[Korea] October 7, 2020 TIGER KRX Bio K -New Deal ETF (364970 KS) Unrivaled growth potential COMPANY ANALYSIS Mirae Asset Daewoo Co., Ltd. Taehee Kim [email protected] Choong-hyun Kim, CFA [email protected] Heightened profile of Korean Biotech companies are among the biggest stocks on the KOSPI biotech firms Samsung Biologics and Celltrion are, respectively, the fifth and seventh largest stocks on the KOSPI by market cap. Just a decade ago, the pharmaceutical/biotech sector accounted for a mere 1% of the KOSPI and 8.2% of the KOSDAQ by market cap. Today, the sector has a 9.1% weight in the KOSPI and a 27.5% weight in the KOSDAQ. The biotech sector includes large, profitable companies as well as smaller, technology-focused firms. Drivers of sustainable growth Korean biotech firms starting to carve out a place in the global market Korean biotech firms have landed a series of out-licensing deals with multinational pharmaceutical companies, proving their enhanced R&D capabilities. In 2020, Korean companies have engaged in not only drug development and technology transfer but also the launch and direct marketing of new drugs in overseas markets. Celltrion and Samsung Bioepis have increased their market shares in the global biosimilars market. Samsung Biologics is solidifying its leading position in the global biologics CMO market, recently announcing a plan to build a fourth production plant. Positive outlook for 4Q20 and Strong earnings growth, R&D momentum, and positive pandemic effects 2021 We project the combined revenue of Celltrion, Samsung Biologics, Hanmi Pharmaceutical, and Yuhan to expand at a CAGR of 18.8% over the next three years. We look for R&D momentum to pick up in 4Q20 and 2021, when many Korean biotech firms plan to publish and present the results of ongoing clinical trials. The COVID-19 pandemic could present promising opportunities for Korean companies; in the absence of a vaccine or effective treatment, they can compete on an equal footing with multinational pharmas. In particular, Korean CMO and diagnostic kit companies have enjoyed strong demand in the wake of the pandemic. TIGER KRX Bio K-New Deal ETF constituents (%) 30 26.3 24.4 25 23.5 20 15 10 8.7 4.8 5 3.8 3.4 2.0 1.8 1.2 0 SK Samsung Celltrion Celltrion Seegene Alteogen Yuhan Hanmi Celltrion Hanmi Biopharm Biologics Healthcare Pharm Pharm Science Source: Mirae Asset Daewoo Research Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including t he US. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. October 7, 2020 TIGER KRX Bio K-New Deal ETF C O N T E N T S I. Executive summary 3 II. Unrivaled growth potential 4 1. The pharma/biotech sector’s weight in the KOSPI has increased to 9.1% 4 2. Drivers of sustainable growth 5 III. 4Q20 and 2021 outlook 8 1. Both revenue and operating profit to grow sharply 8 2. A variety of R&D achievements likely 9 3. Benefiting from COVID-19 11 IV. Status check and outlook by segment 14 1. Biosimilars 14 2. In-vitro diagnostics 18 V. ETF overview 21 Diversified exposure to new drugs, biosimilars, and diagnostic kits 21 Mirae Asset Daewoo Research 2 October 7, 2020 TIGER KRX Bio K-New Deal ETF I. Executive summary Biotech companies are among the biggest stocks on the KOSPI Samsung Biologics and Celltrion are, respectively, the fifth and seventh largest stocks on the KOSPI by market cap. The four largest stocks on the KOSDAQ are Celltrion Healthcare, Seegene, HLB, and Alteogen. The pharmaceutical/biotech sector, which just a decade ago accounted for a mere 1% of the KOSPI, has become one of Korea’s flagship industries. In our view, the industry’s rapid growth is not a bubble but will be sustained over the long term. Drivers of sustainable growth 1) Growing R&D capabilities Korean biotech firms have landed a series of out-licensing deals with multinational pharmaceutical companies, proving their enhanced R&D capabilities. The number of such deals has increased sharply in recent years; in 2015 alone (the year the re-rating of biotech stocks began), Hanmi Pharmaceutical clinched major deals with four global firms (Boehringer Ingelheim, Eli Lilly, Sanofi, and Janssen). Over an eight-month period beginning in Nov. 2018, Yuhan signed major out-licensing deals with Janssen, Gilead Sciences, and Boehringer Ingelheim. 2) Moving beyond technology transfer to direct drug releases Korean biotech companies are currently gearing up to bring their new drugs to market. Notably, SK Biopharmaceuticals will directly market two of its in-house developed drugs in the US: Sunosi (narcolepsy treatment; released in Jul. 2019) and Xcopri (antiepileptic drug; May 2020). We believe Xcopri has strong commercial potential, as it demonstrated superior efficacy to existing treatments in a study (findings were published in a renowned journal). Hanmi Pharmaceutical is also set to release new drugs in the US, albeit through a marketing partner. The firm’s Rolontis (neutropenia treatment) and Oraxol (an oral anti-cancer drug) are expected to receive FDA approval at end-Oct. 2020 and in Feb. 2021, respectively. 3) Korean biotech firms leading the global biosimilars market Korean firms are increasing their dominance in the global biosimilars market. Globally, Celltrion/Celltrion Healthcare and Samsung Bioepis have the largest market shares in a number of biosimilar segments. In Europe, Celltrion’s Remsima and Truxima command market shares of 57% and 40%, respectively, outgrowing their reference drugs. Samsung Bioepis’s Benepali and Imraldi are seeing rapid market share gains. 4) Samsung Biologics, the largest player in the global biologics CMO market Samsung Biologics, which started out with a 30,000-liter plant, became the world’s third largest CMO player when it established a second plant (152,000 liters), and moved to the no. 1 spot by building a third plant (180,000 liters). Recently, the company announced that it would build a fourth plant (256,000 liters), widening its lead over the second and third largest players. Positive outlook for 4Q20 and 2021 We have a positive outlook for 2H20 and 2021. We project the combined revenue and operating profit of four major pharmaceutical/biotech firms—Celltrion, Samsung Biologics, Hanmi Pharmaceutical, and Yuhan—to expand at CAGRs of 18.8% and 53.8%, respectively, over the next three years. Notably, significant licensing deals, a pivotal factor in elevating enterprise value, are expected to materialize, and many Korean firms are planning to present the results of ongoing clinical trials and participate in global conferences in 4Q20 and 2021. In addition, the COVID-19 pandemic is presenting opportunities to Korean biotech players, which are moving as quickly as global rivals to develop vaccines and treatments (with good prospects for commercial results). CMO companies are receiving large-scale supply contracts from capacity-strapped multinational pharmas. In particular, Korean diagnostic kit companies have been able to promote their technologies globally and record explosive earnings growth amid the pandemic. Mirae Asset Daewoo Research 3 October 7, 2020 TIGER KRX Bio K-New Deal ETF II. Unrivaled growth potential 1. The pharma/biotech sector’s weight in the KOSPI has increased to 9.1% Just a decade ago, the pharmaceutical/biotech sector accounted for a mere 1% of the KOSPI and 8.2% of the KOSDAQ by market cap. Today, the sector has a 9.1% weight in the KOSPI and a 27.5% weight in the KOSDAQ. Samsung Biologics and Celltrion are, respectively, the fifth and seventh largest stocks on the KOSPI by market cap. And notably, after the three-way merger of Celltrion, Celltrion Healthcare, and Celltrion Pharm (under a plan recently announced by Celltrion Group; combined market cap of W52tr), the merged entity stands to be the third largest stock on the KOSPI after Samsung Electronics and SK Hynix. Newly listed biotech stocks have contributed to the market weight expansion of the pharmaceutical/biotech sector in the KOSPI, but strong share rallies by existing companies have been the core driver. The KRX Healthcare Index has soared a whopping 211% since 2015, outperforming the KOSPI by 188%p. The sector has also outperformed this year due to the pandemic. Figure 1. Pharma/biotech sector’s weight in the KOSPI Figure 2. Pharma/biotech sector’s weight in the KOSDAQ (%) (%) 10 35 9.1% 9 30 27.5% 8 7 25 6 20 5 15 4 3 10 2 5 1 0 0 00 02 04 06 08 10 12 14 16 18 20 00 02 04 06 08 10 12 14 16 18 20 Source: Quantiwise, Mirae Asset Daewoo Research Source: Quantiwise, Mirae Asset Daewoo Research Figure 3. Relative performances of the KOSPI and KRX Figure 4. Relative performances of the KOSPI and KRX Healthcare Index since 2015 Healthcare Index since 2020 (P) (P) 400 KOSPI KRX Healthcare Index 200 KOSPI KRX Healthcare Index 350 180 160 300 140 250 120 200 100 80 150 60 100 40 50 20 0 0 1/15 1/16 1/17 1/18 1/19 1/20 1/20 2/20 3/20 4/20 5/20 6/20 7/20 8/20 9/20 10/20 Source: Quantiwise, Mirae Asset Daewoo Research Source: Quantiwise, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 4 October 7, 2020 TIGER KRX Bio K-New Deal ETF Aside from improved fundamentals, the Korean pharmaceutical/biotech sector’s outperformance can be attributed to investors’ high expectations for new drug pipelines. Going forward, we expect companies’ enhanced technology and tangible R&D achievements (e.g., licensing deals and new drug commercialization) to drive sector-wide growth and share rallies.