20170616-申万宏源研究_香港_-绿叶制药-02186.HK-Innovative_pharmaceutical_producer_12页_784kb

Luye Pharma Group (2186 HK) Summary

Core Content

Luye Pharma Group is a leading Chinese pharmaceutical company specializing in oncology, cardiovascular diseases, and gastrointestinal and metabolic disorders. It is known for its innovative drug formulations and strong R&D capabilities. The company has a diverse product portfolio, with key products including Lipusu, Beixi, and Xuezhikang. Luye is currently trading at historically low valuations and is actively exploring M&A opportunities to expand its product line.

Main Products and Market Position

• Lipusu (Paclitaxel Liposome Injection): A patent drug used as a first-line chemotherapy for ovarian cancer, breast cancer, and non-small cell lung cancer (NSCLC). It has fewer hypersensitivity reactions and longer duration compared to conventional paclitaxel (Taxol). Despite concerns about price cuts, it is expected to maintain a leading market share in the Chinese paclitaxel market.
• Beixi (Acarbose Capsule): Showed a 30% YoY growth in 1Q17.
• Xuezhikang: A cholesterol-lowering drug that increased by 6% YoY in 1Q17.
• Acino: A newly acquired European TDS drug manufacturer, contributing Rmb50-60m in profit in 17E and expected to drive high-teens growth in the first half of 17E.

Market and Price Dynamics

• Market Share: Lipusu holds a significant market share in revenue (62% in 2016) but a smaller share in volume (around 47% in sample hospitals).
• Price Risk: The company is undergoing price negotiations for inclusion in the National Reimbursement Drug List (NRDL). While the market is concerned about a potential 50% price cut, management believes a 30% cut is reasonable.
• Competition: Hengrui and CSPC have filed for Abraxane (albumin-bound paclitaxel) generic approvals, which could potentially impact Lipusu's market share. However, due to higher costs and longer time to penetrate public hospitals, the impact is expected to be limited.
• Valuation: Based on consensus numbers, Luye is trading at 12x 17E PE and 11x 18E PE, significantly lower than its peers. The company has Rmb1.6bn in net cash as of end-2016, which supports its M&A strategy.

Financial Performance

• 1Q17 Performance: Lipusu grew 19% YoY, Beixi 30% YoY, and Xuezhikang 6% YoY.
• Revenue Growth: From Rmb2,515m in 2013 to Rmb2,918m in 2016, with a 13.8% YoY increase in 2016.
• Net Income: Increased from Rmb310m in 2013 to Rmb892m in 2016, with a 18.2% YoY growth in 2016.
• EPS: Diluted EPS increased from Rmb0.11 in 2013 to Rmb0.27 in 2016.
• ROE: Stabilized around 14.7% in 2016, indicating efficient use of equity.
• Free Cash Flow: Increased from Rmb0.06 per share in 2013 to Rmb0.12 per share in 2016.

R&D Pipeline

Luye has a robust R&D pipeline with several products in various stages of development:

• Risperidone Microsphere: Pending US FDA NDA approval, expected to complete registration by end-19E.
• Vincristine Liposome: In phase-III trials in China, may receive CFDA approval by end-19E.
• Rotigotine Microsphere: In phase-II trials, may get US FDA approval by end-20E.
• Goserelin Microsphere: In phase-I trials, may obtain US FDA approval in 2021.

Investment Rating and Outlook

• Security Investment Rating: The report does not assign a specific rating, but the analyst suggests that the company's performance is expected to be strong given its market position and R&D potential.
• Industry Investment Rating: The report defines ratings based on expected performance relative to the industry index and market benchmark. The company is expected to outperform in the long term due to its strong fundamentals and strategic initiatives.

Key Information

• Market Cap: HK$14,978m (US$1,920m).
• Shares Outstanding: 3,321m.
• Free Float: 54.3%.
• Valuation: Luye is undervalued compared to its peers, with a 12x 17E PE and 11x 18E PE.
• Strategic Moves: The company is leveraging its internal resources and M&A strategy to expand its product portfolio.
• Employee Share Award Scheme: Launched in January 2017, with 66.4m shares purchased on the open market for the scheme.

Conclusion

Luye Pharma Group is a well-positioned pharmaceutical company with a strong product portfolio, particularly in oncology. Despite concerns over price risks, its competitive advantages and valuation make it an attractive investment opportunity. The company's ongoing R&D efforts and strategic acquisitions are expected to drive future growth and enhance its market position.