Deutsche Bank Markets Research
Rating Company Date 11 November 2015 Buy Tonghua Dongbao Initiation of Coverage Asia China Reuters Bloomberg Exchange Ticker Price at 9 Nov 2015 (CNY) 24.74 Health Care 600867.SS 600867 CG SHH 600867 Price target - 12mth (CNY) 29.00 Pharmaceuticals / 52-week range (CNY) 34.02 - 13.51 Biotechnology Shanghai Composite 3,647
The right dose; initiating with Buy Jack Hu, Ph.D Linc Yiu Research Analyst Research Associate (+852) 2203 6208 (+852) 2203 6248 A domestic leader in insulin market in China; initiating with Buy [email protected] [email protected] As the largest domestic player in the human insulin market in China, Tonghua Dongbao is well positioned to capture secular growth in the fast-growing diabetes drug market. We expect operating leverage to continue to improve Price/price relative from ROI in sales and marketing. The upcoming launches of insulin Glargine 40 and Aspart are likely to drive growth, starting from 2017. We model 2016-18 30 CAGRs of 21% and 30% for revenue and net profit, respectively. We initiate coverage of the stock with a Buy and a price target of RMB29. 20 10 Human insulin and insulin analogues could drive long-term growth 0 We expect stable growth in the company’s existing human insulin products in the 11/13 5/14 11/14 5/15 near to mid-term, due to large unmet demand in the rural market, accelerating Tonghua Dongbao drug tenders and increasing sales of EDL drugs at tier 1 and tier 2 hospitals. Shanghai Composite (Rebased) Additionally, we anticipate insulin Glargine and Aspart will be launched in 1H17 Performance (%) 1m 3m 12m and 2018, respectively, which would add another leg of growth. We expect domestic insulin analogues to continue to replace imported ones as the urban Absolute 5.0 24.5 58.6 market is already well educated by MNCs. We model a 24% 2016-18 CAGR for Shanghai Composite 14.6 -7.2 47.5 insulin products. We expect a low single-digit price cut in insulin products in the Source: Deutsche Bank next 2-3 years and a stable GM of 84% from 2016 to 2018.
Operating leverage looks likely to continue We expect Tonghua Dongbao to continue to enjoy operating leverage after intensive investment in sales and marketing since 2012. We forecast that OPM will expand to 38% in 2018 vs. 36%/25%/13% in 1H15/2014/2012, driven by lower selling expenses as a percentage of sales with 25% in 2018 vs. 27%/30%/35% in 1H15/2014/2012 respectively. Additionally, by expanding into diabetes management, we believe the company will be able to secure its leading position in the diabetes segment in the long run. Initiating coverage with a Buy and a price target of RMB29; risks Our price target of RMB29 is based on 55x 2016E EPS of RMB0.53. The target multiple of 55x is derived from a premium of 10% on its A-share biotech peers which are trading at 50x on 2016E EPS with 27% growth in 2017 (vs. the 30% we model for THDB). In our view the premium is justified by its higher growth sustainability and visibility of insulin franchise vs. most other therapeutics, and a compelling risk profile. Key risks include tender price cuts, faster-than- expected replacement of human insulin by insulin analogues, dwindling operating leverage, and pipeline failure.
Forecasts And Ratios Year End Dec 31 2013A 2014A 2015E 2016E 2017E Sales (CNYm) 1,204.2 1,451.3 1,763.2 2,134.0 2,572.0 DB EPS FD(CNY) 0.20 0.28 0.39 0.53 0.69 DB EPS growth (%) 225.5 40.4 41.1 36.6 29.6 PER (x) 56.9 44.4 63.7 46.6 36.0 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close
______Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015.
11 November 2015
Pharmaceuticals / Biotechnology Tonghua Dongbao
Model updated:05 November 2015 Fiscal year end 31-Dec 2012 2013 2014 2015E 2016E 2017E
Running the numbers Financial Summary Asia DB EPS (CNY) 0.06 0.20 0.28 0.39 0.53 0.69 Reported EPS (CNY) 0.08 0.20 0.27 0.42 0.53 0.69 China DPS (CNY) 0.20 0.30 0.30 0.20 0.20 0.20 BVPS (CNY) 2.5 2.1 2.1 2.9 3.3 3.8 Pharmaceuticals / Biotechnology Weighted average shares (m) 776 931 1,030 1,179 1,179 1,179 Tonghua Dongbao Average market cap (CNYm) 4,313 10,389 12,574 29,171 29,171 29,171 Enterprise value (CNYm) 4,363 10,524 12,775 28,166 27,765 27,312 Reuters: 600867.SS Bloomberg: 600867 CG Valuation Metrics P/E (DB) (x) 92.3 56.9 44.4 63.7 46.6 36.0 Buy P/E (Reported) (x) 68.8 56.5 44.9 59.5 46.6 36.0 Price (9 Nov 15) CNY 24.74 P/BV (x) 2.50 5.79 6.79 8.42 7.57 6.59
Target Price CNY 29.00 FCF Yield (%) nm 0.9 0.8 1.3 2.1 2.3 Dividend Yield (%) 3.6 2.7 2.5 0.8 0.8 0.8 52 Week range CNY 13.51 - 34.02 EV/Sales (x) 4.4 8.7 8.8 16.0 13.0 10.6 Market Cap (m) CNYm 29,171 EV/EBITDA (x) 18.1 31.5 26.8 41.6 32.6 25.4 EV/EBIT (x) 32.6 46.5 35.1 51.3 39.0 29.8 USDm 4,586 Income Statement (CNYm) Company Profile Sales revenue 992 1,204 1,451 1,763 2,134 2,572 Tonghua Dongbao was established in 1992 and is Gross profit 634 819 999 1,282 1,572 1,919 headquartered in Tonghua city, Jilin province. The EBITDA 241 335 477 678 853 1,074 company primarily engages in developing, manufacturing Depreciation 99 100 104 121 135 151 and marketing recombinant human insulin products. It has Amortisation 9 8 9 8 7 6 several products under development, including insulin EBIT 134 226 364 549 711 917 analogues, oral diabetes drugs and GLP-1 injections. Net interest income(expense) -14 -18 -27 -20 14 24 Associates/affiliates 8 9 6 7 7 8 Exceptionals/extraordinaries -79 -8 -16 0 0 0 Other pre-tax income/(expense) 18 2 -4 38 0 0 Profit before tax 67 212 324 574 733 950 Price Performance Income tax expense 7 32 47 86 110 142 Minorities -3 -4 -3 -2 -3 -3 40 Other post-tax income/(expense) 0 0 0 0 0 0 Net profit 63 184 280 490 625 810 30
DB adjustments (including dilution) -16 -1 4 -32 0 0 20 DB Net profit 47 183 283 458 625 810 10 Cash Flow (CNYm) 0 Nov 13Feb 14May 14Aug 14Nov 14Feb 15May 15Aug 15 Cash flow from operations 194 221 206 653 918 996 Net Capex -242 -130 -106 -264 -299 -334 Tonghua Dongbao Free cash flow -47 91 100 389 619 662 Shanghai Composite (Rebased) Equity raised/(bought back) 1 0 41 1,041 0 0 Margin Trends Dividends paid -170 -181 -223 -226 -221 -211 Net inc/(dec) in borrowings 101 220 67 70 40 40 50 Other investing/financing cash flows -4 -39 0 -220 0 0 40 Net cash flow -119 91 -14 1,053 438 490 Change in working capital -50 -91 -223 16 168 56 30 Balance Sheet (CNYm) 20 Cash and other liquid assets 125 216 202 1,255 1,693 2,184 10 Tangible fixed assets 1,233 1,276 1,305 1,449 1,613 1,797 12 13 14 15E 16E 17E Goodwill/intangible assets 69 65 56 48 42 36 EBITDA Margin EBIT Margin Associates/investments 173 213 229 449 449 449
Other assets 780 924 1,164 1,142 991 933 Growth & Profitability Total assets 2,380 2,694 2,956 4,344 4,788 5,398 Interest bearing debt 318 539 608 678 718 758 30 25 Other liabilities 71 139 188 183 200 198 25 20 Total liabilities 389 678 796 861 918 956 20 15 Shareholders' equity 1,962 1,991 2,138 3,463 3,852 4,427 15 Minorities 29 25 23 21 18 15 10 10 Total shareholders' equity 1,991 2,016 2,161 3,484 3,871 4,442 5 5 Net debt 193 323 406 -577 -975 -1,426 0 0 12 13 14 15E 16E 17E Key Company Metrics Sales growth (%) 26.4 21.5 20.5 21.5 21.0 20.5 Sales growth (LHS) ROE (RHS)
DB EPS growth (%) 102.3 225.5 40.4 41.1 36.6 29.6 Solvency EBITDA Margin (%) 24.3 27.8 32.8 38.4 40.0 41.8 EBIT Margin (%) 13.5 18.8 25.1 31.2 33.3 35.7 30 30 Payout ratio (%) 247.6 151.9 110.5 48.1 37.7 29.1 20 25 ROE (%) 3.1 9.3 13.6 17.5 17.1 19.6 10 20 Capex/sales (%) 24.4 15.8 7.3 15.0 14.0 13.0 0 15 Capex/depreciation (x) 2.2 1.8 0.9 2.1 2.1 2.1 -10 -20 10 Net debt/equity (%) 9.7 16.0 18.8 -16.6 -25.2 -32.1 -30 5 Net interest cover (x) 9.4 12.8 13.6 27.0 nm nm
-40 0 Source: Company data, Deutsche Bank estimates 12 13 14 15E 16E 17E
Net debt/equity (LHS) Net interest cover (RHS)
Jack Hu, Ph.D +852 2203 6208 [email protected]
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Pharmaceuticals / Biotechnology Tonghua Dongbao
Table Of Contents
Investment thesis ...... 4 Outlook ...... 4 Valuation ...... 4 Risks ...... 4 Valuation ...... 5 Price target of RMB29 based on 55x 2016E EPS...... 5 Investment risks ...... 8 Investment positives ...... 9 Tapping into a large and underpenetrated market ...... 10 Growth driven by existing and pipeline products ...... 16 Improved efficiency and new business opportunities ...... 21 Industry overview ...... 24 China has the largest number of diabetes patients ...... 24 Overview of diabetes drug market ...... 25 Competitive landscape of the insulin market ...... 27 Performance of global and domestic players in China ...... 30 Comparison of prices by MNCs and domestic players ...... 31 Company overview ...... 32 Recombinant human insulin ...... 33 Insulin pens and blood glucose monitors ...... 34 Product pipeline ...... 35 Capital expenditure and export business ...... 36 Company profile ...... 37 Company background and history ...... 37 Shareholding and corporate structure ...... 38 Management profiles ...... 39 Financials ...... 40
Deutsche Bank AG/Hong Kong Page 3
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Pharmaceuticals / Biotechnology Tonghua Dongbao
Investment thesis
Outlook
As the second-largest player in the human insulin market in China, Tonghua Dongbao is well positioned to capture long-term growth in the large and fast- growing diabetes drug market. We forecast CAGRs over 2016-18 of 21% and 30% for revenue and net profit, respectively.
We expect the following three profit growth drivers in the mid-long term. First, we expect sustainable growth for the human insulin segment, due to large unmet demand in the rural market, accelerating tenders and increasing sales of drugs on the Essential Drug List (EDL) at tier 1 and 2 hospitals. We highlight that EDL inclusion has been the major reason for rapid growth of human insulin in the rural market. Second, we expect insulin Glargine and insulin Aspart to be launched in 1H17 and 2018, respectively, which would add another leg of growth. We believe domestic products are likely to substitute imports, for which global players currently have a dominant market share. Additionally, insulin analogues are already widely used in urban areas, so the company will be able to leverage on its existing sales network and leading rapid ramp-up. Lastly, we highlight that Tonghua Dongbao’s operating leverage has improved since 2012 after intensive investment in sales and marketing, and facilities. In the long run, we think the company is likely to expand into diabetes management by providing a full range of services of online-to-offline for patients.
We highlight a key advantage of the company. Insulin products experienced minimal price erosion at a mid single digit from 1Q12 to 2Q15, compared with deepening price cuts for most other therapeutics. As the industry enters another round of drug tenders with imminent price cuts, we believe companies under minimal pricing pressure will be distinguishable.
Valuation
Our price target of RMB29 is based on 55x multiple on our 2016E EPS of RMB0.53. The 55x is derived from a premium of 10% on its A-share biotech peers which are trading at 50x on 2016E EPS with 27% growth in 2017 (vs. the 30% we model for Tonghua Dongbao).
Risks
Key downside risks include tender price cuts, faster-than-expected replacement of human insulin, dwindling operating leverage, and pipeline failure.
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Pharmaceuticals / Biotechnology Tonghua Dongbao
Valuation
Price target of RMB29 based on 55x 2016E EPS
We adopted a PE-multiple based valuation approach. Our price target of RMB29 is based on 55x multiple on our 2016E EPS of RMB0.53. The 55x is derived from a premium of 10% on its A-share biotech peers which are trading at 50x on 2016E EPS with 27% growth in 2017 (vs. the 30% we model for Tonghua Dongbao).
We are convinced that Tonghua Dongbao’s valuation premium is justified by two elements: its higher growth sustainability and visibility of insulin franchise vs. most other therapeutics, and a compelling risk profile. As industry growth is decelerating to a single digit from double digits in 2014, hospital data suggests nearly flat volume growth for Dongbao’s flagship insulin product, Gansulin 30R, ranging within 20-22%. We expect investors to increasingly value volume growth stability, going forward. Additionally, ASP for the entire insulin class has been stable in the past five years, and we expect minimal pricing pressure due to high barriers to entry and limited competition. As such, we believe its risk profile deserves another layer of premium protection.
Figure 1: A-share listed peers
9-Nov 52-week Mkt cap Price BBG Tick e r Nam e High Low (US$m) PE Crncy EPS Grow th % EV /EBIT DA EBITDA Growth % (LC) 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E 600867 CH Equity TONGHUA DONGBA -A 24.7 34.0 13.5 4,417 63.7 46.6 36.0 CNY 41.4 36.6 29.6 41.6 32.6 25.4 25.9 26.0 27.0 300463 CH Equity SICHUA N MA KER -A 112.3 139.0 28.0 3,282 70.9 57.4 47.4 CNY NA 23.6 21.1 51.9 42.2 34.9 NA 11.0 10.0 600161 CH Equity BEIJING TIA N-A 30.9 53.8 20.5 2,505 33.1 31.2 26.7 CNY 24.7 5.9 17.2 NA NA NA NA NA NA 300101 CH Equity CHENGDU CORPRO-A 34.2 35.0 10.7 2,984 136.6 89.4 59.1 CNY 49.7 52.8 51.3 114.5 76.2 55.2 - 22.6 17.4 002022 CH Equity SHA NGHA I KEHUA -A 29.2 60.1 18.2 2,353 46.9 38.5 31.1 CNY - 21.7 24.0 33.5 27.5 19.2 3.6 10.5 19.6 300439 CH Equity NINGBO MEDICA L-A 44.4 71.7 9.2 2,373 90.6 71.6 57.7 CNY NA 26.5 24.2 62.1 50.5 40.7 NA 10.9 11.4 300204 CH Equity STA IDSON BEIJI-A 35.0 61.2 16.9 1,850 48.6 39.8 34.3 CNY 56.5 22.2 15.9 40.6 33.0 28.1 NA 10.9 8.4 002550 CH Equity CHA NGZHOU QIA N-A 17.4 33.6 10.0 1,747 36.2 29.4 20.9 CNY 25.3 22.9 40.7 35.8 26.4 NA 17.9 16.4 NA 300009 CH Equity A NHUI A NKE BIO-A 30.7 41.0 12.8 1,820 75.2 55.3 42.7 CNY 40.7 36.0 29.4 58.6 44.9 34.6 NA 14.2 14.0 300482 CH Equity GUA NGZHOU WOND-A 124.2 124.2 15.9 1,718 85.7 65.4 49.3 CNY NA 31.0 32.6 NA NA NA NA NA NA 002675 CH Equity Y A NTA I DONGCHE-A 43.7 68.1 26.5 1,517 57.6 31.0 23.6 CNY 20.6 85.5 31.2 38.2 23.2 17.7 26.5 28.4 14.4 300289 CH Equity BEIJING LEA DMA - A 19.8 30.8 10.9 1,323 54.2 47.1 40.4 CNY 19.7 15.1 16.7 33.0 29.5 NA NA 5.9 NA 300233 CH Equity SHA NDONG JINCH-A 34.2 57.7 17.0 1,363 34.4 40.8 45.5 CNY 136.9 (15.6) (10.4) 25.6 21.1 17.2 NA 10.2 10.7 603566 CH Equity PULIKE BIOLOGI-A 50.1 84.9 15.5 1,259 47.9 33.3 26.1 CNY NA 44.0 27.2 NA NA NA NA NA NA 000605 CH Equity BOHA I WA TER IN-A 20.4 43.0 13.2 625 68.7 40.8 26.8 CNY NA 68.4 52.0 31.5 13.7 10.5 NA 52.0 14.1 A-share biotech 66.7 50.4 39.5 39.3 30.6 27.0 51.6 38.8 31.2 14.9 17.2 16.1 Source: Deutsche Bank, Bloomberg Finance LP consensus estimates
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Pharmaceuticals / Biotechnology Tonghua Dongbao
Figure 2: Historical one-year forward P/E
12m forward PE Average PE +1 SD -1 SD
85.0
75.0
65.0 55x
55.0 Average: 45x 45.0
35.0
25.0 35x
15.0
Source: Deutsche Bank estimate , Bloomberg Finance LP
DCF valuation We use DCF analysis to cross-check our valuation. Our DCF valuation yields a value per share of RMB30, in line with our price target of RMB29. We forecast free cash flow until 2024 and summarize the analysis below.
Figure 3: Discounted cash flow analysis
RMB millions 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E Terminal value Revenue 2,572 3,113 3,831 4,790 5,941 7,310 8,922 10,799 Growth 21% 21% 23% 25% 24% 23% 22% 21% EBIT 917 1,191 1,503 1,880 2,272 2,723 3,234 3,806 Growth 29% 30% 26% 25% 21% 20% 19% 18% EBIT margin 36% 38% 39% 39% 38% 37% 36% 35% Tax (142) (185) (226) (282) (341) (408) (485) (571) Tax rate 15% 15% 15% 15% 15% 15% 15% 15% EBIT*(1-Tax rate) 775 1,006 1,278 1,598 1,932 2,315 2,749 3,236 Adjustment: Add D&A 157 174 178 260 347 458 550 605 Less CAPEX (334) (342) (445) (579) (694) (833) (917) (1,008) CAPEX as a % of revenue 13% 11% 11% 11% 11% 11% 11% 11% Less change in WC 56 (198) (244) (305) (378) (465) (567) (687) Others 8 9 ------FCF 662 648 767 975 1,207 1,475 1,815 2,146 1,866 Terminal Value 47,074 Terminal growth rate 2.8% WACC 6.8%
PV of CF - discounting to Jan 1, 2017 620 568 630 751 870 996 1,148 1,271 27,887
NPV - Enterprise Value 34,741 Cash 1,693 Debt 718 Minorities at book value 18 Minorities at market value - 8x book 128 Equity Value 35,588 Fully Diluted Shares 1,179 Value/Share (RMB) 30 Source: Deutsche Bank estimates, Company data
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Pharmaceuticals / Biotechnology Tonghua Dongbao
We base our DCF valuation on a perpetual growth rate of 2.8% and a WACC of 6.8%. We derive the WACC using a risk-free rate of 3.9%, equity risk premium of 5.6%, beta of 0.67, tax rate of 15% and a 16% debt proportion. We summarize the sensitivity analysis of our DCF in the following exhibit.
Figure 4: DCF sensitivity analysis
Perpetual growth 30.17 2.60% 2.70% 2.80% 2.90% 3.00% 6.4% 32.2 33.0 33.7 34.5 35.4 6.6% 30.5 31.2 31.9 32.6 33.3 WACC 6.8% 29.0 29.6 30.2 30.8 31.5 7.0% 27.6 28.1 28.6 29.2 29.8 7.2% 26.3 26.8 27.3 27.8 28.3
Source: Deutsche Bank estimates
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Pharmaceuticals / Biotechnology Tonghua Dongbao
Investment risks
Price erosion in drug tenders Tenders for EDL and non-EDL are expected to accelerate in 2H15. Reimbursement budget control is likely to lead to price erosion for most therapeutics in upcoming tenders. Larger-than-expected price erosion for flagship products of the company could lead to margin erosion and slower revenue growth. Additionally, the company might withdraw from a tender if the price erosion is too large.
Faster-than-expected replacement of human insulin by insulin analogues Recombinant human insulin is the company’s largest revenue contributor, accounting for 81% in 1H15. Human insulin is more affordable as it has a higher reimbursement ratio of 100% in EDL vs. 70% of insulin analogue in RDL. Additionally, ASP of insulin analogue is 3-4 times of human insulin. These are the two main reasons for human insulin still holding a significant market share in China. However, if the replacement of human insulin by insulin analogues speeds up, the company’s revenue growth would be affected.
Slower operating leverage improvement We expect the company to enjoy operating leverage in the next three years after intensive investment in the past, but marketing expenses could increase sharply if it overinvests in the online platform and sales team to promote insulin analogues.
Pipeline risks The company has four insulin analogues in its pipeline. Two of them, insulin Glargine and insulin Aspart should complete clinical trials in 2016 and are expected to be launched in 1H17 and 2018, respectively. Delays in the launch of insulin analogues could lead to slower sales growth.
Slower-than-expected import substitution in insulin analogue market MNCs dominate the insulin analogue market, accounting for 88% of it with Gan & Lee the only domestic player (with a 12% market share in 2014). We expect the roll-out of new insulin analogue products by domestic companies to lead to the substitution of imports with domestic products. If substitution occurs slower than expected, Dongbao’s revenue growth would be affected.
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Pharmaceuticals / Biotechnology Tonghua Dongbao
Investment positives
We model 2016-2018 CAGRs of 21% and 30% for revenue and net profit, respectively. Sales growth is mainly driven by sustainable growth from existing human insulin products with expansion in the rural market. Additionally, we expect insulin Glargine and insulin Aspart to be launched in 1H17 and 2018 respectively, adding another leg of growth.
We estimate GM expansion of 76% in 2018 from 69% in 2014 due to an improvement in product mix. We expect operating leverage improvement to continue, thanks to ROI from previous investments in sales and facilities. We anticipate OPM to increase to 38% in 2018 from 25% in 2014. We remind investors that the high growth rates of operating profit and net profit in 2012 were mainly due to a low base which is caused by high R&D expenses in 2011.
Figure 5: Revenue forecast (2009-18E) Figure 6: Operating profit forecast (2009-18E)
Revenue YoY Operating profit YoY RMB mn RMB mn 3,500 30% 1,400 160% 140% 3,000 1,200 25% 120% 2,500 1,000 20% 100% 2,000 800 80% 15% 60% 1,500 600 40% 10% 1,000 400 20% 0% 500 5% 200 -20% - 0% - -40%
Source: Deutsche Bank estimates, Company data Source: Deutsche Bank estimates, Company data
Figure 7: Net profit forecast (2009-18E) Figure 8: Gross margin and operating margin (2009-18E)
Net profit YoY Gross margin Operating margin RMB mn RMB mn 73% 74% 75% 76% 1,200 200% 80% 68% 69% 64% 70% 62% 62% 1,000 150% 57% 60% 800 50% 100% 36% 38% 600 40% 31% 33% 25% 50% 30% 400 17% 19% 20% 11% 13% 0% 7% 200 10% - -50% 0%
Source: Deutsche Bank estimates, Company data Source: Deutsche Bank estimates, Company data
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Pharmaceuticals / Biotechnology Tonghua Dongbao
Tapping into a large and underpenetrated market
We expect sustainable growth of the diabetes drug market and insulin with CAGRs of 11% and 12% respectively from 2015 to 2018, driven by the world’s largest diabetes patient population and a low diagnosis and treatment ratio. We estimate the market potential of insulin in China will be 4.6x of its current RMB15bn in 2014. Tonghua Dongbao is the largest domestic player in the human insulin segment. We believe the company is well positioned to penetrate into the unmet rural market, with high usage of human insulin due to its lower price than insulin analogues.
Sustainable growth of diabetes drug and insulin markets We estimate the total market size of diabetes drugs, in both retail and hospital markets, was RMB27bn in 2014. This represents a CAGR of 15% from 2012 to 2014 vs. 13% for the entire drug market. We expect the diabetes drug market in China to deliver sustainable growth of 11% from 2015 to 2018, driven by a large and fast-growing patient base, high prevalence rate, increasing diagnosis and treatment rates, and expanding coverage of reimbursement. Insulin is the largest class of drugs in the diabetes market, accounting for a 56% market share in 2014. We highlight that the market size of insulin was RMB15bn in 2014, and had a CAGR of 17% from 2012 to 2014. We forecast the insulin market to record a 12% CAGR from 2015 to 2018.
Figure 9: Diabetes drug market in China (2012-18E) Figure 10: Insulin market in China (2012-18E)
RMB bn RMB bn 45 CAGR 2015E-18E: 11% 30 CAGR 2015E-18E: 12% 40 CAGR 2012-14: 15% CAGR 2012-14: 17% 25 35 30 20 25 15 20 15 10 10 5 5 0 0 2012 2013 2014 2015E 2016E 2017E 2018E 2012 2013 2014 2015E 2016E 2017E 2018E Source: Deutsche Bank, Company data Source: Deutsche Bank, Company data
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Pharmaceuticals / Biotechnology Tonghua Dongbao
Figure 11: Comparison of growth rates (2013-15E) Figure 12: Breakdown of diabetes drugs market in 2014
Insulin market Diabetes drugs market Total market Glinide 6% Others 19% α-glucosidase 8% Inhibitor 17% Biguanide 17% 5% 15% Sulfonylureas 13% 8% 11%
9% Insulin 7% 56% 2013 2014 2015E
Source: Deutsche Bank, Company data Source: Deutsche Bank, Company data
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Pharmaceuticals / Biotechnology Tonghua Dongbao
A large and underpenetrated diabetes population in China China has the largest number of diabetes patients across the globe. In 2014, its number of diabetes patients reached 96m with a CAGR of 2% from 2011 to 2014, vs. 2% globally. IDF forecasts this number will grow to 143m in 2035.
We believe China’s diabetes market is underpenetrated: the country accounted for 19% of the world’s population and 25% of its diabetes patients as of 2014. However, China’s expenditure on diabetes was only 7% of global expenditure, according to IDF. We attribute the disproportion to its high percentage of undiagnosed diabetes patients. We highlight that 60% of diabetes patients are undiagnosed in China, and only 17% of total patients receive treatment, according to Chinese Diabetes Society.
Figure 13: Number of diabetes patients in China Figure 14: Prevalence rate of diabetes in China
Diabetes patients (m) 12.0% 160 143 9.4% 9.6% 9.3% 10.0% 9.0% 140 CAGR: 2% 120 8.0% 98 96 100 90 92 6.0% 80 CAGR: 7% 4.3% 4.2% 60 4.0% 40 43 2.7% 2.7% 40 23 24 2.0% 20 0 0.0% 2000 2003 2007 2010 2011 2012 2013 2014 2035E 2000 2003 2007 2010 2011 2012 2013 2014
Source: Deutsche Bank, International Diabetes Federation estimates Source: Deutsche Bank, International Diabetes Federation
Figure 15: Population, diabetes patients, and expenditure Figure 16: Underpenetrated market in China in 2013 on diabetes of China as a percentage of world’s total % of world total 30% 70% 26% 60% 25% 60% 19% 50% 20% 40% 15% 30% 23% 10% 7% 20% 11% 5% 10% 6% 0% 0% Population Diabetes patients Expenditure on Undiagnosed Untreated Efficacy not Efficacy diabetes reached reached Source: Deutsche Bank, International Diabetes Federation Source: Deutsche Bank, Company data
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Potential of insulin market will be 4.6x of RMB15bn in 2014 In 2014, the total diabetes population in rural areas is 34m vs. 62m in urban areas. With a lower diagnosis rate, the undiagnosed population in rural areas is close to that in urban areas at approximately 24m.
Figure 17: Undiagnosed population – urban vs. rural (2014)
Undiagnosed population Diagnosed population Diagnosis rate(%) mn 120 50%
45% 100 40%
35% 80 30%
60 25%
20% 40 15%
10% 20 5%
- 0% Total Urban Rural
Source: Deutsche Bank estimates, International Diabetes Federation
We estimate the market potential of the insulin market in China will be 4.6x of the RMB15bn in 2014, driven by rising diagnosis and treatment rates. We outline our assumptions for the rural and urban markets below.
Daily consumption value is RMB6.7 (40IU) for human insulin and RMB13 (20IU) for insulin analogues;
We assume the diagnosis rate and treatment rate will reach 90%/85% respectively for urban areas and 75%/70% for rural areas. This compares with current approximate rates of 40%/40% in China. Furthermore, we expect 25% of treated patients will receive insulin therapy, in line with observations by endocrinology physicians;
We assume 90% of patients in urban areas and 30% of patients who require insulin therapy will use insulin analogues. We further assume the remaining patients will use human insulin. Our estimate of the potential market size of insulin is RMB69bn, with the rural/urban market accounting for RMB14/55bn respectively. The market potential in the rural area is 4.7x of its current size, vs. 4.6x for urban market.
We summarize the assumptions and calculations in the following exhibits.
Tonghua Dongbao is well positioned to capture the opportunity in the rural market. We believe human insulin will continue to be widely used in rural areas due to its lower price vs. insulin analogues. Additionally, the sales team of Tonghua Dongbao covers 4,000 county level hospitals out of a total of 5,000. As such, the unmet market in rural areas provides upside to the company.
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Pharmaceuticals / Biotechnology Tonghua Dongbao
Figure 18: Assumptions used in estimating insulin market ASP of insulin injection per 300IU (RMB) Human insulin 51 Insulin analogue 199 Average daily consumption volume (IU) Human insulin 40 Insulin analogue 20 Average cost on insulin per year (RMB) Human insulin 2,458 Insulin analogue 4,839 Patients breakdown Total Urban Rural between two types of insulin Human insulin 31% 10% 70% Insulin analogue 69% 90% 30% Source: Deutsche Bank estimates
Figure 19: Potential market size of insulin in China in 2014 Total Urban Rural Number of diabetes patients (mn) 96.3 62.1 34.2 Diagnose rate (%) 85% 90% 75% Diagnosed patients (mn) 82 56 26 Treatment rate (% of diagnosed patients) 80% 85% 70% Treated patients (mn) 65 47 18 Patients receiving insulin therapy % of total treated patients 25% 25% 25% Number of patients receiving insulin therapy (mn) 16.4 11.9 4.5 Potential market size (DBe, RMB bn) 69 55 14 Human insulin (RMB bn) 11 3 8 Insulin analogue (RMB bn) 58 52 7 Current market size (RMB bn) 15 12 3 Potential market size vs. current market size 4.6x 4.6x 4.7x Source: Deutsche Bank estimates
Figure 20: Current insulin market vs. theoretical insulin market
Current insulin market Theoretical insulin market RMB bn 80 69 70
60 55 4.6x 50 4.6x 40 4.7x 30
20 15 14 12 10 3 - Total Urban Rural
Source: Deutsche Bank estimates, IDF
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Pharmaceuticals / Biotechnology Tonghua Dongbao
The major constraint of growth of human insulin in rural areas is the limited number of endocrinology physicians. We believe Tonghua Dongbao has an advantage here as it has trained over 5,000 physicians in grassroots hospitals over the past few years in a series of training programs.
Capturing the opportunity with its leading position in the human insulin market We estimate that Tonghua Dongbao is the second largest player in the human insulin market behind Novo Nordisk (DKK375.10, H). We highlight that it has invested heavily in the coverage of county level hospitals in the past, which is likely to allow the company to capture the unmet market in rural areas.
Figure 21: Market share of human insulin in 2015 (DBe) Figure 22: Market share of insulin analogues in 2015 (DBe)
Domestic Domestic players players 13% 24%
MNC 76% MNC 87%
Source: Deutsche Bank, Company data Source: Deutsche Bank, Company data
Figure 23: Market share of human insulin in 2015 (DBe) Figure 24: Market share of insulin analogues in 2015 (DBe) Bayer 1% Others Ganlee 10% 13% TUL 5% Sanofi 14% Eli Lily 14% Novo Novo 51% 52%
Tonghua Eli Lily Dongbao 21% 19%
Source: Deutsche Bank, Company data Source: Deutsche Bank, Company data
Deutsche Bank AG/Hong Kong Page 15
11 November 2015
Pharmaceuticals / Biotechnology Tonghua Dongbao
Growth driven by existing and pipeline products
We expect the company’s existing human insulin products to drive growth in the near to mid-term as Gansulin 40R is likely to have volume upside from upcoming drug tenders. Additionally, insulin analogues, including insulin Glargine and Aspart, will add another leg of growth after launching in 1H17 and 2018 respectively. We forecast a 24% CAGR in 2016-18 for the insulin segment. We expect limited price cuts and a stable gross margin for its insulin products in the next few years.
Figure 25: Revenue from insulin API and injections (2005-18E)
Insulin API and injections YoY 3,000 100% 90% 2,500 80% 70% 2,000 60% 1,500 50% 40% 1,000 30% 20% 500 10% 0 0%
Source: Deutsche Bank estimates, Company data
Existing human insulin products provide solid near/mid-term growth We expect human insulin to deliver a CAGR of 24% from 2016 to 2018, due to large unmet demand in the rural market, accelerating tenders in 2H15, and government support in essential drugs.
Currently, Dongbao markets five insulin products under the brand name of Gansulin. Three of them, Gansulin 30R, 40R and 50R, are premixed products with different proportions of regular insulin and NPH (Neutral Protamine Hagedorn, an intermediate-acting insulin). Gansulin 30R accounted for 70%- 80% of total insulin sales for the company, thanks to its proven efficacy and EDL inclusion. We believe Gansulin 40R, the only 40R insulin in China launched in 2014, is likely be a growth driver in the near term. The product enjoys better pricing with a 15% premium over 30R. We expect sales growth of Gansulin 40R to accelerate in 2016 as non-EDL tenders accelerate. We summarize the company’s five insulin products below.
Figure 26: Insulin products of Tonghua Dongbao Product Name Type Ingredients Tender price (RMB, 2015 YTD) Gansulin R Fast-acting insulin Regular form 46.8 Gansulin N Intermediate-acting insulin NPH form 46.5 Gansulin 30R Pre-mixed insulin 30% regular +70% NPH 46.5 Gansulin 40R Pre-mixed insulin 40% regular +60% NPH 53.3 Gansulin 50R Pre-mixed insulin 50% regular +50% NPH 51.9 Source: Deutsche Bank, Company data
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Pharmaceuticals / Biotechnology Tonghua Dongbao
Clinical data suggests Gansulin has a similar efficacy and safety profile to MNC products in the treatment of diabetes patients. Two multicenter randomized open controlled clinical trials were conducted in 2007 and 2008 to compare the efficacy and safety of Gansulin and Novolin. We summarize the results in the figure below.
Figure 27: Results of two multicenter randomized clinical trials Year Regimen Number of patients Decrease in HbA1c Decrease in FPG Decrease in 2hPG Incidence rate of (mmol/L) (mmol/L) hypoglycemia 2007 Gansulin 30R vs. Novolin 30R 300 (2:1) 1.08% vs. 1.01% 3.79 vs. 3.05 2.0 vs. 2.2 22% vs. 14% 2008 Gansulin 50R vs. Novolin 50R 480 (3:1) 0.91% vs. 0.92% 1.61 vs. 1.56 3.34 vs. 3.54 31.94% vs. 30.25% Source: Deutsche Bank, Chin J Endocrinol Metab, Chin J Diabetes
In August 2011, the National Development and Reform Commission (NDRC) cut retail price caps on almost 400 products. However, it approved a price hike for Tonghua Dongbao’s insulin product, raising its retail price cap to the same level as MNC products. We think this demonstrates the efficacy of insulin products from Tonghua Dongbao.
Entering a new round of growth with the launch of third-generation insulin We anticipate the launch of the company’s insulin analogues, including Chang Shu Lin (insulin Glargine) and Rui Shu Lin (insulin Aspart), in 1H17 and 2018 respectively. They are likely to be another growth driver. We estimate the pricing of insulin analogues of Tonghua Dongbao will be similar to Gan & Lee’s, which are at a 25% discount to MNC products. With a rapid ramp-up of the new products, driven by a well-educated urban market and an established sales team, we think insulin analogues from Tonghua Dongbao are likely to develop quickly.
Figure 28: Revenue growth of major products by Gan & Figure 29: ASP comparison between second-generation Lee and third-generation insulin (2015 YTD)
Glargine Lispro 250 YoY growth 206 90% 200 80% 155 70% 150 60% 100 50% 54 56 40% 47 50 30% 20% 0 10% Tonghua Eli Lilly Novo Gan&Lee Sanofi Dongbao (human (human (Glargine) (Glargine) 0% (human insulin 30R) insulin 30R) -10% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 insulin 30R)
Source: Deutsche Bank, CPA Source: Deutsche Bank, Company data
We summarize pipeline products of the third generation of insulin by domestic players in China in the following exhibit. We observe the small presence of domestic competitors with just nine players developing insulin analogues. As a reminder, Gan & Lee is the only domestic player in the insulin analogues market and it currently sells insulin Glargine and Lispro.
Deutsche Bank AG/Hong Kong Page 17
11 November 2015
Pharmaceuticals / Biotechnology Tonghua Dongbao
Figure 30: Pipeline of third generation of insulin by domestic companies in China Company name Drug name (EN) Drug name (CN) Status Status start time Tonghua Dongbao Insulin Glargine Injection 甘精胰岛素注射液 Clinical trial 2014-06-17 (600867.SH) Insulin Aspart Injection 门冬胰岛素注射液 Clinical trial 2015-01-07 Insulin Aspart Injection (70/30) 门冬胰岛素 30 注射液 Pending clinical trial approval 2013-12-10 Insulin Aspart Injection (50/50) 门冬胰岛素 50 注射液 Pending clinical trial approval 2013-12-10 Insulin Detemir Injection 地特胰岛素注射液 Pending clinical trial approval 2015-09-24
United Lab Insulin Glargine Injection 甘精胰岛素注射液 Pending manufacturing approval 2013-02-26 (3933.HK) Insulin Aspart Injection 门冬胰岛素注射液 Clinical trial 2013-04-11 Insulin Aspart Injection (70/30) 门冬胰岛素 30 注射液 Clinical trial 2013-04-11 Insulin Detemir Injection 地特胰岛素注射液 Pending clinical trial approval 2013-12-16
Gan & Lee Insulin Aspart Injection 门冬胰岛素注射液 Clinical trial 2011-08-03 Insulin Aspart Injection (70/30) 门冬胰岛素 30 注射液 Pending manufacturing approval 2014-12-24 Insulin Aspart Injection (50/50) 门冬胰岛素 50 注射液 Pending clinical trial approval 2014-10-10 Insulin Lispro Injection (25R) 精蛋白锌重组赖脯胰岛素混合注射液(25R) Pending manufacturing approval 2014-05-16 Insulin Lispro Injection (40R) 精蛋白锌重组赖脯胰岛素混合注射液(40R) Pending clinical trial approval 2014-10-10 Insulin Lispro Injection (50R) 精蛋白锌重组赖脯胰岛素混合注射液(50R) Pending clinical trial approval 2014-10-10
Jiangsu Wanbang Insulin Glargine Injection 甘精胰岛素注射液 Pending clinical trial approval 2013-06-28 (Fosun Pharma Insulin Lispro 赖脯胰岛素注射液 Clinical trial 2013-09-13 2196.HK) Insulin Lispro Injection (25R) 精蛋白锌重组赖脯胰岛素混合注射液(25R) Pending clinical trial approval 2015-03-27 Insulin Lispro Injection (50R) 精蛋白锌重组赖脯胰岛素混合注射液(50R) Pending clinical trial approval 2015-03-27
Hisun Pharma Insulin Glargine Injection 甘精胰岛素注射液 Clinical trial 2015-07-13 (600267.SH) Insulin Aspart Injection 门冬胰岛素注射液 Pending clinical trial approval 2014-05-29
Sino Biopharma Insulin Detemir Injection 地特胰岛素注射液 Clinical trial 2015-07-13 (1177.HK)
HEC Pharma Insulin Glargine Injection 甘精胰岛素注射液 Pending clinical trial approval 2014-04-25 Insulin Aspart Injection 门冬胰岛素注射液 Pending clinical trial approval 2015-09-07
Lunan Pharma Insulin Glargine Injection 甘精胰岛素注射液 Pending manufacturing approval 2011-08-29
Chongqing Fujin Insulin Glargine Injection 甘精胰岛素注射液 Clinical trial 2006-05-29 Biopharma Source: Deutsche Bank, CFDA
Volume growth from EDL tenders in 2H15 and 2016 Human insulin was added to the EDL in the 2012 revision. With accelerating drug tenders in 2H15 and 2016, we expect decent growth in human insulin. Going forward, we expect more types of insulin such as insulin analogues and premixed versions of human insulin apart from 30R to be included in the EDL.
We remind investors that the 300IU dosage for animal insulin, as a popular form of pen refills, was removed from the 2012 version of EDL. We see this move as a discouragement of animal insulin at the state level, indicating animal insulin will soon be replaced by human insulin completely. We summarize the detailed reimbursement rules in the following figure.
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Pharmaceuticals / Biotechnology Tonghua Dongbao
Figure 31: Reimbursement rules on insulin Drug name Form Dosage Type of Reimbursement ratio New additions in reimbursement list 2012 Animal insulin Short acting, intermediate acting, 400IU EDL 100% long acting, and premix Recombinant human insulin Short acting, intermediate acting, 300IU, 400IU EDL 100% Y and premix 30R Animal insulin Injection NDRL A 70% Recombinant Human Insulin Injection NDRL B 70% Ultrashort-acting Insulin Injection NDRL B 70% Y Similitude Long-acting Insulin Injection NDRL B 70% Similitude Source: Deutsche Bank, NHFPC
Increasing use of essential drugs in hospitals We highlight that provincial governments have been initiating guidelines on the usage of essential drugs at tier 1 and 2 hospitals. This is an important driver of sustainable growth of human insulin, which is already on the EDL. Additionally, it is critical for drugs being prepared to enter the next revision of the EDL, such as insulin analogues, providing volume upside. The minimum requirement for provinces on essential drug sales as a percentage of total drug sales is 25%-30% for tier 1 hospitals and 40%-50% for tier 2 hospitals. We summarize the data in the following exhibit.
Figure 32: Minimum requirement on essential drug sales as % of total drugs Province Tier 1 hospital Tier 2 hospital Hubei 25%-30% 40%-50% Jiangxi 25%-30% 40%-50% Guangdong 25%-30% 40%-50% Shandong 17% 35% Gansu 20%-25% 40%-45% Fujian 10%-25% 40% Liaoning 10%-20% 25%-35% Shaanxi 15%-25% 40%-50% Jiangsu 20%-30% 40%-50% Chongqing 25% 40%-50% Shanxi 25%-30% 40% Sichuan 35% 50% Source: Deutsche Bank, Provincial MoH
Deutsche Bank AG/Hong Kong Page 19
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Pharmaceuticals / Biotechnology Tonghua Dongbao
We expect stable pricing ahead We highlight that insulin products have enjoyed stable pricing over the past few years. Insulin products from Tonghua Dongbao have had almost no price cuts since 1Q12, according to hospital sales data. As for tender prices, these have been generally stable over the past nine years. The tender price of Gansulin 30R declined only 3% from RMB47.9 in 2007 to RMB46.5 in 2015. We expect this trend will continue with minimal pricing pressure ahead. With stable pricing, we expect GM will be stable at approximately 84% in the next three years. This represents a similar GM as Novo Nordisk, which is a global leader in diabetes care and its GM in 2014 was 84%. We highlight that the 11ppt of increase in GM in 2012 was mainly due to a change in accounting standards, under which the company reported lower-margin business of insulin pens and needles separately.
Figure 33: ASP for insulin (mixed version of regular Figure 34: ASP for human insulin insulin and NPH) Novo Eli Lilly Novo Tonghua Dongbao Rebased Tonghua Dongbao Bayer Rebased TUL 105 Bayer TUL 102 101 100 100 99 95 98 97 96 90 95 94 85 93 92 80 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 Source: Deutsche Bank, Company data Source: Deutsche Bank, Company data
Figure 35: Tender prices of 5 insulin products by Figure 36: Gross margin of insulin segment at Tonghua Tonghua Dongbao Dongbao (2009-18E)
Gansulin 50R Gansulin 40R Gansulin 30R 90% Gansulin R Gansulin N RMB 80% 56 70% 54 60% 52 50 50% 48 40% 46 30% 44 42 20% 40 10% 0% 2009 2010 2011 2012 2013 2014 2015E2016E2017E2018E
Source: Deutsche Bank, Company data Source: Deutsche Bank estimates, Company data
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Pharmaceuticals / Biotechnology Tonghua Dongbao
Improved efficiency and new business opportunities
We expect a healthy ROI from investment in sales and marketing We expect the company to focus on the urban market for insulin analogues and the rural market for human insulin. We anticipate meaningful ROI from investments in its sales team. After a large increase in number of salespersons from 2009 to 2012, the company began to enjoy operating leverage improvement from 2012, as growth in revenue per salesperson accelerated. We expect the trend will continue and sales expenses are likely to grow at a low-teen rate in the next three years. Meanwhile, the company has been increasing its focus on insulin by divesting its non-core business since 2009. We expect a steady GM improvement for the next three years with an increasing proportion of high-margin insulin products.
Figure 37: Growth of sales employees (2009-14) Figure 38: Revenue per sales employee (2009-14)
Sales employees Total employees Revenue per sales employee YoY Sales employees - YoY Total employees - YoY RMB '000 2,000 30% 2,500 35% 1,800 25% 30% 1,600 20% 2,000 25% 1,400 15% 20% 1,200 10% 1,500 15% 1,000 5% 10% 800 0% 1,000 5% 600 -5% 500 0% 400 -10% -5% 200 -15% - -10% - -20% 2009 2010 2011 2012 2013 2014 2009 2010 2011 2012 2013 2014
Source: Deutsche Bank, Company data Source: Deutsche Bank, Company data
Figure 39: Selling expense (2009 – 18E) Figure 40: Gross margin and operating margin (2009- 18E)
Selling expense YoY (%) Selling expense ratio (%) Gross margin Operating margin RMB mn RMB mn 800 753 50% 73% 74% 75% 76% 669 45% 80% 68% 69% 700 62% 64% 36% 35% 36% 578 40% 70% 62% 600 33% 513 57% 30% 29% 35% 60% 500 26% 435 440 30% 27% 26% 50% 39% 352 34% 36% 400 24%25% 40% 31% 282 20% 25% 300 211 30% 19% 15% 17% 200 147 20% 11% 13% 10% 7% 100 5% 10% 0 0% 0%
Source: Deutsche Bank estimates, Company data Source: Deutsche Bank estimates, Company data
The rural market has been the focus of the company’s marketing strategy since 2009. According to the company, it covers over 4,000 county hospitals out of a total of 5,000 in this segment and expects to gain 50% of new patients. Dongbao has already established sales teams in tier 1 and 2 cities. At present, fewer than 100 hospitals in tier 1 and 2 cities have not been covered. This allows the company to promote insulin analogues and we expect a rapid ramp-up after the launch of insulin Glargine in 1H17.
Deutsche Bank AG/Hong Kong Page 21
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Pharmaceuticals / Biotechnology Tonghua Dongbao
Expanding from an insulin manufacturer into diabetes management platform We believe its online diabetes management platform uses a simple monetization strategy with long-term benefits. The company plans to spend RMB821m over eight years on its diabetes platform, starting from 2016. We summarize the initiatives of its diabetes disease management platform below:
To retain patients by providing a full suite of services in diabetes management;
To regulate the insulin intake of patients through blood monitoring;
To make a profit from selling consumables such as needles and test paper;
To achieve marketing cost savings in the long run. In August 2015, it proposed an RMB1bn private placement of 46mn shares to nine investors at an issue price of RMB22.63 per share. Dongbao Industrial Group – the largest shareholder, Chairman LI Yikui, management and essential employees of the company account for 88% of newly issued shares. The purposes of this private placement are to: 1) acquire a 17.79% equity share of Bionime Corp (4737.TW), a medical device company listed in Taiwan; 2) build its online diabetes management platform; and 3) replenish working capital.
Tonghua Dongbao will be the exclusive agent in China for Bionime after acquiring the 17.8% equity share at a price of TWD95 per share. This deal was recently approved by the Ministry of Commerce in China. However, we remind investors that uncertainties remain as it still requires approvals from the NDRC and Taiwan’s Investment Commission at the Ministry of Economic Affairs (MOEA). The result should be out by YE2015. In February 2015, a major domestic player in blood glucose monitor business, Sannuo (300298.SZ) aborted a deal to buy a 20% share of Bionime at TWD120 per share with a total cash consideration of RMB265mn, due to a delay in approval by the Investment Commission. The deal was proposed in February 2014.
Figure 41: Details of nine investors in private placement Investors Relationship to the company % of newly issued Shareholding before private Shareholding after private shares placement placement Dongbao Industrial Group Largest shareholder 50% 37.3% 37.8% LI Yikui Chairman of the company and Dongbao 8% Industrial Group 0.2% 0.6% CHEN Jianqiu President of Dongbao Industrial Group 1% 0.0% 0.1% WANG Peng Vice president of Dongbao Industrial 1% Group 0.0% 0.1% YAO Jingjiang President of Tonghua Dongbao Jinhongji 1% property 0.0% 0.0% Jixiang Chuangying Investment Management and core sales employees 18% Management 0.0% 0.7% Jifa Zhiying Investment Management and core sales employees 8% Management 0.0% 0.3% LIU Dianjun None 2% 0.0% 0.1% SHI Guang None 10% 0.0% 0.4% Largest shareholder, Chairman and core management and employees 88% 37% 39% Total newly issued shares 100% 37% 40% Source: Deutsche Bank, Company data
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Figure 42: Use of funds from private placement Use of funds Proposed amount (RMB mn) Acquiring 17.79% equity share of Bionime 220 Dongbao diabetes management platform 821 - Online platform build-up (Yutang Medical) 110 - Acquiring patient traffic and daily education 561 - Alliances with physical drug stores 70 - IT platform, logistics and warehouse 80 Total 1,041 Source: Deutsche Bank, Company data
We believe Tonghua Dongbao possesses the following advantages to build a successful diabetes management platform:
The company has already established good relationships with physicians and experts at tier 1 and primary-care hospitals;
Large customer base: 3m existing customers with 50k newly added every month. The company is aiming to retain 5k active users on its online platform, out of a target of 250k users every year. At this speed, the online platform is set to accumulate 500k active users in 10 years;
Monetization strategy is direct and simple for drug manufacturers in the chronic disease segment. Online platform will help increase sales by expanding into new channels and save on marketing expenses.
Deutsche Bank AG/Hong Kong Page 23
11 November 2015
Pharmaceuticals / Biotechnology Tonghua Dongbao
Industry overview
China has the largest number of diabetes patients
According to International Diabetes Federation (IDF), the number of diabetes patients reached 387m globally in 2014 with a CAGR of 2% from 2011 to 2014, while the CAGR from 2000 to 2010 was 7%. The large difference in the number of patients in 2010 and 2011 was mainly due to new data sources used by IDF. It expects the number of diabetes patients to reach 592m by 2035. We highlight that China accounted for 25% of diabetes patients in the world in the 20-79 age group in 2014. With 96m patients in 2014, China has the largest number of diabetes patients across the globe.
Figure 43: Number of diabetes patients in the world Figure 44: Top 10 countries for diabetes patients in 2014
Diabetes patients (m) Diabetes patients (m) 700 120 592 96 600 100 CAGR: 2% 69 500 CAGR: 7% 80 371 382 387 60 400 366 285 40 26 300 246 194 20 12 9 9 8 7 7 7 200 151 0 100 0 2000 2003 2007 2010 2011 2012 2013 2014 2035E
Source: Deutsche Bank, International Diabetes Federation estimates Source: Deutsche Bank, International Diabetes Federation
In China, the number of diabetes patients delivered a CAGR of 2% from 2011 to 2014 and reached 96m, compared to a CAGR of 7% from 2000 to 2010. We attribute the large difference in the number of patients in 2011 and 2010 (90m vs. 43m) to the change in data source used by IDF. The prevalence rate of diabetes in China increased to 9.3% in 2014 from 2.7% in 2000 vs. 8.3% and 4.6% for the world, respectively.
Figure 45: Number of diabetes patients in China Figure 46: Prevalence rate of diabetes in China
Diabetes patients (m) 12.0% 160 143 9.4% 9.6% 9.3% 10.0% 9.0% 140 CAGR: 2% 120 8.0% 98 96 100 90 92 6.0% 80 CAGR: 7% 4.3% 4.2% 60 4.0% 40 43 2.7% 2.7% 40 23 24 2.0% 20 0 0.0% 2000 2003 2007 2010 2011 2012 2013 2014 2035E 2000 2003 2007 2010 2011 2012 2013 2014
Source: Deutsche Bank, International Diabetes Federation estimates Source: Deutsche Bank, International Diabetes Federation
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Pharmaceuticals / Biotechnology Tonghua Dongbao
An underpenetrated diabetes market in China We believe the diabetes market in China is underpenetrated. As of 2014, China accounted for 19% of the world’s population and 25% of its diabetes patients. However, according to IDF, expenditure on diabetes in China represented only 7% of global expenditure. We attribute the disproportion to the high percentage of undiagnosed diabetes patients in China. We highlight 60% of diabetes patients were undiagnosed in China while 23% of the total were untreated in 2013. While 17% of the total patients received treatment, only 6% of the total had efficacious treatment.
Figure 47: Population, diabetes patients, and expenditure Figure 48: Underpenetrated market in China in 2013 on diabetes of China as a percentage of world total % of world total 30% 70% 25% 60% 25% 60% 19% 50% 20% 40% 15% 30% 23% 10% 7% 20% 11% 5% 10% 6% 0% 0% Population Diabetes patients Expenditure on Undiagnosed Untreated Efficacy not Efficacy diabetes reached reached Source: Deutsche Bank, International Diabetes Federation Source: Deutsche Bank, Company data
Overview of diabetes drug market
We estimate the total market size – including retail and hospital – for diabetes drugs reached RMB27bn in 2014. This represented a CAGR of 15% from 2012 to 2014 vs. the 13% CAGR for the entire drug market. We expect stable growth for the market with a CAGR of 11% from 2015 to 2018. We also highlight that the market size for insulin achieved a CAGR of 17% from 2012 to 2014, outperforming the diabetes drug market in the same period. We forecast a 12% CAGR from 2015 to 2018.
Figure 49: Market size of diabetes drug in China Figure 50: Total market size of insulin in China
RMB bn RMB bn 45 CAGR 2015E-18E: 11% 30 CAGR 2015E-18E: 12% 40 CAGR 2012-14: 15% CAGR 2012-14: 17% 25 35 30 20 25 15 20 15 10 10 5 5
0 0 2012 2013 2014 2015E 2016E 2017E 2018E 2012 2013 2014 2015E 2016E 2017E 2018E Source: Deutsche Bank estimates, Company data Source: Deutsche Bank estimates, Company data
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Pharmaceuticals / Biotechnology Tonghua Dongbao
Figure 51: Insulin, diabetes drug and total drug market Figure 52: Breakdown of diabetes drugs market in 2014 growth 2013-2015E
Insulin market Diabetes drugs market Total market Glinide 6% Others 19% α-glucosidase 8% Inhibitor 17% Biguanide 17% 5% 15% Sulfonylureas 13% 8% 11%
9% Insulin 56% 7% 2013 2014 2015E
Source: Deutsche Bank estimates, Company data Source: Deutsche Bank, Company data
Further analysis of diabetes market using hospital data According to Sanofi, the hospital market for insulin and OADs reached RMB7.5bn and RMB6.9bn in 2014. The share of insulin increased from 46% in 2010 to 52% in 2014. Within the insulin market, insulin analog and human insulin accounted for 63% and 37% market shares respectively.
Figure 53: Insulin and oral anti-diabetics growth, 2010- Figure 54: Insulin analogue and human insulin growth, 15E 2010-15E RMB bn Insulin Oral anti-diabetics RMB bn Insulin analogue Human insulin Insulin YoY Oral anti-diabetics YoY Insulin analogue YoY Human insulin YoY 9.0 30% 6.0 60% 8.0 25% 5.0 50% 7.0 6.0 20% 4.0 40% 5.0 15% 3.0 30% 4.0 3.0 10% 2.0 20% 2.0 5% 1.0 10% 1.0 0.0 0% 0.0 0% 2010 2011 2012 2013 2014 2015E 2010 2011 2012 2013 2014 2015E Source: Deutsche Bank estimates, Sanofi Source: Deutsche Bank estimates, Sanofi
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Competitive landscape of the insulin market
The market size of insulin in China reached RMB15bn in 2014 and achieved CAGR of 17% from 2012 to 2014. We forecast 12% CAGR from 2015 to 2018. At present, only animal insulin (first generation) and human insulin (second generation) are included in the EDL. We remind investors that among the premixed versions of human insulin, only 30R is listed in the EDL. We reiterate our projection that insulin analogues and more versions of human insulin will be included in the next revision of EDL. We highlight that the market share of insulin in the EDL declined from 39% in 2012 to 32% in 2014. We ascribe the trend to the increasing popularity of insulin analogue, which accounted for 62% of market share in 2014. Additionally, by hospital type, we observe that tier 1 hospitals accounted for 58% of insulin sales in the hospital market in 2014.
Figure 55: Market size of insulin in China Figure 56: EDL vs. non-EDL breakdown of insulin market
RMB bn EDL Non-EDL 30 CAGR 2015E-18E: 12% 80% CAGR 2012-14: 17% 68% 65% 25 70% 61%
20 60% 50% 39% 35% 15 40% 32% 30% 10 20% 5 10% 0% 0 2012 2013 2014 2012 2013 2014 2015E 2016E 2017E 2018E Source: Deutsche Bank estimates, Company data Source: Deutsche Bank estimates, Company data
Figure 57: Breakdown of insulin market in 2014 Figure 58: Breakdown of insulin market sales 2014
Animal Insulin 2%
Tier II and The 3rd below generation hospitals insulin 42% 62% The 2nd Tier I generation hospitals insulin 58% 36%
Source: Deutsche Bank, Company data Source: Deutsche Bank, Company data
Deutsche Bank AG/Hong Kong Page 27
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Pharmaceuticals / Biotechnology Tonghua Dongbao
DB estimates of overall market share breakdown We summarize our estimates of the market share breakdown of insulin in both retail and hospital markets. For human insulin, Novo Nordisk is the leading player with a 51% market share. Tonghua Dongbao, Eli Lilly and The United Lab have market shares of 19%, 14%, and 5% respectively. For insulin analogue, Novo Nordisk achieved a 52% market share while Eli Lilly/Sanofi/Gan & Lee had 21%/14%/13% shares.
Figure 59: Market share of human insulin in 2015 (DBe) Figure 60: Market share of insulin analogue in 2015 (DBe)
Domestic Domestic players players 13% 24%
MNC 76% MNC 87%
Source: Deutsche Bank, Company data Source: Deutsche Bank, Company data
Figure 61: Market share of human insulin in 2015 (DBe) Figure 62: Market share of insulin analogue in 2015 (DBe) Bayer 1% Others Ganlee 10% 13% TUL 5% Sanofi 14% Eli Lily 14% Novo Novo 51% 52%
Tonghua Eli Lily Dongbao 21% 19%
Source: Deutsche Bank, Company data Source: Deutsche Bank, Company data
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Pharmaceuticals / Biotechnology Tonghua Dongbao
Competitive landscape of insulin in the hospital market In 2014, MNCs held a 84% market share for insulin at the hospital level. While MNCs have been dominant in this market, we highlight that their market share is decreasing. We expect the trend to continue as more domestic companies are likely to receive production approval after aggressive R&D in recent years. Currently, only Gan & Lee manufactures insulin analogues as a domestic player.
On market share, Novo Nordisk was the largest player in 2014 with 54% while Sanofi and Eli Lilly accounted for 16% and 15%. The fourth and fifth largest players are domestic companies, Gan & Lee and Tonghua Dongbao, with 7% and 5% market shares, respectively. We remind investors that Gan & Lee only sells insulin analogues, including Glargine and Lispro, while Tonghua Dongbao only sells human insulin.
Figure 63: Market breakdown of global and domestic Figure 64: Main players in insulin market in 2014 players in the insulin market in China Global Domestic Tonghua Eli Lilly Dongbao 15% 100% Gan Lee 5% 7% Others 4% 80% Sanofi 16% 60%
40%
20%
Novo 0% 53% 1H12 2H12 1H13 2H13 1H14 2H14 1H15
Source: Deutsche Bank, Company data Source: Deutsche Bank, Company data
For human insulin, Novo Nordisk held the largest market share with 64% in 2014 while Eli Lilly and Tonghua Dongbao had 17% and 15% respectively. For insulin analogue, Novo Nordisk was also the largest player with a 49% share while Sanofi, Eli Lilly and Gan & Lee held 25%, 14% and 12%, respectively.
Figure 65: Market share for human insulin in 2014 Figure 66: Market share for insulin analogues in 2014
Bayer Tonghua 3% Dongbao TUL Sanofi Ganlee 15% 1% 25% 12%
Eli Lilly 17% Eli Lilly 14% Novo 64% Novo 49%
Source: Deutsche Bank, Company data Source: Deutsche Bank, Company data
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Performance of global and domestic players in China
Performance of MNCs in China We summarize the performance of leading global companies in the following exhibits. Among the four MNCs, Sanofi delivered highest growth with 22% and 20% in 2013 and 2014. Novo Nordisk and Eli Lilly achieved growth of 12% and 9% in 2013 and 2014. For Bayer, the smallest player among global names, growth decelerated, with 10% growth in 2014 vs. 17% in 2013.
Figure 67: Global players in human insulin market growth Figure 68: Global players in human insulin market share
Novo Sanofi Eli Lilly Bayer Novo Sanofi Eli Lilly Bayer 25% 100% 22% 20% 20% 80% 17% 15% 60% 12% 10%
10% 40% 12% 9% 9% 5% 20%
0% 0% 2012 2013 2014 2013 2014 Source: Deutsche Bank, Company data Source: Deutsche Bank, Company data Performance of domestic players in China We summarize the performance of key domestic players in the insulin market below. Tonghua Dongbao is a dominant domestic player in human insulin while Gan & Lee is the only domestic player in insulin analogues. United Lab entered the market in 2011 and has been ramping up, as reflected in its robust growth rates in 2013 and 2014. We also highlight that Gan & Lee and Tonghua Dongbao achieved significantly higher growth than MNCs in 2013 and 2014.
Figure 69: Domestic players in human insulin market Figure 70: Domestic players in human insulin market growth share
Gan Lee Tonghua Dongbao TUL Gan Lee Tonghua Dongbao TUL 250% 100%
200% 80%
150% 60%
100% 40%
50% 20%
0% 0% 2012 2013 2014 2012 2013 2014 Source: Deutsche Bank, Company data Source: Deutsche Bank, Company data
Flagship products in the insulin market The top three best-selling insulin products in China are Novomix 30 (Insulin Aspart) from Novo Nordisk, Lantus (Insulin Glargine) from Sanofi and Novolin 30R (Human insulin) from Novo Nordisk. They accounted for 9%, 8% and 7% market share of the diabetes market in 2014.
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Figure 71: Growth of top three bestselling insulin Figure 72: Market share of top three branded insulin products products in 2014 Lantus - Novomix 30 - Novo Lantus - Sanofi Novolin 30R - Novo Novomix Sanofi 30 - Novo 8% 25% 9% 20% Novolin 30R - Novo 15% 7%
10%
5%
0% Others 76% -5% 2013 2014
Source: Deutsche Bank, Company data Source: Deutsche Bank, Company data
Comparison of prices by MNCs and domestic players
We conducted an exercise to identify pricing differences among major therapeutics by MNCs and domestic players. While domestic players generally price at a discount to MNCs, we note that the discount for insulin is generally smaller than for oral anti-diabetics. For human insulin (a premixed version of human insulin and NPH), Tonghua Dongbao price is at an approximate 15% discount to MNCs. For insulin Glargine, Gan & Lee has a discount of around 25%. As for Acarbose and Metformin, domestic players have approximately 30% and 60% discounts, respectively.
Figure 73: ASP for Insulin (human + NPH) Figure 74: ASP comparison for insulin Glargine
Tonghua Dongbao Ganlee
Eli Lilly
Sanofi Novo
0 10 20 30 40 50 60 0 50 100 150 200 250
Source: Deutsche Bank, Company data Source: Deutsche Bank, Company data
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Pharmaceuticals / Biotechnology Tonghua Dongbao
Company overview
Tonghua Dongbao, a bellwether company in China’s insulin market, ranks first in the recombinant human insulin market and second in the overall insulin market among domestic players. It has wide coverage of primary medical institutions with about 90% of county hospitals (over 4,000 out of a total of 5,000). We expect its third-generation insulin Glargine and Aspart will be launched in 1H17 and 2018 respectively, adding another leg to its existing product portfolio. We summarize the product portfolio in the following figure.
In 9M15, the company realized revenue of RMB1.2bn, representing YoY growth of 20%. From 2009 to 2014, total revenue had a CAGR of 20% and reached RMB1.5bn in 2014. In revenue contribution, insulin API and injections are the major driver, accounting for 78% in 2014. Total exposure on diabetes products was 88% in 2014, including the insulin business and the segment of insulin pens and blood glucose monitors.
Figure 75: Existing product offerings Product name Type Ingredients Indication Gansulin R Fast-acting insulin Regular form Diabetes Gansulin N Intermediate-acting insulin NPH form Diabetes Gansulin 30R Pre-mixed insulin 30% regular +70% NPH Diabetes Gansulin 40R Pre-mixed insulin 40% regular +60% NPH Diabetes Gansulin 50R Pre-mixed insulin 50% regular +50% NPH Diabetes Insulin pen and blood Medical device and consumables N.A. Diabetes glucose monitor Zhen Nao Ning TCM N.A. Hypertension, arteriosclerosis capsule Dongbao Gantai tablet TCM N.A. Supportive treatment for chronic and acute hepatitis, fatty liver Source: Deutsche Bank, Company data
Figure 76: Revenue (2009 – 9M15) Figure 77: Revenue breakdown (2009 – 14) Insulin API and injections Insulin pen and blood glucose monitor Revenue YoY RMB mn Zhen Nao Ning capsule Dongbao Gantai tablet Other pharmaceuticals Building materials 1,600 1,451 30% 100% 1,400 1,239 90% 7% 6% 1,204 25% 11% 10% 8% 10% 80% 3% 11% 1,200 51% 13% 992 20% 70% 1,000 60% 784 13% 800 638 15% 50% 574 17% 15% 40% 78% 77% 77% 78% 600 69% 75% 10% 30% 49% 50% 400 20% 5% 33% 35% 200 10% - 0% 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2009 2010 2011 2012 2013 2014 9M15
Source: Deutsche Bank, Company data Source: Deutsche Bank, Company data
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Pharmaceuticals / Biotechnology Tonghua Dongbao
Recombinant human insulin
Recombinant human insulin (second generation) API and injections are the largest revenue driver for Tonghua Dongbao, accounting for 81.1%/77.7%/74.6%/72% in 1H15/2014/2013/2012. Sales of recombinant human insulin reached RMB1.1bn in 2014, at a CAGR of 23% from 2009 to 2014. An 11ppt GM increase in 2012 was due to a change in accounting standard when the company reported the lower-margin business of insulin pens and needless separately.
Figure 78: Sales of human insulin (2009 – 1H15) Figure 79: Gross margin of human insulin (2009 – 1H15)
Human insulin sales YoY Gross margin
1127 90% 84% 1200 50% 80% 83% 81% 45% 80% 1000 898 68% 68% 69% 40% 70% 800 714 35% 60% 633 30% 604 50% 600 497 25% 40% 398 20% 30% 400 15% 20% 200 10% 5% 10% 0 0% 0% 2009 2010 2011 2012 2013 2014 1H15 2009 2010 2011 2012 2013 2014 1H15
Source: Deutsche Ban ,Company data Source: Deutsche Bank, Company data
Currently there are five products marketed under the brand of Gansulin by the company. Among them, Gansulin 30R, 40R and 50R are three types of premix products with different proportions of regular form insulin to NPH.
Gansulin 30R accounted for 70-80% of total insulin sales for the company, thanks to past marketing efforts by MNCs when they entered the China market, which helped physicians to become familiar with the 30R type. Gansulin 40R, just launched in 2014, is going to be a new driver, we believe, as it is the only 40R product in China and enjoys better pricing (15% higher than 30R). We expect sales from Gansulin 40R to accelerate in 2016 after the completion of non-EDL tenders. In the following figure, we summarize the details of existing five insulin products.
Figure 80: Insulin products by Tonghua Dongbao Product Name Type Ingredients Tender price (RMB, 2015 YTD) Gansulin R Fast-acting insulin Regular form 46.8 Gansulin N Intermediate-acting insulin NPH form 46.5 Gansulin 30R Pre-mixed insulin 30% regular +70% NPH 46.5 Gansulin 40R Pre-mixed insulin 40% regular +60% NPH 53.3 Gansulin 50R Pre-mixed insulin 50% regular +50% NPH 51.9 Source: Deutsche Bank, Company data
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Pharmaceuticals / Biotechnology Tonghua Dongbao
Insulin pens and blood glucose monitors
To provide a full set of services to its patient customers, including insulin delivery and blood glucose monitoring, the company launched insulin pens in 2003 and blood glucose monitors in 2012. The devices are usually provided free in promotion bundles, while the company makes a profit from sales of consumables such as needles and test paper. Therefore, it is still making a loss in this segment. As for the online platform in the future, the company expects consumables sold online will be 20% cheaper than in offline stores. However, the company believes it will still maintain a normal net profit margin of 20% for needles and test paper by saving on marketing expenses.
The company provides two types of insulin pens: Dongbao pen (launched in 2003) and Gansulin pen (an upgraded version launched in 2010). Gansulin pen is the only insulin pen in the world that involved Chinese patients in its development phase. It is manufactured by a Swiss company, YPSOMED. As for consumables, Dongbao needle received FDA approval and its 31G type has the finest needle in the world, reducing much of the pain when used.
Figure 81: Gansulin pen Figure 82: Dongbao needle
Source: Deutsche Bank, Company Website Source: Deutsche Bank, Company Website
Figure 83: Prices of Gansulin pen and Dongbao needle Market price (RMB) Units Duration Gansulin pen 290 (free in promotion 1 Over 5,000 times bundle) Dongbao needle 19.5 7 4- 10 times (depends on patients) Source: Deutsche Bank
In 2012, the company started to sell blood glucose monitors as an agent for Bionime Corp. Bionime is a Taiwanese company targeting hospital sales of high-end blood glucose monitors and test paper. Tonghua Dongbao mainly sells Bionime’s blood glucose monitors through hospitals in China, and already realized revenue of RMB18.6m in 2014. Bionime achieved total revenue in China of over RMB70m in 2014. After completing a recently proposed deal, Tonghua Dongbao will become the exclusive agent in China for the Taiwan company.
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Pharmaceuticals / Biotechnology Tonghua Dongbao
Product pipeline
Dongbao has 12 diabetes-related drugs in the pipeline. We expect its long- acting insulin Glargine, Chang Shu Lin, to be launched in 1H17 and an ultra short-acting aspart insulin, Rui Shu Lin, to be released in 2018. For oral diabetes generic drugs, the company has applied for marketing approval for repaglinide and repaglinide/metformin. We summarize its pipeline portfolio below.
Figure 84: Pipeline products of Tonghua Dongbao Brand Name Generic Name Type Clinical progress Chang Shu Lin 长舒霖 Glargine 甘精胰岛素 Long-acting insulin It expect to apply for marketing approval at end 2016 and launch in 1H17. Rui Shu Lin 锐舒霖 Aspart 门冬胰岛素 Ultrashort-acting insulin Expects to finish all clinical trials in 2017. 30/70 pre-mix and 50/50 pre-mix are still applying for clinical trials. Ping Shu Lin 平舒霖 Detemir 地特胰岛素 Long-acting insulin Applied for clinical trials in 1H15 Su Shu Lin 速舒霖 Lispro 赖脯胰岛素 Ultrashort-acting insulin Plans to apply for clinical trials in 2016
Generic Name (EN) Generic Name (CN) Type Clinical progress Dulaglutide injection 德拉鲁肽注射液 GLP-1 receptor agonists Preclinical Liraglutide injection 利拉鲁肽注射液 GLP-1 receptor agonists Preclinical Trelagliptin and tablet 曲格列汀及其片剂 DPP-4 inhibitors Preclinical, plans to apply for clinical trials at end 2015 Sitagliptin and tablet 西格列汀 DPP-4 inhibitors Preclinical, plans to apply for marketing approval in 2016 Sitagliptin Phosphate/metformin 西格列汀二甲双胍片 DPP-4 inhibitors Preclinical, plans to apply for marketing Hydrochloride Tablet approval in 2016 Vildagliptin tablet 维格列汀片 DPP-4 inhibitors Preclinical, plans to apply for marketing approval in 2016 Repaglinide and tablet 瑞格列奈及片 Meglitinide Applied for marketing approval Repaglinide／metformin fixed- 瑞格列奈二甲双胍复方片 Meglitinide Applied for marketing approval dose combination tablet Source: Deutsche Bank, Company data
Financial investment in Xiamen Amoytop Biotech The company owns a 34.4% equity share in Xiamen Amytop Biotech, which it regards as a purely financial investment. The latest blockbuster on the company’s pipeline is Y-branched pegylated recombinant human interferon α2b injection, which is indicated for chronic heptitis C and waiting for marketing approval.
Figure 85: Pipeline products of Amoytop Biotech Generic Name (EN) Generic Name (CN) Type Clinical progress Y-branched pegylated recombinant Y 型 PEG 化重组人干扰素 Class I New Drug Completed clinical trials for chronic hepatitis C in 2013, human interferon α2b injection α2b 注射液 now in evaluation stage for new drug. Completed phase III non-inferiority clinical trial for chronic hepatitis B. Y-branched pegylated recombinant Y 型 PEG 化重组人粒细胞刺 Class I New Drug Phase II clinical trial human Granulocyte Colony 激因子注射液 Stimulating Factor injection Y-branched pegylated recombinant Y 型 PEG 化重组人生长激素 Class I New Drug Phase II clinical trial human growth hormone injection 注射液 Y-branched pegylated recombinant Y 型 PEG 化重组人干扰素 Class I New Drug Phase II clinical trial human interferon α2a α2a 注射液 Source: Deutsche Bank, Company data
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Capital expenditure and export business
Capital expenditure The biotechnology industry has very high barriers in terms of technology and capital. We expect capital spending growth for the company to slow down and major spending to go to insulin analogues in the future. Since 2002, Tonghua Dongbao has already spent over RMB1.3bn on facilities for insulin API and injections, and is going to spend RMB658m more on API facilities for insulin analogues in 2016 and 2017. The capacity of 196mn injections will be more than enough for the current production volume of over 30mn per year. As a reminder, the injection facilities can be used to produce both second and third generation insulin.
The major reasons for the company to build large capacity are: 1) this lowers the total investment cost as building a large capacity at once is cheaper than dividing the project into many parts; and 2) management expected a faster tender process at that time. We summarize capital spending on insulin projects over the past 10 years below.
Figure 86: Investment in facilities for insulin manufacturing Year of Completion Projects Capacity Investment (RMB m) 2008 Stage II facility for 3,000kg of insulin API 700 recombinant human insulin 2009 Stage II expansion 70mn of insulin 200 project injections 2014 Stage III facility for 126mn of insulin 296 recombinant human injections insulin 2016/2017 Facilities for insulin N.A. 767 (spent RMB109m so analogue API far) Total 1,963 Source: Deutsche Bank, Company data
Export business We do not expect the export business to be a meaningful revenue contributor in the short term as the company is still receiving certificates. In July 2013, its manufacturing facility for recombinant human insulin received a European GMP certificate. It is the first manufacturing facility for biopharmaceuticals in China to receive the European GMP certificate. The company is also preparing to obtain US FDA approval for its insulin API. At present, it is exporting insulin API to 18 developing and underdeveloped countries, including South America, Ukraine, Poland and ‘White Russia’.
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Pharmaceuticals / Biotechnology Tonghua Dongbao
Company profile
Company background and history
Since 2009, the company has been divesting non-core businesses to focus on the diabetes segment. We summarize its milestones in the following figure.
Figure 87: Milestones Time Event 1992 Established in Tonghua city, Jilin province by LI Yikui, Chairman of the company 1994 Listed on A share market 1995 Hired Dr. GAN Zhongru to lead R&D team, and began to develop recombinant human insulin 1998 The first product - Gansulin R approved by CFDA 1999 Launched Gansulin N 2001 Hired Dr. LI Zhaoqi to build Dongbao international platform in Shanghai Launched Gansulin 30R 2003 Launched Gansulin pen and Dongbao pen Hired an experienced management team led by Li Cong, and built a marketing center for Gansulin 2008 Launched Gansulin 50R Completed expansion project of stage II facility with insulin API production capacity of 3,000kg, and obtained GMP certificate. Tonghua Dongbao has the largest production facility for insulin in Asia and third largest in the world 2009 Completed expansion project with production capacity of 70mn injections Divested 100% equity of Weihai Dongbao, a loss-making pharmaceutical company at a cash consideration of RMB20mn 2011 Sold 29.43% equity of Gan & Lee at a consideration of ~RMB400m 2012 Cleaned up bad debt with 100% provision coverage Divested infusion business 2013 Receives European GMP certificate 2014 Launched Gansulin 40R 2015 Raised ~RMB1bn through private placement to invest in 17.79% equity of Bionime Corp, a glucose monitor manufacturer in Taiwan, and online platform for diabetes management Source: Deutsche Bank, Company data
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Pharmaceuticals / Biotechnology Tonghua Dongbao
Shareholding and corporate structure
We summarize the shareholding and corporate structure of Tonghua Dongbao in the following figure.
Figure 88: Shareholding and major subsidiaries after private placement
Mr. WANG Ms. CHEN Mr. LI Yikui Dianduo Xiaolin
30.00% 20.00% 13.69%
Dongbao Industrial Mr. LI Yikui Other public investors Group
37.77% 0.55% 61.68%
Tonghua Dongbao Pharmaceutical Co., Ltd
79.24% 34.41% 95.00% 60.00% 100.00% 100.00% Tonghua Tonghua Tonghua Beijing Dongbao Xiamen Amoytop Changchun Dongbao Tongbo Dongbao Construction Biotech Dongbao Pharma Jinhongji Property Biopharma Biotech Materials Development
Source: Deutsche Bank, Company data
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Management profiles
We summarize the management profiles below.
Figure 89: Management profiles Name Title Date of appointment Age Work experience Academic qualification LI Yikui Chairman 12/28/1992 64 Currently works as Chairman of the company and Graduated from Peking Dongbao Industrial Group. In 1992, Li established University with a bachelor’s 李一奎 Dongbao Industrial Group and the company. In 1985, degree in biology in 1974. he set up Tonghua No. 4 Baishan Pharmaceutical Senior engineer and certified Company. pharmacist. LI Cong 李聪 CEO 1/25/2007 51 Has worked as CEO of the company since Jan 2007. Graduated from Tongji From Jan 2004 to Dec 2006, Li worked as marketing University with a bachelor’s director of Gansulin and CEO assistant. From Dec degree from the medical 1997 to Dec 2003, he worked as marketing director of department in 1986. Shanghai office in Novo Nordisk China. From July 1986 to Dec 1997, he taught pathology at Tongji University. LENG Vice President 1/25/2007 41 Leng is responsible for general management and Graduated from Liaoning Chunsheng technology support for insulin projects, R&D of Normal University with a 冷春生 genetic engineered drugs. doctoral degree in cytobiology. In 1997, Leng received a bachelor’s degree in fine chemistry from Jilin Institute of Chemical Technology in 2013. CHEN Hong Vice President and 5/6/2011 41 Currently works as Chief Engineer, responsible for Currently pursuing a doctoral Chief Engineer R&D of oral diabetic drugs, TCM and nutrition degree in finance in Wuhan 陈红 products. Chen used to work as manager of R&D University since 2012. Chen department in the company. received a bachelor’s degree in pharmaceutical analysis from Shenyang Pharmaceutical University in 1998. WANG Board Secretary 3/22/1998 50 Currently works as chief accountant and board Graduated from Jilin University Junye secretary in the company. of Finance and Economics with a bachelor’s degree in 王君业 accounting in 1990. Source: Deutsche Bank, Company data
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Financials
Figure 90: Income statement
Income Statement (RMB millions) 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E Total revenue 574 638 784 992 1,204 1,451 1,763 2,134 2,572 3,113
COGS (245) (243) (295) (357) (385) (452) (482) (562) (653) (754) Business tax and surplus (2) (8) (5) (7) (8) (12) (4) (5) (6) (8) Business tax rate 0.41% 1.22% 0.61% 0.75% 0.70% 0.79% 0.25% 0.25% 0.25% 0.25% Gross profit - reported 329 394 489 634 819 999 1,282 1,572 1,919 2,359 Gross profit - core 326 387 484 627 810 988 1,277 1,567 1,913 2,352
Selling expenses (147) (211) (282) (352) (435) (440) (513) (595) (682) (781) General and administrative expenses (incl. R&D) (83) (105) (148) (142) (149) (184) (215) (260) (314) (380) EBIT 96 70 55 134 226 364 549 711 917 1,191
Depreciation and amortisation Depreciation 80 95 98 99 100 104 121 135 151 169 Amortisation 9 9 9 9 8 9 8 7 6 5 EBIT DA 185 174 161 241 335 477 678 853 1,074 1,365
Investment gain on associates 4 144 406 8 6 6 44 7 8 9 Gain/(Loss) on FX Non-operating income 28 11 4 18 6 4 2 Non-operating expense (0) (2) (1) (0) (1) (8) (1) Finance expense (33) (23) (14) (14) (18) (27) (20) 14 24 36 Loss on asset impairment (11) (2) (23) (79) (8) (16) - Net profit before tax 85 199 427 67 212 324 574 733 950 1,235
Income tax expenses (13) (26) (64) (7) (32) (47) (86) (110) (142) (185) Tax rate 15.1% 12.8% 15.0% 11.1% 15.3% 14.6% 15.0% 15.0% 15.0% 15.0% Net profit after tax 72 173 363 60 179 277 488 623 807 1,050 Minority interests 6 5 1 3 4 3 2 3 3 4 Reported net profit 78 178 364 63 184 280 490 625 810 1,054 Net profit - Core 66 55 47 126 190 299 458 625 810 1,054
EPS: Bas ic (RMB) - cor e 0.14 0.10 0.06 0.16 0.20 0.29 0.39 0.53 0.69 0.89 EPS: Diluted (RMB) - core 0.14 0.10 0.06 0.16 0.20 0.29 0.39 0.53 0.69 0.89 Source: Deutsche Bank estimates, Company data
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Figure 91: Balance sheet
Balance sheet (RMB millions) 2,009 2,010 2,011 2,012 2,013 2,014 2,015 2016E 2017E 2018E Assets Cash and cash equivalents 47 63 244 125 216 202 1,255 1,693 2,184 2,672 Accounts receivable 315 316 346 296 338 392 423 480 543 626 Prepaid payments 63 68 132 123 139 50 50 50 50 50 Inventories 170 187 198 233 344 630 577 369 248 382 Others 127 97 134 92 70 38 38 38 38 38 Current assets 721 731 1,054 869 1,107 1,312 2,344 2,631 3,063 3,767 Long-term investments 80 173 121 146 152 158 378 378 378 378 Property, plant and equipment 1,016 1,040 1,086 1,033 954 1,216 1,360 1,524 1,707 1,880 Others 434 241 116 333 480 270 262 256 250 245 Non current assets 1,530 1,455 1,323 1,512 1,587 1,644 2,001 2,158 2,335 2,503 Total as s ets 2,251 2,186 2,377 2,380 2,694 2,956 4,344 4,788 5,398 6,270
Equity and liabilities Short-term borrow ings 223 64 63 79 253 310 360 380 400 420 Accounts payable 41 47 38 31 39 52 47 64 62 81 Long-term liabilities due w ithin one year - - 30 - 30 - - - - - Others 58 59 33 26 53 99 99 99 99 99 Current liabilities 321 169 163 136 375 461 505 543 561 599 Long-term debt 269 267 122 239 256 298 318 338 358 378 Specific payable 17 14 13 12 45 9 9 9 9 9 Deferred tax liabilites 17 4 1 2 2 3 3 3 3 3 Deferred revenue - non-current liabilities - - - - - 24 24 24 24 24 Other non-current liabilities - - - - - 1 1 1 1 1 Non current liabilities 304 285 136 253 303 335 355 375 395 415 Shareholders' equity: Share capital 479 575 776 776 931 1,030 1,179 1,179 1,179 1,179 Additional Paid-in Capital 637 465 246 254 100 157 1,152 1,152 1,152 1,152 Minus treasury stock - - - - - 29 29 29 29 29 Other comprehensive income - - - - - 19 19 19 19 19 Capital surplus 157 177 215 223 243 274 323 385 467 572 Retained profit 320 483 809 708 716 686 818 1,145 1,639 2,352 Minorities 34 33 32 29 25 23 21 18 15 11 Total equity 1,627 1,733 2,078 1,991 2,016 2,161 3,484 3,871 4,442 5,256 Total liabilities and equity 2,251 2,186 2,377 2,380 2,694 2,956 4,344 4,788 5,398 6,270
Source: Deutsche Bank estimates, Company data
Figure 92: Cash flow statement
Cash flow statement (RMB millions) 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E Net profit 72 173 363 60 179 277 488 623 807 1,050 Adjustments: Depreciation 80 95 98 99 100 104 121 135 151 169 Amortisation 9 9 9 9 8 9 8 7 6 5 Financial expenses 32 23 15 15 18 27 20 (14) (24) (36) Net change in operating assets and liabilities Decreases in inventories (31) (17) (3) (29) (110) (287) 52 208 121 (134) Decreases in accounts receivables (5) 17 (136) 22 (26) 29 (31) (57) (63) (83) Increases in accounts payables (13) 16 (14) (43) 46 36 (5) 17 (2) 18 Others 23 (155) (386) 62 6 12 0 0 0 (0) Cash flow from operating activities 166 160 (55) 194 221 206 653 918 996 990
Cash received from return of investment 51 144 456 - - - Purchases of items of property, plant and equipment (79) (73) (89) (242) (190) (106) (264) (299) (334) (342) Cash paid for investments - (36) - (17) (34) - (220) - - - Others 20 1 0 14 56 0 0 - - - Net cash used in investing activities (8) 36 367 (245) (168) (106) (484) (299) (334) (342)
Issue of shares 4 1 41 1,041 - - - Cash from borrow ings 234 114 63 204 319 430 70 40 40 40 Cash repayments of amount borrow ed (333) (276) (172) (102) (98) (362) Cash payments for distribution of dividends or profits (32) (23) (17) (170) (181) (223) (226) (221) (211) (200) Net cash generated from (used in) financing activ (130) (180) (125) (68) 39 (114) 885 (181) (171) (160) Net increase (decrease) in cash and cash equival 28 16 187 (118) 92 (14) 1,053 438 490 488 Cash and cash equivalents at end of year 47 63 244 125 216 202 1,255 1,693 2,184 2,672
Source: Deutsche Bank estimates, Company data
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Pharmaceuticals / Biotechnology Tonghua Dongbao
Appendix 1
Important Disclosures
Additional information available upon request
Disclosure checklist Company Ticker Recent price* Disclosure Tonghua Dongbao 600867.SS 25.13 (CNY) 10 Nov 15 NA *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr.
For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=600867.SS
Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Jack Hu
Historical recommendations and target price: Tonghua Dongbao (600867.SS) (as of 11/10/2015)
40.00 Previous Recommendations
Strong Buy 35.00 Buy Market Perform 30.00 Underperform Not Rated 25.00 Suspended Rating Current Recommendations 20.00 Buy Hold
Security Price 15.00 Sell Not Rated 10.00 Suspended Rating
*New Recommendation Structure 5.00 as of September 9,2002
0.00 Nov 13 Feb 14 May 14 Aug 14 Nov 14 Feb 15 May 15 Aug 15 Date
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Pharmaceuticals / Biotechnology Tonghua Dongbao
Equity rating key Equity rating dispersion and banking relationships Buy: Based on a current 12- month view of total 500 share-holder return (TSR = percentage change in 450 52 % share price from current price to projected target price 400 350 38 % plus pro-jected dividend yield ) , we recommend that 300 investors buy the stock. 250 200 Sell: Based on a current 12-month view of total share- 150 22 % 11 % holder return, we recommend that investors sell the 100 16 % 20 % 50 stock 0 Hold: We take a neutral view on the stock 12-months Buy Hold Sell out and, based on this time horizon, do not recommend either a Buy or Sell. Companies Covered Cos. w/ Banking Relationship Notes: Asia-Pacific Universe 1. Newly issued research recommendations and
target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were: Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12- month period Sell: Expected total return (including dividends) of -10% or worse over a 12-month period
Regulatory Disclosures 1.Important Additional Conflict Disclosures Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing. 2.Short-Term Trade Ideas Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.
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David Folkerts-Landau Chief Economist and Global Head of Research
Raj Hindocha Marcel Cassard Steve Pollard Global Chief Operating Officer Global Head Global Head Research FICC Research & Global Macro Economics Equity Research
Michael Spencer Ralf Hoffmann Andreas Neubauer Regional Head Regional Head Regional Head Asia Pacific Research Deutsche Bank Research, Germany Equity Research, Germany
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