20161031-三星证券-Pharm_Biotech__OVERWEIGHT_Domestic_industry_undergoing_significant_change_157页_3mb

Sector Initiation Summary

Core Content

This report provides an analysis of the Korean pharmaceutical and biotech sector, focusing on its current valuation, future growth potential, and investment opportunities in 2017. It highlights the sector's resilience despite recent challenges and outlines key companies and strategies for investors.

Main Points

• Sector Fundamentals Remain Strong: Despite share price corrections and external headwinds, the Korean pharmaceutical and biotech industry is showing solid fundamentals, with growth driven by biologics exports and the increasing involvement of large conglomerates.
• Valuation Adjustments: The sector has experienced significant derating, with the Kospi Medical Supplies Index and the Kosdaq Pharmaceuticals Index trading at forward P/Es of 23.2x and 30.3x, respectively. These are lower than their 2015 peaks but still relatively attractive compared to global peers.
• Global Trends and Opportunities: The global biosimilars market is growing, and Korean firms like Celltrion and Samsung Bioepis are expected to gain further dominance. Green Cross and Yuhan are also highlighted as key players with strong export potential.
• US and European Biotech Sectors: The US and European biotech sectors had a strong 2015, with increased sales, R&D investment, and net profits. Gilead Sciences and Amgen were major contributors to this growth.
• M&A and Strategic Alliances: M&A activities and strategic partnerships were significant in 2015, with large firms acquiring smaller biotech companies to enhance their pipelines and market positions.
• Investment Strategy: Investors are advised to take advantage of the current oversold conditions to add select stocks to their 2017 portfolios, particularly those with strong export potential and robust R&D pipelines.

Key Information

• Target Prices:

  • Green Cross: KRW220,000 (51.7% upside)
  • Yuhan: KRW350,000 (63.6% upside)
  • Hanmi Pharmaceutical: KRW600,000 (60.6% upside)
  • Celltrion: KRW150,000 (43.5% upside)
  • Seegene: KRW45,000 (37.2% upside)
  • i-SENS: KRW43,000 (34.6% upside)

• Market Share and Valuation:

  • Korean pharma/bio firms currently represent 4.3% of the total market, significantly lower than European (8%), US (7.8%), Indian (7.7%), Japanese (5.7%), and Chinese (4.5%) counterparts.
  • The sector is expected to grow in market share over the medium to long term.

• Challenges and Negatives:

  • Domestic Issues: Concerns over 3Q corporate results and the cancellation of an out-licensing deal between Hanmi Pharmaceutical and Boehringer Ingelheim.
  • International Factors: US presidential candidate Hillary Clinton's drug price-cutting pledge and the Fed's potential rate hike in December.
  • Industry Headwinds: M&A failures, clinical trial setbacks, and declining sales for some blockbuster drugs.

• Positive Developments:

  • Korean biologics companies achieved a trade surplus in 2015, signaling a shift from domestic to export-focused operations.
  • Celltrion received FDA approval for the world's first antibody biosimilar in April 2016, enhancing its global standing.
  • Hanmi Pharmaceutical signed out-licensing contracts worth KRW7.8t in 2015, showcasing strong international engagement.

Top Picks for 2017

• Pharmaceuticals:

  1. Green Cross – Expected to expand plasma-derived product exports to North America.
  2. Yuhan – Likely to deliver strong full-year results from its "Open Innovation" strategy.
  3. Hanmi Pharmaceutical – Set to sign new out-licensing contracts and receive milestone payments.

• Biotech:

  1. Celltrion – Positioned for growth in the North American biosimilars market, with a first-mover advantage.
  2. Samsung Bioepis – Expected to extend its global biosimilars market share.

• Diagnostics:

  1. Seegene – Likely to turn around due to new products and ODM contracts.
  2. i-SENS – Expected to grow earnings and gain a presence in the Chinese market.
  3. Boditech Med – Benefiting from its point-of-care testing products and expansion into developed markets.

Investment Recommendation

• Selective Stock Picking: Investors should consider adding sector plays to their 2017 portfolios during the current correction phase.
• Use of Corrections: The current share price weakness is seen as an opportunity to invest in companies with strong fundamentals and growth potential.
• Focus on Key Players: Emphasis is placed on leading firms with export potential, strong R&D pipelines, and strategic advantages in the global biosimilars market.

Summary

The report concludes that the Korean pharmaceutical and biotech sector, while facing short-term challenges, is well-positioned for long-term growth. With the global biosimilars market expanding and Korean firms gaining traction, the sector is expected to benefit from increased international participation and strong R&D investment. Investors are encouraged to capitalize on the current undervaluation and select stocks based on their export potential and market position.