20171011-信达国际控股-东瑞制药-02348.HK-Thrive_on_China_s_generic_drug_reform_21页_609kb

Dawnrays Pharmaceutical (2348 HK) Summary

Core Content Overview

Dawnrays Pharmaceutical is a Chinese pharmaceutical company with a focus on generic drugs, particularly in the treatment of hepatitis B and hypertension. The company has been actively working on improving its market position through quality consistency evaluation (BE test) and sales restructuring. It also has a strong portfolio of hypertension drugs under the "An" series, which includes several key products such as Anneizhen (Amlodipine Besylate), Anneiqiang (Telmisartan), Anneixi (Losartan Potassium and Hydrochlorothiazide), and Anneiping (Levamlodipine Besylate). Dawnrays has also expanded its export sales and is positioning itself as a premium generic drugmaker in the domestic market.

Main Points and Key Information

Entecavir Generic (Leiyide)

• Launch Year: 2011
• Market Position:
  • Originator drug: Baraclude (Bristol-Myers Squibb), with a premium price of RMB25 per tablet and a market share of 40% in the entecavir market.
  • Domestic generics: Most launched between 2010-2013, with prices around 50% lower than Baraclude.
• Quality Consistency Evaluation (BE Test):
  • Dawnrays submitted CFDA filing in Aug 2016 and initiated BE test in Aug 2017.
  • Expected to accelerate growth post-completion of BE test.
• Sales Restructuring:
  • Completed by 2Q17, ending the master agency relationship.
  • This change allowed for direct sales to hospitals, better control over inventory, and improved pricing strategy.
  • Sales of Leiyide increased from RMB40mn/RMB67mn in 1H16/2H16 to RMB100mn in 1H17, representing a 152% YoY growth.
• Advantages of Leiyide:
  • Maintains a premium pricing strategy (RMB16 per tablet) compared to other domestic generics (RMB10 per tablet).
  • Has export sales to developed countries and regions.
  • Unique formulation as a cyclodextrin inclusion compound, enhancing bioavailability and offering a longer shelf life (36 months) compared to Runzhong (24 months).

Hypertension Franchise ("An" Series)

• Product Portfolio:
  • Anneizhen (Amlodipine Besylate): First-to-market generic in 2002.
  • Anneiqiang (Telmisartan): Generic launched in 2006.
  • Anneixi (Losartan Potassium and Hydrochlorothiazide): FTM generic launched in 2008.
  • Anneiping (Levamlodipine Besylate): Generic launched in 2011.
• Market Performance:
  • Sales grew from RMB250mn in 2013 to RMB424mn in 2016, with a 3-year CAGR of 19.2%.
  • Expected to grow at 12%/15%/20% in FY17/18/19E, driven by:
    1. Completion of BE tests, which will enable substitution for originator drugs.
    2. NRDL inclusion for Anneixi, leading to volume-led growth.
    3. Strong brand equity and academic promotion efforts.
• Market Share:
  • In the Amlodipine market, Dawnrays captured 30% of the domestic share, while originator Pfizer's Norvasc holds 80%.

Market and Disease Background

• Hepatitis B in China:
  • 90 million people have chronic hepatitis B, with 28 million needing treatment and 7 million requiring urgent treatment.
  • Incidence rate is 68.6 per 100,000, 6x higher than in the US.
  • WHO recommends entecavir or tenofovir as first-line treatment for chronic HBV.
• Hypertension in China:
  • 25.2% of adults over 18 had hypertension in 2012, with a total of 270 million affected.
  • The market is expected to grow to RMB88.4bn by 2019, with a CAGR of 13.3%.
  • CCB and ARB account for 42.3% and 22.8% of the antihypertensive market in 2014.

Valuation and Financials

• Revenue Projections:
  • FY15-19E: RMB985mn, RMB824mn, RMB1,025mn, RMB1,155mn, RMB1,341mn.
  • Projected 3-year CAGR of 17.6% (FY16-19E).
• Growth Drivers:
  • Recovery of Leiyide sales.
  • Originator drug substitution.
  • Volume growth from Anneixi due to NRDL inclusion.
• Margin Analysis:
  • Gross profit margin improved from 57.8% in FY15 to 62.0% in FY16, and is expected to reach 68.0% in FY19E.
  • Operating profit margin increased from 40.6% to 42.2% in FY16.
  • SG&A ratio rose from 17.2% to 19.8% in FY16 due to higher selling expenses for Leiyide.
• Valuation:
  • Current P/E ratio is 9.1x for FY18E.
  • Target price is HK$5.50, based on a PEG multiple of 0.85x, which is 15% below peers' average.
  • Expected 3-year CAGR of 18% for revenue and 14% for net profit.

Risk Factors

• BE Test Delays: Slower progress could impact sales growth.
• New Product Approvals: Delays in approvals for Esomeprazole may hinder growth.
• Key Personnel Risk: Reliance on senior management and R&D teams could lead to business disruption if key personnel leave.

Conclusion

Dawnrays Pharmaceutical is well-positioned to benefit from the growing demand for antihypertensive and hepatitis B treatments in China. The company's focus on quality and brand positioning, combined with strategic sales restructuring and regulatory advancements, supports its growth trajectory. The "An" series has shown strong performance, and Leiyide is expected to see increased adoption once the BE test is completed. However, the company faces risks related to regulatory hurdles and dependency on key personnel. With a projected 3-year CAGR of 17.6%, Dawnrays has potential for re-rating as it continues to strengthen its market presence.