20160106-三星证券-Pharm_Biotech__NEUTRAL_Selective_approach_still_valid_amid_sector_reratings_53页_2mb

Sector Update Summary

Core Content

This report provides an analysis of the pharmaceutical and biotechnology sectors in South Korea, focusing on the performance of selected companies and their potential for future growth. The analyst, SeungWoo Kim, CFA, maintains a NEUTRAL rating for the entire sector, emphasizing a selective investment approach due to the sector's re-rating and the competitive R&D pipelines of certain firms. The report also includes updated target prices and valuation adjustments based on new developments and expected performance.

Main Points

• Sector Rating: NEUTRAL for both pharmaceutical and biotechnology sectors.
• Selective Approach: Valid due to the sector's re-rating, with companies having competitive R&D pipelines being more attractive for investment.
• Performance in 2015: Korea's pharmaceutical and health care sector indexes outperformed the Kospi by 45.2% and 116.8% respectively, indicating that much of the re-rating has already been priced in.
• Target Price Adjustments: Based on updated valuations and R&D pipeline potential, with an average increase of 9.3% for the ten companies covered.
• Key Companies: SK Chemicals, Chong Kun Dang Pharmaceutical (CKD Pharm), and Donga ST are highlighted as top picks due to their promising R&D pipelines and potential for out-licensing deals.

Key Companies and Their Highlights

SK Chemicals (006120 KS, KRW78,000)

• Target Price: KRW96,000 (+23.1% upside)
• R&D Pipeline: Expected to launch a full vaccine lineup in 2017, including a quadrivalent flu vaccine and a 13-valent pneumococcal conjugate vaccine in 1H16. The shingles vaccine is expected in 2H16.
• Valuation: SOTP method applied; forward P/E ratio for 2016E is 29.0.

Chong Kun Dang Pharmaceutical (185750 KS, KRW148,000)

• Target Price: KRW170,000 (+14.9% upside)
• R&D Pipeline: Several promising drugs in development, including CKD-506 (autoimmune treatment), CKD-504 (Huntington's disease treatment), and CKD-519 (dyslipidemia treatment). CKD-581 has best-in-class potential for pan-HDAC inhibitors.
• Valuation: SOTP method applied; forward P/E ratio for 2016E is 26.9.

Donga ST (170900 KS, KRW161,000)

• Target Price: KRW190,000 (+18.0% upside)
• R&D Pipeline: Botanical drug DA-9801 for diabetic neuropathy is set to release results from US phase II trials in 1Q16, which may alleviate concerns about its commercial success.
• Valuation: SOTP method applied; forward P/E ratio for 2016E is 38.4.

Hanmi Pharmaceutical (128940 KS, KRW776,000)

• Target Price: KRW810,000 (+4.4% upside)
• R&D Pipeline: Signed large-scale out-licensing deals in 2015, which contributed to its strong performance. However, the analyst expects its 2016 performance to be affected by lower target EV/EBITDA multiple.
• Valuation: SOTP method applied; forward P/E ratio for 2016E is 13.1.

4Q15 Performance Outlook

• Operating Profit: Combined operating profit of the ten companies is expected to rise by 56.8% y-y but fall by 34.3% q-q, slightly exceeding consensus by 7.5%.
• Drivers: Strong performance from Celltrion, SK Chemicals, and Medytox; however, Hanmi's high base from upfront payments and seasonal weakness in vaccine sales are expected to drag down quarterly growth.
• Margin Impact: Operating margin was likely affected by smaller milestone payments and a slight decrease in R&D expenses y-y.

Valuation Adjustments

• Methodology: The analyst adjusted the valuation basis from 2015 to 2016, incorporating the value of new R&D pipelines.
• Target Price Changes: An average increase of 9.3% in target prices for the ten companies, with some exceptions such as Medytox and Daewoong Pharmaceutical, which saw lower multiples due to expected EBITDA growth slowdown.

Investment Strategy

• Focus: On firms with competitive R&D pipelines and stable cash flows from existing operations.
• Rationale: The Korean government's push for R&D and the potential for out-licensing deals with global players increase the appeal of these firms.
• Selectivity: The analyst recommends a selective approach, as the sector's re-rating has largely been priced in, and only a few firms are expected to outperform.

Conclusion

The pharmaceutical and biotechnology sectors in South Korea are expected to continue re-rating in 2016, but the analyst maintains a NEUTRAL stance due to the market's anticipation having been largely priced in. Companies with strong R&D pipelines and potential for out-licensing deals, such as SK Chemicals, CKD Pharmaceutical, and Donga ST, are highlighted as top picks. The report also provides updated target prices and valuation methods to reflect new developments and expected performance.