Sino Biopharm HK$4.20 - BUY Financials Year to 31 December 10A 11A 12FCL 13FCL 14FCL Revenue (HK$m) 4,086 5,782 8,168 8,848 11,810 Rev forecast change (%) - - 0.7 (16.8) (10.6) Net profit (HK$m) 566.9 462.8 847.9 1,013 1,360 NP forecast change (%) - - 0.0 (6.3) 2.0 EPS (HK¢) 11.5 9.4 17.2 20.5 27.5 FCL/consensus (16) (EPS%) - - 105.3 101.5 112.8 EPS growth (% YoY) 43.2 (18.4) 83.2 19.4 34.3 PE (x) 36.6 44.8 24.5 20.5 15.3 Dividend yield (%) 1.9 1.7 1.5 1.8 2.5 ROE (%) 23.5 18.3 25.2 24.0 26.6 Net debt/equity (%) (34.0) (40.5) (46.3) (52.6) (55.6) Source: FortuneCLSA, Company data Please see important notice on last page Heather Hsu (86) 2138784818 ext 8308 Chris Kwai (86) 2138784818 ext 8316 28 February 2013 China Healthcare Reuters 1177.HK Bloomberg 1177 HK Priced on 26 February 2013 CSI 300 @ 2,576.1 12M hi/lo HK$4.20/1.84 12M price target HK$5.50 ±% potential +33% Shares in issue 4,941m Free float (est.) 45.0% Market cap US$2,675m 3M average daily volume HK$34.9m (US$4.5m) Major shareholders Tse Ping and Cheng Cheung Ling 42.7% Stock performance (%) 1M 3M 12M Absolute 17.7 28.0 107.3 Relative 17.7 7.7 103.5 Abs (US$) 0.0 28.0 107.3 Source: Bloomberg www.cf-clsa.com 80 100 120 140 160 180 200 220 240 260 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 Feb 11 Oct 11 Jun 12 Feb 13 Sino Biopharm Rel to CSI 300 (RHS) (HK$) (%) Trusted dispensary Sino Biopharm, including its subsidiaries, is the seventh largest prescription drug maker in China and enjoys a leading share in treating hepatitis thanks to its innovative drugs. With the largest sales team among peers and strong focus on its new drug pipeline, we expect it to deliver 19% and 34% YoY earnings growth in 2013 and 2014. With attractive PE/G, rising free cashflow yield, a strong balance sheet, and improving ROE, we maintain our BUY call with a new target of HK$5.50. Benefits of an ageing population Sino Biopharm, including its subsidiaries, is the seventh largest prescription- drug company with a 1.6% share of the highly fragmented Chinese hospital drug market. While there is on-going pricing pressure due to a price-driven bidding process in most provinces, we expect the company to benefit from an increasingly ageing population, improving healthcare coverage and accelerating industry consolidation. Market leader in hepatitis drugs Some 47% of Sino Biopharm’s revenue is derived from drugs used for the treatment of hepatitis, where its market share has grown thanks to patented drugs launched in 2004-2006. With a focus on driving new drug categories and drug innovation, this will mitigate pricing pressure on existing generic drugs. The company invests 6.2% of sales in R&D, which is higher than its local peer average of 2.2%. Largest sales team Sino Biopharm, along with its subsidiaries, services hospitals in all provinces via a team of 6,385 sales staff. The investment in the sales and distribution network, which improves the penetration and coverage of its client base on a national level, has helped Sino Biopharm to gain market share and continue to leverage its proliferation of products into cardio cerebrovascular, oncology, analgesics and other therapeutic areas. Undemanding valuation Trading at 15x 14FCL PE, the stock is attractive given 19% and 34% forecast earnings growth for 2013 and 2014 and decent ROE. Additionally, the company enjoys a strong balance sheet with a large cash chest for potential M&A. Our target price of HK$5.50, is based on 20x 14FCL EPS, which implies 33% upside despite the recent surge in share price, and the company offers a 1.8% dividend yield. Prepared for: ThomsonReuters [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Trusted dispensary Sino Biopharm, including its subsidiaries, is the seventh largest prescription drug maker in China and enjoys a leading share in treating hepatitis thanks to its innovative drugs. With the largest sales team among peers and strong focus on its new drug pipeline, we expect it to deliver 19% and 34% YoY earnings growth in 2013 and 2014. With attractive PE/G, rising free cashflow yield, a strong balance sheet, and improving ROE, we maintain our BUY call with a new target of HK$5.50.
Benefits of an ageing population Sino Biopharm, including its subsidiaries, is the seventh largest prescription-drug company with a 1.6% share of the highly fragmented Chinese hospital drug market. While there is on-going pricing pressure due to a price-driven bidding process in most provinces, we expect the company to benefit from an increasingly ageing population, improving healthcare coverage and accelerating industry consolidation.
Market leader in hepatitis drugs Some 47% of Sino Biopharm’s revenue is derived from drugs used for the treatment of hepatitis, where its market share has grown thanks to patented drugs launched in 2004-2006. With a focus on driving new drug categories and drug innovation, this will mitigate pricing pressure on existing generic drugs. The company invests 6.2% of sales in R&D, which is higher than its local peer average of 2.2%.
Largest sales team Sino Biopharm, along with its subsidiaries, services hospitals in all provinces via a team of 6,385 sales staff. The investment in the sales and distribution network, which improves the penetration and coverage of its client base on a national level, has helped Sino Biopharm to gain market share and continue to leverage its proliferation of products into cardio cerebrovascular, oncology, analgesics and other therapeutic areas.
Undemanding valuation Trading at 15x 14FCL PE, the stock is attractive given 19% and 34% forecast earnings growth for 2013 and 2014 and decent ROE. Additionally, the company enjoys a strong balance sheet with a large cash chest for potential M&A. Our target price of HK$5.50, is based on 20x 14FCL EPS, which implies 33% upside despite the recent surge in share price, and the company offers a 1.8% dividend yield.
Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Sino Biopharm - BUY
2 28 February 2013
Sino Biopharm - HK$4.20 - BUY The business Competition & market franchise Sino Biopharm is the top-ranked drug developer in China through its two major business subsidiaries: JS Chia Tai TianQing (CTTQ) and Beijing Tide. three of its core products are ranked No.1 in each of their therapeutic areas (TA), which include hepatitis and cardiovascular. These two ailments are correlated to an increasingly ageing Chinese population. The company is expanding to other high potential chronic disease areas such as cancer, analgesic and diabetes. Under the parent company, there are several subsidiaries focusing on drug research and development.
Sino Bio competes against multinationals with patent products and comparable professional sales and marketing teams. CTTQ has an even wider product range and its own patent products and first-to-market generics. Tide has unique world-leading technology on its special formulation technology called 'targeted drug delivery system'. Currently, it has two focused TAs with potential for a c.26% market share in the drug market. With its newly expanded TAs it will see rapid growth, buoyed by an ageing population and increasing affordability. Sino Bio has sustainable net earnings growth yet stable capex, helping to maintain high ROIC over peers.
Valuation history PE bands PB bands Comment
The company has restored its mean valuation in 2012 thanks to continuing strong core earnings growth and an absence of large investment losses.
Bands (from the top): max, +1sd, avg, -1std, min.
Target-price sensitivity In our blue-sky scenario
analysis, if volume sold expands by 5% in 2013, EPS will increase from HK$0.20 in 2013 and HK$0.28 in 2014 in our base case scenario to HK$0.24 and HK$0.33, respectively, which implies a valuation of HK$6.54, based on 14FCL and upside of 56%. In our bedrock scenario, if the ASP of all drugs were cut by 10% in 2013, EPS will decline to HK$0.13 and HK$0.17, respectively, in 2013 and 2014. Our valuation would then be HK$3.42, based on 14FCL, implying 19% downside to the current share price.
Source: FortuneCLSA
0
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2008 2009 2010 2011 2012 2013
(HK$) max 34x
+1sd 23x
avg 16x
-1sd 8.5x
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Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Section 1: Benefits of an ageing population Sino Biopharm - BUY
28 February 2013 3
Benefits of an ageing population The growth in the 65-plus age group is accelerating throughout Asia. In China, this population segment grew by 25% in the past decade to 2010 and looks to grow at twice this rate, increasing by just over 50% in the current decade. By 2020 China will account for over 50% of the Asia Pacific’s elderly population (excluding Japan). An obvious implication of an ageing population is increased spending on healthcare. Higher life expectancy is unfortunately accompanied by a longer period for the potential for ailments, and for a heightened risk of developing various chronic health problems. Contracting any of the ailments commonly associated with the elderly, as well as the heightened concern of contracting these, invariably generates greater demand for healthcare services.
Figure 1 Figure 2
Asia Pacific population aged >65 Growth in those aged >65
Source: FortuneCLSA, United Nations Population Division (UNPD), Council for Economic Planning and Development (CEPD)
Source: FortuneCLSA, UNPD, CEPD
China’s healthcare market will expand at a faster rate compared to other countries as the government aims to increase healthcare expenditure as a percentage to GDP from around 5% to 7% by 2012 to strengthen the country’s safety net and improve social welfare. The total healthcare expenditure in 2011 was Rmb2.43tn according to government data. Healthcare expenditure per capita in China was US$221 in 2010, or only 3-6% of that of developed markets, according to the World Bank.
Figure 3 Figure 4
World: Healthcare cost per capita (2010) China: Healthcare expenditure to GDP
Source: FortuneCLSA, World Bank
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3,5034,065
4,6684,6914,775
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IndiaPhillipines
VietnamChina
MalaysiaMexicoBrazilKorea
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in the Asia Pacific region in the coming decade
Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Section 1: Benefits of an ageing population Sino Biopharm - BUY
4 28 February 2013
Combining the market share of its 33.6%-owned Beijing Tide and 60%-owned Jiangsu Chia Tai Tianqing, Sino Biopharm is the seventh largest hospital chemical drug (a term used to distinguish from more complex biological drugs) company in China and the largest Chinese prescription drug company among domestic players. Beijing Tide, focusing on drugs for the treatment of cardiovascular disorders, has a market share of 0.86% according to MENET, a leading Chinese pharmaceutical research institution. Jiangsu Chia Tai Tianqing, focusing on anti-infective drugs (specifically hepatitis), has a market share of 0.73% of the total hospital drug market in China.
Figure 5
Top 10 prescription drug manufacturer’s market share in China (2011)
Source: FortuneCLSA, MENET
China’s pharmaceutical market In China, 60% of total healthcare expenditure is on pharmaceuticals, consisting of chemical drugs, traditional Chinese medicine (TCM), active pharmaceutical ingredients (API) and others such as biological drugs. In 2011 industry revenue hit Rmb1.45tn and this represented a spectacular 25% Cagr from 2006 to 2011. Chemical drugs, TCM and API are the largest segments, taking up 28%, 23% and 21% of total drug revenue in 2011. The rest of the 28% of the drug revenue is made up by biological drugs (10.4%), medical materials (6.3%), herbal drugs (5.9%) and veterinary & animal drugs (4.7%).
Figure 6 Figure 7
China total pharmaceutical market China’s pharmaceutical segment revenue and growth
Source: FortuneCLSA, NBS
3.11
2.59
2.32.22
1.98
1.78
1.591.5
1.39 1.39
1.0
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AstraZ Pfizer Roche Bayer Qilu Novartis Sino Bio Hengrui Sanofi Merck
(%)
452553
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Pharma enjoys thelargest share of
healthcare spending
Sino Biopharm is the seventh largest drug
company in China
An enviable slice of the healthcare pie
Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Section 1: Benefits of an ageing population Sino Biopharm - BUY
28 February 2013 5
The largest sector component, chemical drugs, which represents 28% of the total drug revenue, saw revenue of Rmb410bn (US$65bn) in 2011, and expanded at a 24% Cagr between 2006 and 2011. Despite slowing growth due to a large base since 2008, growth was maintained at more than 22% in 2011.
However, since 2009 with the government’s focus of controlling drug expenses at the hospital level as part of its healthcare reform program, chemical drugs have grown slightly below the total drug market in China during the past few years. Biological drugs and others (herbal and animal drugs) were expanding at a 31% and 35% Cagr during the period thanks to a low base while APIs expanded at a slower but still resilient 19.4% Cagr from 2006 and 2011.
Figure 8
Sales of chemical drugs versus the total drug market (2003-2011)
Source: FortuneCLSA, National Statistics Bureau
Policy risk is a major overhang While the Chinese government is raising its budget for the healthcare system, it’s major focus is to improve medical coverage while taking more control of the pricing of drugs to contain cost. With the legacy issue of medical doctors in China being paid below the average salary, it is a common practice for doctors and hospitals to prescribe expensive drugs as a means of obtaining extra income. As a result, one of the healthcare reforms is to allow the central government (the NDRC and MoH) and the provincial government to tighten control on drug prescriptions and pricing. The major measures included in this are:
NDRC control over retail prices of some popular drugs
NDRC control over the essential drug list (EDL)
A provincial government tendering process
NDRC’s price controls The NDRC’s has undertaken 31 rounds of price cutting since 1997 with an average 18% price reduction on related categories each time. The price cuts have impacted drugs on a rotational basis and affected a wide range of chemical, biological and TCM drugs. China’s government will continue to drive drug affordability as a cornerstone of sector reform. The price cuts during the previous two years came in March/August 2011 and March/September 2012.
138167
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2006-2011 Cagr:Chemical: 24.3%Total drugs: 24.7%
Chemical drugs lagged the market as the
government cut drug prices
Chemical drugs are the largest drug segment
Policy-induced pricing risk
So far there have been 31 rounds of price cutting to
drive drug affordability
Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Section 1: Benefits of an ageing population Sino Biopharm - BUY
6 28 February 2013
Figure 9
NDRC price cut summary (1997-2013)
No. Year Month Related Categories Average price reduction (%)1 1997 Oct. 15 Antibiotics and 32 biological drugs 152 1998 Apr. 38 antipyretic and analgesic drugs 103 1999 Apr. 21 drugs including Cephalosporins 204 June 150 imported drugs including Cefuroxime 55 Aug. 2 biochemical drugs including Defibrase 156 2000 Jan. 12 biological drugs including human albumin 107 June 9 drugs including Cefradine 158 Nov. 21 drugs including Ampicillin 209 2001 Apr. 69 anti-infective drugs 2010 July 49 TCMs 1511 Dec. 383 drugs used in oncology, circulatory disorders, the nervous system, etc. 2012 2002 Dec. 199 chemical drugs 2013 2003 Jan. 267 TCMs (67 Class A, 200 Class B) 1414 Sep. 107 TCMs (19 Class A, 88 Class B) na15 2004 June 24 Anti-infective drugs 3016 July 18 individual pricing drugs na17 2005 Oct. 22 Antibiotic and biological drugs 4018 2006 May 67 Antitumor chemical drugs 2319 Aug. 99 Antimicrobial drugs 3020 Oct. 32 Antitumor TCMs including Cinobufagin injection 1521 2007 Jan. 354 drugs covering 10 categories, including cardiovascular 2022 Feb. 278 TCMs covering internal medicines 1523 Mar. over 600 TCM doses covering 188 categories 1624 Apr. 260 chemical drugs including Praziquantel 1925 2009 Sep. Pricing guidance for 296 national essential drugs 26 2010 Dec. Some individual pricing drugs including Ceftriaxone 1927 2011 Mar. 162 antimicrobial and circulatory system drugs 2128 Aug. 82 drugs covering hormones, nervous and the endocrine systems 1429 2012 Mar. 53 digestive drugs 1730 Sep. 95 drugs covering immunosuppressive, oncology and blood system 1731 2013 Jan. Over 400 drugs covering antipyretic, analgesics and respiratory areas 15Source: NDRC, FortuneCLSA
Essential drug list (EDL) confines selective drug use The impact of the essential drug list (EDL) is that the central government confines public hospitals to select only certain drugs for certain use. The Ministry of Health (MoH) maintains the essential drug list, which requires public hospitals include in their prescriptions in order to obtain a reimbursement from the government. Drugs able to get on the EDL will see strong volume demand from public hospitals, however, prices will come under pressure as the government looks to control costs via its stronger bargaining power.
The latest EDL was published in 2009 and included around 300 drugs. The MoH was due to publish a new EDL in December 2012, however, this has been further delayed. The market expected the list to be expanded to 500 drugs. There will also be new rules in the EDL system, which require different classes of hospitals to use up to a certain percentage of the drugs from their prescriptions. If the drugs are in exclusive categories and have no competing substitute, they may be able to maintain stable prices while enjoying strong volume growth.
Public hospitals losing more
prescription flexibility
Exclusive drugs can be somewhat immune from
pricing pressure
Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Section 1: Benefits of an ageing population Sino Biopharm - BUY
28 February 2013 7
Figure 10
Percentage of essential drugs used in different classes of hospitals
(%) 2012 guidance 2013 guidance
Tier I hospitals 100 100
Tier II hospitals 25-35 40-50
Tier III hospitals 15-25 25-30Source: Ministry of Health, FortuneCLSA
Provincial government bidding process In addition to the normal price cut on EDL drugs, since 2000 provincial governments have started to develop their own bidding process to procure EDL and non-EDL drugs for state-owned hospitals. The major overhang for the chemical drug sector is the pricing risk due to the provincial bidding system as some of the provinces will prefer the tender offering process to be largely decided on price. As a result, in some of the worst cases, such as in Fujian Province, the drug price was cut by as much as 36% while in less populated areas like Xinjiang, price cuts were only 6%.
Despite the pricing pressure, every pharmaceutical company needs to win the bidding process in order to sell their drugs into hospitals. While the quality of a drug is crucial, most of the bidding process competes on prices. As the bidding system in most provinces take place every two or three years, the winning bids were able to sell more drugs into public hospitals for the next two to three years as other players which lost in the bidding process will not be able to compete.
A total seven provinces completed the tender offer process in 2012 but with a few provinces delaying it into 2013. If there is no further delay from most provinces, there will be 13 provinces ready to undergo the price bidding process this year. The prescription drug companies can react to the pricing risk by launching new products or innovative drugs to mitigate declines in the prices of existing drugs. However, if a large number of provinces go through the price bidding process at the same time, it will create more pressure for the drug companies to smooth out the impact.
Figure 11
Provincial tender price cuts in 2011 and 2012
Source: FortuneCLSA， Provincial health bureau
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Wide range in price cuts
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Likely 13 provinces starting tender offers
in 2013
Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Section 1: Benefits of an ageing population Sino Biopharm - BUY
8 28 February 2013
Accelerating industry consolidation The EDL implementation will limit the legitimate players on the vendor list, while this adds competitive pressure, it also helps the market to quickly consolidate. One of the strategies to mitigate pricing pressure and policy risk is to expand product categories and scale. M&A has offered an easy and quicker venue for this strategy as the R&D cycle is long and will limit the path of growth if expansion is only through organic growth. The manufacturing industry in chemical drugs saw rapid consolidation in 2011 as the number of manufacturers declined to 1,032 from 1,313 in 2010 while the number of drug retailers and wholesalers continued to grow.
Figure 12
Number of chemical drugs manufacturing and distributing companies
Note: In 2011 NBS changed minimum annual sales requirement of manufacturers to be included in the statistics from Rmb 5m to Rmb 20m. Source: FortuneCLSA, National Bureau of Statistics
There are different therapeutic areas where pharmaceutical companies can expand for growth. Anti-infectives (18.9%), which includes hepatitis drugs, is the largest segment in the chemical drug category used by hospitals in 2011 despite a sharp fall from 23.1% in the previous year due to restricted prescriptions on certain antibiotics and price cuts. Oncology is the second largest segment, seeing both fast growth and gains in market share from 14.4% in 2005 to 18.4% in 2011. Treatment for central nervous system disorders is the fastest growing segment, expanding from a 6.8% share in 2005 to 10% in 2011.
Figure 13
Market breakdown of chemical drugs used in hospitals
Source: FortuneCLSA, SFDA
1,195 1,262 1,313 1,032
3,078 3,0683,462 3,834
2,142 2,186
2,634 2,881
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25.1 23.7 24.5 24.0 23.9 23.1 18.9
14.4 17.1 16.7 17.4 17.7 17.118.4
16.3 13.6 13.3 13.4 13.3 13.4 13.4
12.3 12.3 12.5 12.5 12.7 12.8 13.5
12.3 12.8 12.1 11.0 10.6 11.0 11.6
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(%) Anti-infectious Oncology/Immune CardiovascularDigestive/meta Hematopoietic (blood) Central nervousOthers
Consolidation on themanufacturing side
Scale and category expansion through M&A
Prescription drugs are evenly spread in six
therapeutic areas
Anti-infectives the largest segment in the chemical
drug category used by hospitals
Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Section 1: Benefits of an ageing population Sino Biopharm - BUY
28 February 2013 9
With pretty evenly spread therapeutic areas for hospital drugs, the successful industry players which look to gain scale and market share will inevitably develop product categories for inclusion among major therapeutic drugs. As shown in Figure 14, the leading pharmaceutical companies have product covering most therapeutic drugs.
Figure 14
Market share of the top manufacturers in China’s hospital chemical drugs market Rank Manufacturer Origin Oncology/
Immune Digestive/metabolism
Anti-infectious
Cardio-vascular
Haemato-poietic
Central Nervous
2011 Mkt shr (%)
1 AstraZeneca UK-Sweden √ √ √ √ √ 3.112 Pfizer US √ √ √ √ √ √ 2.593 Roche Switzerland √ √ √ √ 2.34 Bayer Germany √ √ √ √ √ √ 2.225 Qilu China √ √ √ √ 1.986 Novartis Switzerland √ √ √ √ √ 1.787 Hengrui China √ √ √ √ √ 1.58 Sanofi France √ √ √ √ √ 1.399 Merck Germany √ √ √ √ √ 1.3910 Yangzijiang China √ √ √ √ 1.3311 GSK UK √ √ √ √ √ 1.2612 Fresenius Germany √ √ √ 1.213 Lilly US √ √ √ √ 1.0314 Boehringer-Ingelheim Germany √ √ √ √ 115 Bristol-Myers Squibb US √ √ √ √ √ 1.9416 Novonordisk Denmark √ √ 0.8817 Harbin Pharma China √ √ √ 0.8718 Beijing Tide China √ √ 0.8619 Harbin Sanlian Pharm China √ √ √ √ √ 0.7520 Jiangsu Chia Tai Tianqin China √ √ √ 0.7321 Beijing SL Pharm China √ √ √ 0.6622 Hansoh Pharm China √ √ √ √ 0.6523 Tiantaishan Pharm China √ √ √ 0.6324 Double Crane China √ √ √ 0.5925 Aosaikang China √ √ √ √ 0.5826 Shandong Reyong China √ √ √ 0.5627 Asia Pioneer China √ 0.5528 Haikou Qili China √ √ 0.5529 North China Pharm China √ √ 0.5230 Gener-Sanyang China √ √ √ √ 0.5Source: Company data, MENET, FortuneCLSA
Company background Sino Biopharm, founded in 2000 and registered in the Cayman Islands, is a pharmaceutical holding company and it engages in R&D through its subsidiaries, and for the manufacturing and distribution of chemicals. The major shareholders are from the Charoen Pokphand Group (CP group) family. Sino Biopharm was listed on the HK mainboard on the 8th December, 2003 with a current freefloat at around 45%. Mr Tse Ping, the Chairman and his wife Ms. Cheng Cheung Ling directly own 42.7% of the company.
Tse Ping, is the founder and Chairman of Sino Biopharm with more than 20 years of related experience in pharmaceutical investment and management. He was formerly the vice-chairman of Shenzhen 999 Pharmaceutical, the chairman of Xian CP, the executive chairman of TM International Bank based in Shanghai, and was involved in the management of the Shenzhen Exchange. Hainan Haiyao (000566 CH). Tse is the current director of Chia Tai Qingchun Bao (CTQ), and a committee member of the Association of Pharmaceutical Biotechnology of China. He is also an Honorary Professor at Shenyang University of Pharmacy.
Under the CP group
Chairman a veteran investor in pharma
Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Section 1: Benefits of an ageing population Sino Biopharm - BUY
10 28 February 2013
The three major subsidiaries under the holding companies are Jiangsu Chia Tai Tian Qing (JCTT) on hepatitis drugs, Nanjing Chia Tian Tianqing (NJCTT) and Beijing Tide for Cardio-cerebral vascular drugs. All of the three subsidiaries have obtained China’s State Food and Drug Administration (SFDA) GMP licences.
The company was able to quickly grow its scale and product portfolio through merger and acquisition. Sino Biopharm acquired 60% of JCTT in May 1997 and 33.6% of Beijing Tide in October 2003 to quickly expand its territory in different therapeutic areas.
Figure 15
Sino Biopharm’s previous major M&A track record Date M&A Target Products Current
stake (%)Initial price paid
(Rmbm)Financial performance
At time of invest (Rmbm) 31 Dec 2011 (Rmbm)Oct 2003 Beijing Tide Cardio-cerebral 33.6 80 Sales: 89
¹ Shandong CTF has been sold to Bausch & Lomb on 26 Sep 2005, the 55% equity interest was sold for HK$1,558m. Source: Fortune CLSA, Company data
Figure 16
Sino Biopharm corporate structure
Source: FortuneCLSA, Company data
Listco is a holding company
Rapid growth through merger and acquisition
Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Section 2: Market leader in hepatitis drugs Sino Biopharm - BUY
28 February 2013 11
Market leader in hepatitis drugs Sino Biopharm garnered the lead position from multinational (MNC) pharmaceutical companies such as GlaxoSmithKline in the hepatitis market in 2010 thanks to its patented drugs, TQ Ganmei and TQ Ganping, which were launched between 2004 and 2006. After 2006, Sino Biopharm has steadily improved on these gains and increased from 6% to a 10% share in 2010 according to MENET data. Both drugs are using extract ingredients from liquorice (a Chinese herb) with intellectual right protection and will continue to ensure the company’s leading position.
Figure 17
Market share of hepatitis drugs used in hospitals (2006-2010)
Source: FortuneCLSA, MENET, Company data
With the protection of patents, patented drugs can fend off competition, reduce product pricing risk and gain market share with ease. Currently, Sino Biopharm generates 34% of revenue from its patented drugs and this is the source of highly stable revenue and profit for the company before the patents expire. In 2003, Sinopharm also gained exposure in the patented analgesic drug, Kaifen, through acquisition of a 33% stake in Beijing Tide.
¹ Patents are registered 5-10 years before marketing. ² The revenue is based on the JV’s revenue multiple by Sino Biopharm’s holding stake. Source: FortuneCLSA, Company data
6.07
6.78
7.99
9.219.56
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2006 2007 2008 2009 2010
(%)
Sino Bio (JCTT) GSKSanofi Bristol-myers squibbRoche
Gaining share from MNCs thanks to Chinese herbal
patent rights
A third of revenue frompatented drugs
Taking the lead from MNC pharmaceutical
companies
Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Section 2: Market leader in hepatitis drugs Sino Biopharm - BUY
12 28 February 2013
Despite the favourable demographic trend, income growth and rising population with chronic conditions, product innovation and development continues to be the most critical investment to drive blockbuster drugs as the pharmaceutical industry in China remains highly fragmented and competitive. While the company continues to focus its merger and acquisition strategy, increasing effort has been invested into proprietary product research and development.
According to the SFDA, Sino Biopharm has four exclusive drugs under current development. Two are currently under clinical trials. Although the company has targeted the launch of 6-7 new products each year, its current product pipeline is heavily skewed to launches after 2014 given less new product launches in 2013.
Figure 19
Sino Biopharm: Core product pipeline Status Expected year to launch English name Chinese name Therapeutic Area Exclusive Clinical trial 2015 Tenofovir 富马酸替诺福韦酯 Hepatitis/HIV
Industry competition The hepatitis drug market has slowed since 2007. However, hepatitis remains endemic in China, with the country claiming the world’s largest population of those infected with the disease estimated at 100m individuals, and with unfortunately many remaining untreated. In 2010, China’s hepatitis drug market was worth Rmb18.3bn. The positive news is that the reason the market has slowed, is because the younger generation have received hepatitis vaccines. As a result, hepatitis is now mostly seen in those over 30 years of age.
A pipeline gap in 2013
R&D is key for growth
Hepatitis is endemicin China
Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Section 2: Market leader in hepatitis drugs Sino Biopharm - BUY
28 February 2013 13
Figure 20
Market size of hepatitis drugs in hospitals (2006-2010)
Source: FortuneCLSA, MENET
The major players in the hepatitis sector include Sino Biopharm’s subsidiary, Jiangsu Chia Tai Tian Qing (JCTT), which is the market leader with a 9.6% share, followed by global players like GSK (9.3%), Bristol-Myers Squibb (8.2%), Roche (7.0%) and Sanofi (4.9%).
Figure 21
Sino Biopharm’s major competitors in the hepatitis market Drugs Chemical name Number of SFDA
licences approved Major Competitors
Mingzheng(名正) Adefovir (Capsule)
17 GSK, TianjingPharma, Novartis, Qilu(齐鲁制药), United Lab(联邦制药), Tasly (天士力贝特), Shuanglu(双鹭药业)
In the cardio-cerebral vascular (CCV) market, where Beijing Tide holds the sixth largest position based on IMS data, the market is even more fragmented than for hepatitis. Beijing Tide is currently holding 1.27% share based on 1H12 data from IMS. Sihuan (0460.HK) is the largest player in CCV market with a 7.5% market share in 1H12, followed by global player Sanofi-Aventis at 4.8%, Shandong Qilu at 3.9%, and Pfizer and Novartis at 2.3% and 1.5% respectively.
Based on IMS data, all chemical drug players lost market share to traditional Chinese medical (TCM) drugs as the IMS started to take into account TCM drugs, which are popularly used as preventive supplements to help facilitate the circulation of the blood vessels. Based on data in 2010 and 2011, Beijing Tide has gained market share from 1.7% to 2.3%.
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(Rmbbn) (%)Hospital purchase of hepatitis drugsYoY (RHS)
Immunisation has resulted in less people
under the age of 30 acquiring hepatitis
Fragmented market
The cardio-cerebral vascular (CCV) market is
even more fragmented
Factoring in TCMs gives appearance of declining
market share
Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Section 2: Market leader in hepatitis drugs Sino Biopharm - BUY
14 28 February 2013
Figure 22
Top CCV drugs market players (2010-1H12)
¹ Starting from 2012, New IMS statistics include TCM drugs, statistics in 2011 only include western drugs. Source: FortuneCLSA, IMS
CCV is a larger market compared to hepatitis, having almost doubled the size of hepatitis treatments based on 2010 data. The CCV market in China reached Rmb37.5bn in 2010 and growth continued to accelerate in 2010 as Chinese are facing more cardiovascular problems with higher caloric diet and rising weight amid economic development and improved household incomes.
Sino-Biopharm’s subsidiary Beijing Tide focuses on Alprostadil drugs, a small segment in CCV which accounts for around 3% of total CCV revenue. Beijing Tide has a 53% share in the Alprostadil market. Alprostadil is a biological extract, which is best used to cure cerebral and peripheral vascular clotting. The Alprostadil market has been expanding at a rapid 27% Cagr from 2009 to 2011.
Figure 23 Figure 24
China CCV market size Alprostadil market share breakdown (1H2012)
Source: Fortune CLSA, IMS Health Figure 25
Sino Biopharm’s major competitors in the CCV market Drugs Chemical Name CCV segment Number of SFDA
¹ TQ Ning is a blood plasma-volume expander and is grouped in Hematopoietic (blood) segment of chemical drugs by both WHO and SFDA. Source: FortuneCLSA, SFDA
(1)
1
3
5
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2010 2011 1H2012¹
(%) Sihuan Sanofi-AventisShandong Qilu PfizerNovatis Sino Bio (Beijing Tide)
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(Rmbbn) (%)China's CCV market sizeYoY (RHS)
Beijing Tide53%
Hayao Bio22%
Sihuan15%
Xian Libang6%
Chongqing Yaoyou
2%
others2%
Beijing Tide gainingshare if excluding TCM
CCV a larger market than hepatitis
Expanding at a rapid 27% Cagr from 2009 to 2011
Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Section 2: Market leader in hepatitis drugs Sino Biopharm - BUY
28 February 2013 15
Oncology (cancer) medicines Oncology is one of the major developing areas for Sino Biopharm as this is the fastest growing therapeutic area among all categories. Sino Biopharm has developed several drugs - Tianqingyitai injections, Tianqingrian injections, Zhiruo injections and Renyi injections through its two subsidiaries - 60%-owned JCTT and 55.6%-owned NJCTT. In 2011, the sales of oncology medicines were up 52.6% YoY and will continue to be the fasting growing areas for Sino Biopharm given its strong focus on oncology medicines in its future product pipeline, with 14 out of 30 new drugs in the pipelines targeting this sector.
Analgesic medicines Another existing blockbuster drug, launched in 2005, analgesic Kaifen injection was developed and manufactured by Beijing Tide. It is a Flurbiprofen Axetil microsphere target sustained release analgesic injection produced on a drug delivery system (DDS) and enabled by advanced target technology. The product is used for strong pain relief with minimal side effects. Sales of the product for 2011 amounted to approximately HK$4,167m, approximately 45% higher than the same period last year.
Major competitors in China The growth in China has attracted more investment from MNCs over the last few years and domestic capital. The major competitors for Sino Biopharm are discussed below.
GlaxoSmithKline (GSK LN) is a leading research based pharmaceutical company. Its hepatitis drug market share only fell below Sino Biopharm’s JCTT after 2009. Market share for GSK’s top product, Heptodin (Lamivudine), fell to 9.3% in 2010 and is ranked second after combined sales of JCTT’s Ming Zheng (Adefovir) and Run Zhong (Entecavir). But Heptodin is still the most used Hepatitis B virus (HBV) product in China.
Bristol-Myer Squibb (BMY US) is a global pharmaceutical firm with strong business in the hepatitis market. In 2010 the company had an 8.22% market share and ranked third in the hepatitis segment. The company paid US$2.5bn to acquire Inhibitex, a clinical stage biopharmaceutical company with research into the treatment of Hepatitis C.
Roche (ROG VS) focuses on China market and has a growing market share in hepatitis (6.99% in 2010). Roche has two main proprietary patented chemicals in oncology and is the largest player in China’s oncology drugs market with a growing 12.6% market share.
Sihuan Pharma (0460 HK) is the largest CCV player in China’s market with a 7.53% market share in 1H12. The company has 92% revenue from CCV, and participates in several CCV drugs including Beijing Tide’s Alprostadil. Its market share in Alprostadil was 15% in 1H12. Sihuan has acquired three companies focusing in the treatment of CCV disorders in 2011 and is expected to further expand its drugs portfolio in the segment.
Sanofi (SNY US) focuses on treatments for CCV, diabetes, oncology and central nervous system drugs in China. It is the third largest pharmaceutical company in the world and the second largest CCV drug player in China with a 4.93% market share in 1H12. Despite its Hepatitis market share declining, it was still the fifth largest player with 4.8% market share in 2010.
Competitive market
Previous leader in hepatitis
Largest CCV player
The fastest growing therapeutic area
Roche the largest player in China’s oncology
drugs market
Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Section 2: Market leader in hepatitis drugs Sino Biopharm - BUY
16 28 February 2013
Shandong Qilu is a non-listed China chemical drugs manufacturer which focuses on oncology, CCV, anti-infectives and central nervous system drugs. The company occupied the third position in the CCV subsector with a 3.9% market share.
Pfizer (PFE US) is the largest R&D based pharmaceutical company in the world. In China, Pfizer has the top market share in hospital prescription drugs. The company acquired Wyeth in 2009. It has a 2.3% market share in CCV and was ranked fourth in the subsector in 1H12. Pfizer has been actively looking for small to mid-sized deals and effective research partners in China to strengthen its portfolio in all therapeutic segments.
Novartis(NVS US) is the second largest pharmaceutical manufacturer in the world. The company has been investing heavily into R&D with 19.6% R&D cost to sales in 2011. In China’s CCV market, Novartis had a 1.5% market share in 1H12. After acquisition of oncology laboratory Genoptix, Novartis has a strong position in expanding its oncology research pipeline.
Hengrui (600276 CH) is the second largest oncology chemical drug manufacturer with a 5.8% market share. The company has a long history of 40 years in distribution channels and a close connection with hospitals and healthcare personnel. R&D cost accounts for 6-8% of total sales.
Merck (MRK US) is a US based pharmaceutical firm with sales driven from its diabetes and vaccines portfolio. Emerging markets accounted for approximately 18% of sales, with China contributing the most with 37%.
Johnson and Johnson (JNJ US) is the largest general healthcare company by market capitalisation. The company generated 40% of its revenue from medical devices, 37% from pharmaceuticals and 23% from healthcare.
AstraZeneca (AZN LN), through its subsidiaries, researches, manufactures, and sells pharmaceutical and medical products. AstraZeneca focuses its operations on eight therapeutic areas: Gastrointestinal, oncology, cardiovascular, respiratory, central nervous system, pain control, anaesthesia, and infection.
Bayer (BAYN GY) produces and markets healthcare and agricultural products, and polymers. The company manufactures products that include aspirin, antibiotics, anti-infective, and cardiovascular, oncology, and central nervous system drugs, over-the-counter medications, diagnostics, animal health products, crop protection products, plastics, and polyurethanes.
Yangzijiang is a non-listed domestic state-owned chemical and TCM drugs manufacturer with Rmb25bn sales in 2010. The company has a wide range of chemical drugs in the anti-infective, oncology, immune system treatments, digestive, CCV and respiratory sectors.
Largest A share hospital drug company
Pfizer, the largest R&D based pharmaceutical company in the world
The largest general healthcare company by
market capitalisation
A non-listed domestic state-owned chemical and
TCM drugs manufacturer
Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Section 3: Largest sales team Sino Biopharm - BUY
28 February 2013 17
Largest sales team Sino Biopharm’s revenue as previously smaller than Hengrui, the largest A-share hospital drug company until 2011, when revenue of the Sino Biopharm group, which includes 33.6% of Beijing Tide’s revenue, leapt ahead. Having said that, Sino Biopharm will change its accounting policy in revenue recognition starting from 2013 to exclude this 33.6% accounted revenue from Beijing Tide.
The three Chinese leading hospital drugs companies all have a very high percentage of revenue coming from patent drugs and first-to-market generic drugs as these are the areas where they will be able to gain competitive advantages for their products. Hengrui and Sino Biopharm have more balanced revenue spread in different therapeutic areas. Both companies also have a similar number of acquired drug patents.
However, one key advantages Sino Biopharm has built over the years is the largest sales team in China with a total number sales staff at 6,385. Even if we exclude the 1,000 sales staff in Beijing Tide, Sino Biopharm group still outnumbered its peers by a large extent. We believe this is one of the key assets for the company to gain further market share.
As there are more than 20,000 hospitals in China (including 1,300 Tier III, 7,000 Tier II and 14,000 Tier I hospitals), the service and distribution to these hospitals on a national footprint can be challenging. As the bulk of hospitals are owned by local governments or state owned enterprises, the different requirements on the service level to the clinical doctors, provincial tendering process and reimbursement systems adds to the complexity of the operation for the pharmaceutical companies.
Figure 26
Patents, revenue and staff breakdown
Sino Biopharm (1177.HK) Sihuan (0460.HK) Hengrui (600276 CH) 2011 revenue (Rmbm) 4,625 2,243 4,550 Patent drugs and first-to-market generic drugs (% of revenue)
Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Section 3: Largest sales team Sino Biopharm - BUY
18 28 February 2013
Figure 27
Sino Biopharm’s distribution network
Source: FortuneCLSA, Company data
Sino Biopharm’s R&D cost to sales is higher than the domestic peer average at 2.2% but still lags global leading medicine companies. This is because Chinese companies still generate the bulk of their revenue from first-to-market generic drugs or generic drugs and hence the R&D investment is far less than for global peers. Sino Biopharm spent 6.2% of sales on R&D in 2011 and the company expects to maintain the ratio at 7%.
Figure 28
R&D expenditure as % of sales
Source: FortuneCLSA, Bloomberg, Company data
In Figure 29, we compare the Chinese pharmaceutical companies to global peers. While the Chinese companies have a very small base in revenue, their revenue growth has been far ahead of global players. One of the key reasons is that they have local knowledge, relationships and distribution to penetrate into the domestic market, which is one of the fastest growing healthcare markets in the world despite China’s healthcare spending sitting at only 1/40 of the US’s level.
2.2
3.7
6.2
8.8
11.5
13.5
13.5
14.3
14.3
16.4
17.9
19.6
0 5 10 15 20 25
China averageSihuan
Sino BiopharmHengrui
J&JPfizer
SanofiMerck
GSKRoche
SquibbNovatis
(%)
Sino Biopharm is thesecond highest in R&D to
sales amongChinese peers
R&D spending leading local peers
Small base but fast growth
Multi-layerdistribution network
Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Section 3: Largest sales team Sino Biopharm - BUY
28 February 2013 19
Sino Biopharm’s net margin is significantly lower than peers but this is because its major business operation is carried out by the 60%-owned JCTT and 55.6% owned NJCTT. If including the minority interests, Sino Biopharm would have a net margin close to 20%, which is close to the net margin level for the global pharmaceutical companies.
Chinese pharmaceutical companies also enjoy better ROE and ROA compared to global peers and this can be attributed to the lower R&D spending as percentage of sales for Chinese and higher investment for MNCs as they tend to focus on innovative drugs. Sino Biopharm booked a substantial one off investment loss in 2011. On a normalised basis, we expect Sino Biopharm’s ROE to improve to >20% in 2012.
While there is sign of deteriorating receivable days due to the change in the government’s reimbursement system and tighter fiscal budgets, Sino Biopharm’s working capital days appear to be slightly better than local and global peers. All Chinese companies are able to maintain a strong balance sheet and large cash chest thanks to the strong free cashflow yield.
Figure 29
Operational comparison of global healthcare companies Company Stock Code 2007 2008 2009 2010 2011Revenue (US$m) Pfizer PFE US 48,613 48,296 50,009 67,809 67,425Johnson & Johnson JNJ US 61,095 63,747 61,897 61,587 65,030Novartis NOVN VX 38,072 41,459 44,267 50,624 58,566Bayer BAYN GY 44,393 48,419 43,462 46,548 50,862Roche ROG VX 38,479 42,255 45,306 45,672 48,153Merck & Co MRK US 24,198 23,850 27,428 45,987 48,047Sanofi SAN FP 38,454 40,550 40,866 40,308 46,491Glaxosmithkline GSK LN 45,451 45,097 44,422 43,886 43,925Astrazeneca Plc AZN LN 29,559 31,601 32,804 33,269 33,591Bristol-Myers Squibb BMY US 19,348 20,597 18,808 19,484 21,244Sino Biopharm 1177 HK 149 293 418 526 743Jiangsu Hengrui 600276 CH 254 339 437 545 704Sihuan 460 HK na na na 153 347Revenue growth YoY (%) Pfizer PFE US 0.5 (0.7) 3.5 35.6 (0.6)Johnson & Johnson JNJ US 14.6 4.3 (2.9) (0.5) 5.6Novartis NOVN VX 5.7 8.9 6.8 14.4 15.7Bayer BAYN GY 22.0 9.1 (10.2) 7.1 9.3Roche ROG VX 14.6 9.8 7.2 0.8 5.4Merck & Co MRK US 6.9 (1.4) 15.0 67.7 4.5Sanofi SAN FP 7.9 5.5 0.8 (1.4) 15.3Glaxosmithkline GSK LN 6.1 (0.8) (1.5) (1.2) 0.1Astrazeneca Plc AZN LN 11.6 6.9 3.8 1.4 1.0Bristol-Myers Squibb BMY US 8.0 6.5 (8.7) 3.6 9.0Sino Biopharm 1177 HK 57.8 96.4 42.8 25.7 41.2Jiangsu Hengrui 600276 CH 44.4 33.7 28.9 24.8 29.2Sihuan 460 HK na na na na 126.45Gross profit (US$m) Pfizer PFE US 40,673 41,256 42,336 54,878 54,389Johnson & Johnson JNJ US 43,344 45,236 43,563 42,795 44,670Novartis NOVN VX 27,040 30,020 32,088 36,136 39,583Bayer BAYN GY 21,978 24,214 22,357 23,859 25,833Roche ROG VX 27,016 29,601 31,807 32,883 34,633Merck & Co MRK US 18,540 18,391 18,525 28,021 31,531Sanofi SAN FP 28,075 29,758 29,877 30,471 31,311Glaxosmithkline GSK LN 35,034 34,401 33,312 32,440 32,283Astrazeneca Plc AZN LN 23,140 25,003 27,029 26,880 27,565Bristol-Myers Squibb BMY US 12,325 12,399 13,668 14,207 15,646Sino Biopharm 1177 HK 123 232 335 425 583Jiangsu Hengrui 600276 CH 213 281 360 455 572Sihuan 460 HK 30 54 76 110 265Continued on the next page
Similar margin to global peers
Better profitability
Strong FCF and balance sheet
Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Section 3: Largest sales team Sino Biopharm - BUY
20 28 February 2013
Operational comparison of global healthcare companies (cont’d) Company Stock Code 2007 2008 2009 2010 2011Gross profit growth YoY (%) Pfizer PFE US (1.1) 1.4 2.6 29.6 (0.9)Johnson & Johnson JNJ US 13.3 4.4 (3.7) (1.8) 4.4Novartis NOVN VX 8.2 11.0 6.9 12.6 9.5Bayer BAYN GY 27.9 10.2 (7.7) 6.7 8.3Roche ROG VX 7.7 9.6 7.5 3.4 5.3Merck & Co MRK US 6.7 (0.8) 0.7 51.3 12.5Sanofi SAN FP 7.5 6.0 0.4 2.0 2.8Glaxosmithkline GSK LN 4.3 (1.8) (3.2) (2.6) (0.5)Astrazeneca Plc AZN LN 10.6 8.1 8.1 (0.6) 2.5Bristol-Myers Squibb BMY US 7.0 0.6 10.2 3.9 10.1Sino Biopharm 1177 HK 60.2 89.1 44.1 26.9 37.2Jiangsu Hengrui 600276 CH 49.5 32.2 28.0 26.4 25.6Sihuan 460 HK na 82.5 39.6 45.4 141.1Operating profit (US$m) Pfizer PFE US 14,780 17,056 17,053 20,832 21,009Johnson & Johnson JNJ US 15,213 16,169 16,776 16,527 16,153Novartis NOVN VX 7,263 9,308 10,017 12,447 12,030Bayer BAYN GY 5,419 5,854 6,813 7,089 8,625Roche ROG VX 12,068 12,872 13,866 12,974 15,233Merck & Co MRK US 5,971 6,439 4,739 3,785 9,588Sanofi SAN FP 8,370 9,498 10,902 11,263 10,442Glaxosmithkline GSK LN 15,396 14,600 14,962 8,120 13,508Astrazeneca Plc AZN LN 9,060 9,037 11,148 11,429 11,279Bristol-Myers Squibb BMY US 3,167 3,566 4,939 5,978 6,647Sino Biopharm 1177 HK 34 68 99 113 150Jiangsu Hengrui 600276 CH 48 88 101 124 157Sihuan 460 HK 23 43 61 91 154Operating profit growth YoY (%) Pfizer PFE US (1.3) 15.4 0.0 22.2 0.8Johnson & Johnson JNJ US 11.0 6.3 3.8 (1.5) (2.3)Novartis NOVN VX (6.5) 28.2 7.6 24.3 (3.4)Bayer BAYN GY 39.0 8.0 16.4 4.1 21.7Roche ROG VX 28.8 6.7 7.7 (6.4) 17.4Merck & Co MRK US 13.9 7.8 (26.4) (20.1) 153.3Sanofi SAN FP 16.3 13.5 14.8 3.3 (7.3)Glaxosmithkline GSK LN 9.1 (5.2) 2.5 (45.7) 66.4Astrazeneca Plc AZN LN 10.3 (0.3) 23.4 2.5 (1.3)Bristol-Myers Squibb BMY US 32.7 12.6 38.5 21.0 11.2Sino Biopharm 1177 HK 119.3 103.4 46.8 14.4 32.5Jiangsu Hengrui 600276 CH 41.7 83.4 14.1 22.6 27.4Sihuan 460 HK na 87.4 41.2 49.8 69.7Net profit (US$m) Pfizer PFE US 15,267 16,366 14,202 17,983 18,217Johnson & Johnson JNJ US 12,085 12,901 13,546 14,675 13,863Novartis NOVN VX 7,552 8,125 8,400 11,832 13,273Bayer BAYN GY 3,154 4,894 4,122 4,597 5,565Roche ROG VX 8,125 8,308 9,007 10,539 11,854Merck & Co MRK US 7,025 7,342 7,410 10,715 11,532Sanofi SAN FP 9,934 10,396 12,307 12,225 12,246Glaxosmithkline GSK LN 10,954 10,076 9,623 4,238 9,205Astrazeneca Plc AZN LN 5,595 6,982 8,180 9,642 9,909Bristol-Myers Squibb BMY US 2,740 3,464 3,667 3,735 5,472Sino Biopharm 1177 HK 29 38 51 73 59Jiangsu Hengrui 600276 CH 54 61 97 107 136Sihuan 460 HK na na na 77 128Continued on the next page
Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Section 3: Largest sales team Sino Biopharm - BUY
28 February 2013 21
Operational comparison of global healthcare companies (cont’d) Company Stock Code 2007 2008 2009 2010 2011Net profit growth YoY(%) Pfizer PFE US 1.9 7.2 (13.2) 26.6 1.3Johnson & Johnson JNJ US 8.6 6.8 5.0 8.3 (5.5)Novartis NOVN VX 6.2 7.6 3.4 40.9 12.2Bayer BAYN GY 58.3 55.1 (15.8) 11.5 21.1Roche ROG VX 29.1 2.3 8.4 17.0 12.5Merck & Co MRK US 27.6 4.5 0.9 44.6 7.6Sanofi SAN FP 12.3 4.7 18.4 (0.7) 0.2Glaxosmithkline GSK LN 10.2 (8.0) (4.5) (56.0) 117.2Astrazeneca Plc AZN LN (7.4) 24.8 17.2 17.9 2.8Bristol-Myers Squibb BMY US 30.5 26.4 5.9 1.9 46.5Sino Biopharm 1177 HK 58.2 32.9 34.0 42.5 (18.5)Jiangsu Hengrui 600276 CH 109.5 12.1 60.1 9.8 26.8Sihuan 460 HK na na na na 65.3Gross margin (%) Pfizer PFE US 84.0 85.4 84.7 81.8 80.7Johnson & Johnson JNJ US 70.9 71.0 70.4 69.5 68.7Novartis NOVN VX 71.0 72.4 72.5 71.4 67.6Bayer BAYN GY 49.5 50.0 51.4 51.3 50.8Roche ROG VX 70.2 70.1 70.2 72.0 71.9Merck & Co MRK US 76.6 77.1 67.5 60.9 65.6Sanofi SAN FP 73.0 73.4 73.1 71.0 67.3Glaxosmithkline GSK LN 77.1 76.3 75.0 73.9 73.5Astrazeneca Plc AZN LN 78.3 79.1 82.4 80.8 82.1Bristol-Myers Squibb BMY US 67.7 70.0 72.7 72.9 73.6Sino Biopharm 1177 HK 82.3 79.3 80.2 80.8 78.5Jiangsu Hengrui 600276 CH 83.0 83.0 82.4 83.5 82.5Sihuan 460 HK 78.9 73.8 72.9 71.8 76.5Operating margin (%) Pfizer PFE US 30.4 35.3 34.1 30.7 31.2Johnson & Johnson JNJ US 24.9 25.4 27.1 26.8 24.8Novartis NOVN VX 19.1 22.5 22.6 24.6 20.5Bayer BAYN GY 8.9 8.2 11.2 11.5 12.2Roche ROG VX 37.6 32.9 33.1 29.5 27.9Merck & Co MRK US 24.7 27.0 17.3 8.2 20.0Sanofi SAN FP 15.9 15.9 19.1 21.1 16.1Glaxosmithkline GSK LN 16.9 17.5 21.5 12.0 19.2Astrazeneca Plc AZN LN 30.7 28.6 34.0 34.4 33.6Bristol-Myers Squibb BMY US 16.4 17.3 26.3 30.7 31.3Sino Biopharm 1177 HK 22.3 23.1 23.8 21.6 20.2Jiangsu Hengrui 600276 CH 18.9 26.0 23.1 22.8 22.3Sihuan 460 HK na na na 59.5 44.4Net margin (%) Pfizer PFE US 31.4 33.9 28.4 26.5 27.0Johnson & Johnson JNJ US 19.8 20.2 21.9 23.8 21.3Novartis NOVN VX 19.8 19.6 19.0 23.4 22.7Bayer BAYN GY 7.1 10.1 9.5 9.9 10.9Roche ROG VX 21.1 19.7 19.9 23.1 24.6Merck & Co MRK US 29.0 30.8 27.0 23.3 24.0Sanofi SAN FP 25.8 25.6 30.1 30.3 26.3Glaxosmithkline GSK LN 24.1 22.3 21.7 9.7 21.0Astrazeneca Plc AZN LN 18.9 22.1 24.9 29.0 29.5Bristol-Myers Squibb BMY US 14.2 16.8 19.5 19.2 25.8Sino Biopharm 1177 HK 19.3 13.0 12.2 13.9 8.0Jiangsu Hengrui 600276 CH 21.4 18.0 22.3 19.6 19.3Sihuan 460 HK na na na 50.3 36.8Continued on the next page
Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Section 3: Largest sales team Sino Biopharm - BUY
22 28 February 2013
Operational comparison of global healthcare companies (cont’d) Company Stock Code 2007 2008 2009 2010 2011Net gearing (%) Pfizer PFE US (18.9) (11.2) 25.1 18.1 14.8Johnson & Johnson JNJ US 0.5 (2.3) (9.7) (19.2) (22.1)Novartis NOVN VX (15.0) 2.5 (6.0) 21.3 23.0Bayer BAYN GY 68.7 86.5 52.0 42.3 37.0Roche ROG VX (32.5) (31.0) 253.5 164.3 107.5Merck & Co MRK US (12.1) 3.6 13.1 10.0 4.5Sanofi SAN FP 9.5 3.9 8.5 3.4 20.1Glaxosmithkline GSK LN 60.9 122.3 87.9 90.9 102.0Astrazeneca Plc AZN LN 61.1 45.7 (10.2) (14.2) (10.6)Bristol-Myers Squibb BMY US 38.3 (14.0) (23.8) (29.0) (38.8)Sino Biopharm 1177 HK (80.3) (75.9) (70.2) (40.1) (50.4)Jiangsu Hengrui 600276 CH (44.1) (23.0) (26.2) (28.1) (21.2)Sihuan 460 HK (50.0) (46.3) (66.3) (87.9) (56.4)ROE (%) Pfizer PFE US 12.0 13.2 11.7 9.3 11.8Johnson & Johnson JNJ US 25.6 30.2 26.4 24.9 17.0Novartis NOVN VX 26.4 16.5 15.6 16.2 14.1Bayer BAYN GY 31.9 10.4 7.7 6.9 13.0Roche ROG VX 23.0 20.0 30.0 103.0 86.7Merck & Co MRK US 18.3 42.3 33.2 1.5 11.5Sanofi SAN FP 11.7 8.6 11.3 10.8 10.4Glaxosmithkline GSK LN 54.9 52.5 61.7 17.3 62.2Astrazeneca Plc AZN LN 37.2 39.8 41.1 36.7 43.0Bristol-Myers Squibb BMY US 21.1 46.0 78.4 20.3 23.4Sino Biopharm 1177 HK 11.4 13.5 16.8 18.5 12.4Jiangsu Hengrui 600276 CH 28.7 23.3 28.9 24.2 23.0Sihuan 460 HK na 38.7 40.6 13.8 12.1ROA (%) Pfizer PFE US 7.1 7.2 5.3 4.0 5.2Johnson & Johnson JNJ US 14.0 15.6 13.7 13.5 8.9Novartis NOVN VX 16.7 10.7 9.7 9.0 7.6Bayer BAYN GY 8.8 3.3 2.6 2.5 4.7Roche ROG VX 12.8 11.6 10.3 12.8 15.2Merck & Co MRK US 7.0 16.3 16.2 0.8 5.9Sanofi SAN FP 7.0 5.4 6.9 6.6 6.1Glaxosmithkline GSK LN 18.4 13.1 13.4 3.8 12.6Astrazeneca Plc AZN LN 14.4 12.9 14.8 14.5 18.3Bristol-Myers Squibb BMY US 8.4 18.9 35.1 10.0 11.6Sino Biopharm 1177 HK 9.4 10.2 11.3 12.1 7.8Jiangsu Hengrui 600276 CH 23.5 19.6 25.3 21.0 20.1Sihuan 460 HK na 31.8 32.1 12.9 10.5R&D expenditure to sales (%) Pfizer PFE US 16.7 16.5 15.7 14.0 13.5Johnson & Johnson JNJ US 12.6 11.9 11.3 11.1 11.6Novartis NOVN VX 16.9 17.4 16.9 17.9 16.4Bayer BAYN GY 8.0 8.1 8.8 8.7 8.0Roche ROG VX 18.2 19.4 20.1 21.1 19.6Merck & Co MRK US 20.2 20.1 21.3 23.9 17.6Sanofi SAN FP 16.2 16.6 15.6 14.0 14.4Glaxosmithkline GSK LN 14.2 14.4 13.9 14.0 14.3Astrazeneca Plc AZN LN 17.5 16.4 13.4 16.0 16.4Bristol-Myers Squibb BMY US 17.7 19.8 19.4 18.3 18.1Sino Biopharm 1177 HK 4.3 3.8 4.5 5.6 6.2Jiangsu Hengrui 600276 CH 8.0 8.1 8.4 8.6 8.8Sihuan 460 HK 4.0 3.8 3.3 2.9 3.7Continued on the next page
Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Section 3: Largest sales team Sino Biopharm - BUY
28 February 2013 23
Operational comparison of global healthcare companies (cont’d) Company Stock Code 2007 2008 2009 2010 2011Dividend yield (%) Pfizer PFE US 5.1 7.2 4.4 4.1 3.7Johnson & Johnson JNJ US 2.4 3.0 3.0 3.4 3.4Novartis NOVN VX 2.4 3.8 3.7 4.0 4.4Bayer BAYN GY 2.2 3.4 2.5 2.7 3.3Roche ROG VX 2.4 3.1 3.4 4.8 4.3Merck & Co MRK US 4.1 4.1 4.1 4.1 4.1Sanofi SAN FP 3.3 4.8 4.4 5.2 4.7Glaxosmithkline GSK LN 4.1 4.4 4.6 5.2 4.8Astrazeneca Plc AZN LN 4.4 5.0 4.4 5.6 6.1Bristol-Myers Squibb BMY US 4.3 5.3 5.0 4.9 3.8Sino Biopharm 1177 HK 4.1 5.7 2.6 2.8 3.0Jiangsu Hengrui 600276 CH 0.2 0.3 0.2 0.2 0.3Sihuan 460 HK na na na 0.0 2.0Inventory days Pfizer PFE US 269 252 399 310 225Johnson & Johnson JNJ US 103 101 103 102 104Novartis NOVN VX 165 180 174 150 116Bayer BAYN GY 138 143 154 130 127Roche ROG VX 155 160 143 146 153Merck & Co MRK US 118 140 212 141 134Sanofi SAN FP 178 183 186 156 161Glaxosmithkline GSK LN 193 226 209 195 194Astrazeneca Plc AZN LN 124 104 107 98 107Bristol-Myers Squibb BMY US 132 135 113 91 84Sino Biopharm 1177 HK 98 98 113 135 121Jiangsu Hengrui 600276 CH 120 129 118 106 111Sihuan 460 HK na 85 78 60 38Receivable days Pfizer PFE US 73 71 86 76 73Johnson & Johnson JNJ US 54 55 58 57 57Novartis NOVN VX 61 60 63 66 63Bayer BAYN GY 66 66 71 66 69Roche ROG VX 74 78 75 76 82Merck & Co MRK US 52 57 69 55 59Sanofi SAN FP 65 68 70 71 80Glaxosmithkline GSK LN 72 75 70 66 61Astrazeneca Plc AZN LN 60 64 64 66 70Bristol-Myers Squibb BMY US 73 79 66 62 62Sino Biopharm 1177 HK 57 50 53 62 63Jiangsu Hengrui 600276 CH 63 101 122 139 149Sihuan 460 HK na 3 2 5 34Payable days Pfizer PFE US 113 120 71 190 114Johnson & Johnson JNJ US 128 143 130 107 97Novartis NOVN VX 84 100 111 109 95Bayer BAYN GY 54 52 64 66 73Roche ROG VX 52 53 55 63 63Merck & Co MRK US 35 39 35 53 52Sanofi SAN FP 138 141 114 116 82Glaxosmithkline GSK LN 56 56 77 102 118Astrazeneca Plc AZN LN 203 221 193 132 130Bristol-Myers Squibb BMY US 82 111 124 133 145Sino Biopharm 1177 HK 47 34 54 55 52Jiangsu Hengrui 600276 CH 72 93 92 101 79Sihuan 460 HK na 16 16 27 21Source: FortuneCLSA, Bloomberg
Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Section 3: Largest sales team Sino Biopharm - BUY
24 28 February 2013
Revenue and cost forecast The revenue growth for 2013 will crater as Sino Biopharm will start to exclude the booking of 33.6% Beijing Tide’s revenue. However, this will not impact the bottom line as the earnings of Beijing Tide will be recognised as equity income under the operating lines.
We forecast Sino Biopharm’s EPS to grow by 19% in 2013 and 34% in 2014. There is earnings deceleration for 2013 as we have factored in higher pricing pressure coming from the provincial price bidding process due to the previous delay from 2012 to 2013. The key risk to our assumption is largely on price and whether there will be any further delay or any acceleration in the provincial tendering process. However, thanks to the high gross margins in the pharmaceutical industry, the impact to ASP decline is less sensitive as Sino Biopharm’s largest cost component is in its sales and distribution. Some of the distribution costs which they paid to distributors is also based on the price of the drugs.
For the main business under Sino Biopharm, we have made the following key assumptions in our forecasts:
Price assumption: ASPs for a total of 5 drugs were cut in May 2012 and another 5 were cut in February 2013. In the May 2012 price cut we factored in a 6% and 4% ASP cut to TQ Ganmei (天晴甘美）in 2012 and 2013. We also factored in a 12% and 8% ASP cut in 2012 and 2013 for TQ Ganping (天晴甘平), Ganlixin (甘利欣), TQ Fuxing (天晴复欣,苦参素) and Getai (葛泰 ,地奥司明). In the February 2013 and 2014 price cuts, We forecast Mingzheng’s ASP will be cut by 7%/1%, Runzhong to be cut by 10%/1%, TQ Yitai to cut 45%/4%, Kaishi to be cut by 9%/1% and Tiance to be cut by 16%/1%, respectively.
Volume Assumption: We have a mixed set of assumptions here: Hepatitis drugs
TQ Ganmei (天晴甘美） is expected to see 69% volume growth in 2012. We also factored in 30% and 25% volume growth in 2013 and 2014. The drug is exclusively patented and saw strong 9M12 sales growth of 62.5% YoY. Mingzheng (名正) is expected to see 14% YoY volume growth in 2012, 8% in 2013 and 5% 2014. Mingzheng receives strong competition from generic drug peers. In the 9M12, sales were up 11.5% YoY. Runzhong (潤眾) is expected to grow by 107% YoY by volume in 2012 and we forecast 2013 and 2014 volume growth to remain robust at 80% YoY. The drug was launched in 2010 as a first-to-market generic drug. Runzhong saw 127% YoY growth in 9M12 sales. Its active ingredient, Entecavir, has been widely used and is one of the most efficacious hepatitis B medicines in the world. TQ Ganping (天晴甘平) is expected to see 38%/20%/20% volume growth in 2012/13/14. The drug is exclusive patented with proven better therapeutic effects than Ganlixin. It saw 9M12 sales growth of 25.3% YoY. Ganlixin (甘利欣) is expected to see a 19% YoY volume increase in 2012, followed by 13% and 10% in 2013 and 2014. The drug continues to face strong replica competition after its patent expired. It saw 9M12 sales decline 2.8% YoY. TQ Fuxin (天晴复欣,苦参素) is expected to see a 1% YoY volume drop in 2012, and 5% YoY volume drop in 2013 and 2014. Other hepatitis drugs contribute less than 2% of the hepatitis treatment revenue and are expected to see volume declines of 12% in 2012 and flat in 2013/2014.
Cardio-Cerebral Vascular (CCV) drugs Yilunping (依倫平片) is expected to see 49% YoY volume growth in 2012, followed by 30% and 15% YoY growth in 2013 and 2014. TQ Ning (天晴寧) should see 24% YoY volume growth in 2012 followed by 20% and 10%
On-going price cut for existing
non-patented drugs
We expect strong volume growth
We anticipate 2013 will see more price cuts
Runzhong saw 127% YoY growth in 9M12 sales
Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Section 3: Largest sales team Sino Biopharm - BUY
28 February 2013 25
growth in 2013 and 2014. Purun (普潤) is expected to see a 20% YoY volume decline in 2012-2014. Tuotuo (托妥) should see 191% YoY volume growth in 2012 and we forecast 50% and 100% growth in 2013 and 2014. For TQ Ganan（天晴甘安), we forecast flat YoY volume growth in 2012-14.
Oncology drugs For all oncology drugs, including TQ Yitai (天晴依泰) and Zhiruo (止若), we forecast 20% growth in 2012 followed by 5% and 20% growth in 2013 and 2014.
Other and new drugs Taibai (泰白缓释片) used in the treatment of diabetes’s should see 12-13% YoY volume decline in 2012-2014. New Ossified Estriol (新骨化三醇) used in orthopaedics should see 37% YoY volume growth in 2012, and 30%/20% growth in 2013/14. Xinhaineng (新海能 ), which is among the nutritious drugs segment, should see 250% YoY volume growth in 2012, 150% in 2013 and 100% in 2014. Fenghaineng (丰海能), also in the nutritious segment should see 56% YoY volume growth in 2012, followed by 25% and 15% growth in 2013 and 2014. Tiance (天册,比阿培南) is SinoBio’s main anti-infective drug and we forecast YoY volume growth of 77% in 2012, 35% in 2013 and 20% in 2014. Getai (葛泰,地奥司明), used for anorectal disorders should see 47% YoY volume growth in 2012, 20% growth in 2013 and 2014. For new drugs we forecast 30% volume growth in 2012, a flattish 2013 and 50% growth in 2014 while we expect SinoBio’s strong pipeline to boost new drugs volume in 2014 and 2015.
Gross margin We expect overall gross margin to decrease slightly, from 79.2% in 2012 to 77.4% in 2013 but rises slightly to 78.3% in 2014 as we expect more provinces to carry out a tendering process in 2013 after the delay in 2012. Each province carries out its tendering process every two to three years, which means this will have a more significant hit on pricing during the first year and stabilise in the second and third year after completion of the tendering process.
Gross margins on drugs for the treatment of hepatitis should decrease from our forecast of 81.5% in 2012 to 79% in 2013 and 2014, while CCV and other drug categories should see mild gross margin decline from our forecast of 80% in 2012 to 78% in 2013 and 79% in 2014. We also forecast the gross margin of synthetic raw materials and oncology drugs decreasing 1-2% in 2013-14.
Figure 30
Gross margin trend 2006-9M2012
¹ Sihuan used 1H12 for latest gross margin data. Source: FortuneCLSA, Company data
65
70
75
80
85
90
2007 2008 2009 2010 2011 9M12
(%) Sino Biopharm Henrui Sihuan¹
Small pressure on gross margin
GM under pressureas we expect more
provincial tendering in 2013
We forecast 5% and 20% growth in 2013 and 2014
for oncology drugs
We expect Sino Bio’s strong pipeline to boost
new drug volume in 2014 and 2015
Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Section 3: Largest sales team Sino Biopharm - BUY
26 28 February 2013
Operating expenses Sino Biopharm’s selling cost/total sales has been varying from 38-43% in the past five years, consistently high compared to global firms at 19-30%. Hengrui, one of Sino Biopharm’s domestic competitors, also saw a similarly high level in selling cost/total sales. This confirmed our view that local Chinese drug companies have heavily invested in sales and distribution channels despite a relative underinvestment in R&D compared to MNCs.
However, we believe the long trend will reverse. Sino Biopharm’s sales and distribution cost as a percentage of sales will fall while R&D cost as a percentage of sales will rise in the future as the expanding scale in revenue will create operating leverage. But the focus on innovative drugs and product upgrades will drive higher cost allocation from sales and marketing to R&D.
Figure 31
Selling and distribution cost as a percentage of total sales
Source: FortuneCLSA, Company data, Bloomberg
Tax assumptions Due to a one-off tax expense in 1H12, We expect the tax rate in full year 2012 to reach 23%, higher than the previous years’ range of 17-21%. However, we forecast the tax rate will decline in 2013 and onwards to 17%.
Qualified “High and New Technology Enterprises” like Jiangsu Chia Tia Tianqing (JCTT), Nanjing Chia Tai Tianqing (NJCTT), Beijing Tide, Jiangsu Fenghai, Jiangsu Qingjiang, Qingdao Haier and Shanghai Tongyong were subject to a corporate income tax of 15%. Other than the above mentioned entities, other subsidiaries located in the PRC are subject to a corporate tax rate of 25%.
Capex and dividend policy Sino Biopharm will continue to spend HK$400-500m on capex every year in the near term as the company continues to grow its volume and requires more manufacturing scale. On top of strong organic growth, Sino Biopharm is also aiming to grow through acquisition. As a result, the company, which used to have very high pay-out ratio at more than 70% decided to cut back its pay-out ratio by half in order to reserve the cash for potential attractive deals. We forecast Sino Biopharm’s capex at HK$456m and HK$578m for 2013 and 2014 and maintain a dividend pay-out ratio of 38% for the next two years.
43.3
38.439.7
41.1 43
15
20
25
30
35
40
45
50
55
60
2007 2008 2009 2010 2011
(%) Roche Novartis MerckGSK Hengrui Sino Bio
Sino Biopharm’s sellingexpense ratio higher
than MNCs
Chinese heavily invested in distribution
Spending for organic and non-organic growth
We forecast the tax rate will decline in 2013 and
onwards to 17%
Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Section 3: Largest sales team Sino Biopharm - BUY
28 February 2013 27
Figure 32
Revenue and cost assumption 2010 2011 12FCL 13FCL 14FCL
BJ Tide's equity income to Sino Biopharm 187 235Source: FortuneCLSA, Company data
Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Section 4: Undemanding valuation Sino Biopharm - BUY
28 February 2013 31
Undemanding valuation We continue to rate Sino Biopharm a BUY but upgrade our target price to HK$5.50, which is based on the comparable sector PE average of 20x 14FCL and EPS of HK$0.275. Our estimates suggest earnings growth of 19% and 34% in 2013 and 2014. We have factored in more pricing pressure as we expect 13 provinces to go through the tendering process in 2013, compared with the nine provinces that underwent the process in 2012. The strong growth outlook for 2014 is mainly driven by less pricing pressure, strong volume growth and contributions from some new drugs.
We expect Sino Biopharm’s net profit to grow to HK$1,013m and HK$1,360m, with EPS to reach HK$0.205 and HK$0.275 in 2013 and 2014. The stock should also offer a 2% yield for 2013 and 2014. Our target price of HK$5.50, is based on 20x 14FCL EPS, which implies 33% upside, despite the recent surge in share price, and the company offers a 1.8% dividend yield.
Sino Biopharm has been trading at largely below 16x PE from 2008 to 2009. In 2010, Sino Biopharm substantially rerated to above 23x. A de-rating commenced in 2011 and it has significantly de-rated from around 30x in 2010-2011 to around 10x in 1H12. The de-rating was mainly due to the large investment loss of HK$210m the company reported in 2012 due to trading in financial products. As core earnings continue to grow at a strong rate and with the absence of investment losses, Sino Biopharm rerated to an average forward PE of 16x in 2H12.
While Sino Biopharm’s price-to-book valuation is reaching the high end of its historical range after the recent share-price surge, we see this as justified by improving returns on shareholder equity. In particular, Sino Biopharm previously had a significant investment portfolio, which generated volatile returns. After the investment write-off in 2011, which dragged the earnings performance for that year, we believe the company now has a cleaner balance sheet which will help to improve its future ROE. The short term and long term investment amount to total assets was 10% in 2010 and has decreased to 2.6% in 1H12. in addition, the company has a strong net cash position, which also dilutes its ROE to a certain extent. The ex-ROE figure will be even higher.
Figure 33 Figure 34
Sino Biopharm 12M forward PE Sino Biopharm 12M forward PB
Source: FortuneCLSA, Wind
0
1
2
3
4
5
6
7
2008 2009 2010 2011 2012 2013
(HK$) max 34x
+1sd 23x
avg 16x
-1sd 8.5x
min 4.2x
0
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3
4
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6
2008 2009 2010 2011 2012 2013
(HK$)
max 4.9x
+1sd 3.5x
avg 2.5x
-1sd 1.5x
min 0.7x
We upgrade our price target to HK$5.50. BUY
Mean reversion in 2012
Implied 24% total upside
Cleaner balance sheet supports PB expansion
Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Section 4: Undemanding valuation Sino Biopharm - BUY
32 28 February 2013
EVA® - ROIC calculation Sino Biopharm has seen continuous growth in ROIC. The sudden drop of ROIC in 2010 was due to a HK$1,104m new share issuance. Its WACC has stayed flat due to a stable capital structure and interest-rate environment in China. Thus, the stock has generated positive economic value add (EVA®). We estimate that the company’s EVA® should continue to improve as its ROIC continues to trend up on the back of sustained margins and steady capital spending.
Figure 35
Sino Biopharm generates increasing EVA®
Source: FortuneCLSA, Bloomberg
Discounted-cashflow analysis We assume cost of equity at 10.0% (a 6% risk premium, 1.0 beta and 4% risk-free rate), with cost of debt at 6% and a terminal growth rate of 3%. The discounted cashflow per share based on 10-year profit up to 2020 is HK$6.13. We use 1.0 beta as this is the three-year average for the Chinese healthcare sector (including A and H shares). We also looked into the beta for global healthcare names, which ranged from 0.85-1.1. However, it is interesting to note that Sino Biopharm’s 12 month beta is now at 0.45 due to the volatile share-price performance over the past 12 months which was driven by the earnings distortion from the equity investment write-off.
Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Section 4: Undemanding valuation Sino Biopharm - BUY
28 February 2013 33
Comparable valuations Most of the MNC pharmaceutical companies trade at 10-15x PE, except for Bristol-Myers and Simcere, Sino Biopharm trade at a similar valuation to local peer, Hengrui, but at a premium to global names while delivering higher ROE than the sector average, based on our estimates.
Figure 37
ROE versus PE in 2013
Figure 38 Figure 39
Pfizer 12M forward PE Pfizer 12M forward PB
Figure 40 Figure 41
GSK 12M forward PE GSK 12M forward PB
Source: FortuneCLSA, Wind
PfizerJ&J
Novartis
Bayer
Roche
MerckSanofi
GSK
AstraZ
Bristol-Myers
Sino BioHengruiSihuan
SimcereFosun0
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70
80
90
5 10 15 20 25 30
(13 ROE %)
13 PE (x)
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35
2008 2009 2010 2011 2012 2013
(US$)
max 23.1x
+1sd 9.9x
avg 8.6x
-1sd 7.3x
min 5.27x
5
10
15
20
25
30
35
40
2008 2009 2010 2011 2012 2013
(US$)
max 2.8x
+1sd 2.1x
avg 1.8x
-1sd 1.4x
min 1.0x
5
505
1,005
1,505
2,005
2,505
3,005
3,505
2008 2009 2010 2011 2012 2013
(GBP/Lot)
max 24.7x
+1sd 15.8x
avg 12.7x
-1sd 9.7xmin 8.5x
700
900
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(GBP/Lot)
max 10.3x
+1sd 8.9x
avg 7.7x
-1sd 6.5x
min 5.3x
Chinese ROEs are at a higher range
Delivering higher ROE than the sector average
Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Section 4: Undemanding valuation Sino Biopharm - BUY
Net margin (excl. non-recurring) (%) 13.9 8.0 10.4 11.4 11.5
Sales/Asset (x) 0.7 0.9 1.1 1.0 1.1
ROAA (%) 0.12 0.08 0.12 0.12 0.13
Asset/equity (x) 1.54 1.64 1.75 1.81 1.91
ROAE (%) 19 13 21 22 26Source: FortuneCLSA
Global peers are trading at lower valuations than Chinese healthcare companies (mostly A-share listed companies) both in the medical devices and chemical drug sectors. This is because the market has continued to reward growing companies. Based on consensus, global medical device companies offer 13% and 12% EPS growth for 2013 and 2014 versus Chinese peers at 28% and 24% earnings growth for the same period. Chinese medical device companies are expected to grow at double the rate versus global names.
In the chemical drug sector, market consensus expects the global pharmaceutical names to grow EPS by 9% and 8% for 2013 and 2014 while Chinese drug companies are expected to grow EPS by 22% and 21% during those two years, a number that is almost triple the growth of peer. Hence we expect the valuation premium for Chinese companies to remain as PE-to-growth remains attractive.
Sino Biopharm, which is now a leading hospital drug company domestically, is likely benefit from the Chinese valuation premium. However, the stock is currently trading at a small discount based on 2014 PE as investors are yet to price in its strong earnings growth for 2013 and 2014. As we expect Sino Biopharm to deliver at least a 20% earnings Cagr over the next three years and Chinese peers are trading at 21.6x and 21.4x, we believe Sino Biopharm is likely re-rate to at least 20x forward earnings.
Figure 43 Figure 44
A-share chemical drug sector forward PE A-share chemical drug sector forward PB
Source: FortuneCLSA, Wind
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Jan 08 Nov 08 Sep 09 Jul 10 Jun 11 Apr 12 Feb 132.0
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Jan 08 Nov 08 Sep 09 Jul 10 Jun 11 Apr 12 Feb 13
Chinese premium
Attractive growthinvestment
Sino Biopharm is cheaperthan Chinese peers
Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Section 4: Undemanding valuation Sino Biopharm - BUY
28 February 2013 35
Figure 45
Healthcare sector global peer valuations Company Code Mkt cap
(US$m)Price (lcy)
T/O (US$m)
PE(x) EPS gth (%) PB (x)12
ROE (%) Yield (%) 12
EV/Ebitda (%) Net gearing(%) 12
12 13 14 12 13 14 12 13 12 13 14Devices
Global Peers
GE GE US 245,484 23.41 935 15.2 13.8 12.5 10.9 10.2 10.1 2.0 11.4 13.8 3.0 9.4 8.5 7.7 1.5
We expect revenue to grow by 41% in 2012, 8% in 2013 and 33% in 2014.Revenue growth slowdown in 2013 is mainly due to a change in accounting rules.Beijing Tide's 33.5% revenue will be excluded from the revenue starting from 2013We forecast net profit to grow by 19% and 34% in 2013 and 2014, respectively.
We expect overall gross margin to decrease slightly from 79.2% in 2012 to 77.4%in 2013 but rise slightly to 78.3% in 2014 as we expect more provinces to carryout the tendering process in 2013 after a delay in 2012. Each province carries outits tendering process every two to three years. We also expect operating margin todecrease slightly from 20-22% in 2010-2012 to 18% in 2013-2014 as SinoBiopharm is still relatively underinvested in R&D at 6.2% of sales compared toMNCs at 12-20% of sales. However, with a large sales team, we expect sellingexpense as a percentage of revenue to decline on operating leverage.
Trading at 15x 14FCL PE, the stock is attractive with decent ROE of 24% in 2013and 27% in 2014. The company also has a strong balance sheet with a large cashchest for potential M&A. Our target price of HK$5.5, is based on 20x 14FCL EPS,which implies 33% upside despite the recent surge in share price, and offers a1.8% dividend yield.
Policy risk is a major overhang. Healthcare reforms allow the central government(the NDRC and MoH) and the provincial government to tighten control on drugprescriptions and pricing. The major measures included in this are: NDRC controlover retail prices of some popular drugs; NDRC control over the essential drug list(EDL) and a provincial government tendering process.
Apart from strong competition from domestic generic drug manufacturers, SinoBiopharm also competes against multinationals with patented products.
Drug safety and quality remains a potential threat for any pharmaceutical companyoperating globally. Despite extensive clinical trials before drug approval, drugtoxicity risk cannot be neglected. In the drug market, there have been manyreported incidents of drug contamination during production, storage and transport.
0
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0.00
0.05
0.10
0.15
0.20
0.25
0.30
2009A 2011A 2013CL
EPS (HK$)
0
5
10
15
20
25
30
2009A 2011A 2013CL
ROAE (%)
0
5
10
15
20
2009A 2011A 2013CL
EV/operating Ebitda (x)
Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Larger investment income as 33.6%-owned Beijing Tide’s equity will be accounted rather than consolidated from 2013.
M&A remains a key strategy but we have not factored in our forecasts due to low predictability.
Manageable working capital.
Strong balance sheet and rising ROE.
Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Appendices Sino Biopharm - BUY
28 February 2013 39
Appendix 3: Non-Essential drugs provincial tender offer Non-Essential Drugs - Mechanism and features in provincial tender offers Tender Type Mechanism Features Provinces
Also named the "Anhui Mode" after Anhui Province first launched its Essential Drug List Tender offer
Used in almost every Essential Drug List Tender
Unqualified drugs of smaller companies filtered in the first stage
But resulted in price undercutting/a price war in the second stage
Anhui, Qinghai
General bidding
Considers quality/reputation/price in the first stage to arrive at an overall score May follow by multiple rounds to further limit the price and competitors
Also named the "Shanghai Mode"
Used in most Non-Essential Drug List Tenders
Quality contributes majority (+50%)
Price cuts less severe due to an overall scoring system (with the exception of Fujian in January 2011)
Guangdong,Hainan, Fujian, Shaanxi, Qinghai
Online exchange system
Drugs are listed on an online exchange for trading and clearance
Free-market, fair competition to all drug manufacturersFluctuating price
No centralized quality check
Chongqing
Note: Detailed tender mechanism differs among provinces. Source: Provincial Health Bureau, FortuneCLSA
Launched provincial Non-Essential Drug tender offer summary (From 2011)
15 Tiopronin 2.29 Digestive - hepatitis and gallbladder
16 Diammonium Glycyrrhizinate 2.21 Digestive - hepatitis and gallbladder
17 Compound Ammonium Glycyrrhizinate 1.98 Digestive - hepatitis and gallbladder
18 Bicyclon 1.85 Digestive - hepatitis and gallbladder
19 Silibinin 1.59 Digestive - hepatitis and gallbladder
20 Liver abstract 1.32 Biological drugs
Others 10.416 Others
Source: FortuneCLSA, MENET
Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Appendices Sino Biopharm - BUY
28 February 2013 41
Appendix 4: China/HK listed chemical drugs manufacturing companies There are a total 152 listed chemical drug manufacturing companies in China/HK. Of these, 121 are listed on the A-share market while 31 are listed as H-shares. Among the A-share companies, 59 are listed on the Shenzhen Exchange while 62 are listed on the Shanghai Exchange.
Total sales of China drug manufacturing rose from Rmb474bn to Rmb1.45tn from 2006 to 2011, a Cagr of 25.1%. Distributers’ sales grew from Rmb336bn to Rmb943bn in the same period, or a Cagr of 22.9%. In 2011, distributer growth surpassed that of manufacturers at 33.1% YoY.
Total sales of China drugs manufacturing versus distribution
Source: FortuneCLSA, Ministry of Commerce
Hospitals remained the largest end-users, at Rmb532bn, or 75.9% of total market share against retail over-the-counter (OTC) at 24.1% in 2010. The YoY growth of the distribution sales to hospitals sped up in 2010 with 26% YoY growth against 14.2% YoY growth for the OTC market.
Distribution sales breakdown: Hospital versus retail Over-the-counter (OTC)
According to the MoC, total sales of drugs reached Rmb943bn
Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Appendices Sino Biopharm - BUY
42 28 February 2013
China’s healthcare reform
Year Reform topic Reform details 1988 Free marketisation
in hospitals Introduced non-core, outsourced services in hospitals Hospitals were allowed to provide premium services and earn extra charges Set up multiple sub-industries to provide value-adding supports to hospitals
(e.g. drug testing, body checking, etc)
1994 Alleviate central deficit and ease healthcare burden
“Tax-sharing” reform from central government launched Provincial tax income decreases after sharing tax income with central government Provincial subsidy on hospitals decreases Cost transfer from government to patients
1994 Improve urban employee’s medical insurance coverage
Urban employee medical insurance(城镇职工医保) launched A mandatory insurance for all urban employees Contribution from both corporate and individuals Reimbursed 75-85% hospitalization cost, 70-75% severe diseases cost
Both parties have to pay - reduced overuse and exploit of healthcare system
2003 Expand rural medical insurance
Rural medical insurance (新农合)launched A non-mandatory insurance coverage to rural areas Reimbursed 40-50% hospitalization cost and 50% severe diseases cost Rural medical insurance coverage improved from less than 10% to 95% in 2012
2007 Expand medical insurance to all urban citizens.
Urban medical insurance (城镇居民医保)launched A non-mandatory insurance to urban students and unemployed Reimbursed 45-78% hospitalization cost and 55-88% severe diseases cost
Participants increased from 42m in 2007 to 195m in 2010.
2009 “New Healthcare reform”
Rmb850bn injections from 2009-2011 National medical insurance coverage increased to more than 90% Raised reimbursement amount in medical coverage Established expanded essential drugs list (EDL) to provide affordable common drugs 15% price premium charge in hospitals were cancelled in trial cities
2011- 2015
“Twelve five year plan” To enhance healthcare infrastructure(online database, rural emergency rooms etc) To improve funding by attracting public funding To rationalized healthcare salary system and attract local talents To further improve medical coverage Expand and promote essential drugs list and procurement procedures Government hospitals to return to non-profitable in nature Promote Traditional Chinese Medicine To consolidate drugs distributions while expanding retail chain stores To provide tax rebate and supports on domestic R&D based drug manufacturers.
Source: FortuneCLSA
Medical insured and essential drugs list changes
List Applicants Year Total drugs No. of Western drugs No. of TCM drugs National Drug Reimbursement List (NDRL)
Urban employee (Mandatory)
2000 1,488 913, in which Full reimbursed: 327 70-80% reimbursed: 586
575, in which Full reimbursed: 135 70-80% reimbursed: 440
2004 1,850 1027, in which Full reimbursed: 315 70-80% reimbursed: 712
823, in which Full reimbursed: 135 70-80% reimbursed: 688
2009 2,151 164, in which Full reimbursed: 349 70-80% reimbursed: 791
987, in which Full reimbursed: 154 70-80% reimbursed: 833
Essential Drugs List (EDL)
1. Rural population 2. Urban students 3. Urban unemployed
2009¹ 307 205 102
¹ EDL is expected to expand to more than 500 drugs in 2013. Source: FortuneCLSA
Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Appendices Sino Biopharm - BUY
28 February 2013 43
China/HK listed chemical drugs manufacturing companies
Code English name Name Mkt Cap (USD m)
Shenzhen listed
002422.SZ KelunPharma 科伦药业 4,568.5
002294.SZ Salubris 信立泰 2,669.7
000963.SZ Hd Medicine 华东医药 2,603.0
002653.SZ HaiscoPharma 海思科 1,959.3
000513.SZ Livzon Group 丽珠集团 1,611.7
000522.SZ Bys 白云山 A 1,517.3
002004.SZ Huapont Pharm 华邦制药 1,305.5
200513.SZ Livzon Group-B 丽珠 B 1,089.9
002262.SZ Nhwa 恩华药业 1,036.4
002393.SZ Lishengpharma 力生制药 933.1
002437.SZ Gloria Pharm 誉衡药业 863.4
000566.SZ Hainan Haiyao 海南海药 796.9
300289.SZ Leadman 利德曼 541.3
300006.SZ Lummy 莱美药业 536.9
300110.SZ Hryy 华仁药业 512.4
300199.SZ Hybio 翰宇药业 494.9
000915.SZ Shanda Wit 山大华特 460.8
300086.SZ Honz 康芝药业 420.9
000790.SZ Hoist Inc. 华神集团 410.0
002626.SZ Kingdomway 金达威 378.5
300016.SZ BeiluPharma 北陆药业 348.0
300318.SZ Bohui Innovation 博晖创新 287.9
000153.SZ Fengyuan Pharmaceutical 丰原药业 278.0
002370.SZ Yatai Pharm 亚太药业 254.5
300254.SZ C&Y Pharmaceutical 仟源制药 192.5
000004.SZ Cau-Tech 国农科技 111.4
Shanghai listed
600276.SH Hr 恒瑞医药 5,840.9
600196.SH Fosun Phar 复星医药 3,720.9
600062.SH Dcpc 华润双鹤 2,147.1
600664.SH Hpgc 哈药股份 1,957.6
600079.SH Hwhg 人福医药 1,935.7
600812.SH Ncpc 华北制药 1,323.2
600380.SH Joincare 健康元 1,153.2
600829.SH Sjzy 三精制药 838.1
600420.SH 0 现代制药 586.1
600789.SH Lkpc 鲁抗医药 381.5
600297.SH Merro Phar 美罗药业 315.1
600513.SH Lhpharma 联环药业 244.8Continued on the next page
Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Appendices Sino Biopharm - BUY
44 28 February 2013
China/HK listed chemical drugs manufacturing companies (cont’d)
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Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
Prepared for: [email protected] Matthew Wong 02/28/13 01:42:36 PM HSBC - Hong Kong {IM}
