20170403-招商证券_香港_-绿叶制药-02186.HK-Why_opting_out_can_be_a_good_option_14页_1mb_1mb

Luye Pharma (2186 HK) Summary

Core Content

Luye Pharma is a pharmaceutical company in Hong Kong that has shown consistent revenue and profit growth from 2014 to 2016, with a strong performance in 2016. The report suggests that the company is well-positioned in terms of risk/reward, and the analyst recommends maintaining a BUY rating.

Main Products and Performance

• Lipusu (liposome paclitaxel): Dominates the market with a 54% share in paclitaxel. It showed growth of 15% in 2016. However, it faces competition from Abraxane generic, which may lead to price pressure and a potential prisoner's dilemma scenario.
• Beixi: Grew by 30% in 2016, showing strong potential for continued growth.
• Xuezhikang: Experienced a 10% growth in 2016, with potential for further expansion.
• Acino Pharma: Acquired in 2016, contributing RMB13mn in one month. Expected to generate RMB140mn in recurring net profit in 2017 due to strong Rivastigmine patch sales.

Financial Highlights (2014–2018E)

Key Points on Lipusu

• Competition Risk: Despite concerns, the current status in China favours Lipusu over Abraxane generic. Luye believes that opting out of price negotiations could avoid significant price cuts.
• Negotiation Scenarios: If Lipusu is included in the price negotiation list, it may lead to a prisoner's dilemma with competitors. However, if Luye opts out, it can maintain the current market status and avoid this dilemma.
• Market Dynamics: The drug is nearing the peak of its life cycle, with expected peak sales at RMB2bn in 2020 when its patent expires. Upside risks include expanding indications, while downside risks involve new treatments like TKIs/mAbs.

Valuation and Target Price

• Current P/E (2017E): 13x, which is close to historical lows and offers a 33% discount compared to peers.
• Target Price: HKD6.8 per share, reflecting a 19x 2017E P/E.
• SOTP Valuation: Based on the net present value of core and pipeline drugs, the valuation per share is HKD6.8.

Strategic Acquisitions and R&D

• Acino Pharma Acquisition: Completed in November 2016 for EUR245mn. The acquisition includes TDS and subcutaneous implant businesses, which are high-margin and strategically aligned with Luye's NDDS focus.
• Rivastigmine Patch: Already a successful generic in the US, with sales of over USD113mn in 2016 and a 28% market share. Expected to generate EUR tens of millions in sales upon launch in Germany.
• R&D Strength: Luye is strengthening its R&D capabilities through the acquisition, with a pipeline of drugs including Risperidone ER, Rotigotine ER, and Ansofaxine ER.

Market Position and Shareholding

• Sector: Pharmaceutical & Healthcare.
• Market Cap: HKD15.609 billion.
• Shareholding Structure:
  • Luye Pharmaceutical Investment: 45.7%
  • Ping An Asset: 16.5%
  • CITIC: 5.9%
• Free Float: 31.9%

Analyst View

• Recommendation: Maintain BUY due to its strong fundamentals, low valuation, and potential for growth.
• Key Arguments: Luye's management is aware that Abraxane was not selected for the price negotiation, and CSPC has also expressed no intention to submit its generic version. The success of Hengrui's Apatinib suggests that drugs can perform well even outside NRDL.

Summary of Key Risks and Opportunities

• Risks:
  • Competition from Abraxane generic.
  • Price pressure from tender negotiations.
  • Potential decline in Lipusu sales as it nears the end of its life cycle.
• Opportunities:
  • Continued growth in Beixi and Sidinuo due to NRDL inclusion/upgrade.
  • Expansion of Lipusu into new indications.
  • Strong performance from the Acino acquisition, particularly in the TDS and patch markets.

Conclusion

Luye Pharma remains a compelling investment opportunity due to its strong financials, strategic acquisitions, and low valuation. While it faces challenges from competition and pricing pressures, the company's management is well-positioned to navigate these risks and maintain its market position. The BUY recommendation is based on the company's ability to manage its portfolio effectively and its potential for continued growth in key areas.