.0 6.6 6.0 15.8% 16.2% 24.0% 1.2 Kunming Pharma 600422.SS Not rated 1,422 25.9 29.0 22.9 18.7 n.a. 20.5 5.0 4.5 18.2% 15.4% 24.7% 0.9 ZhongshengPharma 002317.SZ Not rated 1,179 19.8 30.3 23.4 17.6 30.2 24.9 4.2 3.8 11.7% 12.7% 31.1% 0.8 Yabao Pharm 600351.SS Not rated 1,010 9.1 33.7 23.1 16.0 n.a. n.a. 3.7 3.5 7.2% 10.4% 45.3% 0.5 Mayinglong 600993.SS UNDERPERFORM 1,106 20.7 16.0 -23% 33.6 29.8 27.0 27.0 25.3 4.8 4.4 13.1% 13.0% 11.5% 2.6 Taiji 600129.SS Not rated 1,168 17.0 19.1 16.2 10.9 n.a. 18.8 n.a. 5.5 28.6% 32.4% 0.5 Average 30.8 23.5 19.8 28.6 21.1 5.6 4.7 16.4% 17.3% 25.2% 0.9 H-Healthcare Sinopharm 1099.HK NEUTRAL 10,477 29.4 29.3 0% 21.0 18.2 15.6 11.2 8.7 2.7 2.5 10.3% 12.0% 16.2% 1.1 Sihuan 0460.HK OUTPERFORM 7,140 5.3 6.6 24% 25.9 20.3 16.3 34.7 20.5 5.6 4.9 16.5% 18.8% 26.2% 0.8 Fosun Pharma 2196.HK OUTPERFORM 8,374 28.4 33.9 20% 27.1 22.7 19.4 37.4 32.7 3.5 3.2 13.8% 11.9% 18.1% 1.3 Shanghai Pharma 2607.HK NEUTRAL 7,113 17.9 19.0 6% 15.8 14.2 12.8 11.2 9.0 1.5 1.4 8.5% 8.9% 10.9% 1.3 Guangzhou BYS 0874.HK OUTPERFORM 6,198 29.1 41.0 41% 22.5 17.9 14.5 33.4 26.0 4.4 3.8 14.3% 16.9% 24.4% 0.7 Sino Biopharm 1177.HK NEUTRAL 5,087 8.0 6.5 -19% 28.5 27.1 24.1 18.8 15.4 7.2 6.2 18.9% 21.8% 8.8% 3.1 CSPC 1093.HK OUTPERFORM 5,206 6.8 8.6 26% 28.8 22.2 17.1 22.1 19.8 5.4 4.8 12.7% 16.6% 29.6% 0.7 Luye 2186.HK OUTPERFORM 3,980 9.3 11.0 18% 42.2 23.3 17.3 49.5 26.3 14.0 4.8 17.6% 11.3% 56.0% 0.4 CMS 0867.HK NEUTRAL 4,143 13.3 15.0 13% 31.0 24.9 20.1 39.1 27.3 7.9 6.9 19.7% 22.2% 24.1% 1.0 TRT Technology 1666.HK Not rated 1,669 10.1 22.5 19.4 17.5 15.7 13.3 2.5 2.9 15.0% 13.5% 13.3% 1.5 China Animal Healthcare 0940.HK OUTPERFORM 1,461 5.8 8.5 48% 27.6 17.9 13.3 20.2 14.5 4.3 4.3 10.0% 15.4% 44.4% 0.4 Hua Han 0587.HK Not rated 1,198 1.9 25.2 14.2 27.1 16.9 n.a. 1.8 5.3% 7.3% Shinew ay 2877.HK Not rated 1,291 12.1 10.8 10.1 9.7 10.0 8.5 1.8 1.6 15.5% 5.5% 1.8 Lijun Intl Pharm 2005.HK Not rated 1,279 3.3 16.9 13.5 11.1 14.5 10.5 3.4 3.1 15.4% 18.7% 23.1% 0.6 Trad Chi Med 0570.HK OUTPERFORM 1,464 4.5 5.8 29% 24.0 19.2 15.3 30.0 16.2 3.3 2.9 7.2% 12.1% 25.3% 0.8 United Lab 3933.HK Not rated 909 4.3 9.2 9.9 8.5 4.2 4.0 1.1 1.0 0.8% 13.9% 4.3% 2.3 Tong Ren Tang 8138.HK Not rated 1,109 10.4 29.6 22.5 19.9 30.3 23.2 6.7 5.9 24.9% 21.1% 21.9% 1.0 Daw nrays 2348.HK OUTPERFORM 528 5.1 7.3 44% 15.6 12.5 10.1 13.4 9.8 3.1 2.8 14.6% 18.1% 24.0% 0.5 Weigao 1066.HK OUTPERFORM 3,407 5.9 10.3 75% 19.6 16.2 13.0 14.8 12.2 2.3 2.2 10.4% 11.0% 22.8% 0.7 MicroPort 0853.HK UNDERPERFORM 585 3.2 2.8 -12% (11.3) 157.8 37.4 11.6 (91.9) 1.5 1.8 6.3% -15.8% Bloomage 0963.HK OUTPERFORM 520 12.1 17.0 40% 18.3 14.1 11.5 21.0 11.4 5.7 4.7 27.7% 25.6% 26.5% 0.5 Average 21.5 24.7 16.2 22.4 11.2 4.4 3.5 13.5% 14.1% 23.0% 1.1 Note: Priced as of 16 Jan 2015. Source: IBES consensus, Credit Suisse estimates of covered companies
China Chemical Drug Sector 4 19 January 2015 Table of contents
China Chemical Drug Sector 1 Big sheep run faster 3 Valuation comparison 4 Table of contents 5 Stay on the sweet spot (oncology and CNS) 6 Only the leader will win 14 Stock picking criteria 19 Initiate on four stocks 24 Key investment risks 28 Company initiations 29 Jiangsu Hengrui Medicine (600276.SS / 600276 CH) 30 Focus charts 31 Largest domestic oncology drug manufacturer 32 Strongest R&D among peers 38 Valuation 43 Huahai Pharmaceutical (600521.SS / 600521 CH) 46 Focus charts 47 Zhejiang Huahai Pharmaceutical Co Ltd 600521.SS / 600521 CH 48 The flagship of drug export 49 Close to the turning point as ANDAs boom 56 Valuation 60 Salubris Pharmaceuticals (002294.SZ / 002294 CH) 62 Focus charts 63 Niche leader 64 Next blockbuster launch awaited 70 Appealing valuation with decent growth prospects 73 Humanwell Healthcare (600079.SS / 600079 CH) 76 Focus charts 77 The leading anaesthetic drug maker 78 Proven track record in M&A 83 Valuation 87 China Medical System Holdings Ltd. (0867.HK / 867 HK) 89 CSPC Pharmaceutical Group Ltd (1093.HK / 1093 HK) 90 Dawnrays Pharmaceutical (Holdings) Limited (2348.HK / 2348 HK) 91 Shanghai Fosun Pharmaceutical (Group) Co., Ltd. (2196.HK / 2196 HK) 92 Sihuan Pharmaceutical Holdings Group Ltd. (0460.HK / 460 HK) 93 Luye Pharma Group Ltd. (2186.HK / 2186 HK) 94 Sino Biopharmaceutical Limited (1177.HK / 1177 HK) 95
China Chemical Drug Sector 5 19 January 2015 Stay on the sweet spot (oncology and CNS) We forecast China’s chemical drug sector to deliver 15% CAGR in 2014–16, reaching about We expect oncology drugs Rmb900 bn market size, however, the growth rate will vary among different therapeutic areas and CNS drugs to gain as the higher morbidity rate for chronic diseases is related to ageing population, urbanisation market share while anti- and lifestyle. We expect oncology drugs (17.5% CAGR in 2014–16) and CNS drugs (18.1% infective drugs to lose market CAGR in 2014-16) to gain market share while anti-infective drugs (9.5% CAGR in 2014–16) to share lose market share. Companies focusing on preferred segments should have better growth potential. We compare the chemical companies under our coverage. Hengrui and Luye have the most exposure to oncology drugs while Hengrui, CSPC, Humanwell and Fosun have most exposure to CNS drugs.
Figure 9: Companies categorised by therapeutic areas Digestion and Anti-infective Oncology CNS CCV Blood system metabolism /anti-vitus
Hengrui
Luye
CSPC
Salubris
Sihuan
Sino Biopharm
Humanwell
Fosun Pharma
Huahai - Highest, - Lowest
Note: The companies labelled with blue colour are covered by us this time. Source: Company data, Credit Suisse
15% growth driven by increasing healthcare expenditure and solid demand We believe China’s chemical drug sector will deliver 15% growth in 2014–16, mainly China’s chemical drug driven by increasing healthcare expenditure and ageing population. The sector recorded a sector will deliver 15% market size of ~Rmb573 bn in 2013 with a 22% five-year CAGR. growth in 2014–16, mainly driven by increasing healthcare expenditure and ageing population
China Chemical Drug Sector 6 19 January 2015
Figure 10: We expect the chemical drug sector to deliver +15% growth in 2014–2016
(Rmb, bn) China chemical drug market size (ex-factory price) 1000 900 15% 800
700 22% 600
500
400
300
Market of size chemical drugs 200
100
0 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E Source: Wind, Credit Suisse estimates Increasing healthcare expenditure On the supply side, there is a huge gap between China and other developed countries in terms of healthcare expenditure, according to the World Bank statistics.
Figure 11: Huge gap between China and developed Figure 12: …as well as % of healthcare expenditure in countries in healthcare per capita cost… overall GDP World: Healthcare cost per capita (2010) 20 (US$) Healthcare expenditure as % of GDP US 18 Canada Australia 16 2000 2009 France 14 Germany Japan 12 UK 10 Singapore Korea 8 Brazil 6 Mexico Malaysia 4 China 2 Vietnam Phillipines 0 India (US$) 0 1000 2000 3000 4000 5000 6000 7000 8000 9000
Source: The World Bank, Credit Suisse Source: The World Bank, Credit Suisse To catch up with developed countries, the Chinese government has already set the target of steadily increasing the healthcare expenditure as % GDP from about 5.5% in 2013 to 6.5-7% in 2020E; and hence, we believe that total healthcare expenditure can still deliver a double-digit growth in the near future.
China Chemical Drug Sector 7 19 January 2015
Figure 13: China healthcare expenditure will sustain the upward trend % 7.5 6.5-7.0 7.0
6.5 6.0 6.0
5.5
5.0
4.5
4.0
3.5 Healthcare expenditure as of GDP %
3.0
2001 2005 2009 2013 2000 2002 2003 2004 2006 2007 2008 2010 2011 2012
2015E 2020E
Source: China statistical yearbook, NHFPC, Healthy China 2020 Strategic Research Report Solid demand On the demand side, we see On the demand side, we see sustainable demand from the increasing number of patients sustainable demand from the and the cost per patient. In the past seven years, the number of outpatients and inpatients increasing number of patients delivered 8% and 12% CAGR, while the cost per visit of outpatient and inpatient recorded and the cost per patient CAGR of 9% and 7%.
Figure 14: Stable growth on outpatient numbers… Figure 15: …as well as inpatient numbers bn % mn % 8 14 250 18 16 7 12 200 14 6 10 12 5 150 8 10 4 6 8 100
3 No. of No. outpatient
No. of No. inpatients 6 4 2 50 4 2 1 2
0 0 0 0 2007 2008 2009 2010 2011 2012 2013 2007 2008 2009 2010 2011 2012 2013 Number of outpatients YoY (RHS) Number of inpatients YoY (RHS)
Source: 2013 NHFPC statistical bulletin, Wind, Credit Suisse Source: 2013 NHFPC statistical bulletin, Wind, Credit Suisse
China Chemical Drug Sector 8 19 January 2015
Figure 16: Increasing outpatient per-capita expense… Figure 17: …and inpatient per-capita expense RMB % RMB % 250 12 8000 12
7000 10 10 200 6000 8 8 150 5000 6 4000 6 100 3000 4 4 2000
50 Inpatient percapita expense
Outpatientper capita expense 2 2 1000
0 0 0 0 2007 2008 2009 2010 2011 2012 2013 2007 2008 2009 2010 2011 2012 2013 Spending per capita (outpatient) YoY (RHS) Spending per capita (inpatient) YoY (RHS)
Source: 2013 NHFPC statistical bulletin, Wind, Credit Suisse Source: 2013 NHFPC statistical bulletin, Wind, Credit Suisse Ageing population drives structural growth Given a progressive aging tendency in China, it is estimated that about 14% of social Ageing population drives population will be aged over 65 in 2020. According to NHFPC statistical analysis, structural growth prevalence of chronic diseases such as hypertension and organ failure increase with aging. Population with age over 65 has as high as a 65% chance to suffer from chronic diseases.
Figure 18: Increasing aging population in China Figure 19: Prevalence of chronic diseases increases within different age groups % ‰ 14.0 700 % of population with age > 65 1998 2003 2008 12.0 600
10.0 500
400 8.0
300 6.0 200 4.0 Prevalence of chronicdiseases 100
2.0 1953 1964 1982 1990 2000 2010 2015E 2020E 0 0-4 5-14 15-24 25-34 35-44 45-54 55-64 65+
Source: China statistical yearbook, NHFPC, Healthy China 2020 Source: NHFPC, Credit Suisse Strategic Research Report Prefer oncology and CNS drugs We believe growth rate will vary among different therapeutic areas as the higher morbidity We expect the oncology and rate for chronic diseases related to ageing population and modern life style. We expect the CNS segment to gain more oncology and CNS segment to gain more market share and anti-infective segment to lose market share and anti- market share. infective segment to lose market share
China Chemical Drug Sector 9 19 January 2015
Figure 20: We believe oncology and CNS segments will grow faster
200 20% Growth of China TA segments 180 18% 160 16% 140 14% 120 12% 100 10%
80 8% 16E 16E CAGR sizemarket
60 6% -
2016E market size (Rmb, bn) (Rmb, size market 2016E 40 4% 2014 20 2% 0 0% Oncology and CCV Digestion and Anti-infective Blood system CNS immune metabolism regulatory 2016E market size (Rmb, bn) 2014-16E market size CAGR (RHS)
Note: CNS represents central nervous system, while CCV represents cardiovascular and cerebrovascular. TA means therapeutic area. Source: SFDA southern medicine economic research institute, Credit Suisse estimates As the chart shows below, six therapeutic areas accounted for 85% of the China chemical drug market in 2013. Oncology, central nervous system (CNS) and cardiovascular/cerebrovascular (CCV) were the top three areas. If we compare the mix in China to US, about 55% of the drug market is occupied by oncology, CNS and CCV in the US, while they only take up about 44% market share in China. The huge gap of drug utilisation structure between US and China implicates a guideline to lead further development of the Chinese drug market.
Figure 21: Oncology, CNS and CCV take up 55% market share in US versus 44% in China
45% 56%
14%
14% 23%
11% Market shareof therapeutic areas 19% 18%
China U.S Oncology CNS CCV Others
Source: Menet, IMS US prescription drug market report, Credit Suisse estimates Oncology and immune regulatory is the largest therapeutic area with 19% market share in We believe the oncology China. This segment recorded market size of over Rmb100 bn (~US$16 bn) in 2013 and segment will gain market an 18% YoY growth. Due to the pollution issue and ageing population, tumour now share accounts for 28% of the death-causing diseases in China. According to WHO statistics, the number of 2013 newly-occurred cancer cases in China topped among all countries, reaching a population of about 3 mn, which tripled the number of US. On the contrary, the
China Chemical Drug Sector 10 19 January 2015 sales of oncology drugs in China were far lagging behind the US, recording less than US$20 bn in 2013.
Figure 22: China triples US in number of newly-added Figure 23: …yet far lagging in oncology drug sales cancer cases… mn US$, bn 3 60
2.5 50
2 40
1.5 30
1 20
No. of No. new cancercases 2013 in 0.5 10 2013 oncology chemical chemical sales drug oncology 2013
0 0 China US China US
Source: Cancer country profiles 2014,World Health Organization Source: Menet, Wind, Credit Suisse (WHO), Credit Suisse Given China’s large base of cancer patients versus the unmatched oncology drug market size, we believe that there is a huge room for segment development. Therefore, we estimate the oncology segment to keep gaining market share up to 20% in 2016 with growth rate of 18%.
Figure 24: We believe the oncology segment will keep gaining market share with growth rate of 18%
200 35% Rmb, bn 180 CAGR 18% 30% 160
140 25% 120
100 20%
80 15% 60
40 10% 20
Market size of oncology and immune regulatory drugs regulatory immuneand oncologyofsize Market 0 5% 2009 2010 2011 2012 2013 2016E Market size (ex-factory price) YoY (RHS)
Source: SFDA southern medicine economic research institute, Wind, Credit Suisse estimates
Central nervous system (CNS) drugs account for 23% of the total drug market in the US, compared with 11% in China. Within the segment, anaesthetics and mental disease (eg. Central nervous system Alzheimer and Parkinson) are two major branches. For anaesthetic, we observed a stable (CNS) drugs account for growth rate, about 12%, on number of hospital surgeries since 2008, implying an 23% of the total drug market increasing clinical demand of surgical anaesthetic drugs. For mental disease, China in the US, compared with 11% in China
China Chemical Drug Sector 11 19 January 2015 registered a population of about 100 mn mental disease patients in 2013, far ahead of the 44 mn population in the US. However, the per capita expense for mental disease treatment in the US reached US$1,090 in 2013, almost ten folds of the average cost in China. We believe the huge cost gap between China and the US in this area will be narrowed down in the future due to deepening government concerns.
Figure 25: No. of surgeries showed a stable growth in Figure 26: Per capita drug spending for mental disease China treatment in China is around one tenth of that in US (2013) 45 16% US$
40 14% 1200 35 12% 1000 30 10% 25 800 8% 20 6% 600 15
4% treatment(2013) No. of No. surgeries (mn) 10 400
5 2% 200
0 0% Expense percapita for mental disease 2007 2008 2009 2010 2011 2012 2013 0 No. of surgeries (mn) No. of surgeries YoY (%) US China
Note: The 2013 data was estimated by Credit Suisse. Source: Source: NIH (National Institute of Health, US), NHFPC, Credit Suisse NHFPC, Credit Suisse estimates estimates Therefore, we believe there will be promising growth potential in the CNS drug segment with our estimate of 18% CAGR in 2014–16.
Figure 27: We expect the CNS segment in China to grow at 18% CAGR in 2014–16
120 40% Rmb, bn CAGR 18% 35% 100 In 2013, the digestion and 30% metabolism segment 80 recorded market size of 25% Rmb81 bn, while blood 60 20% system reached sales of Rmb67 bn 15% 40 Market size of CNS drugs CNSofsize Market 10% 20 5%
0 0% 2009 2010 2011 2012 2013 2016E
Market size (ex-factory price) YoY (RHS)
Source: SFDA southern medicine economic research institute, Wind, Credit Suisse estimates In 2013, the digestion and metabolism segment recorded market size of Rmb81 bn and a YoY growth rate of 14%. Within this sector, the top three digestive drugs in terms of sales are specific to peptic ulcer, which is the most common digestion disease in China. We estimate this segment will deliver a 15% growth in 2014–16. Drugs for blood system kept in a stable YoY growth rate of about 16% and reached sales of Rmb67 bn in 2013. Sodium chloride injection used for body homeostasis maintenance, ranks
China Chemical Drug Sector 12 19 January 2015
No.1 (about 12% market share) in blood system drugs due to tremendous clinical requirements. The whole segment is expected to exceed Rmb100 bn in 2016 with growth rate of 16%.
Figure 28: Market size (ex-factory price) of digestion and Figure 29: Market size (ex-factory price) of blood system metabolism drugs in China drugs in China
90 35% 80 35% Rmb, bn Rmb, bn 80 30% 70 30% 70 60 25% 25% 60 50 50 20% 20% 40 40 15% 15% 30 30 10% 10%
20 20 Market size of blood system drugs system bloodofsize Market 5%
10 10 5% Market size of digestion and metabolism drugs drugs metabolism and digestion of size Market 0 0% 0 0% 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013
Market size (ex-factory price) YoY (RHS) Market size (ex-factory price) YoY (RHS)
Source: SFDA southern medicine economic research institute, Wind, Source: SFDA southern medicine economic research institute, Wind, Credit Suisse estimates Credit Suisse estimates Expansion of the cardiovascular and cerebrovascular (CCV) drug market is proportional to Expansion of CCV drug aging population, as aged people are more likely to suffer from CCV diseases. In 2013, market is proportional to CCV drug recorded a market size of Rmb83 bn with a YoY growth rate of 12%. As the aging population most common CCV disease, hypertension recorded ~24% morbidity in China, while severe hypertension can further induce stroke and coronary heart disease (CHD). Therefore, anti-hypertensive/hyperlipidaemia drugs such as Amlodipine and Atorvastatin take up a large market share in the CCV drug market. The anti-infective drug was the most underperformed segment in the past three years. The We expect the market share Chinese government began to prohibit the abuse of anti-infective drugs in 2011 and of anti-infective segment to announced guidance in 2012. The doctors who do not follow the guidance could have their finally come to about 10% in licenses suspended. As a result, the growth of this therapeutic area slumped. Therefore, the next five years implying we expect the market share of this segment to finally come to about 10% in the next five a single-digit growth rate years implying a single-digit growth rate.
Figure 30: Market size (ex-factory price) of CCV drugs in Figure 31: Market size (ex-factory price) of anti-infective China drugs in China
90 40% 100 25% Rmb, bn Rmb, bn 90 80 35% 80 20% 70 30% 70 60
25% 60 15% infective drugs infective
50 - 20% 50 40 15% 40 10% 30 30 10% 20
Market size antiofsize Market 20 5% Market size drugssize Marketofcardiovascular 5% 10 10 0 0% 0 0% 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013
Market size (ex-factory price) YoY (RHS) Market size (ex-factory price) YoY (RHS)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
China Chemical Drug Sector 13 19 January 2015 Only the leader will win Our research shows that larger companies recorded better operating results over small ones Larger companies recorded from 2009 to 2014 with higher revenue growth (20% vs 9%), gross margin (46% vs 42%) and better operating results over ROE (19% vs 13%). We believe the trend is unchanged driven by: (1) higher barrier for R&D, small ones from 2009 to 2014 (2) higher barrier for manufacturer, (3) favourable tender policy and (4) more M&A. with higher revenue growth, gross margin and ROE We divide the listed A-share chemical companies into two groups, the large group (top 50% in terms of 2013 net profit) and the small group (the remaining 50%). The results clearly show the advantage of enterprise scale and support our point of view, strong ones getting stronger. The large group is superior on, both, growth and profitability. It has been continuously beating Larger enterprise scale have the small group in the last five years. The large group maintained a two-digit revenue YoY richer product portfolio, growth rate with high gross margin of ~50%, while the small group only gained one-digit stronger sales network and revenue growth rate with gross margin as low as 43%. In terms of product line, companies with heavy investment on larger enterprise scale have richer product portfolio and stronger sales network, serving as a innovative drug development guarantee of market pricing power. In addition, larger players can afford heavy investment on innovative drug development, ensuring sustainability of future revenue growth.
Figure 32: The large group grows faster in revenue Figure 33: The large group has higher gross margin
30% 55% Revenue YoY 53% Gross margin 25% 51% 49% 20% 47% 15% 45% 43% 10% 41% 39% 5% 37% 0% 35% 2009 2010 2011 2012 2013 3Q14 2009 2010 2011 2012 2013 3Q14
Large group Small group Large group Small group
Note: Revenue YoY is calculated by adding up all company’s revenue Note: Gross margin is calculated as weighed average value of each within each group. Source: Wind, Credit Suisse estimates company within the same group. Source: Wind, Credit Suisse estimates
Figure 34: The large group maintains higher ROE level
35% ROE 30%
25%
20%
15%
10%
5%
0% 2009 2010 2011 2012 2013 3Q14
Large group Small group
Note: ROE is calculated as arithmetic mean of each company within the same group. Source: Wind, Credit Suisse estimates
China Chemical Drug Sector 14 19 January 2015
Higher barrier for R&D According to the national R&D expense statistical bulletin, the pharmaceutical industry Increasing R&D cost make recorded a steady growth rate in R&D investment, which accounted for ~1.7% of overall small pharmas incapable of industry revenue in 2013. By contrast, the number of SFDA drug approvals decreased participating in new drug dramatically since 2010, despite rising numbers of new drug applications every year. The development major reasons for deceleration of SFDA drug approvals are mainly due to: (1) higher standards for clinical verification as well as drug manufacture and (2) discouragement of repetitive generic drugs by SFDA.
Figure 35: SFDA chemical drug approval rate slows down
1000
900
800
700
600
500
No. of No. CFDA approvedchemical drugs 400
300 2009 2010 2011 2012 2013
Source: 2009-2013 CDE annual drug application report , Credit Suisse research On an average, the cost of each new drug application exceeded Rmb4.5 mn in 2013. Increasing R&D cost is mainly driven by inflation of raw material price, rents and research staff wages. In addition, more drug manufacturers now put heavy investment in patent or first-to- market (FTM) drug development instead of common generics, which further enhances capital investment. Considering high R&D expense as well as low SFDA compliance rate, most of the small pharmas are incapable of participating in new drug development.
Figure 36: Rising average R&D expense per drug Figure 37: Higher cost per drug application manufacturer Rmb, mn Rmb, mn 5.0 6.0 4.5
5.0 4.0
3.5 4.0 3.0
3.0 2.5 2.0 2.0 1.5
1.0 1.0 R&D cost drugperapplication
0.5 R&D expense R&D pharmaceutical per company 0.0 0.0 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013
Source: 2009-2013 national R&D expense statistical bulletin, Credit Source: 2009-2013 national R&D expense statistical bulletin, 2009- Suisse estimates 2013 CDE annual drug application report, Credit Suisse estimates
China Chemical Drug Sector 15 19 January 2015
Higher barrier for manufacture To encourage integration, the Chinese government adopted a few policies among which Implementation of new GMP we believe two policies will have material impacts on the pharmaceutical industry and help will increase the entry knock out the small and weak players, new GMP and new round of drug tenders. barriers of the China pharma industry and New GMP to knock out small players accelerate consolidation New GMP guidelines were announced in early 2011 by the CFDA, which constituted of a series of guidelines to be followed throughout the whole drug manufacturing process. Only companies that are granted the new GMP certificates are allowed to manufacture and sell drugs. According to the implementation schedule, all sterile-drug producers/pharmas are required to meet the new GMP guidelines by end-2013/end-2015.
Figure 38: Implementation schedule of new GMP guidelines Time line Government guidance March 2011 Announcement of new GMP guideline December 2013 Companies producing sterile drugs such as vaccines, injections and blood products are required to meet new GMP guidelines December 2015 All drug manufacturers are required to meet new GMP guidelines Source: Centre for Food and Drug Inspection of CFDA, Credit Suisse The table below shows the apparent contrast, big pharmas can meet new requirements while small players are struggling. We believe the implementation of new GMP will increase the entry barriers of the China pharma industry and lead to accelerating market consolidation. About 13% of the 3,500 pharma companies in China are loss making and cannot afford GMP upgrade (about Rmb20 mn for each production line); they have to exit from the market or get acquired. By the end of 2013, which is the first deadline for sterile drugs, 99% of top 100 pharmas got the new GMP certificates while the total compliance rate was only 60.3%.
Figure 39: Big pharmas have higher compliance rate By 12/31/2013 Top-100 players Top-500 players All pharmas No. of sterile-drug companies compliant 99 478 796 Compliance rate 99.0% 95.6% 60.3% Source: Centre for Food and Drug Inspection of CFDA, Credit Suisse Tender policies favour big names We believe that tender policies favour big pharmas in two ways: (1) when setting up the Tender policies favour big score system, most provinces give credits on companies’ scale and (2) tender process is pharmas in scoring system mandatory before drugs being sold in hospitals, thus the big pharmas that usually have and rich pipeline advantage rich pipelines can take the chance to monetise their new drugs while small companies might only suffer from price cut.
Figure 40: Enterprise scale accounts for significant proportion to overall tender success Province Launching Year Tender score related to enterprise capacity Beijing 2012 50/100 Shandong 2013 42/100 Zhejiang 2014 37/100 Hubei 2014 15/100 Gansu 2014 30/100 Anhui 2014 23/100 Source: Provincial tender policy announcements, Credit Suisse
China Chemical Drug Sector 16 19 January 2015
More M&A The concentration rate is still low In China, the concentration rate of the top ten pharmaceutical companies was about 15%, The consolidation in the far below 52% in the US and global level of 42%. Low consolidation of drug manufacturing China healthcare sector has segment leads to decentralised allocation of R&D resource, showing negative effects on shown the trend of innovative drug development. However, the low concentration rate also leaves a huge accelerating, for both room for market leaders to consolidate. numbers and value
Figure 41: Low consolidation level of Chinese pharmaceutical industry (2011)
60% Market concentration of Top-10 players
50%
40%
30%
20%
10%
0% U.S. Global China
Source: SFDA southern medicine economic research institute, Credit Suisse estimates Consolidation is accelerating According to the data from Bloomberg, in the past 12 years, the consolidation in the China healthcare sector has shown the trend of accelerating, for both numbers and value. In 2013 and 2014 YTD, the total deal value of M&A within the China healthcare sector recorded US$5.1 bn and US$7 bn, with YoY growth rate of 43% and 35%, respectively. Through acquisition, some companies embrace into new business areas (e.g. Sinva Medical acquired Bioxun Biotech to extend its business into in-vitro-diagnosis), while others target to consolidate the industry value chain (e.g. Walvax Biotechnology acquired three pharmaceutical distribution companies to integrate the downstream business).
China Chemical Drug Sector 17 19 January 2015
Figure 42: China pharmaceutical sector becomes more Figure 43: More active M&A within China healthcare sector concentrated 8000 60 51% USD mn 7000 49% 50 6000 47% 40 5000 45% 4000 30
43% 3000 20 41% 2000 10 drug manufacturers manufacturers drug 39% 1000 0 0
37% Concentration rate of top 100 domestic domestic 100 top of rate Concentration 35% 2005 2007 2009 2011 2013 2020E M&A deal value No. of M&A events (RHS)
Note: Concentration rate is calculated by dividing revenue of top-100 Note: M&A deal value is calculated by summing up the value of all companies by overall market size of drug manufacture segment. M&A events within the year. Source: Bloomberg, Credit Suisse Source: Menet, Credit Suisse estimates research
China Chemical Drug Sector 18 19 January 2015 Stock picking criteria Our stock picking framework consists of three criteria: (1) capable R&D capacity, (2) strong commercialisation capability and (3) attractive valuation
Figure 44: Stock picking criteria and logic R&D expense Capable R&D capacity No. of R&D staff No. and sales of blockbuster drugs No. of FTM/patent drugs on pipeline No. and efficiency of sales staff
Strong Domestic sales force Sales of drugs in reimbursement list commercialization capability Overseas potential Overseas sales as % of total
Number of ANDA/DMF
P/E ratio Attractive valuation PEG ratio
Source: Credit Suisse Capable R&D The first and the most important criteria for our stock picking is R&D capacity. In the Capable R&D usually brings chemical drug area, a drug will have to face intensified competition and go through price richer pipelines, is also the erosion after the patent expires. Capable R&D is the key advantage to protect margin and key advantage to protect growth sustainability in the long run. margin and growth sustainability in the long run Higher R&D investment usually brings richer pipelines; it is especially true for generics players as the failure possibility is much lower than exploring innovative drugs. So far most players in China focus on branded-generics or the generics business. In 2013, the average R&D expense ratio of chemical drug industry is about 4%, we prefer the companies with higher-than-average R&D expense ratio.
Figure 45: Comparison of R&D expense of different Figure 46: Hengrui has the largest R&D team pharmaceutical companies Rmb mn Comparison of R&D expense 1600 800 10.0% Comparison of R&D staff 700 9.0% 1400 8.0% 600 1200 7.0% 500 6.0% 1000 400 5.0% 800 300 4.0% 3.0% 600 200 2.0% of No. R&D staff 400 100 1.0% 0 0.0% 200
0
2013 R&D expenditure as % of drug sales (RHS)
Note: The four companies with blue labelling are our coverage this Note: The four companies with blue labelling are our coverage this time. Source: Wind, Company data, Credit Suisse estimates time. Source: Company data, Credit Suisse estimates
China Chemical Drug Sector 19 19 January 2015
As a result of R&D investment, the number of drugs approved is another measure to show the R&D capacity of a chemical drug company. Hengrui leads in, both, the number of drug approved and drug undergoing clinical trials.
Figure 47: Leading position of Hengrui in patent drug development Having completed clinical trial Undergoing clinical trial Patent First to market Patent First to market Company drugs generic drugs Total drugs generic drugs Total Hengrui 2 13 15 14 6 20 Huahai 0 11 11 0 6 6 Humanwell 0 1 1 2 4 6 Salubris 0 2 2 3 2 5 Source: Yaozhi database, Credit Suisse estimates For pipeline evaluation, we are typically focusing on type I and type III drugs. Type I drugs own 12 years of patent protection for novel chemical component, which are representative of corporate R&D innovation capacity. Type III drugs are brand new to the domestic market, which possess huge profit opportunities by domestic infiltration. We list the definition of six types of drug applications below for reference.
Figure 48: Definition of drug application code in China Class Definition Type 1 Patented drug, with novel chemical component, which has never been launched in overseas/domestic market Type 2 Adding new administration method to old chemical component, which has never been launched in overseas/domestic market Type 3 First-to-market generic, which has never been sold domestically Type 4 Innovated domestic on-market generics by adding minor chemical modifications Type 5 Innovated domestic on-market generics by changing dosage forms Type 6 Common generics which are identical to domestic on-market drugs Source: Centre for drug evaluation, SFDA , Credit Suisse Research Strong commercialisation capability We divide the capability into two aspects; one is sales force in domestic market while the other is the potential in overseas market. Domestic sales force Sales capability is the other major criteria to focus on when picking chemical pharma A capable sales network companies, especially in China, given most players sell homogeneous generics. Generally, can maximise the value of if the company does not run a capable sales network, the value of its portfolio cannot be companies’ portfolio maximised and it will turn out to be a vicious circle where you spend less and less on R&D and sales network as you can’t generate decent revenue and profit from your products. To tell whose sales network is better, we compare the number of blockbusters of each company, which is one of the most important criteria to show the capability of sales. A blockbuster drug needs not only extensive hospital coverage but also high prescription rate per hospital covered. Hengrui Pharma shows unbeatable strength within the four companies we cover this time, only lagging behind Sino Biopharm. In 2013, Hengrui had 12 products whose annual sales were above Rmb200 mn and generated a total of about Rmb5 bn from its blockbusters.
China Chemical Drug Sector 20 19 January 2015
Figure 49: Hengrui ranks the second among peers in Figure 50: …as well as sales from blockbusters (2013) number of blockbusters (2013)…
16 No. of blockbuster drugs Rmb, bn Sales of blockbuster drugs 14 6.0
12 5.0 10 4.0 8
6 3.0
4 2.0 2 1.0 0
0.0
No. of drugs with sales over Rmb 500mn No. of drugs with sales over Rmb 200mn
Note: The blockbuster drugs refer to the drugs with 2013 sales over Note: Sales of blockbuster drugs are calculated by summing up Rmb200 mn. Source: Company data, Credit Suisse estimates revenue of all the drugs which recorded over Rmb200 mn sales in 2013. Source: Company data, Credit Suisse estimates The number of sales staff is another angle to estimate the strength of sales network. It is hard to afford a large sales team if the company does not run an effective management model. Hengrui ranks No.2 in the perspective with about 4,700 in house sales staff in 2013. Revenues generated per sales staff is a good comparison for companies adopting the same sales mode. However, given both Salubris and Humanwell have some revenues from the outsourcing sales team, we believe the comparison only represents part of the real capability. Salubris leads among the peers with Rmb2.4 mn generated per sales staff.
Figure 51: Hengrui ranks No.2 in number of sales staff Figure 52: Salubris has the highest efficiency by (2013) generating Rmb2.4 mn per sales staff (2013) Rmb mn 6000 2.4 5000 2.2
4000 2.0
1.8 3000
1.6
No. of No. sales staff 2000 1.4
1000 1.2 Revenuegenerated by per sales person
0 1.0 Salubris Humanwell Luye Sino Biopharm Hengrui Sino Biopharm Hengrui Humanwell Luye Salubris Huahai Source: Company data, Credit Suisse estimates Note: Huahai is not listed here due to (1) Special revenue mode highly relying on overseas market (2) Using agents to sell its drugs instead of its own sales team. Source: Company data, Credit Suisse estimates The other important criteria to estimate the commercialisation capacity is the percentage of sales from drugs included in national or provincial reimbursement drug list. A high portion of sales from reimbursed drugs indicates the company's ability to maintain good
China Chemical Drug Sector 21 19 January 2015 relations with the government. In addition, drugs included in the medical insurance list enjoy a high prescription volume. Sihuan and Sino Biopharm lead in this criterion.
Figure 53: Drugs included in medical insurance contribute over 90% revenue for Sihuan and Sino Biopharm (2013) 100%
90%
80%
70%
60%
50% totalfinished revenuedrug
40% Sales Sales of drugsmedical in insurance % as of
Source: Company data, Credit Suisse estimates Overseas potential The generic market in the US is facing an opportunity driven by the deficit budget and US generic will grow to a upcoming patent cliff. In 2013, US generic recorded a US$330 bn size market with 13% YoY market size of US$421 bn in growth. According to the estimates of IMS, US generic will grow to a market size of US$421 bn 2015 in 2015 with 13% CAGR, which is almost five fold of the total China's chemical drug market.
Figure 54: Fast growth of US generic drug market USD bn 450
400
350 300 13% 250
200
150
100 Market of size generic drugs 50
0 2005 U.S. Generic drug 2010 U.S. Generic drug 2015E U.S. Generic drug 2013 China Chemical drug market market market market
Source: IMS 2011 market prognosis, Wind, Credit Suisse estimates Several domestic drug manufacturers have already entered the US drug market in the past Huahai leads in both the three years. Among them, Huahai leads in both the number of FDA-certified drugs and ANDA number of FDA-certified applications. ANDA is reviewed and approved by the FDA for launching a generic drug in drugs and ANDA the US market. According to the number of ANDAs under consideration, we believe it's applications highly possible Made-In-China sees a boost in the US generics market.
China Chemical Drug Sector 22 19 January 2015
Figure 55: Huahai leads domestic peers in exploring overseas drug markets Company Certificated ANDA ANDA under consideration Approved DMF Hengrui 5 6 14 Huahai 17 8 50 Humanwell 6 n.a. 7 Salubris 0 0 0 Source: www.fda.gov, Credit Suisse The blockbuster drug of Huahai, Lamotrigine, which was launched in the US market in 2012 in collaboration with Par Pharma, achieved great success in the US market, with 2013 sales of Rmb1.5 bn. The overseas drug sales accounted for 20% of Huahai’s total sales, implying its business transformation strategy from API production to finished drug export.
Figure 56: Overseas drug sales take huge proportion of Huahai 2013 revenues
25% Generics (finished drug) export as % of total manufacturing revenue (2013)
20%
15%
10%
5%
0% Huahai Humanwell Hengrui
Source: Company data, Credit Suisse estimates Another company, Hengrui, has paved its road towards the US market by acquiring five ANDA approvals and registered 14 active DMF with FDA. Among FDA approved drugs, Cyclophosphamide injections are most likely to become the next blockbuster drug in the US market. Hengrui acquired FDA approval for Cyclophosphamide in November 2014, breaking the long-term monopoly position of Baxter over this drug. The total market size of Cyclophosphamide injection was recorded at US$467 mn in 2013, with a striking YoY growth rate of 56%. Attractive valuation The chemical sector is trading at 26x P/E in 2015 with a 14–16 EPS CAGR of 26%. We prefer the companies with valuation discount or reasonable premium.
Figure 57: Comp set of four covered stocks Company Name Ticker Mkt cap CS Price (Rmb) TP Upside/ P/E EV/EBITDA P/B ROE EPS CAGR PEG (US$, mn) Rating 10/22/2014 (Rmb) Downside 2014 2015 2016 2013 2014 2013 2014 2013 2014 2014-16 2015 Hengrui Medicine 600276.SS 9,432 O 38.9 49.0 26% 39.5 31.1 25.5 35.3 28.8 9.2 7.5 19.5% 18.9% 24.5% 1.3 Huahai 600521.SS 1,822 O 14.4 19.0 32% 36.4 26.4 19.9 21.0 20.8 3.8 3.5 11.9% 9.7% 35.3% 0.7 Salubris 002294.SZ 3,999 O 38.0 45.0 19% 23.7 19.5 16.0 23.3 18.8 7.9 6.6 26.5% 27.9% 21.5% 0.9 Humanw ell 600079.SS 2,346 N 27.5 29.0 5% 31.5 25.9 21.4 15.3 14.2 3.4 3.1 9.6% 9.8% 21.4% 1.2 9 stock average 32.7 25.7 20.7 23.8 20.7 6.1 5.2 16.9% 16.6% 25.7% 1.0
A Share TCM average 30.8 24.5 19.8 28.6 21.1 5.6 4.7 16.4% 17.3% 25.2% 1.1 A Share chemical drug average 31.5 24.3 19.8 27.9 21.6 6.6 5.4 17.9% 18.6% 24.8% 1.1 H Share pharma average 24.2 18.6 15.6 24.8 17.9 4.9 3.8 14.3% 16.0% 23.3% 1.1 Source: IBES consensus, Credit Suisse estimates for covered companies
China Chemical Drug Sector 23 19 January 2015 Initiate on four stocks Stock evaluation on the three criteria The table below shows how we evaluate the four stocks based on the three criteria mentioned above. Hengrui leads in both R&D and sales capacity. Huahai has the strongest commercialization capability in overseas market. In terms of attractive valuation, Salubris leads in the criteria.
Figure 58: Using three criteria to screen chemical drug companies Strong Attractive Capable R&D commercialization Overall ranking valuation capability Hengrui Sihuan CSPC Huahai Salubris Dawnrays x Sino Biopharm Luye
Humanwell
CMS
Fosun Pharma
- Highest, - Lowest. Overall ranking is valued by weighted average of three criteria (Capable R&D:35%, Strong commercialization capability: 35%, Attractive valuation: 30%) Note: The companies labelled with blue colour are initiated by us this time. Source: Credit Suisse research
China Chemical Drug Sector 24 19 January 2015
Our stock pecking order
Our top picks are Hengrui (TP Rmb49, 26% upside, OUTPERFORM) for leading R&D and sales capacity, Huahai (TP Rmb19, 32% upside, OUTPERFORM) for strong overseas potentials and Salubris (TP Rmb45, 19% upside, OUTPERFORM) for most attractive valuation. We also initiated Humanwell (TP Rmb29, 5% upside, NEUTRAL), to wait for a better entry time. Figure 59: Investment thesis and stock recommendations Company Ticker Rating Target price Upside/ Investment thesis (CNY) downside Hengrui 600276.SS OUTPERFORM 49 26% Hengrui Medicine is China's No.1 innovative drug company. In 2013, drug sales (top buy) from oncology and anaesthetic accounted 42% and 28% of its total revenues. Hengrui is the largest domestic oncology drug maker in China with 9.7% market share, only lagging behind Roche. We believe Hengrui can keep gaining market share with revenue CAGR of 20% between 2014 and 2016, leveraging by its hospital distribution franchise and new drug launch. Thanks to its high drug quality, Hengrui's oncology drug also has export potential with five ANDAs approved by the US FDA. Hengrui has the strongest R&D capacity among its peers. The company spends 9% of its sales on R&D with 16 patent drugs and 19 first to market generics, which have either completed or entered into clinical trials. The pipeline begins to bear fruits. We believe five potential blockbusters will drive its next five years' growth: (1) Apatinib for gastric cancer, ~Rmb2 bn potential; (2) Long-acting G- CSF for chemotherapy, ~Rmb1 bn; (3) Capecitabinen for breast cancer, Fondaparinux for anticoagulation and Caspofungin for antifungal at ~ Rmb500 mn, each. Our target price of Rmb49 consists of two parts, Rmb 36 per share for the existing business and pipeline plus Rmb 13 per share for the NPV of 5 upcoming blockbuster drugs. Catalysts: winning upcoming tenders and progress on its R&D pipelines. Risks: setbacks to drug tenders. Huahai 600521.SS OUTPERFORM 19 32% Huahai Pharma manufactures and sells active pharmaceutical ingredient (top buy) (API) and generics in both domestic and overseas markets. In 2013, API export, finished drug export and domestic finished drugs accounted for 63%, 20% and 16% of its total revenues, respectively. Huahai is among the largest API suppliers of Pril and Sartan globally. To tap the huge potential the US generics market offers, the company has successfully moved up the value chain by exporting finished drugs to the US rather than selling API only. As the first mover in China, Huahai now runs the most successful platform of generics export in China. In 2013, finished drug exports business recorded sales of Rmb450 mn, up 150% YoY. After comparing Huahai with its India-based peer, Dr Reddy’s, we believe the company is close to the turning point in terms of No. of ANDAs. We expect Huahai to get 12-14 new ANDAs (Abbreviated New Drug Application) with a potential blockbuster between 2015 and 2016, similar to what Dr Reddy’s experienced between 2006 and 2007 when it saw its sales shoot up and stock price surge. Thanks to the fast growing ANDAs, we forecast its generics exports business to grow 43%/42%/43% and contribute 27%/31%/37% to its total revenues in FY14/15/16. Our target price of Rmb19 is based on 35x 2015E P/E for its huge potential in the US generics market and scarcity in A-share universe in terms of drug exporting business. Catalyst: New ANDA approval. Risk: Uncertainty on API price.
China Chemical Drug Sector 25 19 January 2015
Company Ticker Rating Target price Upside/ Investment thesis (CNY) downside Salubris 002294.SZ OUTPERFORM 45 19% Salubris Pharmaceutical is a leading chemical drug manufacturer in the (top buy) cardiovascular area. In 2013, drug sales from cardiovascular accounted for 64% of its total revenue. Salubris is the niche leader in PCI (Percutaneous Coronary Intervention) related drugs. Its blockbuster Taijia (泰嘉, Clopidogrel) recorded sales of Rmb1.5 bn in 2013 with 36% market share. We believe Taijia will grow 25%/20%/20%YoY in 2014/15/16, driven by: (1) PCI surgery is likely to deliver a 10% CAGR thanks to increasing penetration rate and (2) Salubris's Taijia has a good chance to take market share from Sanofi's Plavix for better cost performance ratio. In 2012, Salubris acquired Allisartan Isoproxil, an innovative anti-hypertension drug with patent protection till 2026. We believe the product has the potential to be an Rmb1 bn worth blockbuster and to become the new growth driver. (1) It targets an Rmb20 bn market with five billion-worth blockbusters, (2) clinical data shows better efficacy compared to Losartan Potassium (氯沙坦钾) and (3) the product can leverage on Salubris' strong academic promotion team in cardiovascular drugs. Our target price is based on 23x 2015 P/E, implying 15% discount to the chemical sector average, which can be seen as safety margin for investors. Catalyst: Allisartan being included in the national RDL. Risk: Intensified competition of Clopidogrel. Humanwell 600079.SS NEUTRAL 29 5% Humanwell Healthcare is a leading anaesthetic drug manufacturer in China. Anaesthetic drugs accounted 76% of its total net profit in 2013. The company also embraced into IVD regent and blood product by M&A. The leading anaesthetic drug maker: Humanwell is the largest domestic anaesthetic drug manufacturer with 19% market share. Thanks to the policy barrier to restricted number of anaesthetic drug manufacturers, Humanwell is the oligopoly in three anaesthetic drugs with decent margin. We believe the segment can deliver 20%/19%/19% revenue growth in 2014/15/16, driven by: (1) increasing surgeries in China, (2) lower penetration and dose used per capita compared to other countries and (3) to launch new drugs to take more market share. Proven track records on M&A: Humanwell has done two major M&As in 2010 and 2012, Ruide (瑞德) Biopharm and Beijing Baron (巴瑞); the two companies achieved 102% and 28% net profit CAGR after being acquired. Given its strong integration ability, we believe M&A is one of the key growth drivers for Humanwell. Our target price is based on 27x 2015 P/E for its high barrier anaesthetic drug business, however current valuation leaves limited upside for investors. Major catalyst is potential M&As. Major risks: uncertainty of launching new drugs. Sihuan 0460.HK OUTPERFORM 6.6 24% Sihuan is an integrated pharma company with the largest cardio-cerebral (top buy) vascular (CCV) drug franchise in China. We like it for its large market cap and high earnings visibility. We expect Sihuan to benefit from its young drug portfolio: The drugs that were approved after 2009 are still in fast-growth stage and have not yet fully participated in last round of drug tenders. We expect them to deliver 40% revenue CAGR in 2014-16 and account for ~65% of 2016E sales. Sihuan will also benefit from the enrolment in Essential Drug List (EDL) of its key products thanks to the acceleration of drug tenders and government’s encouraging use of EDL drugs. Our new TP of HK$6.64 is based on 25x FY15E EPS. Catalyst is strong FY 14 results to be announced in mid-March and potential M&A. CSPC 1093.HK OUTPERFORM 8.6 26% CSPS pharma is one of the most innovative pharma in China with five potential (top buy) blockbusters and tens of new drugs in the pipeline. We expect its three cardiovascular drugs, NBP, Oulaining and Xuanning, to register 30+% revenue growth both in existing market and additional hospital access from new drug tenders in 2015/16. Its two oncology drugs, Duomeisu and Jinyouli, are both generics of global blockbusters, are expected to HK$250 mn/500 mn oncology drug sales targets for 2014/2015, guided by the management. We expect CSPC’s net margin to improve from 9.8% in 2013 to 17.5% in 2016, given the increasing percentage of innovative drugs with a higher margin. Our TP HK$8.61 is based on 28x 2015E EPS, implying 0.95xPEG (2014E-16E CAGR 29.6%). Catalysts include strong FY14 results and approval of new drug Bortezomib in 2015. Source: Company data, Credit Suisse research
China Chemical Drug Sector 26 19 January 2015
New drug tender is a key catalyst The last round of drug tendering took place during 2009–10; the progress in the current We expect the tender round was sluggish until October 2014, but it seems to have picked up pace now. The progress to accelerate National Health and Family Planning Commission (NHFPC) released new guidance on 23 based on recent policies October that requires all provinces to complete the new round of provincial non-EDL drug from the central government tenders by the end of June 2015. This policy has led to an acceleration of the nationwide tender process after a lag of three years. So far, only 27% of the provinces have completed the EDL tendering, 40% are in the process of completing, and 33% have not yet started. The situation is quite similar for non- EDL tendering: Only 30% provinces have completed, while 27% are still in the process of completing and 43% have not started yet. As we discussed above, the nationwide tendering process will accelerate, especially for non-EDL drugs, in 2015. Therefore, we expect 20/19 provinces to show more progress in EDL/non-EDL drug tenders in 2015.
Figure 60: Provincial progress of EDL/Non-EDL drug tender (updated to Jan-2015) 14
12
10
8
6
4
2 No. of No. provinces each in tender status
0 Completed In-progress Not started Completed In-progress Not started Non-EDL drug tender EDL drug tender
Source: The column shows the number of provinces in each tendering status. Source: CAPC, http://zb.sosoyy.com, Credit Suisse Research EDL and non-EDL tenders: Drug tenders are a mandatory bidding process for all pharma companies that want to sell drugs to public hospitals in China and are organised by provincial governments. Drug tenders in China are divided into two groups: EDL (520 drugs, 100 reimbursed) and non-EDL (including 2,151 RDL drugs, 70-100% reimbursed), and the two groups usually run tenders sequentially at similar times. We believe that new drugs approved in recent years need new drug tenders to penetrate into more hospitals, and thus companies with new drugs will benefit from such tenders. We analysed the potential upside from new drug tenders for our nine stocks, and the drugs analysed meet the following criteria: (1) approved after 2009, they missed the last round of drug tenders; (2) exclusive: can charge a decent ASP due to low competition; (3) in the similar therapeutic area of other existing drugs can leverage the existing distribution channel.
China Chemical Drug Sector 27 19 January 2015 Key investment risks Setbacks in tendering process Our revenue assumptions are mainly based on the provincial tendering process can be finished at the end of 2015. If tendering process is further delayed, the hospital penetration rate of newly-launched drugs will also be decelerated, leading to a slower revenue growth than expected. Anti-corruption We have concerns that the anti-corruption policies imposed by central/provincial government will reduce overall hospital prescription amount, thus to influence drug sales of the companies we are covering this time. Uncertainty on drug development For chemical drug manufacturers, approvals for new drugs especially for those FTM/patent ones will have great effects on future revenue growth. The uncertainties of new drug development mainly come from two aspects: (1) process of CFDA drug approvals will be slowed down and (2) efficacy of new drugs cannot be ensured until the end of clinical verification stage.
China Chemical Drug Sector 28 19 January 2015
Company initiations
China Chemical Drug Sector 29
19 January 2015 Asia Pacific/China Equity Research Major Pharmaceuticals (Healthcare CN (Asia))
Jiangsu Hengrui Medicine
(600276.SS / 600276 CH) Rating OUTPERFORM* Price (16 Jan 15, Rmb) 38.91 INITIATION
Target price (Rmb) 49.00¹ Upside/downside (%) 25.9 Mkt cap (Rmb mn) 58,520 (US$ 9,432) China's leading innovative drug company Enterprise value (Rmb mn) 55,787 Number of shares (mn) 1,503.99 ■ Initiating coverage with an OUTPERFORM rating and a Rmb49 target price, Free float (%) 75.6 implying 26% potential upside. Jiangsu Hengrui Medicine is China's leading 52-week price range 40.2 - 29.4 ADTO - 6M (US$ mn) 46.0 innovative drug firm. In 2013, drug sales from its oncology and anaesthesia
*Stock ratings are relative to the coverage universe in each segments accounted for 42% and 28%, respectively, of total revenue. analyst's or each team's respective sector. ¹Target price is for 12 months. ■ No.1 domestic oncology drug manufacturer. Hengrui is the largest
Research Analysts domestic oncology drug maker in China with a 9.7% market share, lagging Zen Zhou only Roche (a 14% market share). We believe Hengrui can continue gaining 852 2101 7640 market share at a 20% revenue CAGR over 2014-16, supported by its hospital [email protected] distribution franchise and new drug launches. Thanks to its superior drug Iris Wang quality, Hengrui's oncology drugs' segment also has export potential, with five 852 2101 7646 abbreviated new drug applications (ANDAs) approved by the US Food and [email protected] Drug Administration (FDA). ■ Strongest R&D among peers. Hengrui has the strongest R&D capacity among peers. The company spends 9% of its sales on R&D, and has 16 patented drugs and 19 first-to-market generics, which have either completed or entered clinical trials. We believe that its pipeline has started to bear fruit, with five potential blockbuster drugs likely driving its next five-year growth: (1) Apatinib for gastric cancer, ~Rmb2 bn potential; (2) Long-acting G-CSF for chemotherapy, ~Rmb1 bn; (3) Capecitabinen for breast cancer; (4) Fondaparinux for anticoagulation; and (5) Caspofungin for antifungal—about Rmb500 mn each for the last three. ■ Valuation. Our target price of Rmb49 consists of two parts: Rmb36 per share for the existing business and pipeline plus Rmb13 per share for the NPV of the five upcoming blockbuster drugs. Catalysts: Winning upcoming tenders and progress on its R&D pipelines. Risks: Setbacks to drug tenders.
Share price performance Financial and valuation metrics
Year 12/13A 12/14E 12/15E 12/16E Price (LHS) Rebased Rel (RHS) Revenue (Rmb mn) 6,203.1 7,364.5 9,313.8 11,567.6 60 160 EBITDA (Rmb mn) 1,596.5 1,938.5 2,412.6 2,935.0 50 140 EBIT (Rmb mn) 1,425.8 1,748.8 2,193.1 2,677.5 40 120 Net profit (Rmb mn) 1,238.1 1,483.3 1,882.4 2,298.2 30 100 EPS (CS adj.) (Rmb) 0.82 0.99 1.25 1.53 20 80 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a. 1.00 1.24 1.53 The price relative chart measures performance against the EPS growth (%) 14.9 19.8 26.9 22.1 Shanghai Shenzhen CSI300 index which closed at 3604.12 on P/E (x) 47.3 39.5 31.1 25.5 15/01/15 On 15/01/15 the spot exchange rate was Rmb6.2/US$1. Dividend yield (%) 0.23 0.25 0.32 0.39 EV/EBITDA (x) 35.3 28.8 22.8 18.5 Performance over 1M 3M 12M P/B (x) 9.2 7.5 6.1 5.0 Absolute (%) 3.8 1.7 12.5 — ROE (%) 21.4 20.9 21.7 21.7 Relative (%) -3.4 -45.9 -50.5 — Net debt/equity (%) net cash net cash net cash net cash
Source: Company data, Thomson Reuters, Credit Suisse estimates
China Chemical Drug Sector 30 19 January 2015 Focus charts
Figure 61: Oncology takes up the largest portion of Figure 62: Hengrui is the largest domestic oncology drug Hengrui's revenue, followed by Surgery anaesthesia (2013) player in China (1H14)
Cardiovascula Others 2013 Hengrui revenue 16% r 4% breakdown Anti-infective 5% 14% 4% 12% Electrolyte Fluid Infusion 10% 8% 8% Oncology Contrast 43% 6% Agent drugsegment 8% 4%
2% Surgery
Anesthesia 1H14market shareof domestic oncology 0% 28%
Source: Company data, Credit Suisse Source: IMS, Credit Suisse
Figure 63: Hengrui's anaesthetic drug sales growing fast Figure 64: Increasing R&D investment Rmb mn Rmb mn 4000 50% 600 12% 45% 3500 500 10% 40% 3000 35% 400 8% 2500 30% 300 6% 2000 25% 20%
1500 200 4% Hengrui's R&D Hengrui'sR&D cost 15% 1000 10% 100 2% 500
Sales Sales of Hengrui'sanesthetic drugs 5% 0 0% 0 0% 2010 2011 2012 2013 2010 2011 2012 2013 2014E 2015E 2016E R&D costs % of total drug sales (RHS) Anesthesia drug sales YoY (RHS)
Source: Menet, Company data, Credit Suisse estimates Source: Company data, Credit Suisse
Figure 65: Significant pipeline advantage versus peers Figure 66: Three criteria for stock evaluation
40 Strong No. of patent/FTM drugs on pipeline Attractive Overall Capable R&D commercializa 35 valuation ranking tion capability 30
25 Hengrui 20
15 Huahai
10 Salubris 5
0 Humanwell Hengrui Huahai Humanwell Salubris No. of patent drugs No. of FTM generics - Highest, - Lowest. Overall ranking is valued by weighted average of three criteria (Capable R&D:35%, Strong commercialization capability: 35%, Attractive valuation: 30%) Note: Drugs include those either completed or that have entered into Source: Credit Suisse estimates the clinical verification stage. Source: www.yaozhi.com, company data, Credit Suisse estimates
China Chemical Drug Sector 31 19 January 2015 Largest domestic oncology drug manufacturer Hengrui Medicine is one of China's largest chemical drug companies. In 2013, drug sales Drug sales from oncology from its oncology and anaesthesia segments accounted for 42% and 28%, respectively, of and anaesthesia segments its total revenue. The company also has exposure to the contrast agent, infusion, anti- accounted for 42% and infective and cardiovascular segments. 28%, respectively, of Hengrui's 2013 revenue Figure 67: Oncology takes up the largest portion of Hengrui's revenue, followed by Surgery anaesthesia (2013) Others 2013 Hengrui revenue breakdown Cardiovascular 4% 5% Anti-infective 4%
Electrolyte Fluid Infusion 8%
Oncology Contrast Agent 43% 8%
Surgery Anesthesia 28%
Source: Company data, Credit Suisse estimates The largest domestic player in oncology drugs According to data from Intercontinental Marketing Services (IMS), Hengrui is the largest Hengrui is the largest domestic oncology drug manufacturer in China with a 9.7% market share, lagging only domestic oncology drug Roche (a 14% market share). At the end of 2012, the National Development and Reform manufacturer in China, with Commission (NDRC) cut the price ceiling of oncology drugs, which suppressed growth in a 9.7% market share 2013. Growth, however, has been recovering since 2014. We believe that Hengrui can continue to gain market share to 10.1% in 2016, supported by its extensive hospital distribution franchise and upcoming new drugs.
China Chemical Drug Sector 32 19 January 2015
Figure 68: Hengrui is the largest domestic oncology drug Figure 69: Sales of Hengrui's oncology drugs recovered player in China (1H14) in 2014 16% Rmb mn 4500 25% 14% 4000
12% 3500 20%
10% 3000 15% 8% 2500
6% 2000
drugsegment 10% 4% 1500 1000 2% 5%
Sales Sales of Hengrui'soncology drugs 500
1H14market shareof domestic oncology 0% 0 0% 2010 2011 2012 2013 2014E 2015E 2016E Oncology drug sales YoY (RHS)
Source: IMS, Credit Suisse Note: At the end of 2012, the NDRC cut the price ceiling of oncology drugs which decelerated growth in 2013. Source: Menet, Company data, Credit Suisse estimates Oncology drug sales are mainly contributed by four drugs: Docetaxel, Oxaliplatin, Irinotecan and Letrozole. These four contributed significantly to sales of the oncology segment and total sales in 2013, at 75% and 32%, respectively.
Figure 70: Hengrui's major oncology drugs Major oncology drugs Chinese name Launch 2013 sales % as 2013 Type National National Provincial Existing year (Rmb mn) revenue EDL RDL RDL competitors Docetaxel for injection 注射用多西他赛 2002 954 15% FTM No B n.a. 27 Oxaliplatin for injection 注射用奥沙利铂 2003 470 8% FTM Yes B n.a. 27 Irinotecan Hydrochloride 注射用盐酸伊立替康 2003 288 5% FTM No B n.a. 4 for Injection Letrozole Tablets 来曲唑片 1999 263 4% FTM No B n.a. 2 Calcium Levofolinate for 注射用左亚叶酸钙 2003 124 2% FTM No No 4B 5 Injection Pegaspargase Injection 培门冬酶注射液 2009 63 1% FTM No No 1B 0 GimeracilandOteracilPoras 替吉奥胶囊 2011 190 3% Generic No B n.a. 3 sium Capsules (second) Capecitabinen Tablets 卡培他滨片 2013 n.a. n.a. FTM No B n.a. 4 APA imatinib 阿帕替尼片(胃癌) 2014 - - Patent No No No 0 Note: FTM means first to market generics Source: Menet, company data, Credit Suisse Docetaxel: Gaining market share Docetaxel is the first-line medication treatment for various cancers, such as breast and Hengrui is the first-to-market gastric cancer. Hengrui is the first-to-market generic manufacturer for this drug, and thus generic manufacturer for has a pricing advantage. According to data from Menet, a trusted domestic medicine Docetaxel, which is the first- information database, Hengrui is the largest player in the Docetaxel market, with ~40% line medication treatment for market share. The high drug quality and strong academic promotion team are key to breast cancer and gastric Hengrui succeeding with this drug. cancer From 2010-13, the tender price of Hengrui's Docetaxel was cut by 20% (from Rmb518 to Rmb431), while the products from other domestic companies suffered a 30% price erosion. Although the drug has 27 competitors so far, we believe Hengrui can maintain its market share and deliver stable growth, thanks to the better brand recognition among doctors.
China Chemical Drug Sector 33 19 January 2015
Figure 71: ASP and sales volume of Docetaxel Figure 72: Market share of Hengrui's Docetaxel Docetaxel for injection 2.5 550.0 Hengrui Docetaxel market share 45% 500.0 2.0 40% 450.0
1.5 400.0 35%
350.0 1.0 30%
300.0 25% Sales Sales terms in of volume 0.5 250.0 20% 0.0 200.0 2010 2011 2012 2013 15% Volume (mn), 0.5ml:20mg ASP (Rmb, RHS) 2012 2013 1H14
Source: Menet, Company data, Credit Suisse Source: Menet, Company data, Credit Suisse Oxaliplatin: Stable volume growth Oxaliplatin is used for the treatment of metastatic colorectal cancer. In 2012, Oxaliplatin Low possibility of harsh was first included in the new Essential Drug List (EDL). The price ceiling of Oxaliplatin was future price cut of Oxalipatin cut sharply by the NDRC at the end of 2012; as a result, Hengrui's tender price went down by 18% in 2013. However, we see stable volume growth and the low possibility of a harsh price cut in the future.
Figure 73: ASP and sales volume of Oxaliplatin Figure 74: Market share of Hengrui's Oxaliplatin Oxaliplatin for injection 1.0 800.0 Hengrui Oxaliplatin market share 35% 0.9 700.0 0.8 30% 0.7 600.0 25% 0.6 0.5 500.0 20% 0.4 400.0 15% 0.3
Sales Sales terms in of volume 0.2 10% 300.0 0.1 5% 0.0 200.0 2010 2011 2012 2013 0% Volume (mn), 100ml:0.1g ASP (Rmb, RHS) 2012 2013 1H14
Source: Menet, Company data, Credit Suisse Source: Menet, Company data, Credit Suisse Irinotecan and Letrozole: In mature stages with stable growth Irinotecan is used in the chemotherapy of metastatic colorectal cancer. As only four Irinotecan is applying for competitors have been approved, the competitive landscape is relatively good; as a result, more indications, such as the tender price of the product is stable. Hengrui is trying to apply for more indications— lung cancer, which we lung cancer—for the drugs, which we believe will drive future growth. believe will drive future growth Letrozole is used in the treatment of breast cancer. The product was launched in 1999 and has entered the mature stage. We expect stable future growth.
China Chemical Drug Sector 34 19 January 2015
Figure 75: ASP and sales volume of Irinotecan Figure 76: ASP and sales volume of Letrozole Irinotecan hydrochloride for injection Letrozole tablets 0.24 1350 2.5 180
0.23 160 1300 2.0 0.22 140 1250 1.5 0.21 120 0.20 1200 1.0 100
0.19 Sales Sales terms in of volume
Sales Sales terms in of volume 1150 0.5 0.18 80
0.17 1100 0.0 60 2010 2011 2012 2013 2010 2011 2012 2013 Volume (mn), 5ml:0.1g ASP (Rmb, RHS) Volume (mn), 2.5mgx10 ASP (Rmb, RHS)
Source: Menet, Company data, Credit Suisse Source: Menet, Company data, Credit Suisse Also leading in anaesthesia drug Hengrui launched its first anaesthesia drug in 2008. Leveraging on its strong brand and By 2013, Hengrui's extensive hospital sales network, the segment has become one of the major growth anaesthesia drug was No. 5 drivers for the company since 2010. By 2013, Hengrui's anaesthesia drug was No.5 in in China, with a 9.3% China, with a 9.3% market share. And Hengrui is one of the two domestic companies market share among the top-five players in the anaesthesia drug market.
Figure 77: Hengrui's anaesthesia drugs rank No.5 in terms of market share 35%
30%
25%
20%
15%
10%
5% Anesthetic drugdomestic market share
0% AstraZeneca Humanwell Pharm Fresenius Maruishi Pharm Hengrui
Note: Data is collected from hospitals of 16 sample cities. Source: Menet, Credit Suisse estimates In 2013, the company's anaesthesia drug segment recorded Rmb1.8 bn in sales, Hengrui's anaesthesia accounting for 28% of total revenue. The segment has delivered strong growth momentum segment has delivered in the past three years. If Menet's 1H14 data is to be believed, the segment will record strong growth momentum in another good year. the past three years
China Chemical Drug Sector 35 19 January 2015
Figure 78: Hengrui's anaesthetic drug sales growing fast Rmb mn 4000 50%
45% 3500 40% 3000 35% 2500 30%
2000 25%
20% 1500 15% 1000 10%
Sales Sales of Hengrui'sanesthetic drugs 500 5%
0 0% 2010 2011 2012 2013 2014E 2015E 2016E Anesthesia drug sales YoY (RHS)
Source: Menet, Company data, Credit Suisse estimates So far, three drugs contribute to the majority of sales of the company's anaesthesia drug segment. We believe all of the three products are in the early stages of their product life cycles and are likely to deliver a decent growth rate in the next three years. Moreover, thanks to the strong brand and the advantage of being the first-to-market generic, the pricing power of the three drugs should be superior.
Figure 79: Hengrui's major anaesthesia drugs Major anaesthesia drugs Chinese name Launch year 2013 sales (Rmb mn) Rank Cisatracurium Besilate for 注射用苯磺顺阿曲库铵 2012 630 FTM Injection Sevoflurane Inhalation 吸入用七氟烷 2008 464 FTM Dexmedetomidine 盐酸右美托咪定注射液 2009 373 FTM Hydrochloride Injection Butorphanol Tartrate Injection 酒石酸布托啡诺注射液 2009 n/a FTM Source: Company data, Credit Suisse research Export potential in the developed market Early in 2007, Hengrui upgraded its production line and underwent an FDA site So far, Hengrui has investigation, thus setting up a good platform for finished drug exports. So far, Hengrui has developed strong export acquired five ANDA approvals and registered 14 active (Drug Master Files [DMF] files with potential by acquiring five the FDA. All these approved ANDAs belong to oncology drugs, showing Hengrui's strong ANDA approvals and R&D capacity in the oncology segment. Recently, in a published DMF list, we noticed that registering 14 active DMFs Hengrui has shifted its research focus to surgery anaesthesia and blood system drugs, indicating a trend to explore other overseas drug areas.
Figure 80: FDA-approved ANDA products Generic name Chinese name Market size No of generic (US$ mn) approvals Cyclophosphamide for injection 注射用环磷酰胺 467 2 (Baxter and Jiangsu) Irinotecan Hydrochloride for Injection 注射用盐酸伊立替康 23 20 Letrozole Tablets 来曲唑片 27 15 Oxaliplatin for injection 注射用奥沙利铂 90 11 Gabapentin Capsule 加巴喷丁胶囊 250 >10 Source: www.fda.gov, Company data, Credit Suisse
China Chemical Drug Sector 36 19 January 2015
Figure 81: Hengrui's registered DMF files API name Chinese name TA Register year Desflurane 地氟烷 Surgery Anaesthesia 2014 Fondaparinux Sodium 磺达肝癸钠 Blood system 2013 Tolvaptan 托伐普坦 Blood system 2013 Cyclophosphamide 环磷酰胺 Oncology 2012 Dexmedetomidine Hydrochloride 盐酸右美托咪定 Surgery Anaesthesia 2012 Sevoflurane 七氟烷 Surgery Anaesthesia 2011 Cisatracurium Besylate 顺苯磺阿曲库铵 Surgery Anaesthesia 2011 Letrozole 来曲唑 Oncology 2010 Docetaxel Trihydrate 多西他赛 Oncology 2010 Gabapentin 加巴喷丁 Anti-epileptic 2008 Oxaliplatin 奥沙利铂 Oncology 2007 Irinotecan Hydrochloride 盐酸伊立替康 Oncology 2007 Ifosfamide 异环磷酰胺 Oncology 1995 Etoposide 依托泊苷 Oncology 1990 Source: www.fda.gov, Company data, Credit Suisse Cyclophosphamide injection has a huge potential Among the approved overseas drugs, Cyclophosphamide injections are most likely to The total market size of become the next blockbuster drug in the US market, in our view. Hengrui acquired FDA Cyclophosphamide injection approval for Cyclophosphamide in November 2014, breaking the long-term monopoly was recorded at US$467 mn position of Baxter over this drug. The total market size of the Cyclophosphamide injection in 2013; Hengrui can easily was US$467 mn in 2013, with a striking YoY growth rate of 56%. Given the huge price gain market share through discount over its competitors' drugs, Hengrui should easily gain market share from Baxter, price discount and in the meantime enjoy a high gross margin.
Figure 82: US market size of Cyclophosphamide injection Figure 83: Huge price discount of Hengrui's Cyclophosphamide USD, mn Rmb 500 100% 600 450 90% 400 80% 500 350 70% 300 60% 400 250 50% 200 40% 300 150 30% 200 100 20% 50 10%
US US market of size Cyclophosphamide 100 0 0% Price Cyclophosphamide of (Rmb/g) 2009 2010 2011 2012 2013 0 U.S. Market Size YoY (RHS) BAXTER Hengrui
Source: IMS, Credit Suisse Source: RxUSA, www.sosoyy.com, Credit Suisse
China Chemical Drug Sector 37 19 January 2015 Strongest R&D among peers Hengrui has the strongest R&D capacity among its peers. The company spends 9% of its The company spends 9% of sales on R&D, with 16 patent drugs and 19 first-to-market generics, which have completed its sales on R&D, with 16 or entered into clinical trials. The pipeline has begun to bear fruit, as we believe five patented drugs and 19 first- potential blockbuster drugs will drive its next five-year growth: (1) Apatinib for gastric to-market generics, which cancer, ~Rmb2 bn potential; (2) long-acting G-CSF for chemotherapy, ~Rmb1 bn; (3) have completed or entered Capecitabinen for breast cancer; (4) Fondaparinux for anticoagulation, ~Rmb500 mn and into clinical trials (5) Caspofungin for antifungal, ~Rmb500 mn. Commitment to R&D Hengrui is a well-known name in the Chinese pharmaceutical industry for its commitment to R&D. In 2013, the company spent Rmb563 mn on R&D, which is 9% of its total sales. In terms of the R&D expenditure as a percentage of total sales, Hengrui ranks No.1 among large pharma peers.
Figure 84: Increasing R&D investment Figure 85: Leading R&D investment among peers Rmb mn Rmb mn Comparison of R&D cost 600 12% 800 10.0% 700 9.0% 500 10% 8.0% 600 7.0% 500 400 8% 6.0% 400 5.0% 300 6% 300 4.0% 3.0% 200 2.0% 200 4% Hengrui's R&D Hengrui'sR&D cost 100 1.0% 0 0.0% 100 2%
0 0% 2010 2011 2012 2013 R&D costs % of total drug sales (RHS) 2013 R&D expenditure as % of drug sales (RHS)
Source: Company data, Credit Suisse Source: Company data, Credit Suisse Hengrui has a leading team of ~1,400 R&D staff, topping its peers. Many of the executives Hengrui has a leading team have rich experience in MNCs, bringing its R&D ideas and process closer to global standards. of ~1,400 R&D staff, topping its peers Figure 86: Hengrui has the largest R&D team
1600 Comparison of R&D staff 1400
1200
1000
800
600 No. of R&D of No. R&D staff 400
200
0
Source: Company data, Credit Suisse estimates
China Chemical Drug Sector 38 19 January 2015
Solid pipelines In terms of the quality of pipeline, Hengrui has significant advantage with 16 patented drugs and 19 first-to-market generics, which have completed or entered into clinical trials.
Figure 87: Hengrui shows significant pipeline advantage among peers
40 No. of patent/FTM drugs on pipeline 35
30
25
20
15
10
5
0 Hengrui Huahai Humanwell Salubris No. of patent drugs No. of FTM generics
Note: Here we counted the drugs which have either completed or entered into clinical verification stage. Source:www.yaozhi.com, Company data, Credit Suisse estimates For pipeline evaluation, we are typically focusing on type I and type III drugs. Type I drugs Type I drugs have 12-year have 12-year patent protection for novel chemical component, which are representative of patent protection for novel corporate R&D innovation capacity. Type III drugs are brand new to the domestic market, chemical component, while and possess huge profit opportunities by domestic infiltration. We list the definition of the Type III drugs are brand six types of drug applications below for reference. new to the domestic market
Figure 88: Definition of drug application code in China Class Definition Type 1 Patented drug, with novel chemical component, which has never been launched in overseas/domestic market Type 2 Adding new administration method to old chemical component, which has never been launched in overseas/domestic market Type 3 First-to-market generic, which has never been sold domestically Type 4 Innovated domestic on-market generics by adding minor chemical modifications Type 5 Innovated domestic on-market generics by changing dosage forms Type 6 Common generics which are identical to domestic on-market drugs Source: Centre for drug evaluation, SFDA , Credit Suisse Looking at its patented and FTM drugs, we identify a rich product portfolio in Hengrui’s Hengrui acquires a rich pipeline, including 35 drugs from 11 different therapeutic areas (TAs). Among these TAs, product portfolio, including Hengrui has its research focus on the oncology and endocrine drugs, suggested by the 35 drugs from 11 different number of patented drugs. In the oncology segment, the blockbuster biologics, 19K, is therapeutic areas (TAs) expected to achieve SFDA approval at the end of 2014. For drugs undergoing clinical verification, Apatinib has launched Phase III clinical trial Apatinib launched Phase III since 2013 for new indication, liver cancer. Besides, we estimate 5-7 of Hengrui’s patented clinical trial in 2013 for a oncology drugs will receive SFDA manufacture certificates within 2016/17/18. In addition new indication, liver cancer to oncology, we notice that Hengrui is strategically entering into diabetes area. Now four patented diabetes drugs are undergoing clinical verification and are expected to launch before 2019.
China Chemical Drug Sector 39 19 January 2015
Figure 89: Rich product portfolio pipeline Generic name Chinese name TA Application stage Application year Rank Oncology PEG-rhG-CSF 聚乙二醇重组人粒细胞 Oncology Apply for production 2014 Patent 刺激因子 （19K） Ondansetron Mouth soluble membrane 昂丹司琼口溶膜 Oncology Apply for production 2016 FTM Gefitinib tablets 吉非替尼片 Oncology Apply for production 2016 FTM APA imatinib (Liver Cancer) 阿帕替尼片(肝癌) Oncology Clinical verification 2017 Patent Fahmi imatinib 法米替尼片 Oncology Clinical verification 2017 Patent Vismodegib-analogue tablets 环咪德吉片 Oncology Clinical verification 2018 Patent HAO472 injection 注射用 HAO472 Oncology Clinical verification 2018 Patent Vismodegib-analogue tablets 乌咪德吉片 Oncology Clinical verification 2018 Patent Maleate azoletinib tablets 马来酸吡咯替尼片 Oncology Clinical verification 2017 Patent Hetrombopag ethanolamine tablets 海曲泊帕乙醇胺片 Oncology Clinical verification 2017 Patent Temozolomide injection 注射用替莫唑胺 Oncology Clinical verification 2019 FTM Felotaxel injection 非洛他赛注射液 Oncology Clinical verification 2016 Patent Tamibarotene tablets 他米巴罗汀片 Oncology Clinical verification 2016 FTM Endocrine Paricalcitol Injection 帕立骨化醇注射液 Endocrine Apply for production 2015 FTM Retagliptin Metformin tablets 瑞格列汀二甲双胍片 Endocrine Clinical verification 2018 Patent Fasiglifam tablets 呋格列泛片 Endocrine Clinical verification 2018 Patent Proline hengaliflozin tablets 脯氨酸恒格列净片 Endocrine Clinical verification 2018 Patent Retagliptin Phosphate tablets 磷酸瑞格列汀片 Endocrine Clinical verification 2016 Patent Cardiovascular Ivabradine Hydrochloride Tablets 盐酸伊伐布雷定片 Cardiovascular Apply for production 2015 FTM Dronedarone Hydrochloride Tablets 盐酸决奈达隆片 Cardiovascular Apply for production 2015 FTM Azilsartan tablets 阿齐沙坦片 Cardiovascular Clinical verification 2017 FTM Anti-infective Caspofungin Acetate for Injection 注射用醋酸卡泊芬净 Anti-infective Apply for production 2015 FTM Caderofloxacin glucose injection 盐酸卡屈沙星葡萄糖注 Anti-infective Apply for production 2015 Patent 射液 Peramivir sodium chloride injection 帕拉米韦三水合物氯化 Anti-infective Clinical verification 2017 FTM 钠注射液 Blood system Tolvaptan Tablets 托伐普坦片 Blood system Apply for production 2015 FTM Fondaparinux sodium injection 磺达肝癸钠注射液 Blood system Apply for production 2015 FTM Contrast Agent Gadavist injection 钆布醇注射液 Contrast Agent Apply for production 2015 FTM Gadoterate meglumine injection 钆特酸葡胺注射液 Contrast Agent Clinical verification 2017 FTM Reproductive system Tadalafil tablets 他达拉非片 Reproductive Apply for production 2015 FTM system Dutasteride soft capsule 度他雄胺软胶囊 Reproductive Apply for production 2015 FTM system Surgery Anaesthesia Ketamine hydrochloride injection 盐酸右氯胺酮注射液 Surgery Apply for production 2015 FTM Anaesthesia Toluenesulfonate raymamidazolam 注射用甲苯磺酸瑞马唑 Surgery Clinical verification 2017 Patent injection 仑 Anaesthesia Muscle and skeleton Clorindocoxib tablets 氯吲昔布片 Muscle and Clinical verification 2016 Patent skeleton Respiratory Erdosteine ambroxol tablets 厄多司坦氨溴索片 Respiratory Clinical verification 2016 FTM Sensory system Bimatoprost ophthalmic solution 贝美前列素滴眼液 Sensory system Apply for production 2015 FTM Note: The table only includes new drug application of type 1.1 and 3.1 new drug application. Source: Company data, Credit Suisse estimates
China Chemical Drug Sector 40 19 January 2015
Five blockbuster drugs poised for take-off We believe Hengrui has five potential blockbuster drugs that are likely to drive its near- term growth. Three of them are patent drugs, which we believe together have market potential of Rmb3.5 bn, while the other two have Rmb500 mn market potential each, according to our estimates. Given the current status of application, we believe the five new drugs can catch up this round of drug tenders, which is critical for a drug to increase penetration in the hospital channel.
Figure 90: Potential blockbusters to be take-off Drug name Chinese name TA (Estimated) Drug type Estimated peak No. of approval year market size in Competitor China(Rmb mn) Capecitabine tablets 卡培他滨片 Oncology 2013 FTM ~500 3 Apatinib mesylate tablets 甲磺酸阿帕替尼片 Oncology 2014 Patent ~2000 0 PEG-rhG-CSF (19K) 聚乙二醇重组人粒细胞 Oncology 2015E Patent ~1000 0 刺激因子 Caspofungin acetate for Injection 注射用醋酸卡泊芬净 Anti-infective 2015E FTM ~500 1 Fondaparinux sodium injection 磺达肝癸钠注射液 Blood system 2015E FTM ~500 1 Source: Company data, Credit Suisse estimates Apatinib Apatinib was approved in 2014 for the treatment of advanced gastric cancer. The drug is Thanks to the exclusive specially branded as the only third-line anti-gastric cancer drug on a global level—used indication, we estimate typically after the failure of second-line treatment. In terms of clinical efficacy, Apatinib can Apatinib will reach a total significantly improve the median survive time (mOS) by 39% (195 vs 140 days) and market size of Rmb2 bn median progression-free survival time (mPFS) by 47% (78 vs 53 days). In 2013, Apatinib clinical phase III trial was launched for another indication, liver cancer, and was expected to be completed by 2015. In China, there are around ~500,000 additional gastric cancer cases and ~400,000 liver cancer cases every year, while the monthly cost of traditional Tinib-type drugs is ~Rmb10,000. Thanks to the exclusive indication, we expect a price premium brought by limited competition faced by Apatinib. Overall speaking, we expect Apatinib to reach a total market size of Rmb2 bn, with Rmb1 bn for both indications—gastric cancer and liver cancer. PEG-rhG-CSF (19K) Long-acting G-CSF (19K) is another independently developed patent drug; its function is to Given the superior clinical promote white blood cell production after chemotherapy. Long-acting G-CSF is originated by efficacy, we estimate the Amgen under the Neulasta brand name. The only domestic manufacturer of long-acting G- future market size of CSF is CSPC, while other companies are mainly focused on manufacturing ordinary (short- Hengrui's G-CSF will reach acting) G-CSF. The long-acting G-CSF is more convenient than ordinary ones because only Rmb1 bn one injection is needed for each round of chemotherapy. Therefore, we expect the long- acting G-CSF to increase its market share over ordinary ones in the near future. In addition, given the clinical efficacy of Hengrui's G-CSF is superior to its sole competitor, CSPC, we expect the future market size of Hengrui's G-CSF to reach Rmb1 bn. Capecitabinen Hengrui's capecitabinen was approved by SFDA in 2013 for the treatment of breast cancer, Considering huge market colorectal cancer and gastric cancer. Before 2013, the whole capecitabinen market was size and lower competition, under the control of its originator, Roche, with 2013 domestic sales of Rmb2 bn. Later, we expect capecitabinen Hengrui got the first-to-market (FTM) generic rights. In addition to Roche, now there are sales to reach Rmb500 mn only two domestically approved manufacturers, Qilu Pharm and Zhengda Tianqing, which in the near future acquired approvals in 2014. Considering a huge market size, as well as low competition, we expect sales of capecitabinen to reach Rmb500 mn in the near future.
China Chemical Drug Sector 41 19 January 2015
Fondaparinux Fondaparinux is a blockbuster anticoagulation drug, first manufactured by GSK in 2011. The high entry barrier of Compared with heparin, Fondaparinux has advantages in terms of specificity, absorbability, Fondaparinux ensures a as well as safety. Theoretically, it can substitute all heparin drugs in clinical application. market size of ~Rmb500 mn Domestic sales of GSK's Fondaparinux reached Rmb2 bn in 2013, implying a huge market size. Hengrui is expected to achieve FTM approval for Fondaparinux in 2015. The high entry barrier, which is caused by production process complexity, prevents most of the manufacturers from embracing this drug. Therefore, we estimate a market size of ~Rmb500 mn for Hengrui's Fondaparinux. Caspofungin Caspofungin is commonly used as an antifungal drug. As a novel subtype of antifungal Due to a rigorous and drugs, Fungin-series drugs show higher bio-selectivity and lower drug resistance due to complicated production their unique mechanism of inhibiting fungi cell wall synthesis. The originator of process, Hengrui has Caspofungin is Merck, which achieved domestic sales of ~Rmb1.5 bn in 2013. Due to a become the only domestic rigorous and complicated production process, Hengrui becomes the only domestic applicant to manufacture applicant for manufacturing Caspofungin, which is likely to be approved in 2015. Taken Caspofungin together, the future market size of Caspofungin is estimated to be ~Rmb500 mn.
China Chemical Drug Sector 42 19 January 2015 Valuation Our target price of Rmb49 consists of two parts, Rmb36 per share for the existing business and pipeline and Rmb13 per share for the NPV of five upcoming blockbuster drugs. We applied 30x P/E to Hengrui's adjusted 2015E EPS, Rmb1.2, which was calculated by excluding the net profit from five upcoming blockbuster drugs. The PE mutiply implies 10% premium over sector average for its leading distribution and R&D platform. In addition, we add NPV per share of Rmb13 which is derived from Hengrui's five blockbuster drugs to reflect its value of near-term growth.
Figure 91: The NPV of five upcoming blockbusters DCF Valuation Units 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E Total Sales Rmb mn 80 350 1,100 1,750 2,555 3,150 3,679 4,220 4,371 4,458 4,500 Apatinib Rmb mn 0 200 500 750 1,125 1,350 1,620 1,944 2,000 2,000 2,000 19K Rmb mn 0 0 100 200 400 600 720 792 871 958 1,000 Capecitabinen Rmb mn 80 100 200 300 390 468 500 500 500 500 500 Caspofungin Rmb mn 0 50 200 300 360 396 436 500 500 500 500 Fondaparinux Rmb mn 0 0 100 200 280 336 403 484 500 500 500 - Manufacture&marketing cost Rmb mn 48 210 660 1,050 1,533 1,890 2,207 2,532 2,623 2,675 2,700 Taxe rate % 15% 15% 15% 15% 15% 15% 15% 15% 15% 15% 15% Free Cash Flow Rmb mn 27 119 374 595 869 1,071 1,251 1,435 1,486 1,516 1,530 Perpertual growth rate % 1% Discount Rate % 6.8% Number of Share mn 1,504 NPV for CashFlow (2014-2024E) Rmb mn 6,210 NPV for Perpectual CashFlow Rmb mn 13,657 Total NPV Rmb mn 19,867 Equity premium price Rmb 13.21
Source: Company data, Wind, Credit Suisse estimates The stock is now trading at a discount to its five-year average 12M forward P/E; however, the fundamentals of Hengrui are improving after its pipeline gap between 2011 and 2013.
Figure 92: Hengrui's 12M forward P/E band
Hengrui's 12M forward P/E 55
50
45 +2std=45.0
40 +1std=39.5
35 mean=34.0
30 -1std=28.5
25 -2std=23.0 20 '09 '10 '11 '12 '13 '14
Source: Bloomberg, Credit Suisse estimates A mean reversion story Hengrui's R&D ability is well above its peers; as a result, the company has always traded at a premium to the healthcare sector. Even during its pipeline gap between 2012 and 2013, the premium only narrowed to the current level for two short periods. We believe the P/E premium is at the bottom of its five-year average P/E premium over healthcare sector.
China Chemical Drug Sector 43 19 January 2015
Figure 93: Hengrui is trading below its five-year average P/E premium over healthcare sector
50%
40%
30% 5Y average: 24%
20%
10%
0% Dec-09 May-10 Oct-10 Mar-11 Aug-11 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14
PE premium 5-Y average
Source: Go-goal, Credit Suisse Three criteria stock evaluation
Figure 94: Three criteria for stock evaluation Strong Capable R&D commercialization Attractive valuation Overall ranking capability
Hengrui
Huahai
Salubris
Humanwell - Highest, - Lowest. Overall ranking is valued by weighted average of three criteria (Capable R&D:35%, Strong commercialization capability: 35%, Attractive valuation: 30%)
Source: Credit Suisse Capable R&D: In terms of the quality of the pipeline of products, Hengrui has significant advantage with 16 patented drugs and 19 first-to-market generics, which have completed or entered into clinical trials. We estimate five to seven of Hengrui’s patent oncology drugs will receive SFDA approvals within 2016/17/18, while four patented diabetes drugs are expected to launch before 2019. Thanks to its strong R&D team and determination to conquer exclusive drugs, Hengrui is likely to become the first Pfizer-like innovative drug manufacturer in China. Strong commercialization capability: Hengrui has the largest sales team among peers to cover its rich product mix in various therapeutic areas. Besides, marketing and distribution expense accounted for as high as 38% of Hengrui's total revenue in 2013, demonstrating a high value put on hospital penetration, as well as academic promotion. In terms of overseas potential, Hengrui has acquired five ANDA approvals and registered 14 active DMF files since its first launch in 2007. Recently, Hengrui got FDA approval for Cyclophosphamide injection, breaking the long-term monopoly position of Baxter over this drug.
China Chemical Drug Sector 44 19 January 2015
Attractive valuation: Our target price of Rmb 46 consists of two parts, Rmb 33 per share for the existing business and pipeline and Rmb 13 per share for the NPV of 5 upcoming blockbuster drugs. Catalysts New products to win the upcoming tenders will be the major catalysts. The R&D progress of potential blockbusters in its pipeline can be seen as a catalyst as well. Investment risks Setbacks in tendering process Our revenue assumptions are mainly based on the provincial tendering process being completed at the end of 2015. If the tendering is further delayed, Hengrui could post slower revenue growth than expected. Failure in clinical trials Hengrui has a strong R&D pipeline, which includes 16 patented drugs—far ahead of any other domestic drug manufacturers. However, during the clinical verification stage, the failure rate of innovative patented drugs is also higher than common generics. Therefore, the failure of its major pipeline products should be a risk.
China Chemical Drug Sector 45
19 January 2015 Asia Pacific/China Equity Research Major Pharmaceuticals (Healthcare CN (Asia))
Huahai Pharmaceutical
(600521.SS / 600521 CH) Rating OUTPERFORM* Price (16 Jan 15, Rmb) 14.39 INITIATION
Target price (Rmb) 19.00¹ Market cap. (Rmbmn) 11,305.55 Yr avg. mthly trading (Rmbmn) 2,080 The flagship of generics exports Last month's trading (Rmbmn) 1,663 Projected return: ■ Initiating coverage with an OUTPERFORM rating and a target price of Capital gain (%) 32.0 Rmb19, implying 32% potential upside. Huahai Pharma manufactures Dividend yield (net %) 1.3 and sells active pharmaceutical ingredient (API) and generics in both Total return (%) 33.4 domestic and overseas markets. In 2013, API export, finished drug export *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. and domestic finished drugs accounted for 63%, 20% and 16% of its total ¹Target price is for 12 months. revenues, respectively.
Research Analysts ■ A flagship for API and finished drugs export. Huahai is among the largest Zen Zhou API suppliers of Pril and Sartan globally. To tap the huge potential that the 852 2101 7640 US generics market offers, the company has successfully moved up the [email protected] value chain by exporting finished drugs to the US rather than selling API Iris Wang only. As the first mover in China, Huahai now runs the most successful 852 2101 7646 [email protected] platform of generics export in China. In 2013, finished drug exports business recorded sales of Rmb450 mn, up 150% YoY. ■ Close to the turning point as ANDAs boom. After comparing Huahai with its India-based peer, Dr Reddy’s, we believe the company is close to the turning point in terms of no. of ANDAs (Abbreviated New Drug Application). We expect Huahai to get 12-14 new ANDAs with a potential blockbuster between 2015 and 2016, similar to what Dr Reddy’s experienced between 2006 and 2007 when it saw its sales shoot up and stock price surge. Thanks to the fast growing ANDAs, we forecast its generics exports business to grow 43%/42%/43% and contribute 27%/31%/37% to its total revenues in FY14/15/16. ■ Valuation. Our target price of Rmb19 is based on 35x 2015E P/E for its huge potential in the US generics market and scarcity in A-share universe in terms of drug exporting business. Catalyst: New ANDA approval. Risks: Uncertainty on API price.
Share price performance Financial and valuation metrics
Year 12/13A 12/14E 12/15E 12/16E Price (LHS) Rebased Rel (RHS) Revenue (Rmb mn) 2,296.4 2,409.8 2,975.3 3,552.7 40 180 EBITDA (Rmb mn) 539.3 536.5 680.0 853.8 30 EBIT (Rmb mn) 405.0 382.9 512.8 673.2 20 130 Net profit (Rmb mn) 359.2 310.6 428.6 569.0 10 EPS (CS adj.) (Rmb) 0.46 0.40 0.55 0.72 0 80 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a. 0.46 0.60 0.71 The price relative chart measures performance against the EPS growth (%) 5.3 -13.5 38.0 32.8 Shanghai Shenzhen CSI300 index which closed at 3604.12 on P/E (x) 30.9 35.8 25.9 19.5 15/01/15 On 15/01/15 the spot exchange rate was Rmb6.2/US$1 Dividend yield (%) 1.4 1.0 1.3 1.8 EV/EBITDA (x) 20.7 20.4 16.2 12.7 Performance over 1M 3M 12M P/B (x) 3.7 3.5 3.2 2.9 Absolute (%) -9.8 9.4 7.8 — ROE (%) 14.5 10.0 12.8 15.5
Relative (%) -17.1 -38.3 -55.2 —
Net debt/equity (%) 0.99 net cash net cash net cash Source: Company data, Thomson Reuters, Credit Suisse estimates.
China Chemical Drug Sector 46 19 January 2015 Focus charts
Figure 95: Revenue breakdown of Huahai’s drug Figure 96: Fast growth of US generic drugs market manufacturing business (2013) USD bn 450
400 Finished drug (domestic) 350 13% 16% 300
250 Finished drug 200 (export) 20% API (export) 64% 150 100
Market of size generic drugs 50
0 2005 U.S. Generic 2010 U.S. Generic 2015E U.S. 2013 China drug market drug market Generic drug Chemical drug market market Source: Company data, Credit Suisse estimates Source: IMS 2011 market prognosis, Wind, Credit Suisse estimates
Figure 97: Generics (finished drugs) export to US Figure 98: Huahai leads in No. of ANDA constitutes a large portion of Huahai’s revenue (2013) 25% 18 Generics (finished drug) export as % of total manufacturing revenue 16 20% 14
12 15% 10
10% 8
6 No. of Certificated ANDA CertificatedNo.of 5% 4
2 0% Huahai Humanwell Hengrui 0 Huahai Humanwell Hengrui Note: Company data, Credit Suisse research Source: www.fda.gov, Credit Suisse estimates
Figure 99: We estimate finished drugs will account for a Figure 100: Three criteria for stock evaluation higher percentage of Huahai's export revenue Rmb mn Revenue from export business Strong 3000 60% Attractive Overall Capable R&D commercializa valuation ranking tion capability 2500 50%
40% 2000 Hengrui 30% 1500 Huahai 20% 1000 10% Salubris
500 0% Humanwell 0 -10% 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E - Highest, - Lowest. Overall ranking is valued by weighted average of three API exported Finished drug exported YoY (RHS) criteria (Capable R&D:35%, Strong commercialization capability: 35%, Attractive valuation: 30%) Source: Company data, Credit Suisse estimates Source: Credit Suisse research
China Chemical Drug Sector 47 19 January 2015
Zhejiang Huahai Pharmaceutical Co Ltd 600521.SS / 600521 CH Price (16 Jan 15): Rmb14.39, Rating:: OUTPERFORM, Target Price: Rmb19.00, Analyst: Zen Zhou Target price scenario Key earnings drivers 12/13A 12/14E 12/15E 12/16E Scenario TP %Up/Dwn Assumptions Finished drug export YoY 45.5 38.8 42.8 28.6 Upside 20.90 45.24 2015 net profit increases by 50% YoY Domestic finished drug 30.5 25.9 25.3 20.0 Central Case 19.00 32.04 2015 net profit increases by 38% YoY YoY — — — — Downside 16.15 12.23 2015 net profit increases by 25% YoY — — — —
— — — — Income statement (Rmb mn) 12/13A 12/14E 12/15E 12/16E Per share data 12/13A 12/14E 12/15E 12/16E Sales revenue 2,296 2,410 2,975 3,553 Shares (wtd avg.) (mn) 785.3 785.3 785.3 785.3 Cost of goods sold 1,289 1,337 1,640 1,897 EPS (Credit Suisse) 0.46 0.40 0.55 0.72 SG&A 573.2 659.9 785.0 937.4 DPS(Rmb) (Rmb) 0.20 0.14 0.19 0.25 Other operating exp./(inc.) (105.4) (123.2) (129.7) (135.9) BVPS (Rmb) 3.83 4.09 4.44 4.91 EBITDA 539.3 536.5 680.0 853.8 Operating CFPS (Rmb) 0.62 0.60 0.51 0.76 Depreciation & amortisation 134.3 153.6 167.2 180.6 Key ratios and 12/13A 12/14E 12/15E 12/16E EBIT 405.0 382.9 512.8 673.2 valuation Net interest expense/(inc.) 36.9 32.4 26.6 25.3 Growth(%) Non-operating inc./(exp.) 44.2 14.9 17.9 21.5 Sales revenue 14.0 4.9 23.5 19.4 Associates/JV — — — — EBIT 5.8 (5.4) 33.9 31.3 Recurring PBT 412.3 365.4 504.2 669.4 Net profit 5.3 (13.5) 38.0 32.8 Exceptionals/extraordinaries — — — — EPS 5.3 (13.5) 38.0 32.8 Taxes 48.9 51.2 70.6 93.7 Margins (%) Profit after tax 363.4 314.3 433.6 575.7 EBITDA 23.5 22.3 22.9 24.0 Other after tax income — — — — EBIT 17.6 15.9 17.2 18.9 Minority interests 4.3 3.7 5.0 6.7 Pre-tax profit 18.0 15.2 16.9 18.8 Preferred dividends — — — — Net profit 15.6 12.9 14.4 16.0 Reported net profit 359.2 310.6 428.6 569.0 Valuation metrics (x) Analyst adjustments — — — — P/E 31.5 36.4 26.4 19.9 Net profit (Credit Suisse) 359.2 310.6 428.6 569.0 P/B 3.76 3.52 3.24 2.93 Cash flow (Rmb mn) 12/13A 12/14E 12/15E 12/16E Dividend yield (%) 1.39 0.96 1.33 1.76 EBIT 405.0 382.9 512.8 673.2 P/CF 23.0 23.9 28.3 18.9 Net interest 36.9 45.1 39.4 39.9 EV/sales 4.94 4.63 3.76 3.11 Tax paid — — — — EV/EBITDA 21.0 20.8 16.4 12.9 Working capital (686.5) 260.7 (240.6) (197.1) EV/EBIT 28.0 29.1 21.8 16.4 Other cash & non-cash items 734.9 (215.1) 87.9 83.1 ROE analysis (%) Operating cash flow 490.3 473.7 399.6 599.1 ROE 14.5 10.0 12.8 15.5 Capex (466.2) (457.0) (255.0) (259.0) ROIC 13.7 10.8 13.7 16.5 Free cash flow to the firm 24.1 16.6 144.6 340.1 Asset turnover (x) 0.51 0.54 0.60 0.66 Disposals of fixed assets — — — — Interest burden (x) 1.02 0.95 0.98 0.99 Acquisitions — — — — Tax burden (x) 0.88 0.86 0.86 0.86 Divestments — — — — Financial leverage (x) 1.48 1.39 1.40 1.39 Associate investments — — — — Credit ratios Other investment/(outflows) (660.4) 583.4 44.1 21.1 Net debt/equity (%) 0.99 (4.71) (3.65) (6.47) Investing cash flow (1,127) 126 (211) (238) Net debt/EBITDA (x) 0.06 (0.28) (0.19) (0.29) Equity raised 821.2 — — — Interest cover (x) 11.0 11.8 19.3 26.6 Dividends paid (109.5) (108.7) (150.0) (199.1) Net borrowings 199.0 (222.0) 29.9 (11.9) Source: Company data, our estimates Other financing cash flow 36.6 (9.4) (62.7) (38.7) Financing cash flow 947.3 (340.1) (182.8) (249.8) 12MF P/E multiple Total cash flow 311.0 259.9 5.9 111.4 50 Adjustments (13.2) — — — 45 Net change in cash 297.8 259.9 5.9 111.4 40 Balance sheet (Rmb mn) 12/13A 12/14E 12/15E 12/16E 35 Cash & cash equivalents 533.2 793.1 799.0 910.4 30 Current receivables 552.1 581.0 774.4 924.7 25 Inventories 786 769 966 1,133 20 Other current assets 727.7 159.9 141.9 147.0 15 10 Current assets 2,599 2,303 2,681 3,115 5 Property, plant & equip. 1,053 1,181 1,193 1,190 0 Investments — — — — 2010 2011 2012 2013 2014 2015 Intangibles 237.4 261.1 287.2 315.9 Other non-current assets 576.4 725.7 760.4 797.6 Total assets 4,466 4,470 4,922 5,419 12MF P/B multiple Accounts payable 357.7 370.9 455.0 526.5 Short-term debt 519.9 597.9 627.8 659.1 8 Current provisions — — — — 7 Other current liabilities 482.5 190.2 243.7 304.7 6 Current liabilities 1,360 1,159 1,326 1,490 5 Long-term debt 43.3 43.3 43.3 — 4 Non-current provisions — — — — Other non-current liab. 43.4 43.4 43.4 43.4 3 Total liabilities 1,447 1,246 1,413 1,534 2 Shareholders' equity 3,007 3,209 3,487 3,857 1 Minority interests 12.3 16.0 21.0 27.7 0 Total liabilities & equity 4,466 4,470 4,922 5,419 2010 2011 2012 2013 2014 2015
Source: IBES
China Chemical Drug Sector 48 19 January 2015 The flagship of drug export Huahai Pharma manufactures and sells active pharmaceutical ingredient (API) and finished drugs in both domestic and overseas markets; in recent years it has moved deeper into the more profitable finished drugs business, whose contribution increased to 36% of its total revenue in 2013 from 11% in 2011.
Figure 101: Revenue breakdown of Huahai drug manufacturing business (2013)
Finished drug (domestic) 16%
Finished drug (export) 20% API (export) 64%
Source: Company data, Credit Suisse estimates Large US market potential for China-made drugs The US generics market is staring at a large opportunity thanks to the budget deficit and the upcoming patent cliff. In 2013, US generics recorded sales of US$330 bn with 13% YoY growth. According to IMS estimates, the US generics market should grow to US$421 bn in 2015, a 13% CAGR, which is almost five times China's overall chemical drugs market.
Figure 102: Fast growth of US generic drugs market USD bn 450
400
350 300 13% 250
200
150
Market size of of generic drugs sizeMarket 100
50
0 2005 U.S. Generic drug 2010 U.S. Generic drug 2015E U.S. Generic drug 2013 China Chemical drug market market market market
Source: IMS 2011 market prognosis, Wind, Credit Suisse estimates
China Chemical Drug Sector 49 19 January 2015
Chinese companies starting to move up the value chain Chinese companies are among the major suppliers of active pharmaceutical ingredient (API) in the global market with more than 20% market share. However, they have significantly lagged their Indian peers in the evolving trend of exporting generics to the developed drug market.
Figure 103: US market accounts for >50% of profits for Indian generics players
80% US market as % of sales/profits 70%
60%
50%
40%
30%
20%
10%
0% Sun Lupin DRL Glenmark Cadila Torrent Cipla
US as % of sales US as % of profits
Source: Company data, Credit Suisse estimates However, we see several Chinese pharmas beginning to reap the fruits of their efforts to embrace the developed drugs market with increasing ANDA applications. ANDA is reviewed and approved by the FDA for launching a generic drug in the US market. According to the number of ANDAs under consideration, we believe it's highly possible Made-In-China sees a boost in the US generics market.
Figure 104: Huahai leads in exploring overseas drug market among domestic peers Company Certificated ANDA ANDA under consideration Approved DMF Hengrui 5 6 14 Huahai 17 8 50 Humanwell 6 n.a. 7 Salubris 0 0 0 Source: www.fda.gov, Credit Suisse A shorter launch period in the US According to our research, a typical ANDA takes about 22~27 months for review before it’s finally approved by the FDA, which is much faster than the drug approval process in China. The shorter duration is mainly a result of the fact that the FDA only requires a ~15M bioequivance review instead of a full clinical verification. In terms of market launch, generics approved in the US only need ~3 months to start generating income while it takes ~3 years for a drug to generate sales after being approved in China due to uncertainty for the drug tendering and adjustment of reimbursement drug list.
China Chemical Drug Sector 50 19 January 2015
Figure 105: A snapshot of drug launch process in the US market
FDA ANDA approval schedule
Bioequivalence ANDA Intergrity /Chemical FDA final Market launch application Inspection of FDA GMP review and of approved /Labeling Inspection submit application files review approval drugs
1 M 2 M 12~16 M 4~5 M 3 M 3 M
Source: www.fda.gov, Credit Suisse estimates Several domestic drug manufacturers have already stepped into the US drugs market in the past three years. Among them, Huahai leads in both number of FDA-certified drugs and ANDA applications. Lamotrigine, which was launched in 2012 in cooperation with Par Pharma, was a great success in the US market with 2013 sales of Rmb1.5 bn. Overseas drug sales accounted for 20% of Huahai’s 2013 total revenue, implying its business transformation strategy from API production to finished drugs export was showing results. Hengrui Pharma is steadily investing into overseas oncology drugs market. In spite of low 2013 overseas drugs sales, we see a great potential from its newly approved injectable oncology drug Cyclophosphamide, with ~Rmb1.8 bn market size and only one competitor in the US. Chinese players’ low cost advantage From a global perspective, when compared with US/ Indian peers, Huahai maintains a geographical advantage as far as cost control is concerned. In brief, drugs produced in China cost less than in the US or India. In China, the overall COGS was 75% lower than that for US companies and 37.5% lower than that for Indian companies during drug manufacturing process. Although China is now lagging behind India in finished drugs export business in the US market, we estimate this situation will be reversed in future thanks to cost advantages.
China Chemical Drug Sector 51 19 January 2015
Figure 106: Competitive advantages of Chinese drug manufacturers Comparison of COGS in different countries 100%
80%
60%
40%
20% Cost of Cost goods (Nomalized) sold
0% US India China
Note: Cost in US is normalised to 100%. Source: Investment Information and Credit Rating Agency (ICRA), Credit Suisse research The flagship of drug export Huahai started exporting API of Sartan and Pril in 1999 and became the largest supplier of Pril in 2009. However, API usually faces the problem of price erosion and volatility of orders. Among the Chinese drug peers, Huahai now is the only Chinese company who has substantial contribution from US generics market.
Figure 107: Generics (finished drugs) export to US constituted a large portion of Huahai’s revenue (2013)
25% Generics (finished drug) export as % of total manufacturing revenue
20%
15%
10%
5%
0% Huahai Humanwell Hengrui
Source: Company data, Credit Suisse research To upgrade its business to finished drugs which has higher entry barrier and more stable sales, Huahai has been the first mover, ahead of the other domestic API exporters. In 2005, the company set up its US subsidiary in New Jersey as its selling and registration platform. Not long afterward, it got the first ANDA and passed an FDA site investigation. By acquiring Solco Healthcare in 2012, a US generic sales and marketing company, Huahai further strengthened its sales network in the US. In 2013, Huahai launched its first blockbuster with Par Pharma, Lamotrigine ER, which recorded sales of US$97 mn with 66% market share in 2013.
China Chemical Drug Sector 52 19 January 2015
Figure 108: Milestones of Huahai’s drug exports business
Becoming the largest global Pril-API supplier and the third-largest Sartan-API supplier
Start Submitting first ANDA Launching exporting API application-Nevirapine; start Launching three new Lamotrigine ER by of Sartan and phurchasing ANDA drugs: Donepezil, cooperating with Pril to US certificates from Par, KV and Losartan Potassium, Par Pharma market Actavis. and Risperidone
1999 2005 2006 2007 2009 2011 2012 2013 2014
Setting up its Setting up another US Acquiring Solco Two more subsidiary subsidiary (Prinston), to Healthcare to ANDA Huahai (US) launch its first overseas establish its own applications in New Jersey drug, Benazepril distribution channel were approved in US market
Passing through FDA site investigation
Source: Company data, Credit Suisse research As the first mover, Huahai leads in the most critical intangible assets of drug exports which are ANDAs and DMFs (Drug Master File). An ANDA is an application for a US generic drug approval for an existing licensed medication or approved drug, usually taking 22~27 months before final FDA approval. DMFs are FDA-registered documents showing confidential and detailed information of API or other materials, which will be used for drug manufacture. A DMF is not an obligation but will be reviewed during ANDA application process. Therefore, by checking registered DMFs of one company, we are able to foresee its future portfolio of drugs to be exported. As of Dec-2014, Huahai had 17 ANDAs on hand and 50 DMFs, topping its peers.
Figure 109: Huahai leads in no. of certified ANDAs… Figure 110: …as well as filed DMFs
18 60
16 50 14
12 40
10 30 8
20
6 DMFs filedNo.of No. of Certificated ANDA CertificatedNo.of 4 10 2
0 0 Huahai Hengrui Humanwell Huahai Humanwell Hengrui Source: www.fda.gov, Credit Suisse Source: www.fda.gov, Credit Suisse
China Chemical Drug Sector 53 19 January 2015
API business is recovering Huahai's API capacity was affected by the suspension from 3Q13 to 2Q14 due to the pollution investigation in Taizhou area which affected all the companies located there. However, the investigation has ended and Huahai's capacity begun to recover from the suspension since 3Q2014. To be conservative, we forecast a 15% YoY growth in 2015 and a flat year in 2016 for its API business. Finished drugs will drive growth Although sales from API dropped 7% due to environmental issues, sales from generics exports recorded a 150% YoY growth in 2013. We believe the finished drug exports business will be able to deliver a 43% CAGR between 2014 and 2016, mainly driven by new ANDA approvals. We believe finished drugs will account for 47% of Huahai’s total export sales in 2016, compared with 24% in 2013.
Figure 111: We estimate finished drugs will account for a higher percentage of export revenue Rmb mn 3000 60%
2500 50%
40% 2000 30% 1500
Revenue 20% 1000 10%
500 0%
0 -10% 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E API exported Finished drug exported YoY (RHS)
Source: Company data, Credit Suisse research Implacable competitive advantage The DMF list of Huahai adds to our confidence in its generics exports business. The number of registered DMFs of Huahai is far ahead of ones of Hengrui and Humanwell, serving as a pool to maintain continuous ANDA approvals. Besides, Huahai's DMF portfolio is highly focused on CNS and CAV drugs. According to an IMS analysis, ~37% of US drug market is occupied by these two drug segments. Among registered API, we noticed several potential blockbuster drugs such as Valsartan (缬沙坦), Duloxetine (度洛西 汀) and Aripiprazole (阿立哌挫), while each of these drugs target over US$1 bn generics market size.
China Chemical Drug Sector 54 19 January 2015
Figure 112: Huahai's leading position in a no. of registered DMFs Comparison of DMF lists Huahai Pharma DMF Enalapril Maleate(马来酸依那普利) Torasemide(托拉塞米) Captopril(卡托普利) Ramipril(雷米普利) Lisinopril dihydrate (赖诺普利二水合物) Candesartan cilexetil (坎地沙坦酯) Benazepril Hydrochloride(盐酸苯那普利) Aripiprazole(阿立哌挫) Fosinopril Sodium(福辛普利钠) Voriconazole(伏立康唑) Carvedilol(卡维地洛) Dihydrogen phosphate carvedilol hemihydrate(磷酸二氢卡维地洛半水 合物) Nevirapine(奈韦拉平) Olmesartan medoxomil(奥美沙坦酯) Paroxetine hydrochloride (盐酸帕罗西汀) Eprosartan methionate(甲磺酸依普沙坦) Escitalopram oxalate(草酸艾司西酞普兰) Alcohol compound(酒精复合物) Quinapril hydrochloride(盐酸喹那普利) Metroprolol succinate(琥珀酸美托洛尔) Enalapril (依那普利) Febuxostat(非布索坦) Ropinirole hydrochloride(盐酸罗匹尼罗) Clopidogrel hydrogen sulfate (硫酸氢氯吡格雷) Risperidone(利培酮) Tolvaptan(托伐普坦) Citalopram Hydrobromide(氢溴酸西酞普兰) Losartan potassium(氯沙坦钾) Quetiapine fumarate(富马酸喹硫平) Pioglitazone hydrochloride (盐酸匹格列酮) Telmisartan(替米沙坦) Paliperidone(帕利哌酮) Valsartan(缬沙坦) Tadalafil(他达拉非) Thiaproline-M-Amino Benzoic acid hydrochloride(TPAB) Ambrisentan(安贝生坦) Hydrochlorothiazide(氢氯噻嗪) Entecavir hydrate (恩替卡韦一水合物) Irbesartan(厄贝沙坦) Pregabalin(普瑞巴林) Levetiracetam(左乙拉西坦) Paroxetine mesylate(甲磺酸帕罗西汀) Duloxetine Hydrochloride (盐酸度洛西汀) Rivaroxaban(利伐沙班) Donepezil hydrochloride(盐酸多奈哌齐) Topiramate(托吡酯) Lamotrigine(拉莫三嗪) Fingolimod hydrochloride (芬戈莫德) Valsartan(缬沙坦) Dabigatran etexilate mesylate(达比加群酯甲磺酸盐 ) Hengrui Medicne DMF Etoposide(依托泊苷) Sevoflurane(七氟烷) Ifosfamide(异环磷酰胺) Cisatracurium Besylate (顺苯磺阿曲库铵) Oxaliplatin(奥沙利铂) Cyclophosphamide(环磷酰胺) Irinotecan Hydrochloride(盐酸伊立替康) Dexmedetomidine Hydrochloride(盐酸右美托咪定) Gabapentin(加巴喷丁) Fondaparinux Sodium(磺达肝癸钠) Letrozole(来曲唑) Tolvaptan(托伐普坦) Docetaxel Trihydrate(多西他赛) Desflurane(地氟烷) Humanwell Pharma DMF Fentanyl citrate(枸橼酸芬太尼) Dutasteride(度他雄胺) Finasteride(非那雄胺) Dutasteride acid(度他雄胺酸) 16A-hydroxyprednisolone(羟基氢化波尼松) Medroxyprogesteron Acetate(醋酸甲羟孕酮) Progesterone(黄体酮) Source: www.fda.gov, Company data, Credit Suisse estimates
China Chemical Drug Sector 55 19 January 2015 Close to the turning point as ANDAs boom After comparing Huahai with its India-based peer, Dr Reddy’s, we believe the company is close to the turning point after nine years’ investment. We expect Huahai to get 12-14 new ANDAs with a potential blockbuster between 2015 and 2016, similar to what Dr Reddy’s experienced between 2006 and 2007 when it saw its sales shoot up and stock price surge. Thanks to the fast growing ANDAs, we forecast its generics exports business to grow 43%/42%/43% and contribute 27%/31%/37% to its total revenue in FY14/15/16. A case study on Dr. Reddy’s To understand the major turning points and catalysts for drug exports companies, we leverage our global research resource on the Indian pharmaceutical sector and select Dr. Reddy’s as a comparable role model for Huahai. Our research shows four historical turning points in Dr. Reddy’s journey. (1) In 1994, Dr. Reddy’s shifted its business focus from API export to finished drugs manufacturing, leading to a 50% increase in its share price. (2) In 2000, its first FTM generic drug, Fluoxetine, was launched in the US, causing a 180% surge in its stock price. It then began to embrace the biologics drug market. (3) Post 2006, the number of ANDA approvals for Dr. Reddy’s was growing explosively, from three in 2005 to 11 in 2006, which enhanced public confidence in its overseas business. (4) The fourth turning point was in late 2007, when it took the world by surprise by developing the first monoclonal antibody generic, Reditux. Following this, a series of biosimilars such as Darbepoetin (2010) and Filgrastim (2011) were launched, marking a beginning of the era belonging to biosimilars.
Figure 113: Dr. Reddy’s stock price was affected by milestone events Local currency Dr. Reddy's historical share price 4000
3500 Launching a series of biosimilars such as Reditux, Darbepoetin 3000 Shifting and Filgrastim since business late 2007 . focus from 2500 FDA ANDA API to approvals finished grew fast and drug 2000 The first FTM exceeded 10 generics, in 2006 1500 Fluoxetine, was launched in U.S; embracing into 1000 biologic generics market 500
0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: the BLOOMBERG PROFESSIONAL™ service, Company data, Credit Suisse estimates Meanwhile, the number of ANDA approvals kept increasing – from nine in 2000 to 122 in 2013. Remarkably, there were two periods of booming number of ANDA approvals, in 2001 and 2006. We see the stock price of Dr. Reddy’s surged during these periods, in accordance with accelerated ANDA approvals.
China Chemical Drug Sector 56 19 January 2015
Figure 114: Explosive growth in annual ANDA approvals Figure 115: Increasing number of ANDA approvals (Dr. in 2001 and 2006 (Dr. Reddy’s) Reddy’s)
No. of new ANDA approvals of Dr. Reddy No. of accumulated ANDA approvals of Dr. Reddy
18 140
16 120 14 100 12
10 80
8 60 6 40 4 20 2
0 0
Source: www.fda.gov, Credit Suisse estimates Source: www.fda.gov, Credit Suisse estimates Huahai is close to the turning point Comparing Huahai with Dr. Reddy’s, we find several similarities in their development milestones. Huahai experienced its second turning point by launching its first blockbuster generic, Lamotrigine ER, which recorded sales of US$97 mn in 2013. After this stage, we expect a substantial increase in its ANDA approval numbers in 15/16 after long-term preparation. Most notably, similar to Dr. Reddy’s, Huahai is also embracing the biologic generics market by cooperating with ONCOBIOLOGICS. They signed a contract in May 2013 to collaborate on four monoclonal antibody generics, two of them having started clinical trials already (Adalimumab in EU & US and Bevacizumab in EU). The four antibody drugs target a potential market size of ~ US$28 bn. According to our estimates, Huahai is likely to get 5-6 ANDAs approved in 2015 and 7-8 in 2016. And the accumulated ANDA approvals will add up to ~30 at that time, similar to Dr. Reddy’s between 2006 and 2007 when it saw a surge in both its sales and stock price.
Figure 116: ANDA approvals should accelerate in 15/16 (Huahai)
Estimated no. of ANDA to be approved 7~8
5~6
2
2014 2015E 2016E Source: www.fda.gov, Company data, Credit Suisse estimates
China Chemical Drug Sector 57 19 January 2015
Why Huahai can take share in the US generics market As we have mentioned in the first segment of the report, Chinese companies have cost advantage over US and India players, and Huahai is the leading player among them. Besides the cost advantage, Huahai also has advantage on some complex dosage forms such as SR (sustained release) and ER (extended release) which have better competitive landscape. Lower cost Low cost is one of the important winning strategies for Huahai to seize share in overseas markets. Internally, Huahai operates its manufacturing business through a vertically integrated value chain, from upstream API provision to downstream finished drug production. Through registering these APIs as DMF files, Huahai can utilise its own API to produce drugs, and further export to the US market. On the contrary, companies that do not have FDA permission to input their own API during production, typically spend higher to import these intermediates from other companies, leading to a low gross margin. Complex dosage form High-tech dosage forms are facing less competition in overseas markets due to stringent quality control and high manufacturing barrier. SR (sustained release, also called ER, extended release) dosage forms are designed to release a drug at a predetermined rate in order to maintain a constant drug concentration along time, thus to minimise side effects. Huahai's great success on Lamotrigine ER, is largely dependent on dosage form advantages. There is only one competitor on ER forms, however with ~20 active players on ordinary tablet forms. Six drugs have good competitive landscape After analysing the potential market size and competitive landscape, we believe six products need to be mentioned and are likely to be the growth driver for Huahai's generics exports business. Among ANDAs under FDA’s review, we prefer drugs with less than ten active players and a relatively large US market size. The second important picking rule is our estimates that these drugs are likely to achieve FDA approvals in/before 2016, in order to make near- term contributions to Huahai's revenue. Huahai has a good technology platform on advanced dosage which usually has higher entry barrier and better competitive landscape. Three out of the six ANDAs under application belong to advanced dosage such as SR tablets or ER tablets. The most promising product under ANDA application is Valsartan tablet, with a US market size of ~US$1,760 mn. Valsartan tablet was originated by Novartis under the brand name of Diovan with a patent expiration date of Sep 2012. Given the mild competitive landscape with only three competitors so far, Huahai has a big chance to take some market share.
Figure 117: Potential blockbusters Year Generic name Chinese name US market size in 2013 No. of active players (US$ mn) 2014 Paroxetine tablets 盐酸帕罗西汀片 ~80 6 Levetiracetam SR tablets 左乙拉西坦缓释片 ~110 6 2015E Bupropion SR tablets 盐酸安非他酮缓释片 ~150 7 Valsartan tablets 缬沙坦片 ~1760 3 Ropinirole ER tablets 罗匹尼罗控释片 ~50 4 2016E Losartan Pot HCTZ tablets 氯沙坦钾氢氯噻嗪片 ~100 8 Note: SR: Sustained Release; ER: Extended Release. Source: www.fda.gov, Company data, IMS, Credit Suisse estimates
China Chemical Drug Sector 58 19 January 2015
Domestic finished drug business also benefits Huahai also runs a domestic generics business which accounted for 16% of its total sales in 2013. The segment used to be constrained by the weak domestic sales network and the speed of drug application. However, the situation might change in the future. Chinese government wants to encourage the domestic companies which are able to meet world- class quality. To serve that purpose, there have been some supportive policies adopted to help the companies to get a better tender price, etc. Favourable tender policies In provinces that have published their tender policies, many of them set favourable policies for drugs which have got the certifications from the US FDA and cGMP. Usually, these kinds of polices will include the oversea-certified drugs into the higher quality level tender group where the price erosion pressure is less intensive.
Figure 118: Tender policies favour overseas certifications Province Time Favourable policies in overseas certification Hubei 2011.08 Independent quality level, overseas certification accounts for 4% of total score Xinjiang 2012.01 Independent quality level Gansu 2012.02 Independent quality level, overseas certification accounts for 30% of total score Hainan 2012.09 Independent quality level, overseas certification accounts for 13% of total score Hunan 2013.05 Independent quality level, overseas certification accounts for 24% of total score Jiangxi 2013.05 Independent quality level Guangdong 2013.05 Independent quality level Fujian 2014.01 Independent quality level Zhejiang 2014.08 Independent quality level Note: there is less generics competitors in independent quality level which is good for getting better tender prices. Source: SFDA, Credit Suisse research
China Chemical Drug Sector 59 19 January 2015 Valuation Our target price is based on 35x 2015E P/E (implied PEG 1, FY14-16E EPS CAGR 35%) for its huge potential in the US generics market and scarcity in A-share peers in terms of drug exports business.
Figure 119: Huahai's 12-M forward PE
100 Forward P/E
90
80
70 +2std=64.5 60
50 +1std=49.5
40 mean=34.5 30
20 -1std=19.5
10 -2std=4.4 0 '09 '10 '11 '12 '13 '14
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse research We also refer to the historical forward P/E of Dr. Reddy’s before its ANDA boom. Before the turning point in 2006, Dr. Reddy’s traded at a high P/E valuation. Despite the extreme P/E caused by the slump in net profit in 2005, the 12M forward P/E recorded an average of ~45x in early 2004 and ~49x around 2006.
Figure 120: Dr. Reddy’s 12-M forward P/E (03-07)
250 12-M forward P/E
200
150 Avg. P/E= 49 Avg. P/E= 45
100
50
0 '03 '04 '05 '06
Source: the BLOOMBERG PROFESSIONAL™ service, Company data, Credit Suisse estimates
China Chemical Drug Sector 60 19 January 2015
Three criteria stock evaluation
Figure 121: Three criteria for stock evaluation Strong Capable R&D commercialization Attractive valuation Overall ranking capability
Hengrui
Huahai
Salubris
Humanwell - Highest, - Lowest. Overall ranking is valued by weighted average of three criteria (Capable R&D:35%, Strong commercialization capability: 35%, Attractive valuation: 30%)
Source: Credit Suisse research Capable R&D: The R&D capability of Huahai is mainly reflected by its overseas ANDA certifications and registered DMFs. The successful launch of Lamotrigine ER in 2012 proved that the R&D team of Huahai is capable enough to challenge the blockbuster generics in US. Besides, in its domestic pipeline, it has 17 FTM drugs which have either finished or entered into clinical verification stage. Strong sales capacity: In the domestic market, Huahai sells its finished drugs through drug distributors instead of its own sales team. In the US market, Huahai acquired Solco Healthcare in 2012, to strengthen its overseas sales network. As of now the company runs the most successful sales platform in the US market with 17 ANDAs/50 DMFs on hand, far ahead of its peers. We estimate Huahai is likely to get 5-6 ANDAs approved in 2015 and 7-8 ANDAs approved in 2016. After comparing Huahai with its India peer, Dr. Reddy’s, we believe the company is close to the turning point after nine years of investment in overseas business. Attractive valuation: We believe a PEG of 1 is reasonable for a company close to the turning point after comparing with Huahai's historical P/E and Dr. Reddy's PE before the ANDA boom. Catalyst New ANDA approval should be the major catalyst for Huahai Pharma. Investment risks Delay of ANDA approvals A typical ANDA application needs 22~27 months before final approval by the FDA. At present Huahai has dozens of ANDA applications which are still under FDA review. We expect ~5–6 new ANDAs to be approved by 2015. Therefore, any delay in the FDA approval process will impact Huahai’s overseas revenue. Uncertainty of API price In recent years, the price of API including Sartan and Pril has continued to fall. Although Huahai has shifted its business focus from API to finished drugs export, sales of API still accounted for 64% of its manufacturing revenue in 2013. Therefore, the uncertainty in API price will impact Huahai's future revenue growth.
China Chemical Drug Sector 61
19 January 2015 Asia Pacific/China Equity Research Major Pharmaceuticals (Healthcare CN (Asia))
Salubris Pharmaceuticals
(002294.SZ / 002294 CH) Rating OUTPERFORM* Price (16 Jan 15, Rmb) 37.95 INITIATION
Target price (Rmb) 45.00¹ Upside/downside (%) 18.6 Mkt cap (Rmb mn) 24,810 (US$ 3,999) Niche leader in cardiovascular drugs Enterprise value (Rmb mn) 24,150 Number of shares (mn) 653.76 ■ Initiating coverage with an OUTPERFORM rating and target price of Free float (%) 28.4 Rmb45, implying 19% potential upside. Salubris Pharmaceutical is a 52-week price range 38.2 - 27.2 ADTO - 6M (US$ mn) 23.8 leading chemical cardiovascular drug manufacturer. In 2013, cardiovascular
*Stock ratings are relative to the coverage universe in each drug sales accounted for 64% of its total revenue. analyst's or each team's respective sector. ¹Target price is for 12 months. ■ Niche leader. Salubris is the leader in the niche Percutaneous Coronary
Research Analysts Intervention (PCI) related drug segment. Its blockbuster drug Taijia (泰嘉, Zen Zhou Clopidogrel) recorded sales of Rmb1.5 bn in 2013, with 36% market share. 852 2101 7640 We believe Taijia will grow 25%/20%/20% YoY in 2014/15/16, driven by: (1) [email protected] the likelihood of PCI surgery registering a 10% CAGR due to increasing Iris Wang penetration rate, and (2) the possibility of Salubris's Taijia cornering market 852 2101 7646 [email protected] share from Sanofi's Plavix due to better cost performance ratio. ■ Next blockbuster to be launched. In 2012, Salubris acquired Allisartan Isoproxil, an innovative anti-hypertension drug with patent protection until 2026. We believe the product has the potential to become a blockbuster worth Rmb1 bn and turn into a new growth driver: (1) the company targets a Rmb20 bn market with blockbusters worth Rmb5 bn; (2) as per clinical data, the new drug shows better efficacy, compared with Losartan Potassium (氯 沙坦钾); (3) the product can leverage on Salubris' strong academic promotion team in the cardiovascular space. ■ Valuation: Our target price is based on 23x 2015E P/E, implying a 15% discount to the chemical sector average, which can be seen as a safety margin for investors. Catalyst: Allisartan being included in the national RDL. Risk: Intensified competition from other Clopidogrel brands.
Share price performance Financial and valuation metrics
Year 12/13A 12/14E 12/15E 12/16E Price (LHS) Rebased Rel (RHS) Revenue (Rmb mn) 2,327.5 2,825.6 3,369.3 4,039.3 60 160 EBITDA (Rmb mn) 1,033.1 1,282.7 1,548.0 1,874.4 50 140 EBIT (Rmb mn) 948.6 1,207.8 1,464.6 1,782.6 40 120 Net profit (Rmb mn) 830.4 1,049.0 1,271.7 1,549.0 30 100 EPS (CS adj.) (Rmb) 1.27 1.60 1.95 2.37 20 80 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a. 1.61 2.00 2.38 The price relative chart measures performance against the EPS growth (%) 30.7 26.3 21.2 21.8 Shanghai Shenzhen CSI300 index which closed at 3604.12 on P/E (x) 29.9 23.7 19.5 16.0 16/01/15 On 16/01/15 the spot exchange rate was Rmb6.2/US$1 Dividend yield (%) 1.6 1.7 2.1 2.5 EV/EBITDA (x) 23.3 18.8 15.4 12.4 Performance over 1M 3M 12M P/B (x) 7.9 6.6 5.5 4.6 Absolute (%) 1.4 12.8 13.6 — ROE (%) 29.0 30.5 30.7 31.1 Relative (%) -5.9 -34.8 -49.4 — Net debt/equity (%) net cash net cash net cash net cash
Source: Company data, Thomson Reuters, Credit Suisse estimates.
China Chemical Drug Sector 62 19 January 2015 Focus charts
Figure 122: Stable growth of PCI surgeries in China Figure 123: Increasing market share of Clopidogrel gained by Salubris (in terms of sales)
In thousand No. of PCI surgeries in China Clopidogrel domestic market share (in terms of sales)
1000
800 10% 64% 73% 70% 82% 79% 600 17%
400
36% 27% 30% 200 18% 21%
2009 2010 2011 2012 2013 0 2010 2011 2012 2013 2014E 2015E 2016E 2013 U.S. Taijia (Salubris) Plavix (Sanofi)
Source: NHFPC, Credit Suisse estimates Source: Menet, Company data, Credit Suisse
Figure 124: Wide price gap between Taijia (泰嘉) and Figure 125: Next blockbuster drug Allisartan targeting a Plavix market size of ~Rmb20 bn Rmb Rmb bn Unit (mg) price of Clopidogrel 25 25% 0.26
0.24 20 20%
0.22 15 15% 0.20
0.18 10 10%
0.16 5 5% 0.14
0 0% 0.12 2007 2008 2009 2010 2011 2012 2013 2008 2009 2010 2011 2012 2013 2014 Market size of antihypertensive drug YoY (RHS) Salubris Taijia (泰嘉) Sanofi Plavix
Source: www.yaozh.com, Credit Suisse estimates Source: 2012 Antihypertension drug market research report, Menet, Credit Suisse
Figure 126: Strong academic promotion team of Salubris Figure 127: Three criteria for stock evaluation Strong Attractive Overall 1200 18% Capable R&D commercializa valuation ranking 16% tion capability 1000 14% Hengrui 800 12%
10% 600 Huahai 8%
400 6% Salubris 4% 200 2% Humanwell
0 0% - Highest, - Lowest. Overall ranking is valued by weighted average of three 2009 2010 2011 2012 2013 criteria (Capable R&D:35%, Strong commercialization capability: 35%, Attractive No. of sales staff YoY (RHS) valuation: 30%)
Source: Company data, Credit Suisse Source: Credit Suisse
China Chemical Drug Sector 63 19 January 2015 Niche leader Clopidogrel (氯吡格雷), under the brand name Taijia (泰嘉), is a blockbuster product of Clopidogrel, a blockbuster Salubris, with Taijia's 2013 sales of Rmb1.5 bn accounting for 76% of the company's antithrombotic drug of finished drug sales. Clopidogrel is typically used as an antithrombotic drug before and Salubris, recorded 2013 after PCI surgeries. In China, the number of PCI surgeries has been growing at a stable sales of Rmb1.5 bn rate over the past five years to touch ~460,000 in 2013. We believe the number will keep rising between 2014 and 2016 at a 10% CAGR given: (1) in developed countries such as the US, the annual number of PCI surgeries is ~1 mn, and (2) PCI surgery has been allowed at level II hospitals since end-September 2011, which will gradually increase the penetration rate.
Figure 128: Stable growth of PCI surgeries in China
In thousand No. of PCI surgeries in China 1000
800 10%
600 17%
400
200
0 2010 2011 2012 2013 2014E 2015E 2016E 2013 U.S.
Source: NHFPC, Credit Suisse estimates The antithrombotic segment recorded a market size exceeding Rmb8 bn and Clopidogrel accounted for over 50% of the segment's market share. Clopidogrel was introduced by French pharma Sanofi under the Plavix brand name. In China, Sanofi is the major competitor of Salubris in the Clopidogrel segment.
China Chemical Drug Sector 64 19 January 2015
Figure 129: Sales of antithrombotic drug exceed Rmb8 bn in 2013 and Clopidogrel takes up over 50% of the market share Rmb mn YoY 9,000 30%
8,000 25% 7,000
6,000 20%
5,000 15% 4,000
3,000 10%
51% 2,000 49%
Antithrombotic marketdrug size 48% 5% 1,000 45% 46%
0 0% 2009 2010 2011 2012 2013 Clopidogrel Other Antithrombotic drug YoY (RHS)
Source: Menet, Credit Suisse Salubris successfully gained 36% of Clopidogrel's market Salubris successfully gained 36% of the total market share in 2013 to double its share share in 2013 to double its over the past five years. We estimate that this gain will continue, given its better cost share over the past five performance. Besides Sanofi, the only approved domestic manufacturer is Henan years Xinshuaike, which has a market share of less than 1%.
Figure 130: Salubris increases its Clopidogrel market Figure 131: Salubris increases its Clopidogrel market share (in terms of sales) share (in terms of volume)
Clopidogrel domestic market share (in terms of sales) Clopidogrel domestic market share (in terms of volume)
53% 64% 60% 70% 63% 73% 75% 70% 82% 79%
47% 36% 40% 30% 37% 27% 25% 30% 18% 21%
2009 2010 2011 2012 2013 2009 2010 2011 2012 2013
Taijia (Salubris) Plavix (Sanofi) Taijia (Salubris) Plavix (Sanofi)
Source: Menet, Company data, Credit Suisse Source: Menet, Company data, Credit Suisse Intensifying competition a market concern There are 65 applications for Clopidogrel out of which 32 might be approved before 2015. Intensifying competition may This means there could be a potential competitor in the upcoming drug tenders. The bring down the ASP of intensified competition may bring down the ASP of Clopidogrel and eventually hurt the Salubris' Clopidogrel growth rate of Salubris.
China Chemical Drug Sector 65 19 January 2015
Figure 132: More companies to get approval for Clopidogrel Appication stage Year No. of companies Company name Approved 3 Shenzhen Salubris, Henan Xinshuaike, Sanofi Estimated to be approved before 2015 32 Zhejiang Hengrui, CSPC, etc. Under application Estimated to be approved after 2015 33 Beijing Sihuan, Hainan Xinshitong, etc. Source: Yaozhi database, Credit Suisse estimates First mover advantage and a well-recognised brand: We believe the risk is limited As per the US generics market data, the first mover usually takes 40% of the total market First mover advantage in share, irrespective of the number of competitors, which can be explained by the generics market preference shown by doctors and patients.
Figure 133: First-time generics take up largest market share in the US (competition landscape for generics in the US )
Market share of US generics market
Others Fifth-time 19% generics 4% First-time generics Fourth-time 40% generics 7% Third-time generics 11% Second-time generics 19%
Source: Navigant, Credit Suisse Unlike other generic brands, Taijia is well-recognised by doctors and patients, which is a barrier for new comers. Taijia to corner market share from Sanofi's Plavix due to better cost performance We believe Taijia can corner more market share from Plavix owing to the wide price gap Wide price gap between between the two products. Clopidogrel has been included in the national EDL to maintain Taijia and Plavix its price premium; Plavix is unlikely to bid in the provinces where harsher tender policies are adopted. Taijia is likely to take over these markets.
China Chemical Drug Sector 66 19 January 2015
Figure 134: Wide price gap between Taijia (泰嘉) and Plavix Rmb Unit (mg) price of Clopidogrel 0.26
0.24
0.22
0.20
0.18
0.16
0.14
0.12 2008 2009 2010 2011 2012 2013 2014 Salubris Taijia (泰嘉) Sanofi Plavix
Source: www.yaozh.com, Credit Suisse estimates Bivalirudin: Replacement of Heparin in PCI surgery Bivalirudin is a key anticoagulation drug used in PCI surgeries. Compared with Heparin (肝 Bivalirudin, replacement of 素), Bivalirudin is superior in terms of its anticoagulation efficacy and fewer side effects. Heparin, is expected to Bivalirudin, introduced by Medicine Company under the Angiomax brand name, registered target a potential market US sales of US$465 mn in 2013. There are only two approved Bivalirudin manufacturers size of ~Rmb500 mn in China viz., Salubris and Jiangsu Hansoh. Salubris launched Bivalirudin in 2011 and recorded ~Rmb25 mn in sales in 2013, while Hansoh obtained the SFDA drug approval only in May 2014 and has yet to register sales. Given that Salubris has already set up a sophisticated sales team in the PCI surgery segment, we expect the current growth momentum of Bivalirudin sales to continue during ~2014-16E. A potential market value of ~Rmb300-500 mn As per our estimates, the number of PCI surgeries will register a CAGR of 15% during 2014-16E. If ~10-15% of these surgeries employ Bivalirudin, with per surgery estimated to cost an average of Rmb5,000, the market size of Bivalirudin will touch ~Rmb300-500 mn by 2016E.
China Chemical Drug Sector 67 19 January 2015
Figure 135: US market size of Bivalirudin was close to Rmb3 bn in 2013
(Rmb bn) ANGIOMAX US sales 3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0 2009 2010 2011 2012 2013
Source: IMS, Credit Suisse Anti-infective drug: Stable growth Anti-infective drug is another major business area of Salubris, with the segment registering Salubris is focusing on high- 2013 sales of Rmb366 mn. The major anti-infective product of Salubris is the end anti-infective products, Cephalosporin antibiotics series. Compared with peers, Salubris is focusing on high-end which have higher gross products such as Cefepime Hydrochloride and Cefuroxime, which have higher gross margins and lower margin and lower competition. competition Since 2012, hospital usage of anti-infective drugs has been restricted by the government, leading to a sharp decline in the sales growth of Salubris' antibiotics products. However, as a result of better product mix, antibiotics sales began to recover in 2013. Overall speaking, the sales percentage of antibiotics products has been declining recently, indicating that the company is strategically relocating its business focus from antibiotics to the CAV segment.
Figure 136: Sales contribution of anti-infective drugs declines Rmb mn 400 40%
350 35% 300 30% 250
200 25%
150 20% 100 15% 50
0 10% 2009 2010 2011 2012 2013
Salubris sales of anti-infective drugs As % of total drug sales (RHS)
Source: Company data, Credit Suisse
China Chemical Drug Sector 68 19 January 2015
Stent business: Lags far behind competitors Stents are mainly used to keep arteries open during PCI surgeries. In 2009, Salubris We are cautious about the entered the heart stent business by setting up a subsidiary to develop medical devices. stent business, given the The subsidiary has managed to acquire four medical device patents mainly in the high-end intensified competition bio-degradable heart stent segment. Although the company expects the first DES product landscape to be launched in 2016, we are cautious about the segment, given the intensified competition landscape.
China Chemical Drug Sector 69 19 January 2015 Next blockbuster launch awaited Salubris bags a potential blockbuster via M&A In October 2012, Salubris formed a joint venture with Shanghai Allist Pharma to acquire The potential CAV 50% equity in Allisartan Isoproxil tablets at a cost of Rmb339 mn. Later, in November 2014, blockbuster, Allisartan, is Salubris acquired the remaining 50% equity for Rmb472 mn and purchased the patent of the first domestically Allisartan Isoproxil API for Rmb10 mn. The acquisitions demonstrate management's developed ARB, and targets confidence in the future market potential of this anti-hypertension blockbuster drug. Rmb1 bn market size Allisartan Isoproxil is the first domestically developed ARB (Angiotension II receptor blocker) drug, with SFDA patent protection period until 2026. Compared with other ARB peers, Allisartan Isoproxil has demonstrated better anti-hypertension efficacy and lower instances of side effects. The overall pharmacological advantage of Allisartan Isoproxil is mainly due to its exclusive mechanism of hydrolysing into a sole metabolite called EXP3174. Targeting a Rmb20 bn market The indication of Allisartan Isoproxil is anti-hypertension. The anti-hypertension drug market had a market size of Rmb21 bn in 2013, with a YoY growth rate of ~12%. The sudden drop in growth rate in 2011 was mainly due to the poor sales growth of two major drugs viz., Amlodipine and Valsartan.
Figure 137: Stable growth of anti-hypertension drug Figure 138: Angiotension II receptor blockers keep market gaining market share in the antihypertension segment Rmb bn Market share of major antihypertensive drug types 25 25%
29% 28% 27% 27% 27% 27% 20 20% 34%
15 15% 25% 29% 32% 33% 35% 37% 39%
10 10%
42% 41% 40% 40% 5 5% 38% 36% 34%
0 0% 2007 2008 2009 2010 2011 2012 2013 2007 2008 2009 2010 2011 2012 2013 Market size of antihypertensive drug YoY (RHS) Calcium antagonist Angiotensin II receptor blocker Other drug types
Source: 2012 Antihypertension drug market research report, Menet, Source: 2012 Antihypertension drug market research report, Menet, Credit Suisse Credit Suisse In the anti-hypertension segment, Angiotension II receptor blocker (ARB) has been registering fast growth since 2007 to gain a market share of 39% by 2013, thereby exceeding the share of Calcium antagonist (34%). We estimate the market size of Allisartan Isoproxil to likely reach ~Rmb1 bn, in reference to the 2013 sales of Valsartan and Irbesartan.
China Chemical Drug Sector 70 19 January 2015
Figure 139: Six out of the top-10 anti-hypertensive drug sales belong to Angiotension II receptor blockers Top-10 anti-hypertensive drugs Drug type Estimated 2013 sales (Rmb mn) Amlodipine (氨氯地平) CA 2,359 Nifedipine (硝苯地平) CA 1,597 Valsartan (缬沙坦) ARB 1,492 L-Amlodipine (左氨氯地平) CA 1,081 Irbesartan (厄贝沙坦) ARB 915 Losartan(氯沙坦) ARB 876 Felodipine (非洛地平) CA 814 Valsartan amlodipine (缬沙坦氨氯地平) ARB 693 Telmisartan (替米沙坦) ARB 668 Irbesartan and Hydrochlorothiazide (厄贝沙坦氢氯噻嗪) ARB 621 Note: Drugs highlighted with blue are competitors of Allisartan Isoproxil. ARB: Angiotension II receptor blocker; CA: Calcium Antagonist. Source: Menet, Credit Suisse Leverages on the strong academic promotion team The success of Clopidogrel was largely dependent on Salubris' academic promotion team Salubris' heavy investment in the cardiovascular area. Since 2009, the company has been enlarging its sales force in its sales team decided its and increasing its expenditure on academic promotion events. Its market promotion Clopidogrel success expense in 2013 was Rmb434 mn, accounting for 73% of its total sales expense, with a striking YoY growth of 45%. The company's huge investment in the sales team demonstrates its determination to actively promote newly launched CAV drugs such as Allisartan Isoproxil and Bivalirudin.
Figure 140: Stable increase in sales staff numbers Figure 141: Fast YoY growth of market promotion expense Rmb mn 1200 18% 500 70%
16% 450 1000 60% 14% 400 350 50% 800 12% 300 10% 40% 600 250 8% 30% 200 400 6% 150 20% 4% 100 200 10% 2% 50 0 0% 0 0% 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013
No. of sales staff YoY (RHS) Market promotion expense YoY (RHS)
Source: Company data, Credit Suisse Source: Company data, Credit Suisse Pipeline Given Salubris' strong academic promotion team in the CAV area, we estimate that the Two CAV drugs in its two CAV drugs in its current pipeline, Lercanidipine Hydrochloride and Benazepril current pipeline will start Lercanidipine Hydrochloride, will start contributing revenue after gaining SFDA approvals contributing to revenue by by 2016-17. In addition, Salubris has entered the biological drug segment by strategically 2016-17 acquiring Suzhou Jinmeng and Chengdu Jinkai. The blockbuster pipeline product, rhPTH, is estimated to gain a market size of Rmb1 bn.
China Chemical Drug Sector 71 19 January 2015
Figure 142: Salubris—Key drugs in the pipeline Drug name Chinese name TA Application stage Estimated Drug application approval year type Lercanidipine Hydrochloride Tablets 盐酸乐卡地平片 Cardiovascular Apply for production 2016 FTM Levetiracetam Tablets 左乙拉西坦片 CNS Apply for production 2016 FTM Benazepril Lercanidipine 盐酸贝那普利乐卡地平片 Cardiovascular Clinical verification 2017 Patent Hydrochloride Tablets Cefbuperazone sodium for injection 注射用头孢拉宗钠 Anti-infective Clinical verification 2017 FTM Cefuroxime Tazobactam Sodium for 注射用头孢呋辛钠他唑巴坦钠 Anti-infective Clinical verification 2017 Patent injection Cefuroxime Sulbactam Sodium for 注射用头孢呋辛钠舒巴坦钠 Anti-infective Clinical verification 2017 Patent injection rhPTH (human parathyroid hormone) 重组人甲状旁腺激素 Skeleton Clinical verification 2017 FTM rhKGF (Keratinocyte Growth Factor) 重组人角质细胞生长因子 Oncology Clinical verification 2018 FTM Sitafloxacin Tablets 西他沙星片 Anti-infective Clinical verification 2018 FTM Note: (1) FTM represents First-to-market generics.(2) Drugs highlighted in grey are biological drugs acquired from Suzhou Jinmeng Pharm. Source: www.yaozhi.com, Company data, Credit Suisse research
China Chemical Drug Sector 72 19 January 2015 Appealing valuation with decent growth prospects Our target price is based on 23x 2015E P/E, implying a 15% discount to the chemical sector average for its single product risk; however, Salubris has been registering a decent growth rate and high ROE, with plenty of cash in hand to enhance its product portfolio by M&A which can be seen as a potential catalyst. The stock is now trading at a discount to its five-year average 12M forward P/E, which provides a good entry point for mean reversion.
Figure 143: Salubris 12M forward P/E band Salubris' 12M forward P/E 55
50
45 +2std=41.9 40
35 +1std=33.0 30
25 mean=24.0 20
15 -1std=15.0
10
5 -2std=6.0 '09 '10 '11 '12 '13 '14
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates
Three criteria for stock evaluation
Figure 144: Three criteria for stock evaluation Strong Capable R&D commercialization Attractive valuation Overall ranking capability
Hengrui
Huahai
Salubris
Humanwell - Highest, - Lowest. Overall ranking is valued by weighted average of three criteria (Capable R&D:35%, Strong commercialization capability: 35%, Attractive valuation: 30%)
Source: Credit Suisse Capable R&D: We estimate that the two CAV drugs on Salubris' current pipeline, viz., Lercanidipine Hydrochloride and Benazepril Lercanidipine Hydrochloride, will contribute to the revenue streams by 2016-17E. In addition, Salubris has entered the biological drug
China Chemical Drug Sector 73 19 January 2015 segment through acquisitions of Suzhou Jinmeng and Chengdu Jinkai. The blockbuster pipeline product, rhPTH, is estimated to have a market size of Rmb1 bn. Strong sales capacity: The success of Clopidogrel is largely dependent on the strong academic promotion team in the CAV segment. Since 2009, the company has been increasing expenditure on academic promotion events, recording a market promotion expense of up to Rmb434 mn in 2013. Attractive valuation: The stock is trading at a 30% discount to the sector average of 27x 2015E P/E, which can be seen as a safety margin for investors. Catalyst: Upcoming drug tenders In addition to the sales team, the tender policy wind will also act as a catalyst to accelerate the market infiltration of Salubris' products. National Health and Family Planning Commission (NHFPC) released a new guidance on 23 October that requires all provinces to complete the new round of provincial non-EDL drug tenders by end-June 2015. So far, only 16 provinces have completed or are about to undergo the tender processes. We believe pharma companies with young product portfolios will benefit from the accelerating drug tender process, as it can open additional hospital access to newer drugs. We define newer drugs as: (1) those approved after 2009 and have not fully participated in the last round of drug tenders, (2) exclusive—can charge a decent ASP due to less competition, and (3) those in the similar therapeutic area of other existing drugs and can leverage on the existing distribution channel. According to our criteria, Allisartan Isoproxil is likely to be a beneficiary of the upcoming round of provincial tenders.
Figure 145: Provincial progress of EDL/Non-EDL drug tender (updated to Jan-2015) 14
12
10
8
6
4
2 No. of No. provinces each in tender status
0 Completed In-progress Not started Completed In-progress Not started Non-EDL drug tender EDL drug tender
Note: The column shows the market share of provinces in each tendering status. Source: CAPC, http://zb.sosoyy.com, Credit Suisse Adjustment of national RDL should be a catalyst We also expect Allisartan Isoproxil to be included in the new national reimbursement drug list, given: (1) its superior anti-hypertension efficacy, (2) lower side effects, and (3) it being branded as the first domestically developed ARB drug. The national reimbursement list is estimated to be adjusted in 2015.
China Chemical Drug Sector 74 19 January 2015
Investment risk Intensified competition in the Clopidogrel space Clopidogrel (氯吡格雷,泰嘉) is a major revenue contributor for Salubris. According to SFDA, there are more than 30 drug manufacturers currently applying for Clopidogrel's manufacturing license. As a result, we are concerned about intensified competition in the segment in the future. Penetration rate of Allisartan lower than expected Allisartan Isoproxil is the first domestically developed ARB (Angiotension II receptor blocker) drug and has better anti-hypertension efficacy and lower side effects. However, the market penetration rate of this blockbuster CAV drug is still uncertain, as it is largely dependent on the progress of tender processes in various provinces.
China Chemical Drug Sector 75
19 January 2015 Asia Pacific/China Equity Research Major Pharmaceuticals (Healthcare CN (Asia))
Humanwell Healthcare
(600079.SS / 600079 CH) Rating NEUTRAL Price (16 Jan 15, Rmb) 27.53 INITIATION Target price (Rmb) 29.00¹ Upside/downside (%) 5.3 Mkt cap (Rmb mn) 14,557 (US$ 2,346) China's leading anaesthetic drug manufacturer Enterprise value (Rmb mn) 16,397 Number of shares (mn) 528.78 ■ We initiate coverage on Humanwell Healthcare with a NEUTRAL rating Free float (%) 82.9 52-week price range 31.1 - 23.3 and a target price of Rmb29, implying 5.3% potential upside. Humanwell ADTO - 6M (US$ mn) 42.1 Healthcare is a leading anaesthetic drug manufacturer in China. Anaesthetic
*Stock ratings are relative to the coverage universe in each drugs accounted for 76% of its total net profit in 2013. The company also analyst's or each team's respective sector. ¹Target price is for 12 months. expanded into IVD regent and blood products through M&A.
Research Analysts ■ Leading anaesthetic drug manufacturer. Humanwell is the largest domestic Zen Zhou anaesthetic drug manufacturer with 19% market share. Thanks to the policy 852 2101 7640 barrier to restrict the number of anaesthetic drug manufacturers, Humanwell [email protected] enjoys oligopoly in three anaesthetic drugs with decent margin. We believe the Iris Wang segment can deliver 20%/19%/19% revenue growth in 2014/15/16, 852 2101 7646 [email protected] respectively, driven by: (1) increasing surgeries in China; (2) lower penetration and dose used per capita compared to other countries; and (3) expected launch of new drugs which is estimated to garner more market share. ■ Proven track record in M&A. Humanwell has carried out two major M&As in 2010 and 2012, Ruide (瑞德) Biopharm and Beijing Baron (巴瑞); the two companies have achieved 102% and 28% net profit CAGR (from 2011 to 2013), respectively, after being acquired. Given its strong integration ability, we believe M&A is one of the key growth drivers for Humanwell. ■ Valuation. Our target price of Rmb29 is based on 27x 2015E P/E for its high-barrier anaesthetic drug business; however, its current valuation leaves limited upside for investors. Major catalyst is potential M&As. Major risks: (1) uncertainty in launching new drugs (Fospropofol); (2) slower market penetration rate for newly-approved drugs and (3) drug export business which is hard to break even.
Share price performance Financial and valuation metrics
Year 12/13A 12/14E 12/15E 12/16E Price (LHS) Rebased Rel (RHS) Revenue (Rmb mn) 6,010.2 7,059.2 8,153.1 9,423.7 40 160 EBITDA (Rmb mn) 1,030.4 1,151.6 1,360.1 1,619.5 35 EBIT (Rmb mn) 892.9 1,006.8 1,191.9 1,428.4 30 110 Net profit (Rmb mn) 417.8 462.5 562.5 681.7 25 EPS (CS adj.) (Rmb) 0.79 0.87 1.06 1.29 20 60 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a. 0.92 1.18 1.50 The price relative chart measures performance against the EPS growth (%) 2.9 10.7 21.6 21.2 Shanghai Shenzhen CSI300 index which closed at 3604.12 on P/E (x) 34.8 31.5 25.9 21.4 16/01/15 On 16/01/15 the spot exchange rate was Rmb6.2/US$1 Dividend yield (%) 0.44 0.48 0.58 0.70 EV/EBITDA (x) 15.3 14.2 12.1 10.6 Performance over 1M 3M 12M P/B (x) 3.4 3.1 2.8 2.5 Absolute (%) 3.5 -2.7 -0.8 — ROE (%) 11.3 10.2 11.3 12.4 Relative (%) -3.8 -50.3 -63.7 — Net debt/equity (%) 24.4 32.4 28.7 35.5
Source: Company data, Thomson Reuters, Credit Suisse estimates.
China Chemical Drug Sector 76 19 January 2015 Focus charts
Figure 146: Anaesthetic drugs account for 28% of Figure 147: Humanwell is the largest domestic Humanwell's 2013 revenue anaesthetic drug manufacturer (2013)
35% Anaesthestic drug market share 30%
Anesthetic drugs 25% 28%
20% Other drugs 58% Medical device 15% 14% 10%
5%
0% AstraZeneca Humanwell Pharm Fresenius Maruishi Pharm Hengrui Source: Company data, Credit Suisse research Note: Data is collected from hospitals of 16 sample cities. Source: Menet, Credit Suisse research
Figure 148: Huge gap of anaesthetic drug usage between Figure 149: Stable increase in number of surgeries China and developed countries (2011) nationwide Unit Usage of anesthesia mn No. of surgeries nationwide 50,000 40 45,000 35 40,000 10% 35,000 30 30,000 25 25,000 20,000 20 15,000 15 10,000 5,000 10 193 0 5
0 2006 2007 2008 2009 2010 2011 2012 Source: International Narcotics Control Board (INCB) Source: NHFPC, Credit Suisse research
Figure 150: Zhongyuan Ruide recorded a rapid sales Figure 151: Three criteria for stock evaluation growth after being acquired by Humanwell in 2010 Strong Rmb mn Attractive Overall 160 50% Capable R&D commercializa valuation ranking 140 48% tion capability 46% 120 44% Hengrui 100 42% 80 40% Huahai
60 38% 36% Salubris 40 34% 20 32% Humanwell 0 30% 2010 2011 2012 2013 - Highest, - Lowest. Overall ranking is valued by weighted average of three Sales of Zhongyuan Ruide YoY (RHS) criteria (Capable R&D:35%, Strong commercialization capability: 35%, Attractive valuation: 30%) Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
China Chemical Drug Sector 77 19 January 2015 The leading anaesthetic drug maker Humanwell Healthcare is a leading anaesthetic drug manufacturer in China. Although Humanwell is a leading anaesthetic drugs only contributed 28% of its total revenue, the segment accounted for anaesthetic drug 76% of its total net profit in 2013. The company also expanded into IVD regent and blood manufacturer in China, with product through M&A. 19% market share
Figure 152: Anaesthetic drugs accounted for 28% of Humanwell's 2013 revenue
Anesthetic drugs 28%
Other drugs 58% Medical device 14%
Source: Company data, Credit Suisse According to the data from Menet, Humanwell is the largest domestic anaesthetic drug manufacturer with 19% market share, only lagging behind AstraZeneca.
Figure 153: Humanwell is the largest domestic anaesthetic drug manufacturer (2013)
35% Anaesthestic drug market share 30%
25%
20%
15%
10%
5%
0% AstraZeneca Humanwell Pharm Fresenius Maruishi Pharm Hengrui Note: Data is collected from hospitals of 16 sample cities. Source: Menet, Credit Suisse
China Chemical Drug Sector 78 19 January 2015
High entry barrier for anaesthetic drugs To avoid the abuse of anaesthetic drugs, the Chinese government strictly controls the manufacture and distribution. In 1985, China became the member of the Single Convention on Narcotic Drugs, an international treaty to prohibit production and supply of specific (nominally narcotic) drugs and of drugs with similar effects except under license for specific purposes, such as medical treatment and research. Restricted number of manufacturers CFDA set both restrictions on manufacturers and distributors of anaesthetic drugs. For CFDA has set restrictions manufacturers; only one to two companies are allowed to provide API of certain kind of on both manufacturers and anaesthetic drugs while only one to three companies are approved to manufacture distributors of anaesthetic finished drug of certain kind of anaesthetic drugs. For distributors, only three distributors drugs are permitted to distribute anaesthetic drugs nationwide.
Figure 154: Restricted number of manufacturers and distributors TA Company types Maximum No. restricted by government API manufacturers 1~2 Anaesthetic drugs Finished drug manufacturers 1~3 Distributors nationwide 3 Source: CFDA, Credit Suisse Anaesthetic drugs also have a separate price setting system. The drugs sold in China's Anaesthetic drugs also have hospitals are required to go through the provincial drug tenders to determine their selling separate price setting prices. However, anaesthetic drugs' prices are directly set by NDRC, including ex-factory system, which are directly price and retail price, etc. We believe the impact of this unique rule is kind of positive given set by NDRC the tenders usually result in lower prices. Promising growth outlook The anaesthetic drugs Compared with developed countries, the anaesthetic drugs usage per capita in China is usage per capita in China is still at a low base and has a huge room to grow. We see the number of surgeries has still at a low base, bearing a increased steadily which should be a major driver for anaesthetic drugs. huge room to grow Figure 155: Huge gap of anaesthetic drug usage between Figure 156: Stable increase in number of surgeries China and developed countries (2011) nationwide Unit Usage of anesthesia mn No. of surgeries nationwide 50000 40
45000 35 10% 40000 30 35000
30000 25
25000 20 20000 15 15000
10000 10
5000 193 5 0 U.S. Canada German Japan South Brazil China Russia India 0 Africa 2006 2007 2008 2009 2010 2011 2012 Source: International Narcotics Control Board (INCB) Source: NHFPC, Credit Suisse
China Chemical Drug Sector 79 19 January 2015
Oligopoly in three anaesthetic drugs As we mentioned above, only one to three companies are allowed to manufacture the API So far, Humanwell enjoys and finished drug of certain anaesthetic drugs. So far, Humanwell enjoys oligopoly in three oligopoly in three major anaesthetic drugs, Fentanyl Citrate (芬太尼), Remifentanil Hydrochloride (瑞芬太尼) and anaesthetic drugs Sufentanil Citrate (舒芬太尼). The three products together make up 98% of its sales from anaesthetic drugs.
Figure 157: Comparison of Fentanyl-series of anaesthesia drugs Generic name Chinese name Therapeutic area Effect in surgery National EDL National RDL Fentanyl Citrate 芬太尼 Surgical anaesthesia Commonly-used surgical Yes A anaesthesia with moderate effects Remifentanil Hydrochloride 瑞芬太尼 Surgical anaesthesia Rapid anaesthetic effects with quick No B clearance Sufentanil Citrate 舒芬太尼 Surgical anaesthesia High analgesic intensity, 5-10 fold to No B Fentanyl Citrate Source: www.yaozh.com, Company data, Credit Suisse estimates According to the data from Menet, Humanwell does well in the three major drugs, Fentanyl, Remifentanil and Sufentanil, with 28%, 100% and 76% of market share, respectively.
Figure 158: Current market share of Humanwell in Fentanyl-series anaesthesia drugs (2013)
Changzhou Siyao 3%
Euro Cept 24% Humanwell 28%
Johnson&Joh Humanwell nson Humanwell 76% 69% 100%
Sufentanil Citrate Fentanyl Citrate Remifentanil Hydrochloride
Source: Menet, Credit Suisse Thanks to the dominant position in the three anaesthetic drugs, Humanwell achieved rapid We believe Humanwell's growth in the segment in the past five years. We believe the anaesthetic segment will anaesthetic segment will maintain a growth rate of 20%/19%/19% in 2014/15/16, respectively. maintain a growth rate of 20%/19%/19% in 2014/15/16, respectively
China Chemical Drug Sector 80 19 January 2015
Figure 159: Rapid growth in the segment of anaesthetic drugs Rmb mn 3,500 40%
3,000 35%
30% 2,500 25% 2,000 20% 1,500 15% 1,000 10%
500 5%
0 0% 2009 2010 2011 2012 2013 2014E 2015E 2016E Sales of Humanwell anesthetic drugs YoY (RHS)
Source: Company data, Credit Suisse research Promising pipeline to garner more market share Although Humanwell has already achieved good position in Fentanyl-series, the company The company is facing a still faces a huge potential on Propofol (丙泊酚) and Sevoflurane (七氟烷) which together huge potential on Propofol make up 64% of the anaesthetic drug market in China. Propofol market is mainly occupied (丙泊酚) and Sevoflurane by Astrazeneca while Sevoflurane market is bisected by Hengrui and Maruishi. After (七氟烷) analysing the pipeline, we believe Humanwell has a chance to gain more market share by launching new products.
Figure 160: Market share of major anaesthetic drugs in China (2013)
Generic name Domestic anesthetic drug market share Major players
Propofol (丙泊酚) 43% Astrazeneca (65%), Fresenius (25%)
Sev oflurane (七氟烷) 21% Maruishi (44%), Hengrui (44%)
Remifentanil (瑞芬太尼) 12% Humanw ell (100%)
Sufentanil (舒芬太尼) 10% Humanw ell (76%), Euro Cept (24%)
Fentany l (芬太尼) 5% Johnson&Johnson (69%), Humanw ell (28%)
Ropiv acaine (罗哌卡因) 4% Astrazeneca (82%)
Others 4%
Source: Menet, Credit Suisse
Several drugs get ready for the upcoming tenders Humanwell has three major anaesthetic drugs approved in 2010/12/13, reflecting its strong Humanwell has three major R&D capacity in the anaesthetic area. Hydromorphone injection, a potential out-of-surgery anaesthetic drugs approved anaesthesia blockbuster, is typically used to eliminate pain caused by cancer and arthritis. in 2010/12/13, reflecting its This drug is complementary to Humanwell's current drug portfolios which are mainly strong R&D capacity in the composed of surgery anaesthesia. anaesthetic area The other promising drug is Nalbuphine injection. It was approved in 2013, functioning in a different molecular pathway to Fentanil-series of drugs. Due to its exclusive mechanism, it
China Chemical Drug Sector 81 19 January 2015 demonstrates more obvious anaesthetic effects to female patients. Therefore, as the first domestic manufacturer of Nalbuphine, Humanwell is likely to enjoy a huge market share in gynecologic surgery.
Figure 161: Rich portfolio and pipeline of products General name Chinese name TA Application stage (Estimated) Drug type approval year Paracetamol and tramadol 氨酚曲马多片 Surgery Anaesthesia Approved for production 2010 FTM hydrochloride tablets Hydromorphone hydrochloride 盐酸氢吗啡酮注射液 Anaesthesia Approved for production 2012 FTM injection Nalbuphine hydrochloride Injection 盐酸纳布啡注射液 Surgery Anaesthesia Approved for production 2013 FTM Alfentanil hydrochloride injection 盐酸阿芬太尼注射液 Surgery Anaesthesia Apply for production 2015 FTM Meptazinol hydrochloride Tablets 盐酸美普他酚片 CNS Clinical verification 2016 FTM Recombinant human TNF-related 注射用重组人肿瘤坏死 Oncology Clinical verification 2016 Patent apoptosis-inducing ligand(TRAIL) for 因子相关凋亡诱导配体 injection Fospropofol disodium for injection 注射用磷丙泊酚钠 Surgery Anaesthesia Clinical verification 2017 Patent Phenylpropanol tablets 苯丙醇片 Digestion Clinical verification 2017 FTM Isoflurane injection 异氟烷注射液 Surgery Anaesthesia Clinical verification 2018 FTM Compound pholcodine capsules 复方福尔可定胶囊 Respiratory Clinical verification 2018 FTM Source: www.yaozh.com, Company data, Credit Suisse estimates Rmb1 bn potential market for Fospropofol disodium (注射用磷丙泊酚钠) On its pipeline, Humanwell is collaborating with Huaxi Medical University to develop a We estimate the market size novel Propofol-substitute, Fospropofol disodium. In 2013, Propofol was the most of Fospropofol will reach commonly used anaesthesia during surgeries with a market share of 43%. However, its ~Rmb1 bn due to lower side characteristics of lipid-solubility increase the risk of side effects. Therefore, Fospropofol effects disodium was designed to minimise the side effects by changing to water-solubility. If half of the Propofol could be substituted by Fospropofol disodium in future, we estimate the market size of this drug will reach ~Rmb1 bn.
China Chemical Drug Sector 82 19 January 2015 Proven track record in M&A In the past ten years, Humanwell has extended its business from anaesthetic drugs to Humanwell has carried out blood products, TCM drugs and in-vitro diagnostics by investing in specialty companies. two major M&As in 2010 The Uyghur drug (TCM) business was established in 2001 and still maintained a high and 2012, Ruide (瑞德) growth rate of 32% in 2013. In 2010, Humanwell purchased 70% equity stake of Biopharm and Beijing Baron Zhongyuan Ruide (瑞德) Biopharm, thus expanding into blood product business. In 2012, (巴瑞), to enter into blood Humanwell began its in-vitro diagnostics business (IVD) by acquiring 80% equity stake of product and IVD businesses Beijing Baron (巴瑞). For long-term development, Humanwell strategically stepped into biologics business by acquiring Xinpeng (新鹏) Biopharm as a wholly owned subsidiary. Now its blockbuster product, rhTRAIL (TNF-related apoptosis-inducing ligand), has been approved for clinical trial. This product is a patented oncology drug bearing high specificity in cancer treatment.
Figure 162: Time line of Humanwell's M&A events
Acquiring 85% Acquiring 80% shares Holding 70% equity of Xijiang of Beijing Baron ( 瑞) equity of Yichang Xipa ( ) Establishing its medical device Humanwell by Uyghur Pharm, drug exporting company, beginning purchasing embracing into subsidiary, IVD business another 19% TCM business Puracap, in US
2003 2006 2008 2009 2010 2012
Phurchasing 70% equity of Ruide (瑞 ) Acquiring 33% equity of Biopharm, embracing Shenzhen Xinpeng ( ) into blood product Biopahrm, embracing into business; acquiring biologics development. another 67% equity of Xinpeng Biopharm.
Source: Company data, Credit Suisse Zhongyuan Ruide (Blood products) Zhongyuan Ruide (中原瑞德) became a wholly owned subsidiary of Humanwell after a Zhongyuan Ruide has three-step acquisition of 70%/15%/15% stake in its equity in 2010/11/13, respectively. recorded a rapid sales and Ruide is focusing on producing blood products such as Albumin and Rabies immunoglobin. net profit growth after being Due to the strict regulation of blood products, the government has not approved new blood acquired by Humanwell product manufacturers any longer since 2001, which offers a mild competitive landscape in 2010 for Ruide. Ruide recorded a net loss of Rmb0.42 mn in 2010. After being acquired by Humanwell, Ruide was growing fast due to improved operations management. In 2013, Ruide recorded a sales of Rmb148 mn with YoY growth rate of 46%. This high growth rate will be maintained as the company is planning to establish new blood plasma stations. The successful turnaround of Ruide is largely dependent on excellent management capacity of Humanwell.
China Chemical Drug Sector 83 19 January 2015
Figure 163: Zhongyuan Ruide recorded a rapid sales Figure 164: …as well as in net profit growth after being acquired by Humanwell in 2010… Rmb mn Rmb mn 160 50% 60 200% 48% 140 180% 46% 50 120 160% 44% 40 140% 100 42% 120% 30 80 40% 100% 38% 20 60 80% 36% 40 10 60% 34% 40% 20 32% 0 2010 2011 2012 2013 20% 0 30% 2010 2011 2012 2013 -10 0% Sales of Zhongyuan Ruide YoY (RHS) Net profit of Zhongyuan Ruide YoY (RHS)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Beijing Baron (IVD) To enjoy the rapid growth of In-vitro diagnostics (IVD) market, Humanwell stepped into the Humanwell stepped into the IVD business by acquiring an 80% equity of Beijing Baron (巴瑞) in 2012. Baron is mainly IVD business by acquiring an agency company, which is responsible for distribution of Roche's IVD products in China. an 80% equity of Beijing After consolidation, Baron contributed a sales of Rmb626 mn with a net profit of Rmb150 Baron (巴瑞) in 2012 mn in 2013, only second to that of Humanwell's anaesthetic business. Given sales of Roche from IVD segment reached Rmb6 bn in 2013 with a stable growth rate of 26%, we believe Baron will be able to maintain the growth momentum.
Figure 165: Sales revenue of Beijing Baron rose 24% YoY Figure 166: …while net profit increased 16% YoY in 2013... Rmb mn Rmb mn 700 40% 160 70%
600 35% 140 60%
30% 120 500 50% 25% 100 400 40% 20% 80 300 30% 15% 60 200 20% 10% 40
100 5% 20 10%
0 0% 0 0% 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 Sales of Beijing Baron YoY (RHS) Net profit of Beijing Baron YoY (RHS)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
China Chemical Drug Sector 84 19 January 2015
Xinjiang Uyghur Pharm (TCM) Xinjiang Uyghur Pharm was co-founded by Humanwell and Xinjiang Uyghur hospital in Under management of 2001. Humanwell acquired 55% of its equity upon establishment and procured 14.85% Humanwell, Xinjiang Uyghur additional stake in November 2014. The major products of this company are Uyghur drugs, Pharm achieved 2013 sales which enjoy favourable government policies and high entry barrier. Under management of of Rmb220 mn with a three- Humanwell, Xinjiang Uyghur pharm achieved 2013 sales of Rmb220 mn with a three-year year average growth rate of average growth rate of 47%. 47%
Figure 167: Xinjiang Uyghur Pharm maintains a high Figure 168: …and net profit growth rate in both sales… Rmb mn Rmb mn 250 70% 30 70% 60% 60% 25 200 50% 50% 40% 20 150 30% 40% 15 20% 30% 100 10% 10 20% 0% 50 -10% 10% 5 -20% 0 0% 0 -30% 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 Sales of Xinjiang Uyghur Pharm YoY (RHS) Net profit of Xinjiang Uyghur Pharm YoY (RHS)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Puracap (Generics export) To catch up with the huge profit opportunities of generic market in the US, Humanwell Humanwell is now taking established a subsidiary, Puracap, to launch its drug export business. So far, all six ANDA advantages of acquired products of Humanwell were acquired from other drug manufacturers such as Pharmeral, ANDA products to pave a Par Pharma and Actavis. In 2012, Humanwell purchased a patent dermatology drug, way for exporting self- EpiCream, which recorded sales of US$639 mn in 2013. Even so, the overall profit from developed generics overseas business is still at a loss. We believe that Humanwell is now taking advantages of acquired ANDA products to pave a way for exporting self-developed generics. Medical service business Humanwell established two subsidiaries to step into the medical service business. Since Humanwell stepped into the July 2014, Humanwell has spent a total of Rmb400 mn to set up two medical service medical service business by companies separately in Laohekou City (老河口市) and Zhongxiang City (钟祥市), aiming supplying hospital to supply hospital management service to local public hospitals. Besides, the invested management service to capital will also be utilised to construct new hospital areas to expand existing scales. local public hospitals According to Humanwell's announcement, its medical service business coverage will extend upto 20 public hospitals within three to five years. Private placement plan Private placement served as a positive catalyst for Humanwell's share price. Humanwell Catalytic effects of private announced two private placements in 2013 and 2014, respectively. The first placement has been priced announcement took place on 13 July 2013, causing a sharp price boost in the following in the stock two months until middle of September. The second placement plan was initially announced on 26 March 2014, and further revised in August. Right after the initial announcement in March, Humanwell's share price maintained a rising tendency until July.
China Chemical Drug Sector 85 19 January 2015
Therefore, we believe the pull-up effects driven by the recent private placement have already been priced in. In this placement plan, Humanwell will issue 133 mn new shares to actual controller (58%), senior management (8%) and mutual funds (36%). The capital raised by offering will be used for payment of debt and creating supply capital for future acquisitions. According to the plan, Humanwell will utilise ~Rmb382 mn to expand into medical service business through investment in hospitals.
Figure 169: Catalytic effects of private placement has been priced in the stock Rmb 34 22.6% Announcement 32 of private Announcement placement on of 2014 private 17.3% placement on 30 13rd Jul 2013 26th Mar 2014
28
26
24
22
20 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14
Humanwell's historical share price (adj.)
Source: Bloomberg, Company data, Credit Suisse
China Chemical Drug Sector 86 19 January 2015 Valuation Our target price of Rmb29 is based on 27x FY15E P/E which is equal to the sector average to reflect its mixed bag of high barrier anaesthetic drug business and loss-making business. On the other hand, the company’s net profit CAGR of 21% in 2014-16 lags behind sector average which will limit the re-rating potential. The stock is trading below its historical 5-Y; however, given the uncertainty of turnaround for its loss-making business, the current valuation leaves limited upside for investors.
Figure 170: Humanwell's 12M forward P/E band
55 Humanwell's 12M forward P/E
50
45 +2std=41.6 40 +1std=36.3 35
mean=31.0 30
25 -1std=25.6
20 -2std=20.3
15 '09 '10 '11 '12 '13 '14
Source: Company data, Credit Suisse estimates Three criteria for stock evaluation
Figure 171: Three criteria for stock evaluation Strong Capable R&D commercialization Attractive valuation Overall ranking capability
Hengrui
Huahai
Salubris
Humanwell - Highest, - Lowest. Overall ranking is valued by weighted average of three criteria (Capable R&D:35%, Strong commercialization capability: 35%, Attractive valuation: 30%)
Source: Credit Suisse research Capable R&D: Humanwell has three major anaesthetic drugs approved in 2010/12/13, reflecting its strong R&D capacity in anaesthetic area. Besides, Humanwell is collaborating with Huaxi Medical University to develop a blockbuster anaesthesia drug, Fospropofol disodium, with a potential market size of ~Rmb1 bn. Strong sales capacity: As CFDA has set restrictions on both manufacturers and distributors of anaesthetic drugs, the competition landscape of Humanwell is not so intensified as drug manufacturers in other therapeutic areas. Therefore, its sales team is
China Chemical Drug Sector 87 19 January 2015 facing less stress from generic competitions. In US market, all six ANDA products of Humanwell were acquired from other drug manufacturers such as Pharmeral, Par Pharma and Actavis. We believe that Humanwell is now taking advantages of acquired ANDA products to pave a way for exporting self-developed generics. Attractive valuation: The stock is trading at 27x 12M forward P/E which leaves limited upside to our target price. Catalyst Given its proven track record on integration, we believe potential M&A should be the catalyst for its share price. Investment risks Uncertainty of Fospropofol Propofol enjoyed the largest market share of 43% in surgery anaesthetic market in 2013. Humanwell is now collaborating with Huaxi Medical University to develop a novel Propofol- substitute to lower its side effects. However, the drug is still under clinical verification stage, bearing an uncertainty of its efficacy. Slower market penetration rate for newly approved drugs Three promising anaesthetic drugs were approved in 2010/12/13. We are concerned that their market penetration rate will be slower than our expectations. Drug export business is hard to break even Over the past four years, Puracap, the overseas subsidiary of Humanwell maintained its loss-making status. It might still need several years for Humanwell's drug export business to reach its break-even point.
China Chemical Drug Sector 88 19 January 2015
Asia Pacific / China Pharmaceutical Distribution
China Medical System Holdings
Ltd. (0867.HK / 867 HK) Rating NEUTRAL*
Price (16 Jan 15, HK$) 13.30 Target price (HK$) 15.00¹ Upside/downside (%) 12.8 Controlling two potential blockbuster drugs, Mkt cap (HK$ mn) 32,116 (US$4,143) Enterprise value (US$ mn) 4,066 but potential upside mostly priced in Number of shares (mn) 2,414.75 Free float (%) 29.7 ■ Reinforced collaboration with Tibet Pharma. CMS increased its equity 52-week price range 14.68 - 8.26 interests in Tibet Pharma to 26.6% in October 2014 from 8.6% previously, and ADTO - 6M (US$ mn) 9.2 became its largest shareholder. The company is likely to extend the exclusive marketing rights of Tibet Pharma's XinHuoSu for the longer term (the current *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. agreement will expire in 2019). CMS has acquired commercialisation rights for ¹Target price is for 12 months. another high potential drug, NuoDiKang from Tibet Pharma in January 2015. Both Xinhuosu and Nuodikang have significant potential to become Rmb1-bn Research Analysts drugs in terms of their sales in China on the back of their innovative Iris Wang 852 2101 7646 molecules/formula and patent protection. [email protected] ■ From distribution rights to ownership acquisition. The equity investments in Tibet Pharma and assets buyout of Succinylated Gelatin Injection further demonstrated CMS's transition from acquiring distribution rights to acquiring product ownership, following the acquisition of Stulln and GanFuLe. Management commented that it will prefer acquiring all assets related to a particular product in the future. ■ Sales network expansion started to bear fruit. CMS increased the number of covered hospitals by 2,000 in 1H14. It also enhanced marketing commitment; for instance, the number of visits by sales force in key hospitals, especially grass-root hospitals. Management believes the market potential for its existing products is high as its sales team further extends to lower-tier hospitals, and the company hopes to develop its products into blockbusters with annual sales of over Rmb1 bn. ■ Valuation: Historically, CMS has traded at a discount to CSPC and Sino Biopharm. There are concerns that it might lose rights to commercialise products when the distribution agreement expires. We believe the transition has alleviated market's concerns, and the stock price has been rerated in the past three months and has started trading at a premium to R&D-oriented companies. We believe the potential upside from XinHuoSu and NuoDiKang has been mostly priced in. Share price performance Financial and valuation metrics
Year 12/13A 12/14E 12/15E 12/16E Price (LHS) Rebased Rel (RHS) Revenue (US$ mn) 363.3 476.9 603.6 748.8 20 400 EBITDA (US$ mn) 105.2 149.0 187.6 233.3 15 300 EBIT (US$ mn) 99.1 140.5 176.3 219.4 10 200 Net profit (US$ mn) 102.8 133.8 166.6 206.1 5 100 EPS (CS adj.) (US$) 0.04 0.06 0.07 0.09 0 0 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Change from previous EPS (%) n.a. 0 0 0 Consensus EPS (US$) n.a. 0.06 0.07 0.09 The price relative chart measures performance against the EPS growth (%) 20.9 30.1 24.5 23.7 MSCI CHINA F IDX which closed at 6914.25 on 16/01/15 P/E (x) 40.3 31.0 24.9 20.1 On 16/01/15 the spot exchange rate was HK$7.75/US$1 Dividend yield (%) 0 0 0 0 EV/EBITDA (x) 39.1 27.3 21.4 16.9 Performance over 1M 3M 12M P/B (x) 7.9 6.9 5.9 5.0 Absolute (%) 10.8 0.6 53.4 — ROE (%) 21.2 23.8 25.5 26.9
Relative (%) 2.7 -48.3 -10.9 —
Net debt/equity (%) net cash net cash net cash net cash Source: Company data, our estimates.
China Chemical Drug Sector 89 19 January 2015
Asia Pacific / China Major Pharmaceuticals
CSPC Pharmaceutical Group
Ltd (1093.HK / 1093 HK) Rating OUTPERFORM*
Price (16 Jan 15, HK$) 6.83 Target price (HK$) 8.61¹ Upside/downside (%) 26.1 High growth visibility driven by innovative Mkt cap (HK$ mn) 40,352 (US$ 5,206) Enterprise value (HK$ mn) 39,789 drugs Number of shares (mn) 5,908.02 Free float (%) 36.0 52-week price range 8.29 - 5.91 ■ High earnings visibility driven by innovative drugs. We expect its three ADTO - 6M (US$ mn) 20.4 cardiovascular drugs—NBP, Oulaining and Xuanning—to register 30%+
revenue growth both in existing markets and additional hospital access from *Stock ratings are relative to the coverage universe in each new drug tenders in 2015/16. Management has guided its two oncology analyst's or each team's respective sector. drugs, Duomeisu and Jinyouli—both generics of global blockbusters—to ¹Target price is for 12 months. meet HK$250 mn and HK$500 mn oncology drug sales targets for 2014 and Research Analysts 2015, respectively. Iris Wang 852 2101 7646 ■ Smooth progress in R&D. CSPC has submitted a clinical study application [email protected] for its hepatitis C drug, Sofosbuvir tablet, the generic of Sovaldi launched by Gilead in end-2013. CSPC is the first domestic manufacturer together with Kelun Pharma to submit the application. Management estimates total R&D costs of ~Rmb20 mn for Sofosbuvir. It also expects to get clinical study approval soon for the oncologic drug Paclitaxel (protein-bound particles for injectable suspension (白蛋白紫杉醇)) in China, and will consider applying for this product in the US and Europe in the future. ■ More favourable tender policies. Management stated that the recent tendency of applying favourable tender policies to good quality drugs in Zhejiang and Fujian tender may likely roll over to nationwide next year. We believe this will likely benefit R&D-oriented pharmaceutical companies such as CSPC with low price cut pressure and less competition. ■ Valuation: Management is confident about its earnings guidance of 30% YoY for 2014/15. We expect innovative drugs to continue to drive strong earnings growth, with acceleration in drug tenders and the recent tendency of applying favourable tender policies to drugs with good quality. Share price performance Financial and valuation metrics
Year 12/13A 12/14E 12/15E 12/16E Price (LHS) Rebased Rel (RHS) Revenue (HK$ mn) 9,949.1 10,063.1 11,673.0 13,435.0 10 400 EBITDA (HK$ mn) 1,836.3 2,010.2 2,592.4 3,265.0 8 300 EBIT (HK$ mn) 1,180.0 1,732.3 2,314.5 2,987.0 6 200 Net profit (HK$ mn) 947.5 1,396.1 1,808.7 2,346.7 4 100 EPS (CS adj.) (HK$) 0.16 0.24 0.31 0.40 2 0 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Change from previous EPS (%) n.a. 0 0 0 Consensus EPS (HK$) n.a. 0.22 0.29 0.36 The price relative chart measures performance against the EPS growth (%) 31.7 47.3 29.6 29.7 MSCI CHINA F IDX which closed at 6914.25 on 16/01/15 P/E (x) 42.4 28.8 22.2 17.1 On 16/01/15 the spot exchange rate was HK$7.75/US$1 Dividend yield (%) 1.0 1.0 1.3 1.6 EV/EBITDA (x) 22.1 19.8 15.0 11.5 Performance over 1M 3M 12M P/B (x) 5.4 4.8 4.2 3.6 Absolute (%) 5.1 3.8 7.9 — ROE (%) 13.5 17.6 20.0 22.4 Relative (%) -2.9 -6.6 -3.2 — Net debt/equity (%) 2.0 net cash net cash net cash
Source: Company data, our estimates.
China Chemical Drug Sector 90 19 January 2015
Asia Pacific / China Major Pharmaceuticals
Dawnrays Pharmaceutical
(Holdings) Limited (2348.HK / 2348 HK) Rating OUTPERFORM*
Price (16 Jan 15, HK$) 5.07 Target price (HK$) 7.30¹ Upside/downside (%) 44.0 No substantial earnings impact from CEO's Mkt cap (HK$ mn) 4,089.6 (US$527.6 Enterprise value (Rmb mn) 2,987mn) resignation; share price correction overdone Number of shares (mn) 806.62 Free float (%) 45.3 ■ Resignation of CEO created uncertainties on talent retention strategy. 52-week price range 8.00 - 4.90 During a conference call following the resignation of CEO, Ms Huang, ADTO - 6M (US$ mn) 1.8 management reassured investors that business operations were not impacted and guided to 30%/25% YoY earnings growth for FY14/15E. *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. Dawnrays assigned a new sales Vice President, Mr Chen, and he stated ¹Target price is for 12 months. there was no change in Danwrays' sales strategy. Ms Li, Executive Director
Research Analysts and Chairman, confirmed that several senior management left during 2014 Iris Wang due to either unfit working culture or unfit expertise. We believe there are 852 2101 7646 uncertainties in Dawnrays' talent retention strategy. [email protected] ■ Commercial rights of Entecavir to be finalised. Currently, Dawnrays has appointed a sales agency for the management of Entecavir's sales in the China market. Dawnrays is considering two options—to either withdraw the distribution rights completely or to adopt a mix of in-house sales and sales agency network after the distribution agreement expires in 2015. An announcement will be released after the board has made the decision. With the expectation of acceleration of drug tenders in 2015, Dawnrays strives to win as many tenders as possible for Entecavir. Overseas market will also remain a focus: Entecavir’s sales in Hong Kong were a success and Dawnrays will strive to explore new market opportunities, such as Russia. ■ New drug approval could be a catalyst. Dawnrays' new anti-dementia drug dihydroergocryptine mesilate and caffeine tablets (麦角隐亭咖啡片) will get approval next year, according to management. ■ Valuation: Our TP of HK$7.30 is based on 18x 2015E EPS, implying a PEG of 0.75 (2014-16E CAGR of 24%) at a discount to industry average of 1.0, given the concern that the recent high turnover of management team poses risks to business visibility, and the recent derating of pharma companies due to sector rotation. However, in our view, the ~20% share price correction was overdone, as we believe there will be no substantial (over 10%) earnings impact, thanks to the accelerating drug tender progress. Share price performance Financial and valuation metrics
Year 12/13A 12/14E 12/15E 12/16E Price (LHS) Rebased Rel (RHS) Revenue (Rmb mn) 915.0 1,005.2 1,143.7 1,314.5 10 600 EBITDA (Rmb mn) 229.0 303.7 369.8 444.2 400 EBIT (Rmb mn) 192.6 268.5 335.3 410.4 5 200 Net profit (Rmb mn) 153.1 208.6 261.5 320.9 EPS (CS adj.) (Rmb) 0.19 0.26 0.33 0.40 0 0 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Change from previous EPS (%) n.a. 0 0 0 Consensus EPS (Rmb) n.a. 0.26 0.33 0.42 The price relative chart measures performance against the EPS growth (%) 33.5 36.3 25.3 22.7 MSCI CHINA F IDX which closed at 6914.25 on 16/01/15 P/E (x) 21.3 15.6 12.5 10.1 On 16/01/15 the spot exchange rate was HK$7.75/US$1 Dividend yield (%) 1.5 2.6 3.2 3.9 EV/EBITDA (x) 13.4 9.8 7.8 6.0 Performance over 1M 3M 12M P/B (x) 3.1 2.8 2.5 2.2 Absolute (%) -26.5 -34.0 -11.5 — ROE (%) 15.3 18.9 21.3 23.2 Relative (%) -34.5 -44.4 -22.6 — Net debt/equity (%) net cash net cash net cash net cash
Source: Company data, our estimates.
China Chemical Drug Sector 91 19 January 2015
Asia Pacific / China Major Pharmaceuticals
Shanghai Fosun Pharmaceutical (Group) Co., Ltd. (2196.HK / 2196 HK) Rating OUTPERFORM*
Price (16 Jan 15, HK$) 28.35 Target price (HK$) 33.89¹ Upside/downside (%) 19.5 A proxy for the China healthcare sector Mkt cap (HK$ mn) 64,910 (US$ 8,374) Enterprise value (Rmb mn) 56,458 ■ A diversified portfolio of blockbuster drugs. Fosun Pharma has built a Number of shares (mn) 2,311.61 diversified drug portfolio in fast-growing therapeutic areas. We identify You Di Er, Free float (%) 91.9 Atomolan, Ao De Jin and Bang Ting as the four key growth drivers for the next 52-week price range 30.6 - 22.0 three years, and expect the anti-depressants and insulin analogue to become ADTO - 6M (US$ mn) 7.3 growth drivers in the medium and long terms, respectively. We expect the pharma manufacturing business to achieve revenue growth of 16%/18%/18% in *Stock ratings are relative to the coverage universe in each 2014/15/16, respectively, mainly driven by an increase in its hospital penetration analyst's or each team's respective sector. from the new drug tenders, capacity bottleneck removal and new drug launches, ¹Target price is for 12 months. without factoring in potentially another 5-10% growth p.a. from M&A. Research Analysts ■ Benefits from booming private healthcare. Private healthcare services has Iris Wang registered double-digit growth over the past five years as the government 852 2101 7646 opened up healthcare services to private companies ending the age-old [email protected] monopoly of public hospitals. The government is expected to gradually remove barriers for private hospitals such as allowing physicians to practise in multiple sites and improving reimbursement coverage. For hospital M&As, Fosun Pharma targets large general/specialty hospitals with leadership positions in local areas and focuses on building up regional healthcare service franchises, serving both high-income groups and mass population. We expect its hospital business to grow at 140%/50%/50% in 2014/15/16, respectively, led by improving operational efficiencies, expanding hospital bed capacity, increasing utilisation of hospital beds and ongoing acquisitions. ■ Catalysts. Fosun Pharma should benefit from sector-wide positive catalysts such as accelerating drug tenders and easing of anti-corruption rules in the healthcare sector. Other catalysts include new acquisitions and a recovery in revenue growth in 2H14. ■ SOTP valuation implies 33% upside potential. Our target price of HK$33.89 for Fosun Pharma is based on a sum-of-the-parts valuation. We value its: (1) pharma manufacturing business by using 22x 2015E P/E, given 18.6% organic growth (FY14-16 core EPS CAGR) and potentially another 5-10% growth from acquisition; (2) hospital business by using 4x FY13 net asset per share given the number of operating hospital beds would more than double and the EBIT margin would improve to 16.5% by end-2016; and (3) other businesses/investments as marked-to-market or benchmarked to comparable companies. Share price performance Financial and valuation metrics
Year 12/13A 12/14E 12/15E 12/16E Price (LHS) Rebased Rel (RHS) Revenue (Rmb mn) 9,921.5 12,150.6 14,747.0 18,014.2 40 400 EBITDA (Rmb mn) 1,459.2 1,726.5 2,106.3 2,634.7 30 300 EBIT (Rmb mn) 1,038.8 1,248.0 1,591.0 2,085.0 20 200 Net profit (Rmb mn) 2,027.1 1,910.7 2,278.2 2,663.7 10 100 EPS (CS adj.) (Rmb) 0.90 0.84 1.00 1.17 0 0 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Change from previous EPS (%) n.a. 0 0 0 Consensus EPS (Rmb) n.a. 0.95 1.12 1.31 The price relative chart measures performance against the EPS growth (%) 13.4 -7.3 19.2 16.9 MSCI CHINA F IDX which closed at 6914.25 on 16/01/15 P/E (x) 25.1 27.1 22.7 19.4 On 16/01/15 the spot exchange rate was HK$7.75/US$1 Dividend yield (%) 1.2 1.1 1.3 1.5 EV/EBITDA (x) 37.4 32.7 26.9 21.6 Performance over 1M 3M 12M P/B (x) 3.5 3.2 2.9 2.7 Absolute (%) 5.0 11.0 18.9 — ROE (%) 14.6 12.5 13.6 14.4
Relative (%) -3.0 0.5 7.8 —
Net debt/equity (%) 14.5 23.7 22.9 21.5 Source: Company data, our estimates.
China Chemical Drug Sector 92 19 January 2015
Asia Pacific / China Major Pharmaceuticals
Sihuan Pharmaceutical
Holdings Group Ltd. (0460.HK / 460 HK) Rating OUTPERFORM*
Price (16 Jan 15, HK$) 5.34 Target price (HK$) 6.64¹ Upside/downside (%) 24.3 Beneficiary of increasing EDL drug Mkt cap (HK$ mn) 55,345 (US$ 7,140) Enterprise value (Rmb mn) 41,531 prescription and acceleration of drug tenders Number of shares (mn) 10,364.18 Free float (%) 25.9 52-week price range 6.44 - 3.78 ■ Government reinforces the plan of increasing EDL drug prescription. A ADTO - 6M (US$ mn) 19.3 couple of provinces have reinforced the increase in the use of EDL drugs in
their circulars as part of promoting reform in the healthcare system in 2014. *Stock ratings are relative to the coverage universe in each According to Menet, currently sales of EDL drugs account for less than 10% analyst's or each team's respective sector. of hospitals' total prescriptions. We believe that the EDL drug market will ¹Target price is for 12 months. maintain robust growth driven by the government policy. Research Analysts Iris Wang ■ Entries in the EDL market contribute to key product growth. Sihuan has 852 2101 7646 started to get its key products, especially exclusive drugs, listed on provincial [email protected] EDLs since late 2012 and has made great progress. Compared to 1H13, when only Kelinao and Yuanzhijiu entered Guangdong's EDL, Sihuan now has eight products included in the EDLs of Guandong, Hubei, Xinjiang, Chongqing, and Anhui. Sihuan's strategy to enter the EDL market has been proved effective in prolonging the life cycles of mature products. For example, Kelinao, which was launched over a decade ago, had recovered to 20%+ volume growth in 1H14 from negative growth in 2012. The EDL market's contribution also stimulates the ramp-up of growth-stage drugs. Yuanzhijiu saw 50% YoY volume growth in 1H14. ■ New drug tender to benefit the younger drug portfolio. We expect Sihuan to benefit from its younger drug portfolio given the acceleration in drug tenders. The drugs that were approved after 2011 are still in a fast- growth stage and have not yet fully included in the last round of drug tenders. We expect them to deliver a 40% revenue CAGR over 2014-16 and account for ~65% of 2016E sales. ■ Valuation. Our target price of HK$6.64 is based on 25x FY15E EPS, implying PEG of 0.95 (2014-16E CAGR of 26.2%), still below the sector average of 1.1. Catalysts are strong FY14 results and potential M&A. Share price performance Financial and valuation metrics
Year 12/13A 12/14E 12/15E 12/16E Price (LHS) Rebased Rel (RHS) Revenue (Rmb mn) 4,732.7 6,408.3 8,064.5 10,008.9 8 400 EBITDA (Rmb mn) 1,237.6 2,030.0 2,391.1 2,825.6 6 300 EBIT (Rmb mn) 1,043.4 1,525.2 1,919.4 2,382.1 4 200 Net profit (Rmb mn) 1,303.0 1,706.9 2,177.8 2,718.3 2 100 EPS (CS adj.) (Rmb) 0.13 0.16 0.21 0.26 0 0 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Change from previous EPS (%) n.a. 0 0 0 Consensus EPS (Rmb) n.a. 0.17 0.21 0.26 The price relative chart measures performance against the EPS growth (%) 44.1 31.0 27.6 24.8 MSCI CHINA F IDX which closed at 6914.25 on 16/01/15 P/E (x) 34.0 25.9 20.3 16.3 On 16/01/15 the spot exchange rate was HK$7.75/US$1 Dividend yield (%) 1.2 1.2 1.5 1.8 EV/EBITDA (x) 34.7 20.5 17.0 14.0 Performance over 1M 3M 12M P/B (x) 5.6 4.9 4.2 3.5 Absolute (%) 6.4 -14.8 36.9 — ROE (%) 17.4 20.1 22.1 23.5 Relative (%) -1.6 -25.3 25.8 — Net debt/equity (%) net cash net cash net cash net cash
Source: Company data, our estimates.
China Chemical Drug Sector 93 19 January 2015
Asia Pacific / China Pharmaceutical Distribution
Luye Pharma Group Ltd.
(2186.HK / 2186 HK) Rating OUTPERFORM* [V]
Price (16 Jan 15, HK$) 9.29 Target price (HK$) 11.00¹ Upside/downside (%) 18.4 Jialin acquisition delayed; US clinical trial to Mkt cap (HK$ mn) 30,853 (US$ 3,980) Enterprise value (Rmb mn) 22,180 release Number of shares (mn) 3,321.07 Free float (%) 20.1 ■ Acquisition of Beijing Jialin delayed. Luye extended the expected 52-week price range 11.22 - 6.57 ADTO - 6M (US$ mn) 10.7 completion date of the first tranche of acquisition of Beijing Jialin, the
manufacturer of Lipitor generics A Le, from end-November 2014 to end- *Stock ratings are relative to the coverage universe in each January 2015, due to the delay of the final court judgement of a legal case analyst's or each team's respective sector. between Jialin and Pfizer. Although the ruling results of the case is ¹Target price is for 12 months. immaterial to Jialin's business operations, such delay would impact the [V] = Stock considered volatile (see Disclosure Appendix). FY15E/16E earnings accretion for Luye. Research Analysts ■ We recently revised down FY15E/16E EPS. Our pro-forma analysis of Iris Wang Luye's earnings accretion from Jialin is based on the assumption that Luye 852 2101 7646 can start booking the earnings of Jialin proportionally to its shareholding right [email protected] after the transaction is completed. We recently cut our pro-forma 2015/16E EPS by 4.8%/1.4% based on the new transaction timeline: (1) ~48% of Jialin business consolidated by end-January 2015 and the rest consolidated by mid-2015, and (2) Luye borrows corporate loans of ~Rmb 4 bn in June 2015 at a 6% interest rate to fund the payment of the Third Tranche and the Remaining Equity Interests acquisition. ■ Catalyst. Luye is also one of the few Chinese pharmas that are seeking US FDA approval for finished drugs. Luye is conducting clinical trials for its microsphere-based formulation of risperidone. The clinical trials are expected to complete by March 2015 and we expect positive announcement about the clinical trial results in the next six months. If the clinical trial result is positive, the drug is expected to get approved by US FDA by 1H17. ■ Valuation. Our target price to HK$11 is based on 27x our FY15E EPS—the lower multiple (previously 28x) reflects the recent sector de-rating and potential further earnings downside from the delayed acquisition timeline, while we maintain our OUTPERFORM rating for the potential upside from the potential approval of risperidone by the US FDA in 2016/17. Profit-taking of cornerstone investors whose position got unlocked on 7 January 2015 and adverse regulation on Lipusu's selling price are the major risks. Share price performance Financial and valuation metrics
Year 12/13A 12/14E 12/15E 12/16E Price (LHS) Rebased Rel (RHS) Revenue (Rmb mn) 2,515.1 3,254.2 4,091.3 5,009.1 14 180 EBITDA (Rmb mn) 507.2 842.9 1,123.1 1,410.0 12 EBIT (Rmb mn) 406.3 740.6 1,007.9 1,281.7 10 130 Net profit (Rmb mn) 310.5 585.6 1,058.2 1,425.3 8 EPS (CS adj.) (Rmb) 0.09 0.18 0.32 0.43 6 80 Jul-14 Nov-14 Change from previous EPS (%) n.a. 0 0 0 Consensus EPS (Rmb) n.a. 0.18 0.29 0.39 The price relative chart measures performance against the EPS growth (%) 83.7 88.6 80.7 34.7 MSCI CHINA F IDX which closed at 6914.25 on 16/01/15 P/E (x) 79.5 42.2 23.3 17.3 On 16/01/15 the spot exchange rate was HK$7.75/US$1 Dividend yield (%) 0 0 0.35 0.28 EV/EBITDA (x) 49.5 26.3 19.4 15.0 Performance over 1M 3M 12M P/B (x) 14.0 4.8 4.1 3.5 Absolute (%) — -7.7 — — ROE (%) 19.2 16.9 19.0 22.0 Relative (%) -8.0 -18.1 — — Net debt/equity (%) 21.7 net cash net cash net cash
Source: Company data, our estimates.
China Chemical Drug Sector 94 19 January 2015
Asia Pacific / China Major Pharmaceuticals
Sino Biopharmaceutical
Limited (1177.HK / 1177 HK) Rating NEUTRAL*
Price (16 Jan 15, HK$) 7.98 Target price (HK$) 6.48¹ Rising competition and old drug portfolio Upside/downside (%) -18.8 Mkt cap (HK$ mn) 39,433 (US$ 5,087) could drag growth Enterprise value (HK$ mn) 35,436 Number of shares (mn) 4,941.46 Free float (%) 54.0 ■ Cautious on rising competition and downward new product cycle. 52-week price range 8.30 - 5.91 Blockbuster drug like Tianqingganmei with annual revenue of ~ Rmb2 bn ADTO - 6M (US$ mn) 10.9 this year is likely to see slower growth in 2015 as it grows into a mature product, according to the management. Due to the delay of the amendment *Stock ratings are relative to the coverage universe in each of reimbursement drug list, Sino Biopharm’s young product such as Zhiruo analyst's or each team's respective sector. ¹Target price is for 12 months. and Xinhaineng are not covered by national medical insurance which remains a bottleneck to its growth. Management expects four newly Research Analysts launched oncology drugs to record Rmb 150-200 mn sales in 2014, with Iris Wang 852 2101 7646 Dasatinib recording less than Rmb10 mn in annual revenue. Management [email protected] guided ~10% YoY for 2015 revenue growth.
■ Low visibility in expense ratio. 3Q14 earnings growth outpaced top-line growth mainly because selling expense ratio and administration expense ratio decreased dramatically in 3Q14 vs 3Q13. Management stated that the volatility was due to seasonality and guided 45%/6.4%/10% for selling/administration/R&D expenses ratio for 2014. ■ New drug approval and new version of drug reimbursement list should be growth drivers post-2017. Management expects to have three oncology drugs with high potential to get approved in 2017. If the new version of RDL can be launched in 2015/16, Sino Biopharm is likely to get Zhiruo and Tianqingyitai on the list and unleash their sales potential. ■ Valuation. Our TP of HK$6.48 is based on 22x 2015E EPS, above the sector average of 19x. We remain cautious about the stock, given (1) negative structural changes such as rising competition and downward new product cycle, and (2) low visibility in expense ratio and operating margin.
Share price performance Financial and valuation metrics
Year 12/13A 12/14E 12/15E 12/16E Price (LHS) Rebased Rel (RHS) Revenue (HK$ mn) 9,901.2 12,054.2 13,971.1 15,906.3 10 400 EBITDA (HK$ mn) 1,943.7 2,304.8 2,668.6 3,052.0 8 300 EBIT (HK$ mn) 1,712.2 2,139.5 2,470.5 2,817.0 6 200 Net profit (HK$ mn) 1,039.3 1,382.6 1,456.6 1,635.6 4 100 EPS (CS adj.) (HK$) 0.21 0.28 0.29 0.33 2 0 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Change from previous EPS (%) n.a. 0 0 0 Consensus EPS (HK$) n.a. 0.28 0.33 0.39 The price relative chart measures performance against the EPS growth (%) 15.4 33.0 5.4 12.3 MSCI CHINA F IDX which closed at 6914.25 on 16/01/15 P/E (x) 37.9 28.5 27.1 24.1 On 16/01/15 the spot exchange rate was HK$7.75/US$1 Dividend yield (%) 0.6 1.0 1.0 1.1 EV/EBITDA (x) 18.8 15.4 12.9 10.8 Performance over 1M 3M 12M P/B (x) 7.2 6.2 5.2 4.4 Absolute (%) 12.4 3.4 16.2 — ROE (%) 20.6 23.4 21.0 19.8 Relative (%) 4.4 -7.1 5.1 — Net debt/equity (%) net cash net cash net cash net cash
Source: Company data, our estimates.
China Chemical Drug Sector 95 19 January 2015
Companies Mentioned (Price as of 16-Jan-2015) Actavis (ACT.N, $268.66) Amgen Inc. (AMGN.OQ, $158.43) AstraZeneca (AZN.L, 4715.0p) Baxter International Inc. (BAX.N, $72.01) Beijing Tongrentang Co Ltd. (600085.SS, Rmb24.43) Bloomage BioTechnology Corporation Limited (0963.HK, HK$12.1) CONBA (600572.SS, Rmb15.66) CR Double-Cran (600062.SS, Rmb21.62) CR Sanjiu Pharma (000999.SZ, Rmb24.26) CSPC Pharmaceutical Group Ltd (1093.HK, HK$6.83) Chase Sun (300026.SZ, Rmb25.49) CheezhengTTM (002287.SZ, Rmb22.99) China Animal Healthcare Ltd (0940.HK, HK$5.76) China Medical System Holdings Ltd. (0867.HK, HK$13.3) China Traditional Chinese Medicine Co. Ltd (0570.HK, HK$4.48) Dawnrays Pharmaceutical (Holdings) Limited (2348.HK, HK$5.07) Dong-E E-Jiao (000423.SZ, Rmb39.96) Dr Reddys (REDY.NS, Rs3285.8) Fresenius Medical Care AG & Co. (FMEG.DE, €64.9) GZBL (002424.SZ, Rmb42.77) Gloria Pharma (002437.SZ, Rmb23.75) Guangzhou Baiyunshan Pharmaceutical Holdings Co Lt (0874.HK, HK$29.05) Guangzhou Baiyunshan Pharmaceutical Holdings Co Lt (600332.SS, Rmb31.12) Guilin Sanjin (002275.SZ, Rmb18.6) Hainan Haiyao (000566.SZ, Rmb15.62) Haisco (002653.SZ, Rmb19.76) Hongcheng Mach (600566.SS, Rmb20.6) Hua Han (0587.HK, HK$1.89) Humanwell Healthcare Group Co Ltd (600079.SS, Rmb27.53, NEUTRAL, TP Rmb29.0) Jiangsu Hengrui Medicine Co. Ltd (600276.SS, Rmb38.91, OUTPERFORM, TP Rmb49.0) Jiangsu Kanion Pharmaceutical Co Ltd. (600557.SS, Rmb24.16) Johnson & Johnson (JNJ.N, $104.04) Kaibao (300039.SZ, Rmb13.5) Kangmei Pharmaceutical Co Ltd. (600518.SS, Rmb17.16) Kelun Pharm (002422.SZ, Rmb31.93) Kunming Pharma (600422.SS, Rmb25.87) Lijun Intl Pharm (2005.HK, HK$3.34) Livzon Group (000513.SZ, Rmb49.2) Luye Pharma Group Ltd. (2186.HK, HK$9.29) Mayinglong Pharmaceutical Group Co Ltd. (600993.SS, Rmb20.69) Merck & Co., Inc. (MRK.N, $63.03) MicroPort Scientific (0853.HK, HK$3.19) Nhwa (002262.SZ, Rmb25.98) Novartis (NOVN.VX, SFr85.05) Pfizer (PFE.N, $32.8) Roche (ROG.VX, SFr247.2) Sanofi (SASY.PA, €79.93) Shandong Weigao Group Medical (1066.HK, HK$5.9) Shanghai Fosun Pharmaceutical (Group) Co., Ltd. (2196.HK, HK$28.35) Shanghai Pharmaceuticals Holding Co., Ltd. (2607.HK, HK$17.88) Shenzhen Salubris Pharmaceuticals Co Ltd (002294.SZ, Rmb37.95, OUTPERFORM, TP Rmb45.0) Shineway (2877.HK, HK$12.1) Sihuan Pharmaceutical Holdings Group Ltd. (0460.HK, HK$5.34) Sino Biopharmaceutical Limited (1177.HK, HK$7.98) Sinopharm Group Co (1099.HK, HK$29.35) Sun Pharma (SUN.NS, Rs849.75) Taiantang (002433.SZ, Rmb12.4) Taiji (600129.SS, Rmb16.98) Tasly Pharmaceutical Group Co Ltd (600535.SS, Rmb43.31) Tong Ren Tang (8138.HK, HK$10.36) Tong Ren Tang (1666.HK, HK$10.1) United Lab (3933.HK, HK$4.33) XPH (300147.SZ, Rmb19.24) Yabao Pharm (600351.SS, Rmb9.06) Yibai (600594.SS, Rmb35.17) Yiling Pharm (002603.SZ, Rmb29.91) Yunnan Baiyao Group Co Ltd. (000538.SZ, Rmb66.02) Zhangzhou Pientzehuang Pharmaceutical Co Ltd. (600436.SS, Rmb88.75) Zhejiang Huahai Pharmaceutical Co Ltd (600521.SS, Rmb14.39, OUTPERFORM, TP Rmb19.0) Zhongheng (600252.SS, Rmb17.23) ZhongshengPharma (002317.SZ, Rmb19.79)
China Chemical Drug Sector 96 19 January 2015 Disclosure Appendix Important Global Disclosures Zen Zhou and Iris Wang, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10- 15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
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Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 46% (54% banking clients) Neutral/Hold* 38% (50% banking clients) Underperform/Sell* 14% (43% banking clients) Restricted 2% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.
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China Chemical Drug Sector 97 19 January 2015
Price Target: (12 months) for Shenzhen Salubris Pharmaceuticals Co Ltd (002294.SZ) Method: Our target price is based on 23x 2015E P/E, implying a 15% discount to the chemical sector average for its single product risk; however, Salubris has been registering a decent growth rate and high ROE, with plenty of cash in hand to enhance its product portfolio by M&A which can be seen as a potential catalyst. Risk: Risks that could impede achievement of our Rmb45 target price for Shenzhen Salubris Pharmaceuticals Co include: Intensified competition of Clopidogrel Clopidogrel (氯吡格雷,泰嘉) is the major revenue contributor of Salubris. According to SFDA, currently there are more than 30 drug manufacturers which are applying for Clopidogrel manufacturing. We are concerning about the intensified competition on this drug in future. Penetration rate of Allisartan lower than expectation Allisartan Isoproxil is the first domestically developed ARB (Angiotension II receptor blocker) drug with better anti-hypertension efficacy and lower side effects. However, the market penetration rate of this blockbuster CAV drug is still an uncertainty, which is largely dependent on tender progress in various provinces.
Price Target: (12 months) for Humanwell Healthcare Group Co Ltd (600079.SS) Method: Our target price of Rmb29 is based on 27x FY15E P/E which is equal to the sector average to reflect its mixed bag of high barrier anaesthetic drug business and loss-making business. On the other hand, the company’s net profit Cagr of 21% in 2014-16 lags behind sector average which will limit the rereating potential. The stock is trading below its historical 5-Y; however, given the uncertainty of turnaround for its loss-making business, the current valuation leaves limited upside for investors. Risk: Risks that could cause the share price to diverge from our Rmb29 target price for Humanwell Healthcare Group Co Ltd include: Uncertainty of Fospropofol Propofol occupied the largest market share of 43% in surgery anesthetic market in 2013. Humanwell is now collaborating with Huaxi Medical University to develop a novel Propofol-substitute to lower its side effects. However, the drug is still under clinical verification stage, bearing an uncertainty of its efficacy. Slower market penetration rate for newly-approved drugs Three promising anesthetic drugs were approved in 10/12/13. We concern that their market penetration rate will be slower than our expectation. Drug export business is hard to breakeven Over the past four years, Puracap, the overseas subsidiary of Humanwell kept in a loss-making status. It might still need several years for Huamnwell's drug export business to reach its breakeven point.
Price Target: (12 months) for Jiangsu Hengrui Medicine Co. Ltd (600276.SS) Method: Our target price of Rmb49 consists of two parts, Rmb36 per share for the existing business and pipeline and Rmb13 per share for the NPV of five upcoming blockbuster drugs. We applied 30x P/E to Hengrui's adjusted 2015E EPS, Rmb1.2, which was calculated by excluding the net profit from five upcoming blockbuster drugs. The PE mutiply implies 10% premium over sector average for its leading distribution and R&D platform. In addition, we add NPV per share of Rmb13 which is derived from Hengrui's five blockbuster drugs to reflect its value of near-term growth. Risk: Risks that could impede achievement of our Rmb49 target price for Jiangsu Hengrui Medicine Co. Ltd include: Setbacks in tendering process Our revenue assumptions are mainly based on the provincial tendering process can be finished at the end of 2015. If tendering is further delayed, Hengrui could face slower revenue growth than expected. Failure in clinical trials Hengrui has a strong R&D pipeline which includes 16 patent drugs, far ahead of any other domestic drug manufacturers. However, during clinical verification stage, the failure rate of innovative patent drugs is also higher than common generics. Therefore, failures for its major pipelines should be a risk.
Price Target: (12 months) for Zhejiang Huahai Pharmaceutical Co Ltd (600521.SS) Method: Our target price is based on 35x 2015E P/E (implied PEG 1, FY14-16E EPS CAGR 35%) for its huge potential in the US generics market and scarcity in A-share peers in terms of drug exports business. We also refer to the historical forward P/E of Dr. Reddy’s before its ANDA boom. Before the turning point in 2006, Dr. Reddy’s traded at a high valuation. Despite the extreme P/E caused by the slump in net profit in 2005, the 12M forward P/E recorded an average of ~45x. Risk: Risks that could impede achievement of our Rmb19 target price for Zhejiang Huahai Pharmaceutical Co Ltd include: Delay of ANDA approvals A typical ANDA application needs 22~27 months before final approval by FDA. Now Huahai has dozens of ANDA applications which are still under FDA review. We expect 5~6 new ADNAs to be approved by 2015. Therefore, any delay of FDA approving process will have influence on Huahai’s overseas revenue. Uncertainty of API price In recent years, the price of API including Sartan and Pril continues to fall. Although Huahai has shifted its business focus from API to finished drug export, sales of API still accounts for 64% of its manufacturing revenue in 2013. Therefore, the uncertainty of API price will impact Huahai's future revenue growth.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names The subject company (ACT.N, 0853.HK, 0570.HK, PFE.N, ROG.VX, AMGN.OQ, 600332.SS, AZN.L, JNJ.N, NOVN.VX, 0460.HK, 1099.HK, BAX.N, 2196.HK) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.
China Chemical Drug Sector 98 19 January 2015
Credit Suisse provided investment banking services to the subject company (ACT.N, PFE.N, AMGN.OQ, 600332.SS, NOVN.VX, 0460.HK, 1099.HK, BAX.N) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (ROG.VX, BAX.N) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (ACT.N, PFE.N, AMGN.OQ, NOVN.VX, 0460.HK) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (ACT.N, PFE.N, AMGN.OQ, 600332.SS, NOVN.VX, 0460.HK, 1099.HK, BAX.N) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (600521.SS, ACT.N, 0853.HK, 0570.HK, MRK.N, PFE.N, 0940.HK, 0874.HK, 0963.HK, AMGN.OQ, 600332.SS, AZN.L, JNJ.N, NOVN.VX, 0460.HK, 1099.HK, BAX.N, 2196.HK) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (ROG.VX, BAX.N) within the past 12 months As of the date of this report, Credit Suisse makes a market in the following subject companies (ACT.N, MRK.N, PFE.N, AMGN.OQ, JNJ.N, BAX.N). As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (1066.HK, NOVN.VX, 1099.HK). As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (PFE.N). As of the date of this report, an analyst involved in the preparation of this report, Vamil Divan, has following material conflicts of interest with the subject company. The analyst or a member of the analyst's household has a long position in the common stock Pfizer (PFE.N). A member of the analyst's household is an employee of Pfizer (PFE.N). As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (PFE.N). As of the date of this report, an analyst involved in the preparation of this report, Ronak Shah, has the following material conflict of interest with the subject company. The analyst has a long position in the common stock Pfizer (PFE.N).
For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683. Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (002294.SZ, 600079.SS, 600276.SS, 600521.SS, 1093.HK, 000538.SZ, 0867.HK, FMEG.DE, ACT.N, 600085.SS, 0853.HK, 600518.SS, 0570.HK, MRK.N, 600436.SS, 000999.SZ, PFE.N, PFE.N, PFE.N, 2186.HK, 0940.HK, ROG.VX, 600535.SS, 0874.HK, 2348.HK, 0963.HK, 1177.HK, AMGN.OQ, 2607.HK, AZN.L, JNJ.N, 600557.SS, 1066.HK, NOVN.VX, 0460.HK, 600993.SS, 1099.HK, SASY.PA, 2196.HK) within the past 12 months An analyst involved in the preparation of this report has visited certain material operations of the subject company (BAX.N) within the past 12 months The travel expenses of the analyst in connection with such visits were not paid or reimbursed by the subject company, other than de minimus local travel expenses. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. The following disclosed European company/ies have estimates that comply with IFRS: (FMEG.DE, AZN.L, SASY.PA). Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (ACT.N, PFE.N, AMGN.OQ, NOVN.VX, 0460.HK, BAX.N) within the past 3 years. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse (Hong Kong) Limited ...... Zen Zhou ; Iris Wang
China Chemical Drug Sector 99 19 January 2015
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China Chemical Drug Sector 100 19 January 2015
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This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. Copyright © 2015 CREDIT SUISSE AG and/or its affiliates. All rights reserved. Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.
China Chemical Drug Sector PH0175101