Company Update Indonesia 11 November 2019 Healthcare | Pharmaceuticals Kalbe Farma (KLBF IJ) Buy (Maintained) Ground Checks: Investment In The Future; BUY Target Price (Return) IDR2,000 (+25%) Price: IDR1,595 Market Cap: USD5,309bn Avg Daily Turnover (IDR/USD) 49bn/3.5m Maintain BUY and IDR2,000 TP, 25% upside plus c.2% yield. We recently Analysts visited the Kalbio Global Medika (KGM) production facility in Cikarang, West Java. KGM, KLBF’s subsidiary, specialises in biosimilar products, in Jessica Pratiwi partnership with South Korean biotechnology R&D company, Genexine Inc. +6221 5093 9845 The facility has a land area of 11,000 sqm and 195 employees. The site visit [email protected] was hosted by Daniel Iskandar Wirawan (site head) and Fahrizal Nugraha (QC manager) from KGM, and Megawati Purnama and Marcella Cloudia (KLBF investor relations team). Michael W Setjoadi Higher biosimilar sales to support declining pharma margins. Competition +6221 5093 9844 in the biosimilar market is not as strong as in generic drugs given the high [email protected] development costs and production complexity (c.2 months/batch). The two local competitors are Combiphar Dong-A and Daewoong Infion. EBIT margin Share Performance (%) in this segment is also much more attractive at 23-25% vs 8-10% for unbranded YTD 1m 3m 6m 12m generics. Absolute 4.3 (2.8) 10.8 5.7 14.0 Currently, 90% of KLBF’s biosimilars, mainly the Hemapo drug (c.3,000 Relative 4.7 (5.5) 11.5 7.8 10.2 units/year), are for National Social Health Insurance (JKN) patients. The 52-wk Price low/high (IDR) 1,260 – 1,690 products are still fully imported from Kalbe Farma’s partner in China (Shandong Kexing Bioproducts) as local production will only start next year. Including Kalbe Farma – IDR oncology drugs, biosimilars contribute c.7-8% of total pharma sales and 2% of IDR the topline, implying c.15% production capacity. KLBF also plans to export 2,000 these products to Myanmar, Cambodia and Africa. Two biosimilars commercially ready by next year, three more in pipeline. 1,800 Two products will be locally produced by 2020: Leucogen (GCSF) for cancer 1,600 treatment post chemotherapy, and Hemapo (erythropoietin, or EPO) for post- 1,595 haemodialysis treatment. Still in the pipeline are Epoeitin (long acting EPO), 1,400 insulin pen cartridges, and monoclonal antibody (mAB) products. New products can take up to 1.5-2 years to produce, due to the complexity of biomedical 1,200 technology transfer, but are potentially less costly than the original biological 1,000 medicine. These five products should increase production capacity utilisation Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Oct-14 Oct-15 Oct-16 Oct-17 Oct-18 Oct-19 Apr-15 Apr-16 Apr-17 Apr-18 to 40%. Apr-19 What are biosimilars and how big is the potential? A biosimilar is a similar Source: RHB, Bloomberg; Note: As at 7 Nov 2019 version of another already approved biological medicine, both made using living organisms. A biosimilar can only be approved after the patent of the original biological medicine has expired. The process flow (Figure 7) is slightly different from normal chemical medicines, with additional biotech processes. The finished products are filled in syringes, cartridges and vials. According to Results Healthcare, the market reached USD4.4bn in annual sales in 2017, or c.4% of the total biopharmaceuticals market. The biosimilar market is on a growth trajectory, estimated to reach USD25bn by 2023 at a CAGR of 34%. Implications and downside risk. We continue to like KLBF for its value-added products and differentiation initiatives. Private hospitals could potentially use biosimilars as credibility should gradually pick up. Along with personalised medication, biosimilars could be extended to preventive testing using DNA – similar to Prodia’s (PRDA IJ, NR) genetic testing services. Downside risks including development risk and high capital intensity. Forecasts and Valuation Dec-17 Dec-18 Dec-19F Dec-20F Dec-21F Total turnover (IDRbn) 20,182 21,074 22,813 24,836 26,969 Reported net profit (IDRbn) 2,404 2,462 2,632 2,867 3,161 Net profit growth (%) 4.5 2.4 6.9 8.9 10.2 EPS (IDR) 51 53 56 61 67 DPS (IDR) 22 25 26 28 31 P/E (x) 30.9 30.2 28.2 25.9 23.5 P/B (x) 5.6 5.1 4.7 4.2 3.9 Dividend Yield (%) 1.4 1.6 1.7 1.8 1.9 EV/EBITDA (x) 19.9 19.3 18.1 16.6 15.2 ROAE (%) 19.1 17.7 17.2 17.1 17.2 Net gearing (%) net cash net cash net cash net cash net cash Source: RHB, Bloomberg; Note: As at 7 Nov 2019 See important disclosures at the end of this report 1 Kalbe Farma Indonesia Company Update 11 November 2019 Healthcare | Pharmaceuticals Financial Exhibits Asia Indonesia Financial Summary 2017 2018 2019F 2020F 2021F Healthcare Recurring EPS (IDR) 51 53 56.2 61 67 Specialty Pharma DPS (IDR) 22 25 26.3 28 31 BVPS (IDR) 283 311 340.9 374 411 Major shareholders (%) ROE (%) 19 18 17 17 17 Gira Sole Prima 10.2 Santa Seha Sanadi 9.7 Valuation Metrics 2017 2018 2019F 2020F 2021F Diptanala Bahana 9.5 Recurring P/E (x) 30.9 30.2 28.2 25.9 23.5 P/B (x) 5.6 5.1 4.7 4.2 3.9 Valuation basis FCF yield (%) 1.4 2.2 1.9 2.8 3.5 Our 12-month TP of IDR2,000 is based on a 10-year Dividend yield (%) 1.4 1.6 1.7 1.8 1.9 DCF (WACC: 8.9%, terminal growth: 5%). This implies 32x FY20F P/E. EV/EBITDA (x) 19.9 19.3 18.1 16.6 15.2 EV/EBIT (x) 22.7 22.0 20.6 18.9 17.2 Key drivers i. Stable USD/IDR outlook; Income Statement (IDRbn) 2017 2018 2019F 2020F 2021F ii. Better e-catalogue pricing management; Total turnover 20,182 21,074 22,813 24,836 26,969 iii. Higher contribution from biosimilar sales. Gross profit 9,812 9,848 10,600 11,541 12,544 3,662 3,777 4,029 4,407 4,818 Key risks EBITDA (adj.) Depreciation and amortisation 449 463 490 533 579 i. USD appreciation vs IDR; 3,214 3,314 3,539 3,874 4,238 ii. Unfavourable regulations; Operating profit iii. Lower-than-expected consumer purchasing Net interest 99 95 100 83 113 power. Pre-tax profit 3,241 3,351 3,579 3,894 4,288 Taxation (788) (838) (895) (974) (1,072) Company Profile Minority interest 50 51 52 53 55 KLBF produces and develops pharmaceutical products. Net profit 2,404 2,462 2,632 2,867 3,161 The company’s product offerings include medicine, capsules, syrup, and medicines for eye care, animal health, and nutritional uses. It serves patients in Cash Flow (IDRbn) 2017 2018 2019F 2020F 2021F Indonesia. Change in working capital (696) (98) (533) (435) (194) Cash flow from operations 2,064 2,704 2,458 2,823 3,391 (1,143) (1,250) (1,233) (943) (995) Capex Cash flow from investing activities (1,275) (1,360) (1,369) (1,068) (1,129) Dividends paid (1,031) (1,170) (1,231) (1,316) (1,434) Cash flow from financing activities (900) (1,094) (1,190) (1,316) (1,341) Cash at beginning of period 2,896 2,785 3,035 2,934 3,373 Net change in cash (111) 250 (101) 439 921 Ending balance cash 2,785 3,035 2,934 3,373 4,294 Balance Sheet (IDRbn) 2017 2018 2019F 2020F 2021F Total cash and cash equivalents 2,785 3,035 2,934 3,373 4,294 Tangible fixed assets 5,343 6,253 7,127 7,680 8,251 Total assets 16,616 18,147 19,743 21,504 23,588 Short-term debt 169 189 173 133 140 Total long-term debt 146 163 149 115 121 Total liabilities 2,722 2,918 3,070 3,235 3,546 Total equity 13,281 14,575 15,977 17,530 19,260 Minority interests 613 654 696 738 782 Total liabilities and equity 16,616 18,147 19,743 21,504 23,588 Key Metrics 2017 2018 2019F 2020F 2021F Revenue growth (%) 4.2 4.4 8.3 8.9 8.6 Recurrent EPS growth (%) 4.5 2.4 6.9 8.9 10.2 Gross margin (%) 48.6 46.7 46.5 46.5 46.5 EBITDA margin (%) 18.1 17.9 17.7 17.7 17.9 Net profit margin (%) 11.9 11.7 11.5 11.5 11.7 Dividend payout ratio (%) 44.8 48.7 50.0 50.0 50.0 Capex/sales (%) 5.7 5.9 5.4 3.8 3.7 Interest cover (x) 88.3 76.2 75.2 75.6 76.2 Cash conversion cycle (days) 136.3 136.3 137.4 135.7 129.9 Net gearing (%) nc nc nc nc nc Source: Company data, RHB See important disclosures at the end of this report 2 Kalbe Farma Indonesia Company Update 11 November 2019 Healthcare | Pharmaceuticals Figure 1: KLBF’s 9M19 revenue breakdown by segment Figure 2: KLBF’s pharmaceuticals segment breakdown 100% Pharmaceutical; 90% 23.3% 28.9% 27.8% 27.0% 28.0% Distribution & 80% Logistics ; 31.5% 70% 15.1% 16.9% 19.0% 60% 21.0% 50% 40% 30% 56.0% 55.3% 54.0% 51.0% Consumer Health; 20% 16.4% 10% 0% 9M16 (M17 9M18 9M19 Nutritionals; Branded Generics Unbranded Generics Licensed Products 28.8% Source: RHB, Company data Source: RHB, Company data Figure 3: KGM head office in Central Cikarang, Bekasi, West Figure 4: Short presentation by KGM site head Daniel Java, with land area of 11,000 sqm Iskandar, followed by Q&A Source: RHB Source: RHB Figure 5: Comparison between small molecules (chemical-based) medicine vs biologics-based medicines Source: Results Healthcare website See important disclosures at the end of this report 3 Kalbe Farma Indonesia Company Update 11 November 2019 Healthcare | Pharmaceuticals Figure 6: Global biosimilar market size Figure 7: Biosimilar process flow Biotechnology Process Upstream Formulation Cell Culture: Mixing - Roller Bottle - Bioreactor Downstream Filling and Packaging Purification: - Filling - Ultrafiltration - Syringes inspection - Diafiltration - Blistering - Chromatography - Secondary - Bioreactor packaging API Bulk Finished Products Source: Results Healthcare website Source: RHB, Company data Figure 8: Bioreactor Figure 9: Chromatography system Source: RHB Source: RHB Figure 10: Hemapo product, priced at IDR160,000/unit Figure 11: Insulin serum and pen Source: RHB Source: RHB See important disclosures at