20171227-申万宏源研究_香港_-丽珠医药-01513.HK-New_incentive_7页_1mb

Livzon Pharmaceutical Group (1513:HK) Summary

Core Content

Livzon Pharmaceutical Group (1513:HK) is a company in the pharmaceutical and biotechnology sector. This report provides an analysis of its financial performance, valuation metrics, and recent developments, with a Hold recommendation and an unchanged target price of HK$59.00.

Financial Summary

The following are the key financial highlights for Livzon Pharmaceutical Group:

Key Developments

• New Stock Option Incentive Plan: Livzon has introduced a new incentive plan for 1,045 employees, involving 15 million A-shares. The plan will be implemented in 2Q18, with a potential 2.7% dilution for current shareholders. The strike price for the first round is Rmb67.78 per A-share. The plan requires core net profit to reach Rmb9.92bn in 2018, Rmb11.41bn in 2019, and Rmb13.12bn in 2020, which implies a CAGR of 15% or more for core earnings from 2017 to 2020. The company will adjust its earnings forecasts after the plan is implemented.

• Sales Challenges:

  • Shenqi Fuzheng and Likangle are both auxiliary drugs with restricted clinical use.
  • The new National Reimbursement Drug List (NRDL) has imposed stricter reimbursement conditions on Shenqi Fuzheng, limiting it to patients with lung or stomach cancer undergoing radio- or chemotherapy.
  • Likangle (mNGF) is now restricted to specific indications, such as traumatic optic neuropathy and n-hexane poisoning, which could negatively impact sales. Previously, it was used off-label for various nerve injuries.
  • The report forecasts that Shenqi Fuzheng sales will decline by double digits in 2018, while Likangle sales will grow at 15% in 2017, 5% in 2018, and 3% in 2019.

• New Drug Approvals:

  • The ilaprazole injection has passed on-site inspections and is pending CFDA approval. It is expected to be approved within the next month, though it may take 2-3 years to have a significant impact on revenue due to missing recent tenders and reimbursement list revisions.
  • The company received CFDA approval in December 2017 to start clinical trials for an anti-RANKL monoclonal antibody.
  • Livzon has five monoclonal antibodies approved for clinical trials, with the anti-TNF alpha monoclonal antibody expected to be commercialized in 2020E, becoming its first commercialized monoclonal antibody.

Investment Recommendation

• Hold Recommendation: The target price remains unchanged at HK$59.00, implying a 24.5x 2018E PE. The report forecasts a 4% downside from the current price, and thus, the Hold recommendation is maintained.

Financial Ratios

Investment Rating Definitions

• Security Investment Rating:

  • BUY: >20% upside over 12 months.
  • Outperform: 10–20% upside over 12 months.
  • Hold: 10% downside to 10% upside over 12 months.
  • Underperform: 10–20% downside over 12 months.
  • SELL: >20% downside over 12 months.

• Industry Investment Rating:

  • Overweight: Industry outperforms the market.
  • Equal Weight: Industry performs similarly to the market.
  • Underweight: Industry underperforms the market.

Disclaimer and Disclosure

• The report is intended for clients of SWS Research Co., Ltd., and not for other individuals.
• The views expressed are the analyst's personal views.
• The report is based on public information, and the Company does not guarantee its accuracy or completeness.
• The Company does not hold any equities or derivatives of the target company, but may provide financial advisory or investment banking services.
• The Company fulfills its duty of disclosure within its knowledge.
• The report contains non-public information and is copyrighted by the Company. It may not be copied, distributed, or used without prior written consent.

Summary of Key Points

• New Incentive Plan: The company has introduced a stock option plan to align management and shareholder interests, with potential dilution of 2.7% and a requirement for core net profit to grow at 15% CAGR from 2017 to 2020.
• Sales Challenges: Sales of Shenqi Fuzheng and Likangle are expected to face headwinds due to reimbursement restrictions and market strategy changes.
• New Drug Approvals: The ilaprazole injection is close to approval, but may take time to impact revenue. The anti-TNF alpha monoclonal antibody is expected to be commercialized in 2020E.
• Hold Recommendation: The target price is unchanged at HK$59.00, with a 4% downside, and the recommendation remains Hold.

Conclusion

Livzon Pharmaceutical Group is facing challenges in the short term due to reimbursement restrictions and market strategies, but has a long-term growth strategy through its new incentive plan and upcoming monoclonal antibody products. The financial performance is projected to show significant growth in 2017, followed by a decline in 2018, and a modest increase in 2019. The company is advised to maintain a Hold position based on current financial forecasts and market conditions.