20180205-交银国际证券-东阳光药-01558.HK-Leader_in_niche_anti-flu_market_backed_by_strong_R_D__20页_933kb

HEC Pharm (1558 HK) Summary

Core Content

HEC Pharm is a leading player in the niche Chinese anti-influenza drug market, with a market share of approximately 15%. The company is backed by strong R&D capabilities and a strategic partnership with its parent company, HEC Research Group, which provides a robust pipeline of innovative and generic drug candidates. The report initiates coverage with a Buy rating and a target price of HK$45.00, representing a 29% upside from the last closing price of HK$34.95.

Main Points

• Market Position: HEC Pharm is a dominant player in the anti-influenza drug market in China, with its flagship product Kewei (oseltamivir) accounting for 84% of total sales and ~90% of sales growth in the first half of 2017.
• Growth Drivers: Kewei is expected to maintain strong growth, with a sales potential of RMB3bn/year and a CAGR of 19% from 2017 to 2020, driven by the attractive Chinese anti-influenza market, improved insurance coverage, and deeper hospital penetration.
• Pipeline Development: HEC Pharm has a diversified pipeline with:
  • Three Class 1 new drugs for chronic hepatitis C infection (HCV).
  • Five insulin candidates for diabetes.
  • Several generic drugs to be launched in 2018–2019.
• Strategic Partnership: HEC Pharm has preemptive rights to acquire or in-license drug candidates from HEC Research Group, a leading R&D institution with a strong pipeline of 13 Class 1 new drug candidates.
• Valuation: The company is currently trading at a 2018/19E P/E of 17x/14x, which is considered highly attractive. The target price of HK$45.00 is derived from a 10-year DCF valuation using a WACC of 11.5%, terminal growth rate of 3%, and beta of 1.1, implying a 2019E P/E of 19x and a PEG of 0.5, significantly lower than the peer group’s PEG of 1.0.

Key Information

Financial Highlights (2015–2019E)

Investment Highlights

• Leader in the niche anti-influenza market with a strong growth momentum.
• Kewei remains the key growth driver with a large market potential.
• Robust pipeline and strategic cooperation with the parent company offer a reliable source of future product expansion.
• Attractive valuation with a target price of HK$45.00, implying a 29% upside.

Key Catalysts

1. Launch of generic candidates in 2018–2019, including esomeprazole injection, clarithromycin, and levofloxacin.
2. Continued implementation of the National Reimbursement Drug List (NRDL) in 2018, which includes Kewei Granules, boosting sales.
3. Progress on novel pipeline candidates, including Yimitasvir, Inlebovir, and others, which could drive future growth.

Key Risks

1. Seasonal weather changes may impact sales of Kewei, as influenza outbreaks are weather-dependent.
2. Potential increase in competition for Kewei, although the market remains relatively underpenetrated.
3. Loss of patent protection for Kewei, though the license with Roche has been extended to 2024.
4. Setbacks in new drug development could delay the launch of pipeline candidates, affecting future growth.

Market Overview

• The Chinese anti-influenza drug market is highly underpenetrated, with Menet.com estimating a market size of RMB10bn in 2017.
• Kewei has gained significant market share, reaching ~20% in 2017 and expected to grow by ~20% annually.
• Oseltamivir is a well-acknowledged first-line influenza treatment, recommended by WHO, CDC, and the latest Chinese guidelines.
• Amantadine and rimantadine have been removed from the 2018 guidelines due to resistance, accelerating the substitution to oseltamivir.

Product Portfolio

• Kewei (oseltamivir): Capsules and granules, with granules specifically targeting pediatrics.
• Ertongshu (benzbromarone): For hyperuricemia.
• Oumeining (telmisartan): For hypertension.
• Xinhaining (amlodipine): For hypertension.
• Insulin candidates: Including recombinant human insulin, insulin glargine, and insulin aspart, expected to be launched in 2018–2022.
• Generic candidates: Including esomeprazole, lansoprazole, pantoprazole, and rabeprazole, targeting peptic ulcers.

Strategic Cooperation

• HEC Pharm has preemptive rights to in-license or acquire candidates from HEC Research Group.
• HEC Research Group has 1,600+ research staff and a pipeline of 13 Class 1 new drug candidates, with 8 under clinical trials and 5 pending approval.
• The group has six generics with US ANDA approvals, two of which have been granted priority review by CFDA.

Conclusion

HEC Pharm is well-positioned to capitalize on the growth of the anti-influenza drug market in China, supported by its strong market share, robust pipeline, and strategic R&D collaborations. The company's valuation is attractive, and the upcoming launches of new products and inclusion in the NRDL are key catalysts for future growth. However, the company must navigate risks related to seasonal influenza trends, potential competition, and the development progress of its pipeline.